Force Protection Cashout

Some insiders sell their shares even with talk of big orders ahead.
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Force Protection

(FRPT) - Get Report

sure takes care of its own.

Just look at the company's payouts to CEO Gordon McGilton. At the beginning of 2006, the defense contractor issued McGilton 300,000 shares when Force Protection was trading at 72 cents a share. That stock, which vested immediately, now fetches around $17 a share, making it worth more than $5 million.

Paul Meeks, a fund manager in Force Protection's home base of South Carolina, calls the stock grant "a bit odd" and, given some unevenness in the company's generally impressive 2006 financial performance, wonders if McGilton really deserves it.

"Usually, stock grants like that vest over a period of years," Meeks says. "This was not even an option grant. It was basically a check."

Force Protection didn't comment. McGilton's regular paychecks, totaling about $350,000 annually, look almost modest in comparison. But his leadership training firm, known as APT, helps out.

With McGilton in charge, APT keeps securing more and more business from Force Protection. In 2004, before McGilton joined the company, Force Protection paid APT just $21,000 for its services. That bill jumped to $225,000 in 2005 and then rocketed to $600,000 in 2006 -- McGilton's first full year at the helm.

Meanwhile, 2007 could prove even more lucrative for McGilton. During a three-day stretch this January, McGilton sold 1 million shares for nearly $20 million. He now has just 11,560 shares left.

Based on McGilton's public comments, however, Force Protection's future has never looked brighter. Just last week, in fact, McGilton was bragging about Force Protection's record 2006 results and hinting at even better days ahead.

To be fair, Force Protection made some major progress in 2006 and ended the year with a bang. Impressively, Force Protection beat revenue targets and toppled profit estimates for the fourth quarter.

But roughly two-thirds of the company's quarterly profits came from a deferred tax benefit rather than from regular operations. Moreover, the company continues to burn through cash whether it reports a profit or not.

Force Protection blamed last year's negative cash flow, in part, on rising accounts receivable (A/R). Meeks, for one, is concerned.

"Look at the difference between 2005 and 2006," Meeks says. "Sales were up 294% -- but A/R was up 882%. Ideally, you would want A/R to grow at the same rate as sales or even at a lesser rate. But their A/R just exploded."

Indeed, Meeks notes, Force Protection weathered a huge surge in A/R even as it factored some $44.7 million worth of receivables. Thus, he says, A/R could have looked even worse than it did.

Force Protection should see improvements elsewhere, however.

Back in November of 2005, an investment fund issued Force Protection $7.5 million worth of promissory notes carrying an interest rate of 24%. Three months later, a fund operated by Force Protection Chairman Frank Kavanaugh got a piece of that action by taking over $2.5 million worth of those high-interest notes for itself.

Kavanaugh's fund would go on to collect $50,000 in bonus payments for extending the maturity date on those notes by just a month or two at a time. The company paid Kavanaugh's fund off in full less than six months after it entered the picture.

"Mr. Kavanaugh's relationship to (the fund) was fully disclosed to the company," Force Protection assured in its recent 10-K filing. "And Mr. Kavanaugh did not participate in the negotiations or decision process" that brought his fund into the game.

Of course, Kavanaugh has scored even bigger returns by selling Force Protection stock. During the final quarter of 2006, Kavanaugh executed a series of stock sales that generated more than $20 million in proceeds.

This year could bring a new threat to Force Protection's bottom line. Notably, Protected Vehicles -- a competitor run by two Force Protection alums -- has partnered with heavyweight truck maker


(OSK) - Get Report

to sell cheap vehicles under the Mine-Resistant Ambush-Protected military vehicle program.

Specifically, analysts note, Oshkosh is selling so-called Category I vehicles for $300,000 apiece, while Force Protection is still seeking nearly $450,000 for Category I vehicles of its own.

"We continue to believe MRAP production will be split between two or maybe three teams, with FRPT's team and BAE Systems as the primary suppliers," SunTrust Robinson Humphrey analyst Chris Donaghey wrote on Monday. But "if Oshkosh Truck's Alpha (made by Protected Vehicles) passes testing ... it, too, may see larger production contracts -- if only for the aggressive pricing."

Donaghey, like most mainstream analysts, is bullish about Force Protection's prospects nonetheless. He has a buy rating and a $31 price target on the company's stock. His firm has investment banking ties to the company.

Not so long ago, with the stock above $20 a share, Meeks felt that investors should sell Force Protection short in anticipation of a decline instead. His call proved correct. But with the share price now lower -- and contract awards looming -- Meeks has since backed away from that call despite his ongoing concerns about the company.

"It's not 'shortable' right now," says Meeks, who has no position in the stock himself. To its credit, "the company is showing some improvement in gross margins, and its operating expense as a percentage of sales is getting a little better.

"But sooner or later, they have to show cash flow. The bottom line is: Does this company generate cash?"