Force Protection Is Haunted by Past

Two former execs now head up a cross-state rival.
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A possible threat to

Force Protection

(FRPT) - Get Report

hits close to home.

The South Carolina-based defense contractor has no shortage of rivals in bidding on a huge Defense Department order for blast-resistant military trucks. Nine companies have been asked to supply test vehicles under the multibillion-dollar contract.

But some of Force Protection's stiffest competition may come from nearby -- from a company based across the state that is run by Force Protection alumni.

The closely held company, called Protected Vehicles, employs two senior executives -- CEO Garth Barrett and CFO Thomas Thebes -- who helped transform Force Protection into what it is today.

After serving as a military leader in South Africa, Barrett helped bring that country's blast-resistant technology to the U.S. He founded Technical Solutions Group, a maker of blast-resistant vehicles, in 1997 and sold the company to Force Protection five years later. Before then, Force Protection was a sinking recreational boat seller known as Sonic Jet Performance.

At first, Garrett stayed on as Force Protection's chief technology officer. But he finally left in 2005, when the company tapped Gordon McGilton -- part owner of a leadership training outfit -- as its CEO. Thebes soon followed Garrett out the door and became CFO of Garrett's new privately held company.

Garrett declined to elaborate on his departure from Force Protection because he felt that the situation could get "ugly." Meanwhile, Thebes simply said that he left the company "for sound professional reasons."

Today, Protected Vehicles employs both military and manufacturing veterans in its executive suite. The company has been strengthening its regular workforce as well. The company plans to hire another 400 people in anticipation of big orders, which would more than quadruple its current staff.

Of course, Force Protection has expanded already. The company boasts nearly 800 employees and a partnership with heavyweight defense contractor

General Dynamics

(GD) - Get Report

to boot.

Given its current strength and the track record of its vehicles, Force Protection feels unthreatened by Protected Vehicles or other players that may be trying to copy its success.

"Competition is one of the higher forms of flattery," Force Protection Vice President Michael Aldrich told

TheStreet.com

. "It means you have something worth taking -- or trying to take."

Still, Protected Vehicles clearly plans to succeed. The company points out that the government is widely expected to choose several companies to make the new vehicles rather than lavishing the whole huge contract on one lucky winner.

"That would be a heck of a thing for any one contractor to accomplish on its own," says Drew Felty, program manager for Protected Vehicles. In industry circles, "it has been reiterated several times that two to three contractors are expected to receive high-volume awards. ... We're very confident that we're going to be part of that final selection group."

To be sure, Protected Vehicles still has to prove itself. While Force Protection has already supplied hundreds of vehicles for the war on terrorism, with riders suffering almost no fatalities, Protected Vehicles has been busy playing catch-up. Still, the company says that it has enjoyed some early success in Israel and, like Force Protection, has even "partnered with a major defense contractor" -- to be revealed soon -- here in the U.S.

Some have compared Protected Vehicles' new Alpha to Force Protection's popular Cougar, but with superior body-protection features.

"We've got a long history of understanding mine protection," Barrett explains. And "obviously, you don't build a vehicle to be second-best."

Force Protection isn't shy on confidence, either.

In mid-December, Force Protection raised $153 million by selling 13 million shares of stock to institutional investors in a private placement. Afterward, McGilton publicly thanked those investors for their faith in the company.

In fact, however, that select group of investors had almost nothing to lose. They paid just $11.75 for their Force Protection shares -- with the stock fetching nearly $15 and rising. Then, as promised in advance, Force Protection turned around one month later and filed the paperwork necessary for those investors to start dumping their shares.

Only after private-placement buyers registered to sell their shares -- with Force Protection shifting from the OTC Bulletin Board to the more liquid Nasdaq -- did the stock reverse course and come under intense pressure. The shares did regain some ground this week, closing at $19.02 on Friday.

Even a local South Carolina money manager seems worried about the stock.

Early on, Paul Meeks recommended Force Protection to readers of the business-oriented

Charleston Mercury

newspaper. Now, however, Meeks feels increasingly uneasy about the company. Looking back, Meeks finds it odd that the local company never responded to his original questions about its well-timed stock option grants. He has found plenty more that troubles him since then.

For starters, in his recent column for the

Mercury

, Meeks called Force Protection's latest private placement "as unusual as it's disturbing." He fretted over heavy insider selling as well.

Meeks also took a close look at Force Protection's operating results. He saw a gross margin that was less than half of normal and a research and development budget that was almost nonexistent.

"This is not the mark of a technologically advanced company that's properly funding future product development," Meeks declared in the

Mercury

. And "if FRPT isn't a technology leader, it shouldn't be valued by investors as such."

Meeks recommends that long-term investors sell Force Protection shares short in anticipation of a correction down the road. He has no financial stake in the company himself.

For its part, Force Protection promises better times ahead. Before, Aldrich says, the company was rushing to meet the "urgent operational needs" of soldiers on the ground and had little interest in maximizing profits while doing so. But with help from its big partner, Aldrich says, the company now expects to deliver "dramatically improved" cash flow this year.