The Wall Street Journal-20080206-How a Safer Iraq Endangered One Firm- Force Protection Geared Up To Build Armored Trucks- Now Orders Will Soon Halt
Return to: The_Wall_Street_Journal-20080206
How a Safer Iraq Endangered One Firm; Force Protection Geared Up To Build Armored Trucks; Now Orders Will Soon Halt
Full Text (1385 words)Washington -- When bloodshed in Iraq spiked early last year, the Pentagon launched its largest wartime buying spree since World War II.
Defense companies raced to secure a piece of the $28.2 billion appropriated by Congress to buy thousands of heavily armored trucks to protect U.S. troops from roadside bombs. Among the winners: Force Protection Inc., a struggling contractor that landed $1.85 billion in deals to build 3,000 of the so-called mine-resistant, ambush-protected trucks, or MRAPs. But with the violence in Iraq subsiding, the spending boom appears to be ending as abruptly as it began, whipsawing Force Protection in the process.
The Marine Corps initially wanted to buy 3,700 of the vehicles, but it recently slashed its orders by 1,300. The Army is weighing a similar reduction, which could set off a shakeout in the nascent MRAP industry. As a result, Force Protection's stock price, which soared when the orders rolled in, has fallen hard. Next year, analysts expect the company's earnings to fall by a third.
"It's going to be difficult, because we are going to halt production at some point," says Brig. Gen. Michael Brogan, the Marine commander who helps run the MRAP program. "We won't ramp down very much -- it will probably be pretty close to an abrupt end."
MRAPs were developed in South Africa in the 1970s and have been used by armed forces around the world for decades. The enormous trucks sit high off the ground, have V-shaped hulls and are designed to come apart in an explosion, dissipating the force of the blast. They are also designed so that they can usually be put back together and reused. Last month, the U.S. military recorded its first MRAP fatality when a soldier who was partially exposed while riding in one was killed. Force Protection says it didn't make that MRAP.
Even the smaller MRAP models, which can weigh more than 15 tons and stand eight feet tall, dwarf the military's Humvee. Force Protection's Buffalo model, which is 13 feet tall, had a cameo in this summer's "Transformers" movie as an evil robot named Bonecrusher.
The MRAP project moved faster than any other acquisitions in recent Defense Department history, a response to the death toll exacted by roadside bombs, which reach a high of 90 in May 2007 from four in July 2003 and now account for about 60% of all U.S. combat deaths in Iraq. In the 1980s, the military took more than five years to design and test its troop transport, the Humvee, before deploying it to the field, according to Lt. Gen. Stephen Speakes, a top Army acquisitions officer. By contrast, he says, it has taken the military less than a year to ship 1,700 MRAPs to Iraq.
The government did have to scramble. The trucks are so heavy that they require a specialized tire made only by France's Michelin Corp., which made just 1,000 a month, a fraction of the 10,000 needed. The Pentagon spent $4 million to buy new equipment for Michelin, which is now producing more than 15,000 tires a month. Concerned about possible shortages of heavy-duty truck axles and ballistic glass, the Pentagon also invoked a rarely used, Cold War-era industrial power that forced companies to build parts for the MRAPs before turning to other orders.
Contractors, sensing the military's eagerness to spend whatever was necessary, rushed into the market. Existing MRAP builders, such as Force Protection, had to expand quickly to survive against bigger and richer competitors. It was a particularly steep challenge for Force Protection, which had been selling just a few dozen MRAPs a year to the military, mainly for use by explosives disposal units.
"For all intents and purposes, we were an empty building four years ago, and we were a small band of people three years ago," says Gordon McGilton, 62 years old, who was the company's chief executive until he retired at the end of last month. When Mr. McGilton joined Force Protection in 2005, the company had gone through a stretch of management turmoil and was at risk of losing its existing military contracts because of production delays. A 2007 Defense Department Inspector General report said Force Protection "did not perform as a responsible contractor and repeatedly failed to meet contractual delivery schedules for getting vehicles to the theater."
Mr. McGilton knew the Pentagon's MRAP push would give the company a new lease on life, and he decided to double-down on government business. The company hired 1,800 permanent and temporary workers and formed a partnership with General Dynamics Land Systems, a division of General Dynamics Corp.
Chastened by the Defense Department's criticism, the company produced more MRAPs in one month in late 2007 than it had made in all of 2006. Its revenue jumped from $10 million in 2004 to $206 million in the 2007 third quarter alone.
On a recent trip to Iraq, Gen. Brogan saw a Force Protection MRAP that had been blown apart by roadside bombs and put back together five times, with its crew surviving each blast. "You could still see the shrapnel holes in the sheet metal," he says admiringly.
At Force Protection's main factory in Ladson, S.C., evidence of the company's rapid-fire growth abounds. Caterpillar diesel engines sit on enormous shelves in one of the company's bustling assembly buildings, which was empty a year ago. Welders, putting together the company's mainstay Cougar model, huddle over rows of partially assembled vehicles, sending sparks flying.
In October, the government's Defense Contract Audit Agency told the company its bookkeeping didn't meet standards. In a Securities and Exchange Commission filing dated Nov. 13, the company noted that it has "extensive work remaining in order to meet these standards" and has restated results for 2005, 2006 and part of 2007. Failure to fix the problems could mean losing out on more government work.
Of all the defense companies building MRAPs for the military, Force Protection is the only one solely focused on armored trucks. That leaves it particularly vulnerable to any large-scale military cutback.
The risks facing the company became apparent on Nov. 30, the same day that North Carolina's two Republican senators, Elizabeth Dole and Richard Burr, joined Mr. McGilton and other Force Protection executives at a ribbon-cutting for a new plant in Roxboro, N.C., where the company will manufacture a different type of armored off-road vehicle known as the Cheetah.
Just hours earlier, the Marines had announced their cutback. Mingling with local dignitaries, Mr. McGilton was unaware of the development. He later got the bad news from a reporter at the event.
Mr. McGilton says Force Protection can weather future cutbacks by retrenching, selling trucks to foreign militaries and producing MRAP spare parts. He also believes the U.S. military will order more of the company's armored vehicles, including the new Cheetah, because the success of MRAPs in Iraq has raised expectations that U.S. forces will be protected from roadside bombs no matter where they're deployed.
Investors remain skeptical. The military has yet to commit to buying any of the company's Cheetahs, and many analysts expect the Army to cut back its MRAP order soon. Force Protection's stock is trading at $4.83 a share, off its May high of $31.16 a share.
For 2008, Wall Street analysts expect the company to report a profit of $1.01 a share, according to Thomson First Call. For 2009, they see that falling to 64 cents a share. The company doesn't provide earnings guidance.
In December, the Pentagon said it would spend $2.66 billion on an additional 3,126 vehicles from Force Protection, BAE Systems and International Military & Government, bringing the government's total MRAP order to more than 15,000. U.S. commanders say they will ship 500 of the vehicles to Afghanistan in coming months because of the deteriorating security situation there. But John Young, the senior Pentagon acquisitions official overseeing the program, says the military will place a final order in March and then shift its focus to buying spare parts and tires for the existing fleet of trucks.
Talking about the MRAP market, Nick Chabraja, CEO of General Dynamics, told analysts last month that after this year "our view is that it goes away." General Dynamics, Force Protection's much larger partner, expects that other domestic and international defense sales will help it make up for the drop-off.
