uh oh -- looks like more trouble for fgi longs
big negative piece by big-dog's fave oilbabe, mavis.
With investors already fretting over Friede Goldman's
(FGI:NYSE) pending merger with Halter Marine
(HLX:AMEX) and worrying about project delays, yet another
red flag has been hoisted.
On June 22, the Center for Financial Research and
Analysis, an independent research firm known for detecting
misleading accounting practices, issued a five-page analysis
of Friede's financials. It concludes that Friede's increased
use of aggressive accounting methods may have boosted
earnings in recent quarters. Among its issues, CFRA says
Friede has falling margins, weakening operating cash flow
and a questionable rise in unbilled receivables. It also
includes in its backlog a contract it hasn't definitely sealed,
CFRA notes.
Friede dismisses the report's conclusions as erroneous.
"Our business is comprised of a handful of contracts, all of
which are individually significant, so a timing difference [in
billing] on one contract can make a difference in what the
balance sheet looks like," says Jobie Melton, Friede's chief
financial officer. "Therefore, it's really difficult to make any
valid inferences related to the overall status of the business
from simply a change in the balance sheet elements from
one period to the next."
In addition, many of the report's assertions are old news,
having been disclosed in Securities and Exchange
Commission filings and conference calls, notes John Alford,
a Friede executive vice president. For instance, Friede's
decrease in gross profit "is something that everyone knows,"
Alford says.
Still, the report comes as nervousness among Friede
investors is growing.
The concern began last year as industry-wide demand for
rigs declined and daily rental rates plunged. However, Friede
made several key acquisitions, grew revenue and beat
earnings estimates. Bulls still believe in the company. Bo
McKenzie, an analyst at Jefferies, twice in June reiterated
his buy rating, even though he lowered his earnings
estimates for this year due to rig construction delays. He
reduced his 1999 estimate to $1.45 from $1.60. He's positive
on Friede's franchise position in the industry, its growth
prospects and the Halter merger, which he says will bring
$20 million in savings in the first year. (Jefferies has done
underwriting for Friede.)
But investors clearly are troubled. Friede's stock has
tumbled almost 20% since the merger announcement on
June 2. It closed Wednesday at 13 11/16, off 5/16. And
Friede has trailed the sector's 60% rally since March's
OPEC production cuts; in the same period, Friede is up
26%.
Friede Shares Underperform
The company has a long way to go to catch up with
the rally in other oil-service issues
Source: Bigcharts.
All this uncertainty has led short-sellers to pounce. Short
interest jumped to 2.4 million shares as of June 15, a 14.7%
increase over the May figures. Shorts argue that there won't
be any new rigs ordered for years due to the global
oversupply.
Among the concerns highlighted by the CFRA is Friede's
backlog, which includes a $143 million contract to build a rig
for a Brazilian company that has yet to secure financing. The
Brazilian company is applying for a loan guarantee from the
U.S. Maritime Administration, which should enable it to
secure private-sector financing more easily.
However, the company is still finalizing its application,
according to Friede, which says it's confident of approval.
The loan guarantee determination takes approximately 60
days after the application is filed, so the earliest the
financing can be expected is late in the third quarter.
Excluding this contract, Friede's backlog stood at $264
million at March 31, down 40% from a year ago. As a
percent of revenue, Friede's backlog has declined
dramatically from a year ago, both with and without the
Brazilian contract, CFRA notes. This is where the Halter
merger comes in handy: The combined company would have
had a backlog of $1.1 billion at March 31.
Investors may also be intrigued by the surge in unbilled
receivables. CFRA cautions that a sudden jump in revenue
that have been booked but which the company cannot turn
around and bill the client for can indicate cost overruns or
lower project cost estimates. Unbilled receivables at Friede
increased by $14.4 million in the fourth quarter from
$100,000 in the third quarter, and by an additional $13.7
million in the first quarter.
Friede says the jump was simply a matter of timing. In April,
one of the contracts met a milestone that allowed the
company to bill the customer, says Friede's Melton. And in
the past year, Friede has experienced no cost overruns on
any of its fixed-price contracts, which make up the bulk of its
business, he says.
Then there's the gross-margin issue. Gross margins slipped
to 18% in the first quarter from 27% in the year-ago period.
Friede says this is simply due its current business mix. Its
higher dollar volume of new construction work carries lower
margins than the conversion and retrofit work it did more of in
past quarters. Margins were also affected, but to a lesser
degree, by Friede's use of higher-cost subcontracted labor,
hired to meet delivery deadlines.
But CFRA notes that Friede's March quarter margins would
have been even lower had the company not amortized
$600,000 related to its acquisition of a Canadian shipyard in
early 1998 to offset its cost of revenue, an aggressive move.
Melton, the CFO, says it would have been inappropriate to
characterize the item in "other income," as CFRA
advocates.
Another item in the report pertains to a plunge in billings in
excess of costs, or cash collections made prior to services
rendered. CFRA notes that a decline in this figure can
indicate depletion of a future revenue source or possibly
more aggressive accounting than in prior periods.
Melton says this too is a matter of timing. "If the March
financial statement had been done [a few weeks later] it
would have looked completely different," he says. A $50
million payment Friede received completely turned around
CFRA's assertion, he adds.
But for now, it seems investors are buying the view from the
outside. |
