Wednesday, October 29, 2008

New Prescription for Growth at Novartis

  • As a sales-focused pharmaceutical company, Novartis AG (NVS-$50.83) has always depended, in part, on influencing physicians' prescribing habits through a reach-and-frequency contact model. National in scope, the business strategy required field representatives to make regular visits and calls to customers, correlating frequency of product sales calls to size of the customers' practices and/or value of targeted MDs as local opinion leaders. Recognizing the more restrictive relationship that has developed between healthcare providers and drug makers -- some groups no longer will even accept pens with business logos -- Novartis has announced a new commercial model for its U.S. General Medicines Business, as described in its FORM 6-K filed with the SEC last week:

    As the US market continues to diversify and become more complex, an innovative new program called "Customer Centric Initiative" is underway to implement a new regional US business model that will better address customer needs and differences in local market dynamics. Five new regional units will be created that have cross-functional responsibility for the full primary care product portfolio, replacing the nationally managed sales forces.

Strategies to improve shareholder value, increase profitability, and improve top line growth are nothing new -- companies just change the buzzwords:

  1. In December 2007, Bristol-Myers Squibb implemented its "Productivity Transformation Initiative," which included a 10 percent cut in its workforce, or about 4,300 people.
  2. In 2006, Merck announced a new global supply chain initiative, known as the "Merck Production System." which resulted in the loss of 7,000 positions in manufacturing and other divisions.
  3. And, last month, Schering-Plough announced plans to eliminate about 1,000 sales representatives, or about 20 percent of its field force -- a part of its "Productivity Transformation Program" launched in April 2008.

As for Novartis, its customer-centric initiative will result in the loss of about 550 U.S. sales jobs in a "socially responsible manner." The new organization will start on January 1, 2009. A one-time charge of approximately $20 million will be taken in the 2008 fourth quarter, with annual cost savings of $80 million anticipated from 2010.

Editor David J Phillips holds a financial interest in Bristol-Myers Squibb common stock. The 10Q Detective has a Full Disclosure Policy.

Saturday, October 25, 2008

BNET Update: Monday, October 27, 2008

Even amidst declining energy prices and the uncertainty in the credit markets, Diamond Offshore Drilling (DO-$72.58) is signing deepwater rates in excess of $620,000 per day for its semi-submersible rigs.

In order to meet manufacturing targets for 2010 - 2013, Evergreen Solar (ESLR-$2.58) will need to improve operating efficiencies, expand capacity at the Devens facility, and build a planned new factory — which will
require additional working capital.

Based on the current operating environment, Foundation Coal (FCL-$15.71) is cutting its full-year 2008 and 2009 EBITDA guidance to a range of $300 to $320 million and to $500 to $625 million, resulting from
expected production constraints in its Eastern operations.

Despite the domestic and global economic downturn, Intuitive Surgical (ISRG-$158.68) increased top-line revenue forecast for 2008. The company now expects revenues to grow 49 percent to 50 percent over 2007 sales of $600.8 million, which is up from a previous estimate of 45 percent to 47 percent. However,
management acknowledged sales could slow if customers have trouble securing capital.

The current economic environment could make for a challenging holiday shopping season for Mattel (MAT-$13.07). The world’s largest toy manufacturer expects borrowing difficulties are making it harder for the company’s retail distributors in Western Europe to acquire Christmas toy inventories.

Although Southwest Airlines’ (LUV-$10.97)
fuel hedging program wiped-out operating income of $86 million in the third-quarter 2008, fuel derivative instruments have historically provided economic benefit to the company.

Against a backdrop of an 11 percent increase in rig count activity, Weatherford International (WFT-$12.98) reported third-quarter sales of $2.5 billion, up 29 percent from the same period last year. The company’s large North American onshore drilling presence, which comprised 46.4% of total sales, remains a potential liability in a deteriorating natural gas pricing environment. Nonetheless, going forward, pullback in drilling activity in both the US and Canada should be offset by
a growing international footprint.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Thursday, October 23, 2008

The Este Lauder Companies: A Family That Plays Together, Gets Paid Together

If the name is Lauder is may spell job security—and that is not a bad thing as unemployment rises above six percent. The most recent Proxy Statement for The Estée Lauder Companies, Inc. (EL-$35.38), filed with the SEC at the beginning of October 2008, provides a long list of officers and employees who are members of the Lauder Family.

More importantly the proxy filing provides a run down on their compensation. As Chairman of the Board, Leonard Lauder was paid $1.4 million in salary and $1.8 million in bonus in fiscal year 2008. Five additional family members, including Leonard’s brother, wife and nieces, were paid $2.1 million in cash and about $116,000 in stock. William Lauder, who is Leonard’s son and Chief Executive Officer, draws the biggest paycheck, receiving a total of $9.2 million in fiscal year 2008, in the form of cash salary and bonus as well as equity awards.

If those figures make it seem like the Lauder Family is on the corporate dole, consider the compensation of the other four top-paid executives at Estee Lauder. The Chief Financial Officer, Richard Kunes, and three other group and regional heads, were paid a combined $19.0 million in fiscal year 2008.

Yes, your calculator is working right. The bill for executive and brand name-related compensation was $33.6 million in fiscal year 2008. Put into perspective, that was 4.0% of FY08 operating income before compensation expenses.

While compensation for marquee-named employees may be a minor portion of profits, corporate commitments to Leonard Lauder demonstrate the lengths to which the Board of Directors is prepared to go to keep the Lauder Family scion happy.

Furthermore, Leonard’s employment contract is perpetual—if he retires he will be provided an office, a full-time executive secretary "for as long as he would like." In addition, when he retires he is entitled to his salary and compensation for six months, but if he dies while still Chairman his beneficiary is entitled to the same compensation for an entire year. Does that latter discrepancy may provide some insight into why Leonard’s next of kin are also on the pay roll?

Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective

Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.

Monday, October 20, 2008

Southern Hospitality at CSX Corp

Why would a major railroad, principally involved in the transportation of freight and intermodal containers, spend $50 million to renovate and manage a luxury resort-hotel? CSX Corp. (CSX-$45.57), the owner of the venerable, Mobile four-star Greenbrier Resort, located in White Sulphur Springs, West Virginia, would say it is just part of its strategic plan to diversify its portfolio holdings to create value for shareholders. A review of the company's recent third-quarter 2008 10-Q filing reveals, however, income from real estate and resort-operations comprised just $6 million, or 0.1 percent, of net income of $382 million for the quarter ended September 26. Albeit the company did not breakout its specific numbers for its real estate and resort operations, it did admit to the following:

Results from resort operations were down in 2008 because of decreased group business resulting from the uncertainty of labor negotiations, and an inability to sufficiently reduce contractual labor costs accordingly.

Since 2007, certain dissident shareholders of CSX, including The Children's Investment Fund and 3G Capital Partners, have attempted to reform the Company's corporate governance practices. For example, in April 2008, the hedge funds alleged in an
amended Proxy Filing:

...the improprieties in CSX's executive compensation practices went beyond the use of material non-public information in stock grants ["spring loaded" options]. Indeed, a former employee has recently filed suit and alleging that CSX's top executives have obtained substantial amounts in undisclosed non-cash compensation in the form of perquisites at the Greenbrier Hotel, a resort owned by CSX.

In March 2008, Paul Ratchford, former president of The Greenbrier,
filed a $50 million lawsuit against CSX, claiming that CSX President Michael Ward fired Ratchford after he tried to stop company executives from enjoying free rooms and meals, discounted merchandise and even free medical exams at the resort. In addition, Ratchford's lawsuit claims that CSX executives were benefiting from the lavish comforts available at the four-star resort while, Ratchford claims, The Greenbrier was losing roughly $15 million a year.

Are the activist hedge funds and Ratchford focused on personal gain - or do they raise legitimate issues as to corporate governance practices at CSX?

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Saturday, October 18, 2008

BNET Update: Monday, October 20, 2008

After reporting disappointing sales and a drop in third-quarter profit Tuesday, Domino’s Pizza (DPZ-$6.43) also said its ability to draw upon its variable funding notes had been reduced from $90 million to an estimated $21.7 million after Lehman Brothers, the primary provider of those funding notes, declared bankruptcy.

Labor unions in the United States and Canada on Tuesday expressed concern about the prospect of job losses from any merger between General Motors Corp (GM-$6.43) and Chrysler LLC, which is controlled by private equity group Cerberus Capital Management. But Chairman and CEO Rick Wagoner could be
could be rewarded handsomely with severance benefits in the event of a change in control.

InterOil (IOC-$11.68) said the Antelope-1 rig site location is complete and drilling will commence in the next few days, targeting a limestone reef porosity zone intersecting in the Elk-4, a well that yielded a gas flow rate of 105 million standard cubic feet and approximately 2,000 barrels of condensate per day in a previous test, a record-high gas flow rate for Papua New Guinea. Discovery of a second well that confirms commercial gas reserves
is critical to a proposed LNG project in Papua New Guinea with the government.

Moving forward with its strategy of monetizing non-core oil and gas assets, Linn Energy (LINE-$13.13) announced Monday that it had entered into
a definitive agreement to sell its deep rights in non-producing Oklahoma acreage, which includes its Woodford Shale interval.

Despite the ongoing credit crisis and uncertainty about economic growth, Peabody Energy (BTU-$32.03) said it sold 66 million tons of coal in its third-quarter 2008 ended September 30, up six percent from year-ago levels.
Thermal coal prices remain strong, too, driven by demand growth and tight global supplies.

Although Schlumberger Ltd (SLB-$49.99) has limited direct credit market exposure, as it enters the fourth quarter, the global banking crisis will likely have an
have an effect on demand for its oilfield service activities, though Chairman and Chief Executive Andrew Gould anticipates this will be largely limited to North America and to some emerging offshore markets overseas.

Sears Holdings Corp (SHLD-$60.90) has reported that Chief Financial Officer J. Miles Reidy
will step down later this year to "attend to a family issue." The resignation comes amid slumping sales at the struggling department-store retailer.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Monday, October 13, 2008

"Marking to Make-Believe" Accounting at Goldman Sachs

Goldman Sachs Group (GS-$111.00) filed its August 2008 quarter report with the SEC last week. The venerable investment bank is among the first of the major institutions to report earnings since the U.S. credit market began to seize up at the end of August 2008. At the time the earnings were made public in a Goldman Sachs press release on September 16, 2008, the market was surprised by stronger than expected earnings. Yet Goldman shares sold off to a three-year low as investors anticipated yet another shoe to drop from the "credit market centipede."

Earnings impress few these days as risks lurking on corporate balance sheets have come to light. Some have blamed accounting practices, specifically Financial Accounting Standards Board Rule 157, which went into effect in November 2007. Rule 157 changed the way public companies increase or decrease asset values on their balance sheet to reflect the prices that would be received if the asset were sold right then and there. The process, called "mark to market," is repeated each quarter.

In Goldman's quarter filing total current financial assets valued at fair market prices were $400.1 billion. This includes collateralized agreements and other financial instruments owned by Goldman. This asset category peaked in value at $498.9 billion at the end of the February 2008 quarter and has declined in each of the two quarters since.

That is only half of the story. Goldman has liabilities such as financial instruments sold to other parties with agreements to repurchase them later. At the end of the August 2008 quarter, total current liabilities composed of financial instruments that had to be marked to market prices were $378.9 billion. Fortunately, for Goldman such financial assets are still valued higher than similar financial liabilities.

Goldman began explaining the so-called FASB Rule 157 in its first-quarter 2008 10-Q, even going so far as to describe the hierarchy of information sources prescribed by Rule 157 to determine "fair market value." Back then only a few financial experts could see the trouble looming with the newly adopted standard. What happens, for example, when there is no market for a certain financial instrument or the market all but goes away such as for collateralized debt obligations? It becomes necessary to abandon market prices altogether and search for "recent trades." When even scattered values are not available, Rule 157 prescribes the use of "unobservable inputs" -- a euphemism for accountants own assumptions -- a practice which many financial analysts have dubbed "'marking to make believe."

As impressive as Goldman's detailed explanation of Rule 157 might be, what is missing from the quarterly filing is whether Goldman was able to "mark to market" or had to "mark to make believe."
Original new stories can also be found at BNET Energy & BNET Insight: 10-Q Detective

Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.

Sunday, October 12, 2008

BNET Update: Monday, October 13, 2008

Operating results at Texas-based AmeriCredit Corp (ACF-$8.06), which has focused predominantly on servicing sub-prime borrowers (with credit scores of 630 or lower) underscores why — going forward — even more problematic for those folks looking to access car financing.

From September 2002 thorough April 2008, Aubrey K. McClendon, the billionaire chief executive of Chesapeake Energy Corp (CHK-$16.52) purchased more than 11 million shares of his company’s common stock at a total cost of approximately $319 million. Tragically, however, failing to remember that like all commodities — the price of natural gas is cyclical — McClendon recently went on a stock buying binge from April - June, purchasing an additional 2.45 million shares at an approximate cost of $108.4 million in open market transactions. Now comes word that McClendon has sold “substantially all” of his stock over the past three days in order to meet margin loan calls in the natural gas company he co-founded, the Company said late Friday.

Losing the Sand’s recommendation compounds an already bleak outlook at Circuit City (CC-$0.37). In the August-quarter of fiscal 2009, comparable store sales decreased 14.4 percent, driven by a double-digit decline in traffic as compared to last year. Specifically, strong sales growth in digital television converter boxes and video gaming products were not enough to offset tepid purchases of flat panel televisions and broad-based weakness in the sale of most other categories, including camcorders, projection and tube televisions, and personal computers. With $1.5 billion of inventory sitting on store shelves, markdowns could come quicker than the day after Christmas for gift seekers.

Ivanhoe Energy (IVAN-$1.14) announced Wednesday a definitive agreement with Ecuador state oil companies Petroecuador and Petroproduccion to explore and develop Ecuador’s Pungarayacu heavy-oil field, utilizing Ivanhoe’s HTL upgrading technology. Although Ivanhoe’s thermal cracking technology has the potential to substantially improve the economics and transportation of heavy oil,
no commercial-scale HTL plant based on the proprietary technology has ever been constructed.

Long recognized as a well-run, innovative athletic footwear and apparel company, Nike (NKE-$54.54)
has demonstrated its “swish” for making money in other investments, too.

Palm (PALM-$5.37) has bet heavily that new products and a new operating system platform can retake lost market share from Blackberry and iPhone. In the first quarter 2009, Palm paid $6.9 million, or 1.9% of sales, on its interest obligation. Looking ahead,
the handset maker will be paying much more in borrowing costs.

Tighter credit and lower energy prices are forcing U.S natural gas drillers, such as Chesapeake Energy and Petrohawk Energy, to scale back capital expenditure budgets. Mark Smith, Chief Financial Officer of Ultra Petroleum (UPL-$38.00), told attendees at the 2008 Oil & Gas Investment Symposium in San Francisco, however, that Ultra’s
liquidity continues to remain more than adequate to fund the 2008 capital budget of $945 million.

World Fuel Services (INT-$17.39)
improved its liquidity profile by an additional $160 million after entering into a two year syndicated trade receivables purchase facility program with HSBC Bank. The monies will likely be used to purchase fuel products for re-sale to customers.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Saturday, October 04, 2008

BNET Update: Monday, October 6, 2008

On September 9, Ken Huseman, Chief Executive Officer of Basic Energy Services (BAS-$17.54), said selected operating data for August 2008 — utilization in well servicing and drilling segments — signaled that the company was successfully leveraging its wide footprint and range of services to take advantage of market conditions over the last year. Left unanswered, however, was whether the increased level of activity in each of the company’s three primary business segments (well servicing, fluid services, and completion/remedial services) would lead to pricing and margin improvements, too.

Carnival Corp. (CCL-$32.74), the largest cruise ship operator in the world, with a portfolio of cruise brands that includes Carnival Cruise Lines, Princess and Cunard Line, reported in its third-quarter 10-Q filed with the SEC on Friday that AIG is the payment intermediary for some of its estimated $1.06 billion in contingent obligations.

At the Cisco Systems (CSCO-$21.28) annual meeting to be held in November, shareholders will be asked
to vote on a Human Rights resolution, again.

Effective January 2009, FedEx Corp (FDX-$79.36) is increasing its rates by an average 6.9 percent. While the rate increase may seem
like a shot in the foot, it may turn out to be a smart move for FedEx’s bottom line.

JA Solar (JASO-$9.54) confirmed its production guidance in the range of 340-megawatts (MW) to 350MW for fiscal 2008, and remained cautiously optimistic about the potential for raising its 2009 projected output beyond 700 MW at its Ningjin plant. However, it was reported this week that Jiangsu Shunda, a major solar wafer supplier, suffered a silicon tetracholoride leak and was shutting down for repairs until October 10,
calling into question JA Solar’s ability to meet output goals.

The North American gas drilling industry suffered an earthquake of uncertain magnitude last week when Chesapeake Energy (CHK-$29.00), third-largest overall producer of natural gas in the US, slashed its drilling capital expenditure budget by $3.2 billion, or 17 percent, for the second half of 2008 through 2010. Contract drillers, like Patterson-UTI Energy (PTEN-$16.76), which are highly dependent on onshore drilling activity, will likely witness an adverse tectonic shift in forward demand for drilling rigs and services.

Petrohawk Energy (HK-$16.20) said Wednesday it
would reduce its 2009 capital budget by a third to $1.0 billion and intends to shift spending to those projects with the highest internal rates of return and greatest potential for reserve growth, namely, development in the Haynesville and Fayetteville formations.

Looking to divert attention away from their own incompetence, many investment bankers on Wall Street are calling for the elimination of mark-to-market accounting, a framework adopted by companies to make more transparent the current values of certain (often illiquid) financial instruments. In my opinion,
a likely critic of fair value would be RenaissanceRe Holdings (RNR-$44.25), the Bermuda-based provider of reinsurance and individual and property risk insurance.

As the housing market continues to deteriorate, Washington Federal (WFSL-$19.14), which has thrift operations in eight western states, could feel more pain.

Editor David J Phillips and Columnist Debra Fiakas do not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.