Salix Pharmaceuticals Gives GI Upset To Investors

Salix Pharmaceuticals, Ltd (SLXP-$7.28) received an approvable letter from the U.S. Food and Drug Administration for balsalazide 1100 mg tablets as a treatment of mild-to-moderate active ulcerative colitis in patients 18 years and older.

As part of its Life Cycle Management Plan, Salix filed the NDA for the new version of its GI ant-inflammatory in spring 2007, looking to mitigate the sales impact of its COLAZAL franchise from The Office of Generic Drugs approval of three generic balsalazide capsule products on December 28, 2007.

Historically, the tummy company derived a majority of its revenue from sales of balsalazide disodium (COLAZAL), accounting for 39.2 percent, 49.6 percent, and 71.2 percent of net sales in 2007, 2006, and 2005, respectively.

Offsetting the dosing advantage of the new formulation version of the anti-inflammatory—two times a day versus three times a day for the generic—is the size of the pill, which is a 1100 mg tablet formulation (compared with 750 mg for the generic). The patent expiry on the new dose is in 2018.

In our view, sales of the new pill will be limited by restricted Tier formulary access, too.

Financial Checkup

In our view, the combined effect of COLAZAL reduction in sales (to generic competitors) and limited market acceptance of the new balsalazide tablet will have a materially adverse effect on the company’s business and financial condition in FY 2008.

Due to the loss of COLAZAL sales, Salix posted a net loss of $24.0 million, or $0.50 per share, for the first quarter of 2008, on a 43 percent Y/Y drop in total product revenue to $34.3 million.

And the share-price of Salix Pharma nose-dived after losing patent expiry in FY 2007.

As of the first-quarter 2008 ended March 31, Salix had $111.5 million in cash. Nonetheless, the 10Q Detective believes a combined drop in 2008 sales with limited cash flow generated from operations will necessitate management slashing its spend rate—including R&D—in order for the company to limp through 2008—without needing to raise new capital.

Incoming monthly cash flow slowed from $5.8 million in 1Q:07 (excluding purchase of product rights) to $723,000 in the 1Q:08. Improved collections—about $26.4 million in accounts receivables—prevented the company from reporting an operating cash flow loss in 1Q:08. Expect operating losses in coming quarters to flip cash flow to cash burn!

Of concern, too, allowances for product returns in the 1Q:08 increased 43.7% Y/Y to $10.8 million. The returns for the three-months ended March 31, 2008, excluded COLAZAL, resulting from an unexpected large return from a small wholesaler of VISICOL (a bowel evacuant used to clean the colon prior to colonoscopy).

Salix has $12.65 million coming due in FY 2008, primarily for operating leases and fixed purchase commitments.

The company is currently in compliance with loan covenants (which include a leverage test and a fixed charge test). Albeit, net operating losses for 2008 could put Salix out of compliance in coming quarters, unless management obtains a waiver or amendment, the $15.0 million currently outstanding on the credit facility would immediately come due.

Business Strategy

Management opines that it can rebuild top-line growth by expanding the indications for its current products.

Save for XIFAXAN tablets (rifaximin), we do not believe that any of Salix’s eight other products can replace lost COLAZAL sales, including the new twice-a-day COLAZAL.

Rifaximin Franchise

XIFAXAN, as approved for travelers’ diarrhea, competes with the generic antibiotic ciprofloxacin (preferred agent of choice by the Academy of Family Physicians) and a plethora of OTC products, such as Imodium (loperamide), bismuth subsalicylate (BSS), which is the active ingredient in Pepto-Bismol, and probiotics (such as Lactobacillus GG and Saccharomyces boulardii).

XIFAXAN contributed 49 percent and 26 percent of net product revenues in 1Q:08 and 1Q:07, respectively. XIFAXAN net sales increased only 8.7 percent Y/Y. The increase in percentage resulted from a corresponding 43 percent drop in net product sales due to generic introduction of COLAZAL.

However, total prescription growth from 2005/2006 to 2006/2007 fell from 118 percent to about 35 percent year-over-year.

Nonetheless, management 2008 revenue guidance for XIFAXAN is approximately $71.0 million, a 10.4% increase over 2007 sales.

Studies to assess the utility of rifaximin for the treatment of irritable bowel syndrome (IBS), hepatic encephalopathy (HE), and for the prevention of travelers’ diarrhea (TD) have been completed, are in the planning stages or are underway (markets in the aggregate of more than $4.0 billion per annum).

Based on current timelines—and assuming trial results support NDA submissions, management anticipates submitting applications for the HE and IBS indications in 1H:09 and 2H:2010, respectively.

Prevention of travelers’ diarrhea is a bright spot for the company, for antibiotic prophylaxis is not recommended by the Centers for Disease Control and Prevention—even for high-risk travelers—because it can lead to drug-resistant organisms and may give travelers a false sense of security.

Salix has hurdles to jump before it could market rifaximin for this indication (off-label use excluded). To date, studies have only evaluated the effectiveness of rifaximin in the prevention of travelers' diarrhea against a placebo.

Not good enough, for the FDA would probably require a randomized, double-blind, efficacy trial against a 'gold-standard' option, such as fluoroquinolones—and, preventive treatment with quinolones is up to 90 percent effective!

However, increasing resistance to these agents, initially among Campylobacter species and now among other TD pathogens, may limit their benefit in the future—opening the door for rifaximin.
Sales/EPS Estimates

Management forecasts a loss of about $1.12 a share on total product revenue of $180 million for FY 2008.

In our view, this guidance could prove to be too optimistic, for sales visibility of the 1100 mg tablet formulation of balsalazide is poor. In addition, to ease formulary restrictions, the company may need to offer contract rebates, resulting in net price erosion.

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.

Trading Alerts: Monday, May 19, 2008

Negotiators for union mechanics and bag handlers at American Airlines (AMR-$9.17) have rejected a contract proposal from the nation's largest air carrier that called for lump-sum payments instead of wage increases.

Moody's Investors Service assigned its 'Aa3' rating to junior subordinated debentures to be issues by American International Group, Inc (AIG-$39.34) but placed the rating on review for possible downgrade.

Subsidiaries of Allstate Corp (ALL-$50.07) can resume selling new car insurance and other policies in Florida after the insurer turned over documents showing how it sets homeowners rates, the state said Friday.

After recently trashing the stock of Berkshire Hathaway Inc (BERK.A-$1,244.00) just six months ago in December, Barron's is now making a case for its purchase with an article entitled "Cheap Stock?"

Analysts polled by Thomson Reuters expect Campbell Soup Co (CPB-$35.95) to post a profit for the fiscal third-quarter of 44 cents per share on revenue of $1.9 billion, on average. Campbell expects profit to rise 5 percent to 7 percent for fiscal 2008. Investors will be watching to see whether the soup and snacks maker can meet its goal as costs continue to rise.

Fitch Ratings upgraded the issuer default rating and senior unsecured notes of Devon Energy Corp (DVN-$121.38) to BBB+ from BBB. The rating hike reflects the robust credit profile and a debt reduction expected in 2008 for the oil & gas company.

German cosmetics and detergents group Henkel AG expects an agreement on the sale of its 25 percent stake in cleaning and sanitizing provider Ecolab Inc (ECL-$46.70) this year.

Electronic Arts' (ERTS-$46.90) hostile bid for Grand Theft Auto producer Take-Two Interactive (TTWO-$27.10) expired at midnight on Friday.

General Electric Co (GE-$32.13) plans to sell or spin off the business that for a century has put appliances in American homes, a decision that could presage further asset sales, analysts said.

U.S. mobile navigation device company Garmin Ltd (GRMN-$50.02) is the mystery bidder behind a takeover approach for Britain's Raymarine Plc, according to the Sunday Telegraph. At a time of intense consolidation in the burgeoning market for satellite and mobile navigational technology, sources close to the deal said that Raymarine, a supplier of electrical products to leisure boats, would be an ideal fit.

Homebuilder Hovnanian Enterprises Inc (HOV-$9.45) plans to sell as much as $600 million of notes to repay bank debt.

Ixys Corp (IXYS-$7.61) late Friday offered to acquire electronic chipmaker Zilog Inc (ZILG-$4.14) in a cash and stock deal valued at $4.50 a share, or about $17.0 million. The power semiconductor company requested a response by May 27.

Analysts polled by Thomson Reuters expect Lowe's Co (LOW-$24.89) to post a profit for its first-quarter of 40 cents per share on revenue of $12.37 billion, on average. Analysts are looking for any up tick in big-ticket item sales that might signal the beginning of a recovery at the home improvement retailer.

For speculation Friday, "Mad Money" host Jim Cramer turned to his favorite form of alternative energy, wind power, recommending MasTec Inc (MTZ-$10.07) as a stock investors need to own. Cramer said MasTec mainly builds infrastructure for the telco and energy industries, but it also has a budding wind power business that's gaining momentum.

Medarex Inc (MEDX-$8.31) said it plans to unveil new data June 2 at ASCO on its drug Ipilimumab and its use in the treatment of melanoma. Survival data is of key interest to researchers and Wall Street.

Rich Nottenburg, chief strategy and technology officer of Motorola Inc (MOT-$10.07), has become the latest senior staff member to exit since activist investor Carl Icahn strengthened his influence over the cell phone maker, a spokeswoman said on Friday.

Perfect World Co., Ltd (PWRD-$31.30) will release results for the first-quarter ended March 31, 2008, before the market opens on Monday. Analysts polled by Thomson Reuters expect the three-dimensional (3-D) online game developer to post a profit of 35 cents per share on revenue of $39.39 million, on average. Wall Street recently raised share-net and revenue estimates due to higher-than-anticipated growth from the launch of new games and 'meaningful' increases in the number of active paying customers for online games that follow its item-based revenue model.

Starbucks Corp (SBUX-$17.05) shares rose 6 percent in trading Friday after billionaire investor Nelson Peltz disclosed that his investment fund bought a stake in the specialty coffee retailer. Other stakeholders, however, have sold. Goldman Sachs Asset Management revealed it had dumped 12.4 million shares as of March 31, while Morgan Stanley Hedge Fund Partners said it sold 4.9 million shares. And, last month the 10Q Detective cautioned readers that turning weakening fundamentals around at the coffee purveyor would be much harder than brewing up a fresh batch of Pikes Place Roast.

Yahoo! Inc (YHOO-$27.66) is seeking to conceal large portions of a shareholder lawsuit alleging the Internet company's board improperly thwarted Microsoft's $47.5 billion takeover offer, raising shareholder questions over the motives for the secrecy.

Zimmer Holdings Inc (ZMH-$70.11), one of the world’s biggest makers of orthopedic implants, is reviewing its royalty contracts with hundreds of US surgeons in a move that could increase the company’s bill for clearing up a legal case last year to more than $450 million. Zimmer and other orthopedic companies agreed in 2007 to a multimillion-dollar settlement with the U.S. Justice Department concerning product marketing, including allegations that the companies paid orthopedic surgeons exorbitant amounts to be consultants and to use their products exclusively.

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.

Death Takes A Holiday At Hillenbrand Inc

Because I could not stop for Death --
He kindly stopped for me. ~ American poet Emily Dickinson (1830 – 1886)

Rising fuel prices, cold weather/warm weather, sub-prime impairments—all commonly used excused for less-than expected share-net earnings. To this list add increasing life expectancy rates.

Hillenbrand Inc (HI-$23.56) said Tuesday that its second-quarter profits fell about 30 percent from a year ago to $23.3 million, or 37 cents per share, due to separation costs (associated with the recent separation of the Company from Hill-Rom Holdings) and an unfavorable impact of product mix, offset in part by casket price hikes and a return to more 'typical volume of Winter deaths' due to pneumonia and influenza.

Do not go gentle into that good night

Contrary to expectations, the 10Q Detective does not believe that the Batesville, Indiana-based casket maker offers investors stable growth prospects in a "recession-resistant industry."

Unit volume at Hillenbrand was negatively affected by an inventory glut (capacity to make caskets is twice the current demand), for people are living longer.

Competition is hurting sales, too. Even the box retailers are looking to profit by death. Costco Wholesale Corp (COST-$73.27) starting selling discount-priced coffins—and cremation urns—at its warehouse clubs back in 2004.

Cremations as a percentage of total U.S. deaths have increased steadily since the 1960s, resulting in a contraction in the demand for burial caskets, a contributing factor to lower burial casket sales at Hillenbrand, too.

According to a 2005 Harris Poll survey, the reasons for choosing cremation were: to save* money (30%); because it is simpler, less emotional and more convenient (14%); and to save land (13%).

*[Ed. note. Basic burial services—removal of the body, immediate burial with no funeral service—are competitive in price to basic cremation services, until embalming, casket, memorial service, and/or cemetery service prices are added to burial costs.]

Those who favor cremation tend to be better educated and from household with higher incomes.

The most recent figures from 2007 show that the U.S. cremation rate was approximately 32 percent (about 778,000). Based upon increases in acceptance over the past five-year average, the Cremation Association of North America (CANA) forecasts a national cremation rate of 43 percent by 2025, with more than 1.4 million cremations taking place annually.

Kn-knockin' on heaven's door
Kn-knockin' on heaven's door
Kn-knockin' on heaven's door

Cremation Footprint

The compounded annual growth rate (CAGR) of deaths (number in millions) in the United States is 0.3 percent, according to company provided statistics.

Management believes it can offset demographics by focusing on cremations, with a recent CAGR of 1.1 percent.

"You just better start sniffin' your own
rank subjugation jack `cause it's just you
against your tattered libido, the bank and
the mortician, forever man and it wouldn't
be luck if you could get out of life alive"
Kn-kn-knockin' on heaven's door. ~ Guns N' Roses ("Knockin' on Heaven's Door") < youtube video

In FY 2007, the company derived six percent of its $667 million in sales from cremation products.

Looking to offset declining funeral volumes and expand top-line growth, Hillenbrand said it plans to grow its deathcare footprint in cremation services, by hiring both marketers and a team to focus on the cremation business in 2008.

Investors should note, however, that other deathcare providers are not standing still, too. Service Corp Int’l (SCI-$11.12), one of the largest operators of funeral homes and cemetaries, is expanding its cremation products and services, too. In 2007, 41.6% of its comparable funeral services were performed with cremation cases, and the company expects this trend to continue upward in future years.

However, as average gross revenue per unit (not supplied by company) is less for cremation than casket sales (customer add-on merchandising increases revenue/unit), Hillenbrand must demonstrate it can best its average trailing gross margin (three-years) of 41.4 percent through continued improvement in cost management, leveraging customer relationships, and selective acquisitions.

“I am ready to meet my Maker, said English statesman Winston Churchill. “Whether my Maker is prepared for the great ordeal of meeting me is another matter.”

Hillenbrand would probably reply: “just as long as you used one of our coffins!”

Guidance

Management recently reaffirmed its 2008 guidance of revenue in a range of $668 million to $686 million and earnings of $1.27 to $1.47 a share.

Investment Considerations

Albeit, the shares offer an attractive 3.10% dividend yield, but the price fetches 17.2 times estimated midpoint 2008 EPS, a 32 percent premium to its five-year forward EPS growth rate.

Based on life-expectancy tables, death will not starting working overtime again until about 2019, when the first of us Baby Boomers will kick the bucket.

Rising competition, challenges that accompany lower-margin cremation products—short of a transgenic outbreak of avian flu or a blessing from St. Stephen (patron saint of casket makers)—and limited earnings visibility, we believe Hillenbrand is dead money.

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.

Abercrombie & Fitch's Jeffries Smells the Teen Spirit

Michael S Jeffries, Chairman and Chief Executive of Abercrombie & Fitch (ANF-$75.03), received compensation of $9.9 million and $19.9 million for fiscal year 2007 and fiscal year 2006, respectively, according to a recent proxy filing with the SEC.

Almost all of the increase in FY ’06 was in $8.4 million in stock option awards expensed by the teen apparel retailer in 2006.

In 2007, Messer. Jeffries also received a salary of $1.5 million, performance-based cash incentives of $1.9 million, stock grants of $5.0 million, and other compensation totaling $1.4 million, including $656,545 for personal use of helicopter/aircraft use, $543,033 in contributions to his retirement & savings plans and $111,311 in a related tax gross up.

Similar to other retailers, ANF’s profit strategy largely depends on the timely opening of new stores and/or remodeling of existing stores.

A Competent CEO Still in the Building

Under the stewardship of Jeffries, Chairman and Chief Executive Officer of ANF since May 1998, the company has expanded from 250 stores into a chain of 1040 stores in the United States.

In addition, he shepherded new branded concepts, successfully launching five differentiated retail businesses, including Abercrombie & Fitch, targeting college-age kids with its casual—sometimes provocative—causal sportswear apparel, Hollister, which markets Southern California 'cool' at 14 to 18 year-old guys ("dudes") and girls ("bettys"), and the urban, post-grad style RUEHL for those at 22 to 35 year-old men and women.

Net income as a percentage of net sales averaging more than 12.0% per annum, tangible book value almost tripling in value to $19.17 a share, and a return on equity of 31.6% per annum—Jeffries has steered shareholders to profitable returns (with a pristine balance sheet—nil in long-term debt) during the five-year period ended January 31, 2008.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index

The aforementioned metrics are strong testimony that Michael Jeffries has overseen one of the best business models in the apparel retailing industry.

If Jeffries chose to retire for 'good reason,' he would receive a severance package worth about $99.8 million, which includes cash payment of $10.1 million, ANF equity valued at $68.4 million, and a retirement plan value of $22.6 million, according to regulatory filings.

The cash and equity rewards include a pro-rata "stay bonus" (worth $6.0 million if he stayed on as chief executive until January 31, 2009) and the pro rata value of a 1.0 million "career share" grant awarded to Jeffries (at $25.58 a share), respectively.

You Play. You Win. You Play. You Lose. You Play. ~ British writer Jeanette Winterson

On January 30, 2003, the Company amended Jeffries employment contract, with the intent to secure his continued employment through December 30, 2008. [FY 1999 – FY 2003, shareholder equity and share-net grew from $311.1 million to $871.2 million and $1.39 to $2.06, respectively.]

Growth Drivers

There are few visible growth drivers for specialty apparel companies in the United States—a crowded market with similar concepts competing for the ephemeral clothing tastes of tweens, teens, and young adults.

And I forget just why I taste
Oh, yeah, I guess it makes me smile
I found it hard, it's hard to find
Oh well, whatever, nevermind

In our view, with Jeffries at the helm, ANF has the brand strength and management to successfully navigate and penetrate intenational markets.

Hello, Hello, Hello, How Low
Hello, Hello, Hello

Save for three Abercrombie & Fitch stores and three Hollister Company stores in Canada, the company operates one ANF store in London, opened in May 2007.

With the lights out it's less dangerous
Here we are now, entertain us
I feel stupid and contagious
Here we are now, entertain us ~ Nirvana ("Smells Like Teen Spirit" youtube video)

Consistent with its European expansion plans, Abercrombie & Fitch announced its plan to open a new 16,000-square foot store in Copenhagen, Denmark in 2009. Management is also in the process of securing locations in Italy, France, Germany, Spain, and Sweden. The Company plans to open its first flagship in Asia, centrally located in Tokyo's Ginza district, in late 2009.

Debate over the pay-for-performance orthodoxy aside, as shown by compensation activities at ANF: "to win you gotta' play—pay!"

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.

Trading Alerts: Monday, May 12, 2008

American Technology Corp (ATCO-$1.93) late Friday posted share-net loss of 7 cents, wider than the First Call dual-analyst estimate of $(0.03) a share. The maker of hailing and warning acoustic products for the military attributed the decrease in profit margins to lower sales associated with the transition to a new Long Range Acoustic Device (LRAD) product line (launched in late March).

Bally Technologies Inc (BYI-$35.66) will release its third-quarter fiscal 2008 results after the market closes on Monday. Analysts surveyed by FactSet Research expect the gambling equipment company to report fiscal third-quarter earnings of 47 cents a share, on average. On April 18, citing "a very attractive valuation, as well as continued solid business fundamentals," Deutsche Bank gaming analyst, Bill Lerner, upgraded the shares to "BUY" from "HOLD." Investors should be watching margins, for management signaled back in February that it expected improvement in game sales and operations compared to 2007.

After the close of trading, China Security & Surveillance Technology Inc (CSR-$19.05), a supplier of digital surveillance technology, said its president, Shufang Yang, resigned effective Tuesday with "plans to pursue other opportunities outside of the security industry."

Circuit City Stores Inc (CC-$5.08) on Friday gave in to pressure from activist shareholders, essentially putting itself up for sale and agreeing to nominate dissident directors to its board.

Shares of Dr Pepper Snapple (DPS-$25.24) fell flat in their Wall Street debut, trading in New York on Wednesday at a lower-than-expected $25 a share. But when investors finally warm to the beverage maker's story, chances are the stock will bubble up, said columnist Andrew Barry in a Saturday Barron’s online story.

Farmer Bros Co (FARM-$22.58) reported an operating loss for its third-quarter ended March 31, 2008, of $1.0 million, compared with an operating loss of $2.2 million in last year's third. The coffee roaster said profit margins continue to be pressured by volatility in green coffee prices, higher fuel costs and increasing costs for packaging supplies.

FedEx Corp (FDX-$90.37) cut its earnings guidance for fiscal fourth-quarter by fifteen cents, blaming continuing increases in fuel costs. The Memphis-based shipping company said it now expects profits in the range of $1.45 to $1.50 per share for the three months ended May 31, 2008.

Fluor Corp (FLR-$183.97) should report a profit of $1.26 a share in the first quarter on a 27.4 percent Y/Y gain in sales of $4.64 billion, according to analysts surveyed by FactSet Research. The engineering and construction company is expected to show a 36.9 percent Y/Y gain in share-net, fueled by global demand for energy, infrastructure, mining, and basic materials. The Company closed FY 2007 with $30.2 billion in backlog--and investors will be watching for hints of any slowdown in spending by customers in the aforementioned sectors.

Will Google Inc (GOOG-$573.20) and Yahoo! Inc (YHOO-$25.93) come together on a search advertising partnership? The two companies have been discussing an agreement under which Google would deliver some ads alongside Yahoo’s search results.

Hawk Corp (HWK-$16.95), a friction products supplier (brakes, clutches and transmissions) increased its full year 2008 guidance for pre-tax income from continuing operations to between $21.0 million and $23.0 million, an increase of between 7.7 percent and 18.0 percent compared to 2007 pre-tax income from continuing operations of $19.5 million. The Company expects to benefit from improved operating leverage due to increased sales volumes and continued operating improvements through the balance of 2008.

Iomega Corp ($3.83), the Zip drive maker being acquired by data storage systems provider EMC Corp (EMC-$15.96) for $3.85 a share, late Friday reported net income of $1.95 million, or 4 cents a share, a penny below the mean estimate of analysts polled by Thomson Reuters. Revenue for the quarter ended March 30 rose 26 percent to $95.9 million, helped by climbing external hard disk drive product(s) revenue, versus the mean estimate of 92 million its first-quarter profit rose.

On April 1, LDK Solar Co (LDK-$37.05) lowered its profit outlook and raised its revenue guidance for the first-quarter of 2008 ended March 31, due to the Chinese New Year holidays and severe snowstorms. The maker of multicrystalline photovoltaic wafers now estimates fully diluted earnings to be in the range of $0.40 to $0.44 per ADS. Wall Street is not as optimistic, expecting LDK to report profit of 39 cents a share following the close of trading on Monday. Investors should watch for the impact of polysilicon pricing and increasing competition in the wafer segment on gross margin.

Nutritional supplements maker Mannatech Inc (MTEX-$6.42) swung to a loss of $2.3 million in its first quarter, sunk by lower North American sales and litigation costs.

In our view, Wall Street already discounts an expected loss of 19 cents a share when MBIA Inc (MBI-$9.43) reports its first-quarter numbers before the market opens on Monday. What do investors really want to know? Does the bond insurer have enough assets and liquidity to meet maturing liabilities and to post collateral in the event of downgrade from credit rating agencies. In an open letter to shareholders, MBIA Chairman and Chief Executive Officer, Jay Brown, wrote he continues to believe the company "has adequate equity capital to get through this crisis."

McDermott Int’l (MDR-$53.90) is expected to report earnings of 58 cents a share on sales of $1.48 billion in the first-quarter, on average, according to nine analysts surveyed by Thomson Reuters. Last month, the engineering and construction company cautioned Wall Street of business delays in its Offshore Oil & Gas Construction Segment for the 1Q:08 ended March 31. More than one-half of planned offshore working days for major construction vessels were unproductive, primarily due to harsh weather in certain parts of the Asia-Pacific and Middle East regions.

As the only remaining major independent player in the market for Graphic Processing Units used in PCs, NVIDIA Corp (NVDA-$22.53) is well positioned to benefit from increased graphics requirements. However, product related transitional issues are pressuring gross margins, according to Zacks Equity Research. Analyst Steve Biggs, CFA, is lowering his estimates for full fiscal year 2009 to $1.33 a share.

News Corp (NWS-$19.35) unexpectedly withdrew a $580 million offer for Long Island newspaper Newsday, three days after its chairman, Rupert Murdoch, said talks with owner Tribune Company were in a "pretty advanced stage.''

Standard & Poor's cut the corporate credit rating of Pitney-Bowes Inc (PBI-$37.54) and its subsidiaries to 'A' from 'A+.' Last week, the provider of mail processing equipment and integrated mail solutions posted better-than-expected first-quarter results, helped by strength at its mailstream services segment.

Expect Radian Corp (RDN-$5.43) to post a loss of $2.13 a share in the first-quarter, according to analysts polled by Thomson Reuters. On May 2, Fitch Ratings withdrew its ratings on the company and its mortgage insurance and financial guaranty subsidiaries because Radian "had not provided it with adequate information to maintain credible ratings."

Repros Therapeutics Inc (RPRX-$8.83) posted a wider first-quarter loss on higher spending for clinical development programs, including pivotal Phase 3 clinical trials for Proellex, which is being studied for the treatment of symptoms associated with uterine fibroids.

Santarus, Inc (SNTS-$2.50) needs to reduce its dependence on its Zegerid line of products, which are a combination of a proton pump inhibitor and one or more antacids used to treat gastrointestinal disorders, and should try to boost growth through the in-licensing or acquisition of suitable candidates, according to Zacks Equity Research. Analyst Jason Napodano, CFA, is maintaining a Hold rating with a target price of $3.00 a share.

Analysts, on average, are expecting Sprint Nextel Corp (S-$9.38) to post a profit of 2 cents per share on sales of $9.41 billion, according to a poll by Thomson Reuters. Investors will be looking for any variance emerging on subscriber, ARPU and churn trends in the wireless carrier’s earnings report.

Stewart Information Services Corp (STC-$24.50), a real estate information and title insurance provider, said Friday its losses during the first quarter were larger than originally reported because of a previously missed charge of $4.6 million.

Valspar Corp (VLR-$2187) should report anemic Y/Y second-quarter profit growth of about 5 percent, posting share-net of 42 cents, on average, according to analysts surveyed by FactSet Research. J.P. Morgan Securities lowered share-net visibility of the paint and coatings maker on April 11, citing a short-term risk to sales prospects due to the weakness in the residential and commercial construction markets. Owing to higher raw material costs, investors should expect a drop in margins, too.

Virgin Mobile USA Inc (VM-$3.16) and Helio LLC, two cellphone companies that offer service through re-sell agreements with Sprint Nextel Corp., are in advanced merger discussions and could announce a deal in coming weeks, people familiar with the matter said on Friday.

Winn-Dixie Stores, Inc (WINN-$17.29) plans to file its financial results with the Securities and Exchange Commission on Monday, May 12. Two analysts polled by Thomson Reuters expect the Florida-based grocer to record a third-quarter profit of 21 cents a share on sales of $1.71 billion. Shareholders should watch to see if rising food prices are adversely impacting traffic and/or effect of promotional events and Easter holiday shopping on operating margin and sales, respectively.

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.

Drilling Costs Presage Lower Profits at ExxonMobil and Other Majors

ExxonMobilOil, PetroChina, and other oil exploration companies should expect the extended up-cycle in day rates to rent offshore floaters to continue unabated. Declining yields from mature, onshore energy fields coupled with increasing natural gas and oil prices is driving the demand for global drilling activity in deep-water provinces, pushing fleet utilization rates for high-end rig counts close to 100 percent, too.

Record oil prices are lifting corporate profits to dizzying heights throughout the energy industry, with energy giants ExxonMobil, Royal Dutch Shell plc, and BP plc posting record first-quarter 2008 earnings of $10.9 billion, $7.8 billion, and $6.6 billion, respectively, up Y/Y 17 percent, 12 percent, and 48 percent, respectively.

However, rising oil and natural gas prices, combined with full capacity worldwide in the offshore rig market — and competition for these fleets — is hurting the backside of international oil companies, with drilling and production costs more than doubling in recent years. My own review shows that exploration and production costs in the first-quarter Y/Y at ExxonMobil, Royal Dutch Shell, and BP, rose 30 percent to $5.8 billion, 39 percent to 7.4 billion, and 59 percent to $10.0 billion, respectively. [read more…]

Circuit City Should Remind Blockbuster Investors of 2005 Bankruptcy Fears

"Just because I don't care doesn't mean I don't understand." ~ Homer Simpson

Circuit City Stores Inc (CC-$4.95) rejected the recent offer by Blockbuster Inc (BBI-$2.79) to acquire the company for between $6.00 and $8.00 per share in cash, questioning how the video rental chain would finance the offering.

Circuit City Board of Directors – Fools or Geniuses

There are a good many fools who call me a friend, and also a good many friends who call me a fool. ~ Essayist G K Chesterton (1874 – 1936)

Activist shareholder Wattles Capital Management, a 6.5 percent holder of the electronic retailer’s shares, in a proxy filing derided management and the Board for "dismissing the legitimate, third-party interest in acquiring the Company."

Mark Wattles faulted the Board, too, for its failure to open its books: "During the due diligence process the ability of Blockbuster to finance the transaction and the ultimate structure of the financing [could be] fully fleshed out by all parties."

Mr. Wattles is best known for selling the video chain he founded, Hollywood Entertainment Group, to Movie Gallery Inc for approximately $1.2 billion in April 2005.

In the view of the 10Q Detective, the Board of Directors did not neglect their fiduciary duties. Their refusal to negotiate further with Blockbuster was in the best interests of shareholders, for after examining the books of the video chain we strongly believe Blockbuster would find it difficult to (i) refinance its existing debt and/or (ii) raise the proceeds sufficient to purchase Circuit City.

How would BBI, which held just $184.6 million of cash on its balance sheet and burned through $56.2 million in cash from its operating activities, as of the fourth quarter ended Jan. 6, 2008, finance (up to) a $1.4 billion acquisition?

Blockbuster CEO Jim Keyes tried to assure Circuit City and investors that billionaire Carl C. Icahn, who beneficially owns 16 percent and 7.7 percent of Blockbuster’s Class A shares and B shares, would provide support for the deal (backstopping a rights offering).

You might as well praise a man for not robbing a bank. ~ American golfer Bobby Jones (1902 – 1971)

Amid foundering growth prospects at Circuit City, in our view, Mark Wattles feigned sympathy for other long-suffering Circuit City shareholders. A savvy investor—not accustomed to being on the losing end of a deal—he now sits on dead money, with purchases of several million shares made in December 2007 at prices between $6.00 - $7.00 per share, according to regulatory filings with the SEC. His comment that they [shareholders] "were immediately and substantially damaged" because of "a lack of cooperation by the Board"rings hollow.

Bait and Switch

Blockbuster was definitively less than a "legitimate third party."

BBI was tapped out. As of January 6, 2008, BBI’s available borrowing capacity totaled $247.3 million—significantly less than the $1.4 billion tender offer.

In addition to aggregate indebtedness of $757.8 million, minimum rental payments under non-cancelable operating leases (commitments for various real and personal property, including office space, and stores) of $542.6 million and $438.4 million come due in fiscal 2008 and fiscal 2009, respectively.

The 10Q Detective opines that BBI’s play for the electronic gadgets retailer was an effort to turn Street attention away from its own business failings—and, a last-ditch effort to revive a moribund brick& mortar business model. "The transaction would allow both companies to benefit from the revenue growth generated by their complementary products," said CEO Keyes. "While the resulting synergies would substantially improve consolidated financial performance, thereby increasing shareholder value.

Does anyone remember the RadioShack - Blockbuster alliance? In June 2001, 130 “RadioShack Cool Things” boutiques opened in Blockbuster outlets--six months later BBI pulled the plug on the 'pilot program.'

"I'm normally not a praying man, but if you're up there, please save me Superman." ~ Homer Simpson.

Increasing competition from other retailers (more favorable studio pricing policies for mass merchants such as Wal-Mart, Best Buy and Target) coupled with a shorter "rental window" (timing and exclusivity of home video retailers versus alternative methods of content delivery, such as video-on-demand) is the video trailer for an accumulated deficit of $4.85 billion at this disaster-in the-making motion picture!

"Kids, you tried your best and you failed miserably. The lesson is, never try." ~ Homer Simpson

Although same-store sales increased 3.4 percent Y/Y, rental and merchandise margins fell 450 basis points and 160 basis points, respectively, to 60.7% and 23.3 percent. Management did not breakout revenue per transaction, but we suspect that much of the same-store comps improvement was due to price hikes.

Is BBI is headed for bankruptcy?

In the early 60's Edward Altman used statistical techniques—combining a set of 5 financial ratios—to predict a company's fiscal fitness—its probability of failure—called the Altman Z-Score. The beauty of Altman’s equation is its ability to pinch the fat and read only the muscle on a balance sheet.

Two of the eight variables used in Altman’s equation are working capital and total assets. As of fiscal year ended January 6, BBI reported Total Assets of $3.14 billion. Back out, merchandise inventories & rental library (zero residual values), pre-paid assets (monies already allocated for future uses), and goodwill—value of Total Assets declines about 60 percent to $1.30 billion. Ergo, working capital falls from $170.3 million to $(852.5) million, and the Ratio of Working Capital/Total Assets at BBI plummets to less than zero from 5.42 percent.

A Z-SCORE less than 1.80 suggests the "Probability of Financial Embarassment is very High." BBI scored a negative 2.90!

"Oh, people can come up with statistics to prove anything, Kent. 14% of people know that."

BBI escaped insolvency in 2005--when liquidity problems threatened its a/c payable(s) with its trade distributors. Unfortunely, Homer, this time around, we believe the statistics do not bode well for the future of Blockbuster Inc.

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.