Liberty City Rules At Take-Two Interactive

The Grand Theft Auto franchise accounted for 60 percent, or $710 million, of total publishing sales in the year-ended October 2008 at Take-Two Interactive Software (TTWO-$7.10).

The cost to develop a frontline software product can range from $10 million to $30 million. Ergo, it is cheaper—and safer—to roll out sequels. One could question management’s commitment to bringing to market creative, new titles: in 2008, Take-Two spent 28.7% of revenue, or $353.2 million, on software development, an increase of only $32.9 million from the prior year. Albeit management claims to have 36 titles in various stages of development, most of them are retreads of ... Read More….

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.

Garmin's Nuvifone -- Dead on Arrival?

Ten months after Garmin Ltd (GRMN-$18.80) announced plans to enter the GPS (Global Positioning System) — enabled smart phone market, the provider of satellite navigation and communication devices said its Nuvifone has received approval from the Federal Communications Commission. Good news for investors, as more than 70 percent of the company’s current growth comes from sales of personal navigation devices (PNDs) in its auto/ personal mobile series of products — where price is more important than brand to most customers…. Read More….

Perchance, he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that. ~ English Poet John Donne (1572 – 1631), Meditation XVII

Addicted to Profits at Green Mountain Coffee Roasters

Despite formidable competitors in the single-cup brew industry, including the FLAVIA beverage system (MARS), the TASSIMO beverage system (KRAFT), and the SENSOE brewing system (Sara Lee), among others, Green Mountain Coffee Roasters (GMCR-$38.42) is showing impressive growth in the installed base of brewing systems. At October 1, Keurig increased its unit market share for coffee makers in the single-serve cup category to 60 percent, up from a 33 percent market share in the prior year—which bodes well for its annuity-like income stream (from future sales of K-Cup portion packs and accessories)…. Read More….

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.

Debt Level a Tall Order for Staples

Given slower store traffic and an uncertain global economic environment, did Staples (SPLS-$18.35) pick the wrong time to spend approximately $4.4 billion in connection with the June 30 acquisition of Dutch peer Corporate Express? Borrowings and debt service requirements have increased substantially at the world’s largest office products retailer.

The current level of indebtedness (75 percent of shareholder equity), combined with maturing debt obligations and vulnerability to a prolonged downturn in consumer and business spending, will limit Staples’ ability to borrow additional amounts (for working capital, future acquisitions, and capital spending initiatives) needed to resuscitate growth…. Read More….

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.

America’s Car-Mart Caters to Riskier Borrowers

Whereas competitors, such as AutoNation and CarMax, currently face difficulty in moving trucks and sport utility vehicles off their lots, due to changing consumer buying patterns and/or restricted access in obtaining auto financing, America’s Car-Mart (CRMT-$12.08) is finding success in selling basic and affordable transportation. Against a backdrop of rising unemployment, Car-Mart’s decision to not focus on luxury or sports cars is paying dividends. The average car sold in 2008 cost $8,690, and was between three and ten years of age with 80,000 to 130,000 miles on the odometer.

Lending money to sub-prime borrowers, however, is not without challenges. For the three months ended October 31, provision for credit losses was 22 percent of net sales…. Read More….

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.

Upscale Shoppers Pinching Pennies at Nordstrom

Are upscale shoppers less susceptible to economic downturns? Luxury retailer Nordstrom (JWN-$12.63) is now acutely aware that even the wealthy are holding back on purchasing new holiday fashions, and with housing values still in freefall (particularly in California, where one-third of its stores are located), credit delinquency rates are rising, according to…. Read More….

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.

Can Chesapeake Break Spending Habit?

Aubrey McClendon, Chief Executive Officer of Chesapeake Energy (CHK-$16.30), told investors on a conference call on Monday that the the natural gas company’s revised operating and capital budget for 2009 and 2010 could be funded with internally generated cash flow. It is important to note, however, that cash flow from operations and revolving bank credit lines have historically been insufficient to fund all of Chesapeake’s annual expenditures…. Read More….

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.

SubPrime Mess Still Haunts H&R Block

Despite shedding its money-losing mortgage operations to focus on its tax business, H&R Block (HRB-$19.95) is still haunted by collapsing real-estate prices. As of the second-quarter ended October 30, the largest provider of U.S. tax preparation services held approximately $812 million in residential loans purchased from former mortgage loan affiliates, Option One and H&R Block Mortgage, net $63.7 million in allowance for loan losses, according to its…. Read More….

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.

Target Undercut By Consumer Credit Charges

Amid declining comparable store sales resulting from a decrease in consumer spending, discount retailer Target (TGT-$39.00) is also being adversely affected by rising bad debt expenses as consumer creditworthiness continues to deteriorate. In response, Chief Financial Officer Doug Scovanner told investors on the November earnings call that the retailer is further tightening finance terms for its card holders…. read more….

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.

Acergy SA -- Betting on an Energy Turnaround

Acergy (ACGY-$5.72), a Norwegian-based seabed-to-surface engineering and construction contractor for the offshore oil and gas industry, expects to end the 2008 fiscal year with a backlog of approximately $2.6 billion, down from $3.3 billion at the end of the third-quarter, resulting from delays in signings of new projects in Nigeria and other offshore global locations due to falling energy prices. Albeit the company has a strong balance sheet, the uncertainty and timing of new project deals will require Acergy to cut back on cash outflows in 2009….. read more….

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.

Fleetwood's Cash Concerns Overshadow Hyped Hybrid RV

Fleetwood Enterprises Inc. (FLE-$0.25) unveiled its first-ever hybrid motor home at the annual National RV Trade Show in Louisville, Ky., last week. The Fleetwood Hybrid features increased fuel economy, getting up to 12 miles to the gallon, about 42 percent more than its conventional recreational vehicles. Despite its "green appeal," Fleetwood said it had no plans at this time to manufacture the concept hybrid—likely due to weakening demand for motor homes and cash flow problems endemic to Fleetwood…. continue reading….

…. Decision to delay the introduction of its hybrid vehicle probably was influenced by continued discounting by dealers (to move inventory of their lots) and turmoil in the credit markets. Heather Everett, a Fleetwood spokeswoman, told the Press-Enterprise a hybrid RV would likely cost $40,000 to $45,000 more than a conventional RV. A few gallons of diesel saved per mile does little to offset the higher cost—coupled with lenders tightening credit terms, including higher down payments….

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.

NVIDIA Not Intimidated By Intel

Intel is looking to wrestle share away from graphics chipset maker Nvidia (NVDA-$7.36) by putting integrated-graphics silicon into its cental processing units. Nvidia, which dominates the market for high-end graphics popular among gamers, is fighting back against its cross-town rival by moving aggressively to capture share for entertainment applications in smaller, mobile Internet devices. Luckily for Nvidia, it is able to subsidize R&D of its new class of mobile chip, called Tegra, with the millions it saves on its tax bill…. continue reading….

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.

Beazer Homes' Stock Price Soars on Weak Outlook

Even though the quarterly loss more than tripled at Beazer Homes (BZH-$2.06) and its management expects losses to continue through 2009, the share price of the homebuilder has jumped more than 65 percent in the last two trading days—Why? "All dogs have their day; even rabid dogs," said Scottish historian Thomas Carlisle. This dog is full of fleas. Avoid— for the company could find itself with little borrowing capacity needed to stay afloat until industry conditions improve…. continue reading….

How Certain Are 2009 Tax Profits at Jackson Hewitt?

Despite popular thinking on the certainty of taxes, recent filings with the SEC suggest even Jackson Hewitt Tax Service (JTX-$13.53) – and its business partners — is taking a cautious approach to the coming year. The No. 2 U.S. tax return preparer, which competes with H&R Block, has reworked agreements with its bank and credit card affiliates, consolidated its senior management team and struck an agreement for a “winning” marketing program…. continue reading….

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.

Rebates! Rebates! Driving Pill - Popping at NBTY

Vitamin retailer NBTY (NYT-$13.83) maker of familiar brands Nature’s Bounty, Solgar, Osteo Bi-Flex and Rexall, is becoming more dependent on one customer and promotional programs and customer rebates to drive sales, which raises other concerns about consumer traffic trends and margin deterioration… continue reading….

"Americans have the most expensive pee in the world. If I could collect the pee and filter it, I'd be the richest man in the world." ~ Dr. Alfred Brown, Auburn University

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.

No Busy Signals at American Tower

American Tower (AMT-$25.43) is a leading owner and operator of communications sites for the wireless and broadcast industries, with more than 23,000 sites in the United States, Mexico, Brazil and India. Against the current credit backdrop, the company’s financial position remains solid relative to its publicly traded peers, Crown Castle Int’l and SBA Communications. In addition, the comparable, weighted average term of debt for American Towers, Crown Castle, and SBA was 5.2 years, 2.6 years, and 3.1 years, respectively, at September 30.

American Tower has approximately $600 million of liquidity and no material maturities until 2012. In the unlikely event that credit markets were to remain dislocated over the time period until these maturities occur in 2012, management believes that its operations would generate sufficient internal cash from operations to pay off …. continue reading….

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.

Hornsbeck Offshore Optimistic on On Deep Water Rates

Hornbeck Offshore (HOS-$16.77) does not believe that short-term fluctuations in energy prices will affect the long-range investment plans of major oil companies, and remains upbeat on long-term prospects for day rate pricing of its offshore supply vessels. Chairman and Chief Executive Officer Todd Hornbeck told analysts on the third-quarter 2008 earnings call that a growing world population, developing economies in China, India, Latin America, and the Far East, and projected long-term overall economic growth– despite existing global events— will result in net increases in demand for hydrocarbons. Nonetheless, the company remains dependent on cash flow generated from existing supply vessels to meet contractual obligations on new builds under construction … continue reading…

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.

Nike Sues MercadoLibre over Fake Sneakers

On August 14, 2008, Nike requested a preliminary injunction against a subsidiary of MercadoLibre’s (MELI-$11.16) in the First Civil and Commercial Federal Court, Argentina. The sportswear maker alleged that the subsidiary of the leading online auctioneer in Latin America was infringing Nike’s trademarks as a result of sellers listing allegedly counterfeit Nike branded products through the Argentine page of the Company’s website. A preliminary injunction was granted on August 11, 2008, to suspend the offer of Nike-branded products …continue reading…

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.

More House Cat than Cougar in Force Protection's Future?

Force Protection (FRPT-$3.47), a manufacturer of ballistic- and blast-protected wheeled vehicles for the U.S. military, reported a profit of $19.9 million for the third quarter of 2008 ended September 30, compared to a net loss of $(799,000) in the prior-year quarter. Chief Executive Officer Michael Moody credited the earnings’ turnaround, in part, to growth in spare parts and services revenues. Nonetheless, as the company lost out in its bid to build the Pentagon’s next-generation, mine-resistant Humvee, forward growth visibility is somewhat hazy. The Cougar series remains its top ‘Mine Resistant Ambush Protected’ (MRAP) vehicle, representing 95 percent, or $882 million, of total MRAP vehicles it sold to the U.S. military for the nine-months ended September 2008.

A key challenge to future growth will be lessening its dependence on the Department of Defense for virtually all of its business, especially when President-elect Obama campaigned on withdrawing substantially all troops from Iraq in 2010. [ …continue reading… ]

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.

Wanted: New Business Model at Crocs

Sales at Crocs (CROX-$1.16) fell 32 percent in the third-quarter ended September 30 to $174.2 million, as the company experienced substantial declines in demand for its brightly colored clogs, largely attributable to reduced consumer spending, market share erosion to cheap knock-offs and counterfeits, and decreased foot traffic at shopping malls. Challenging global economic and retail environments aside, management is ignoring the reality that the novelty of its footwear, introduced in 2002, has worn thin. Further evidence that the lightweight, resin clogs are long past the maturity phase of their product life cycle can be found in [… continued … ]

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.

Ford Motor Company's Retiree Obligations

Ford Motor Co (F-$1.58) said it burned through $7.7 billion in its third-quarter ended September 30, reflecting operating losses and the carmaker’s purchase of Ford Credit debt securities. To conserve cash, Ford has undertaken several cost reduction initiatives, including salaried job cuts and reduced capital spending (up to $1 billion in both 2009 and 2010). Even if management is successful in meeting its objective of trimming $5 billion in cash ouflows from North American operations, the company is still obligated to fund $13.2 billion owed to retired workers (and spouses) covered under terms of a Health Care Settlement Trust Agreement reached with the United Auto Workers union. [ continued…]

Jamba Juice Growth Prospects Sour

For the third quarter of fiscal 2008 ended October 7, comparable store sales at Jamba Juice (JMBA-$0.60) declined by 10.3 percent. While other quick service restaurant concepts have also experienced declining comparative store sales in the current economy, management of the smoothie maker said it believed sales declines had been exacerbated by a combination of the high concentration of Company Stores in states facing high home foreclosure and adverse economic activity, and the consequences of focusing corporate resources in trying to grow operations too quickly. California operations generate approximately 75 percent of total revenue.

What is rare, however, is that management owned up to another misstep — one rarely admitted by other fast food operators. As stated in its third-quarter 10-Q regulatory filing:

"By significantly slowing Company Stores growth, the Company expects to better optimize its resources and better understand potential cannibalization resulting from new Company Stores, which we believe contributed to declines in our Company Store average sales volumes and increased costs."

Although I applaud management for being candid, I question whether their business model itself can offer sustainable profitability. The Jamba branding message of encouraging "healthy living," though notable, is an easily duplicated strategy, with few barriers to entry — as any purveyor of quick, convenient food and beverage products, such as coffee shops, donut shops and grocery stores, can offer similar fruit drinks and healthy food items.

This article first appeared in BNET Insight: 10-Q Detective.

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.

Higher Day Rates at Transocean

The Company: Transocean (RIG-$52.00), the world’s largest offshore drilling contractor.

The Filing: FORM 10-Q filed with the SEC on November 6, 2008.

The Finding: Transocean believes most of its deepwater drilling projects remain economically viable at $60 oil and the company reports seeing no change in interest from its customers regarding additional deepwater capacity, or renewal of existing services.

The Upshot: Transocean continues to experience historically high day rates across its high-end fleet, with average daily revenue per rig of $369,300, up 26 percent from third-quarter 2007. Management expects deep-water and harsh environment drilling revenue in the fourth quarter of 2008 and the full year 2009 to benefit from commencement of higher rate contracts and start-up operations of five new ultra-deepwater drillships. In addition, the company believes that exploration successes in the deepwater offshore provinces of Brazil, Angola, and India will continue to drive significant demand for its Ultra-Deepwater Floaters.

Transocean inked a five-year deal in October with Exxon Mobil for a Hyundai Heavy Industries drillship. The contract is expected to commence in the fourth quarter of 2010 at $650,000 a day for operations in Brazil and $640,000 per day for operations in the US Gulf of Mexico. Depending on the country of operations, contract revenues over the contract term are expected to range from $1.17 billion to $1.19 billion.

Chief Executive Bob Long told analysts during the recent third-quarter 2008 conference call, however, that there were some markets in the mid-water floater and jackup business, such as the North Sea, where he anticipated $60 oil might adversely impact margins. He is also no longer optimistic that the $700,000 threshold for deepwater average day rates will be crossed this year.

Contract backlog at October 31 was approximately $41.1 billion, up from approximately $32 billion at December 31, 2007. In addition, no contract contains any put clause where counter-parties could nullify or modify terms to any signed deals due to falling energy prices. Long said on the call that 90 percent of its drilling contracts are with investment-grade companies or state-owned oil companies.

The Question: Despite signed contracts, with oil prices now trending below $60 a barrel, could Brazil’s state-owned oil company, Petrobras, and/or independents (such as Chevron and StatoilHydro) delay drilling activities of certain offshore blocks in the (difficult to access) Brazilian Tupi field and Gulf of Mexico — and postpone delivery of eight Transocean drillships still in construction shipyards?

This article first appeared in BNET Energy.

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.

Oral Remodulin Failure Sinks United Therapeutics

United Therapeutics Corp (UTHR-$58.62) said a late-stage trial of its experimental oral treatment for pulmonary arterial hypertension (sustained-release formulation of treprostinil) failed to meet the main goal of the study, a six-minute walking distance at Week 16, sending its shares tumbling 36 percent to a new year-low. As the 10-Q Detective warned readers back on August 27, the company was drifting into troubled waters, given the over-reliance on Remodulin for top-line growth.

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.

BNET Update: Monday, November 17, 2008

Apache (APA-$76.05), the largest acreage holder in Egypt, continues to benefit from its active drilling program in the Western Desert, a gas-rich area of about 450,000-square kilometers.

Avis Budget Group (CAR-$1.03) warned on Nov. 7 that it might be unable to comply with financial covenants contained in its principal corporate credit facility, due to slowing demand for vehicle rental services and increases in borrowing costs associated with fleet financing.

Online jewelry retailer Bidz.com (BIDZ-$2.84) said Tuesday that new buyers to its website for the third-quarter of 2008 fell 2.4% to 54,072, as potential customers shied away from discretionary purchases of luxury goods

Capstone Turbine (CPST-$1.00) continues to incur significant operating losses, and sales growth remains insufficient to cover operating costs.

Going forward, while comScore (SCOR-$9.33) anticipates the need for ongoing investments in technical infrastructure and new digital market intelligence formats to support the combination of an increased customer base and new products, management believes that capex requirements will be less than the revenue growth generated by these actions.

Now may be a propitious time for Kerkorian increase his stake in Delta Petroleum (DPTR-$5.69).

A key obstacle to future growth at Force Protection (FRPT-$2.81), a manufacturer of ballistic- and blast-protected wheeled vehicles, will be lessening its dependence on the Department of Defense for virtually all of its business.

These first appeared in either BNET Energy or BNET Insight: 10-Q Detective.

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.

Has Warren Buffett's Hot Hand Finally Gone Cold?

Warren Buffett, 78, through his investment vehicle Berkshire Hathaway (BRK.A-$109,000), spent billions buying stakes last month in Goldman Sachs and General Electric? As recorded in the third-quarter 2008 regulatory filing:

On October 1, 2008, Berkshire invested $5 billion in Goldman Sachs perpetual preferred stock. The preferred stock has a stated dividend rate of 10% and is callable at any time at a 10% premium. Berkshire also acquired warrants to purchase $5 billion of Goldman Sachs common stock at $115 per share.

On October 16, 2008, Berkshire invested $3 billion in General Electric Company perpetual preferred stock. The preferred stock has a stated dividend rate of 10% and is callable after three years at a 10% premium. Berkshire also acquired warrants to purchase $3 billion of common stock at $22.25 per share. The Goldman Sachs and General Electric warrants are exercisable at any time over five years. These investments were funded with available cash balances.

Where others see junk, Buffett looks for opportunity. Did the Oracle from Omaha move too quickly? Goldman Sachs, which will report an unexpected loss in the fourth-quarter 2008, has lost 43 percent in value in the last month; shares in General Electric are also trading 18 percent below the stated exercise price.

“If a business does well, the stock eventually follows.” – Warren Buffett

Legendary for his patience, Buffett can afford to wait for a turnaround, as he is receiving a yield of 10 percent on his preferred holdings.

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.

BNET Update: Monday, November 10, 2008

As lower natural gas prices and tight credit cause some natural gas companies to cut back on drilling activity in the costly Appalachian Basin, Carrizo Oil & Gas (CRZO-$23.05) announced a joint venture with Avista Capital Partners to pursue growth opportunities in the Marcellus Shale. Terms of the deal, however, initially favor the private equity firm.

To offset weaker construction spending in the United States, Europe, and Japan, Caterpillar (CAT-$38.45), the global leader of construction and mining equipment, is making it easier for customers in developing countries to access credit.

In the current environment of lower natural gas prices, especially in the Mid-Continent and Permian Basin, Cimarex Energy (XEC-$$33.67) expects to drop its operating rig count from the third-quarter high at 42 to somewhere between 25 and 30 rigs by the middle of the fourth-quarter ended December 31. As the company has historically increased production through the drill bit, one would expect downward revisions to add-ons in 2009 production and proved reserves to follow.

Turmoil in the financial markets has temporarily limited credit reporter Equifax’s (EFX-$25.32) ability to finance new initiatives via the credit markets

Albeit Exxon Mobil (XOM-$73.95) reduced GreenHouse Gas emissions by about 5 million metric tons in 2007 — equivalent to removing about one million cars from roads in the United States — it is clear from a read of the company’s third-quarter 2008 earnings report that policy options seriously being pursued by the company do not include a commitment to developing renewable fuel alternatives.

In its most recent quarterly filing, Manpower, Inc (MAN-$29.50) detailed a write-down of $140.8 million in goodwill and $22.3 million in intangible assets, signaling another asset bubble bursting in this global slowdown – that of employment service providers.

Mobile phone maker Motorola (MOT-S4.79), still stumbling from its failure to design smartphones to compete against the likes of Apple’s iPhone and Blackberry models from Research in Motion, now has a new misstep to deal with – poor returns on its in-house Fund, SigmaFund.

Based on the current annualized distribution rate of $1.20 a share, Provident Energy Trust (PVX-$6.10) offers an attractive dividend yield of approximately 20 percent. In addition, much of the income being generated from the company’s oil and gas properties would be effectively sheltered from the proposed legislation by the Canadian government, Budget Implementation Act (Bill C-52), until 2016.

SunPower (SPWRA-$33.86) filed its third-quarter 10-Q with the Securities and Exchange Commission late Friday. In addition to new foreign exchange currency issues, a read of the report suggests the solar cell maker could face a cash shortage in coming quarters, too.

These first appeared in either BNET Energy or BNET Insight: 10-Q Detective.

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.

Is CBS Eyeing Dividend Cut?

Les Moonves, Chief Executive of CBS Corp. (CBS-$8.25), told analysts on the third-quarter 2008 earnings call that the company was committed to paying a healthy dividend to its shareholders. As global recessionary pressures mount, whether the broadcaster can continue to produce the free cash necessary to support the current 13 percent yield, or $1.08 per share, is questionable.

During the third-quarter ended September 30, free cash flow was a $38 million use of cash compared to the 2007 September-quarter when CBS threw off excess cash of $265 million. The drop in free cash flow of $304 million was due to $120 million lower adjusted operating income (before depreciation and amortization), resulting from a nearly seven percent year-on-year drop in advertising sales and higher capital spending (at TV stations and on a London Underground advertising contract).

Ad buys are the engine driving growth at CBS, representing approximately 70 percent of total sales. In my opinion, uncertainties from current economic conditions will likely depress advertising sales in 2009, blurring earnings visibility at the "EYE" network. Although non-cash in nature, anticipated cash flows to be generated from certain properties in the future have been lowered, as evidenced by write-downs disclosed in the third-quarter 2008 regulatory filing:

• "During the third quarter of 2008, the Company performed an interim impairment test as a result of its assessment of factors such as the continuation of adverse market conditions, which affected the Company's market value and trading multiples for entities within the Company's industry, as well as the continued economic slowdown which has adversely affected the Company's advertising revenues, primarily at the Company's local businesses.
• As a result of this impairment test, the Company recorded a non-cash impairment charge of $14.12 billion in the third quarter of 2008 to reduce the carrying value of goodwill by $10.99 billion and intangible assets by $3.13 billion. The charge was reflected as a reduction to goodwill at the Television segment of $5.81 billion, the Radio segment of $2.33 billion and the Outdoor segment of $2.85 billion as well as a reduction to the carrying value of intangible assets related to FCC licenses at the Television segment of $2.13 billion and the Radio segment of $984.6 million, and franchise agreements at the Outdoor segment of $8.2 million."

At first glance, the balance sheet appears healthy, with leverage of 2.3 times operating income (before depreciation and amortization) and a coverage ratio at 5.6 times interest costs. However, cash on-hand has fallen $1.75 billion in six-months to $550 million, due to stock buybacks, CNET acquisition, and lower operating income.

The company is comfortable with a dividend payout ratio of approximately 50 percent, suggesting the company will need net profit of about $1.37 billion in 2009 to satisfy existing common stock dividend commitments. Whether earnings from higher-margin content businesses, such as syndication and online/interactive, will offset anticipated pullbacks in radio and TV spending by advertising customers remains the $64,000 Question.

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.

Credit Crunch Flattens Growth at Harley-Davidson

Shipments of Harley-Davidson (HOG-$23.89) motorcycles totaled 74,704 units for the third-quarter ended September 30, a decrease of 11,831 units or 13.7 percent compared to last year's third quarter. Deteriorating economic conditions are also adversely impacting credit results at Harley-Davidson Financial Services (HDFS), according to the recent FORM 10-Q regulatory filing:

Annualized losses on HDFS’ managed retail motorcycle loans were 1.97% during the first nine months of 2008 compared to 1.65% during the first nine months of 2007. The 30-day delinquency rate for managed retail motorcycle loans at September 28, 2008 increased to 5.59% from 4.91% at September 30, 2007. Managed retail loans include loans held by HDFS as well as those sold through securitization transactions. The increase in losses was primarily due to a higher incidence of loss resulting from an increase in delinquent accounts. The Company expects that HDFS will continue to experience higher delinquencies and credit losses as a percentage of managed retail motorcycle loans in 2008 as compared to 2007.

Going forward, Chief Executive Officer Jim Ziemer expects the global economy and consumer concerns to continue to create challenges for Harley-Davidson through year-end and into 2009. The company has narrowed its shipment expectations to 303,500 to 306,000 Harley-Davidson motorcycles for the fourth-quarter.

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.

BNET Update: Monday, November 3, 2008

In 2001, eBay (EBAY-$15.27) bought a 19.5 percent stake in the Latin American online auction-site operator MercadoLibre. The global slowdown and current turmoil in the credit markets, however, has eroded the value of that holding.

Returning an attractive 17.2% on shareholder equity, on average, over the last five years, the board of Ensco International (ESV-$38.05) obviously felt that repurchasing its own shares on the open market was a prudent investment. Like many of its offshore contract drilling peers who made similar fiduciary decisions, however, Ensco International overpaid for its own stock.

First Solar (FSLR-$143.70) is striving to open new markets that do not depend on traditional photovoltaic (PV) subsidiaries, such as feed-in-tariffs, and can offer significant long-term growth, such as the California Renewable Portfolio Standards market for utility scale generation. Despite good intentions, approximately 70 percent of 2008 module volumes and an estimated 60 percent of 2009 module volumes will be deployed in Germany.

For-profit education provider ITT Educational Services (ESI-$87.65) delivered on its third-quarter ended September 30, with sales and operating income up year-on-year 17 percent and 28 percent, on a 19.4% jump in student enrollment. Going forward, however, ITT’s prospects during the current economic climate appear less sanguine, for disruptions in the credit markets have reduced significantly the amount of private loans available to potential students.

McMoRan’s Explorations’ (MMR-$14.19) strategy focuses on the deep gas plays, drilling to depths of 15,000 to 25,000 feet in the shallow waters of the Gulf of Mexico and Gulf Coast area, and on ultra-deep gas plays below 25,000 feet. Drilling in deep water is not without risk, however, as assessments following Hurricane Ike identified several platforms with significant structural damage. Based on current information, McMoran currently expects fourth-quarter production to average approximately 180 MMcfe per day, down from a production average of about 296 MMcfe/d in July and August.

Tidewater (TDW-$43.61) has 57 vessel commitments of various class and type, ranging from offshore tugs to deepwater vessels, scheduled for delivery from November 2008 through 2012. Given uncertainties in the credit and energy markets, the company is in the process of re-assessing its previous strategy of fleet expansion and replacement plans.

Jeff Fettig, Chief Executive of Whirlpool Corp. (WHR-$46.65) told analysts on the third-quarter 2008 earnings call the company was implementing previously announced cost-based price increases and cost control initiatives, such as plant closings, yet he failed to discuss the potential impact on the company’s profitability and cash flow generation should the credit crisis adversely impact Latin American operations.

Anticipating a challenging business environment in 2009, Xerox Corp. (XRX-$8.02) will slash five percent of its work force, or about 3,000 jobs, in the next six months. Going forward, retirees of the copier giant, however, will share the burden in cost displacements, too.

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.

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.

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.

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.

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.

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.

"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.

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.