Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.
Continental Airlines (CAL-$11.50) likes to brag that its Work Hard. Fly Right campaign reflects the philosophy of the world’s fifth largest air carrier. That – and its corporate culture –says the company, is what helped make Continental the most admired airline among FORTUNE Magazine’s 2009 list of "Most Admired Global Companies." This adulation, however, likely excludes dog lovers – given its policy of banning certain kinds of puppies from flying to their new foster homes. Just ask Joey, a four-month old pit bull…. Read More at BNET Travel.
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 distribution deal Netflix (NFLX-$55.32) signed with Sony is important because it not only ends the lock Microsoft had on the U.S. movie-rental service provider in the game console market — the Xbox 360 had previously been the exclusive videogame brand (the expiring agreement was recently extended to spring 2010 at Microsoft’s option) — but also because it broadens the number of TV sets already enabled to accept streaming Internet content. And, with about nine million PS3 users, Sony offers fertile ground from which Netflix can grow its own subscriber base.
AMR (AMR-$5.90), the corporate parent of American Airlines, continues to jettison unprofitable routes and shift more traffic capacity to hubs in Dallas/Fort Worth, Chicago, Miami and New York, along with the city of Los Angeles. That said, AMR’s competitive global presence could be severely impaired — think loss of feeder traffic — if two cornerstone OneWorld carrier initiatives collapse.
AMR and fellow partners British Airways and Iberia are looking to expand their existing oneworld pact to include coordinated schedules and prices — figuring that jointly serving destinations will create operating efficiencies and is permissible under the liberalized flight policies of the 2007 U.S. – EU “Open Skies” agreement(intended to deregulate transatlantic markets and permit airline operators to enter into cooperative arrangements, including codesharing, franchising, and leasing). In September 2009, the European Union issued a “Statement of Objection” related to the proposed joint business proposal …. Continue Reading at BNET Travel ….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Expect European regulators to likely recommend that the use of Biogen Idec’s (BIIB-$44.16) drug for relapsing forms of multiple sclerosis, Tysabri, include mandatory drug holidays after a determined length of use, as 23 cases of progressive multifocal leukoencephalopathy (PML) have been reported in those on therapy. How would this development impact recent sales momentum of Tysabri – e.g. for the first time since early 2008 Copaxone (glatiramer acetate) patients became the primary source of switches – and the growing importance of the MS drug to operating profitability? Read more at BNET Pharma Industries….
Web Buzz: Biogen Idec Update – could there be a link between the seemingly higher prevalence of Tysabri-related PML cases in Germany and lack of oversight? Read More at BNET Pharma….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
At a glance, the financial performance of Atheros Communications (ATHR-$28.90) suggests the wireless chipset provider is weathering the downturn well, due to increasing acceptance for both newer 802.11 products (a set of standards carrying out WLAN computer communication in the 2.4, 3.6, and 5 GHz frequency bands) and its Ethernet solutions. A one-time income tax benefit, however, boosted net income from 11 percent (of net sales) to 25 percent, up from seven percent last year, according to the 10Q regulatory filing with the SEC.
Chief executive officer Craig Barratt boasts the the strength and diversity of the company’s products will enable Atheros to thrive in coming quarters. Could his ringing optimism have anything to do with personal interests to get the Board to revisit his annual base salary, which the Compensation Committee cut in February by 40 percent to $204,000?
Marriott International (MAR-$28.04) learned the hard way that moving from a cash-based business like lodging to a financing-based business like timeshares wasn’t without risk – especially when consumers go bust and credit markets dry up. Going forward, the hotelier will no longer invest its own capital into new luxury-residential and new timeshare properties. Can the company avoid triggering the debt leverage covenant of its revolver credit line by selling off parts of its $1.5 billion in timeshare inventory? To read more about the near “junk status” of Marriott’s indebtedness, click on BNET TRAVEL industry….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
What does the future hold in store for Depomed’s (DEPO-$3.60) investigational non-hormonal therapeutic option for the treatment of menopausal hot flashes, Serada? In an exclusive interview, chief executive Carl Pelzel shared his thoughts with me on the higher-than-expected efficacy seen with patients given placebo and possible outcomes from a likely meeting with the FDA in December. Continue Reading at BNET PHARMA Industries….
KB Homes (KBH-$15.63) said on Monday the Securities and Exchange Commission is investigating it for possible accounting and disclosure violations. As if the SEC were not enough of a distraction – if the homebuilder’s tangible net worth falls below the required maintenance covenant of $278.2 million, its bankers could be poking through its books, too:
As late as August 3, MannKind Corp (MNKD-$6.34) predicted a successful outcome to negotiations with Big Pharma to co-market its lead product candidate, the inhaled insulin product AFRESA. Unfortunately, after burning through more than $1.4 billion to develop the inhaler, still no deal. Notwithstanding credibility issues, the question remains whether the pulmonary route of delivering insulin is finished in the eyes of the FDA — or if MannKind’s inability to secure a marketing deal at this time with a deeper-pocketed pharmaceutical house was nothing more than financial posturing by the company to secure a better deal. Read More at BNET PHARMA….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Long known as the unlucky kid brother of fashion designer Kenneth Cole, critics have long alleged that Neil Cole, chief executive of Iconix Brand Group (ICON-$12.34), has a history of overpaying for acquisitions -- in his eagerness to add breadth to Iconix's portfolio of apparel, footwear, and household related-accessories. As the recession stumbles along, if licensees of Iconix's clothing and footwear brands, such as iconic names Joe Boxer, London Fog, and Candies, fail to deliver on mandated royalty streams, what will this mean to the company's financial health and growth prospects going forward?
Cole has built Iconix on a novel, licensing-only business model with guaranteed royalty streams from 15 direct-to-retailer distribution partnerships, with such well-known stores as Wal-Mart, Target, Sears, K-Mart, Kohl's, and Lowes. The attractiveness of this business model, says management, is that it shifts all the cost-risks of inventory, manufacturing, and distributing goods to the licensing partners, which pay Iconix guaranteed royalties of up to 10 percent.
To date, Neil Cole has proven his detractors wrong, as sales increased from $80.7 million in 2006 to $216.8 million in 2008, largely resulting from acquisitions and licensing deals. Nonetheless, this growth has not come cheaply. Cole has spent more than $800 million in the last three years acquiring trademarks of long-lived brands that had fallen on tough times -- with the goal of resuscitating their growth prospects through licensing arrangements and marketing campaigns with leading global retailers. Nonetheless, concerns still linger that Neil's entrepreneurial reach might exceed his managerial grasp.
Iconix's revenues are primarily dependent on the recurring royalty streams from its licensing agreements -- which in most cases provide for guaranteed, minimum payments from its retailing partners (up to $500 million under existing contracts). However, a substantial portion of revenue is concentrated with a limited number of retailers: Target, Wal-Mart, Kohl's, and K-Mart represent approximately 17 percent, 15 percent, seven percent, and five percent, respectively, of total revenue.
Not to rain on the company's successful picnic, but could nimbostratus storm clouds be forming on the horizon? Target's U.S. licenses for Mossimo, Fieldcrest, and Waverly Home-branded products expire in January 2012, July 2010, and January 2011, respectfully; license agreements with discount, retailing powerhouse Wal-Mart for Ocean Pacific and Danskin expire in June 2011 and December 2010; and, Candies and Joe Boxer-branded product categories trademark agreements with Kohl's expire in January 2011 and December 2010, according to a recent common stock prospectus. If these retailers fail to re-up, or negotiate new agreements at less-than favorable terms to Iconix, future revenue and cash flows could be adversely affected.
The real scorcher to Iconix's financial health, however, could be the material impact changes in the amount of goodwill and other intangible assets, including trademarks, would have on the company's growth prospects. Goodwill represents almost $152 million, or 11 percent of total assets, and trademarks and other intangibles account for approximately $1.06 billion, or about 76 percent of total assets! The 10Q Detective finds it troubling that despite uneven comparable store sales at the company's key customers in the last three years -- e.g. Joe Boxer-branded sales at K-Mart dropped sequentially from $19.4 million in 2006 to $10.8 million in 2008 -- the company did not believe any impairment write-downs of its brand names were warranted.
Could the fact that asset impairments often signal a weakening undertone of fundamentals -- and reinforce industry watchers possible uneasiness with baby brother Neil Cole's continued ability to lead -- explain the reluctance to move forward with this financial litmus test? That said, asset write-downs could decrease shareholder equity, increasing financial leverage, and borrowing costs of future debt.
A read of the company's regulatory filings with the SEC shows that debtors of $328.9 million in asset-backed loans hold liens on trademarks acquired in connection with the debt borrowings. Ergo, violations of debt covenants or debt default would enable the lenders to foreclose on valuable assets such as Mossimo, Candies, Bongo, Joe Boxer, Mudd, and London Fog. Luckily, this debt, however, does not come due until 2012.
Iconix anticipates five percent organic growth for fiscal 2009, although it said in a recent press release that underlying operations will not be strong enough to offset dilution from a recent $153 million stock offering and changes to licensing terms of its Rocawear women's lines. The industry trade group, National Retail Federation, is predicting the all-important holiday retail sales season will record its second consecutive decline this November - December, too, which suggests apparel and retail clients of Iconix are not out of the winter's woods just yet.
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
Raser Technologies (RZ-$1.40) still maintains that the five production wells drilled to date are viable geothermal resources, with demonstrated flow temperatures in “commercially productive” ranges of approximately 240° Fahrenheit to 300° Fahrenheit, and bottom-hole temperatures in excess of 350° Fahrenheit. Never mind questioning previous statements by management supporting the economics of its technology at “lower temperatures.”
Given Raser’s checkered history, I wouldn’t pin my hopes on the company solving its geothermal power problems. Management will likely stumble onto other revenue pathways to profitability:
Remarkedly, even with the highest unemployment rate in 27 years, H J Heinz (HNZ-$38.69) continues to maintain its pricing power in the United States. Chief financial officer Art Winkleblack told analysts on the earnings call that 88 percent of total U.S. retail sales were sold off the shelf at full price. That said, fears about consumers buying more store brands or trading down to discounters seem mostly overblown:
Cabot Oil & Gas (COG-$33.94) estimates that production from developed (producing) reserves will decline sequentially at projected rates of 21 percent, 17 percent, and 12 percent during the years 2009 -2011. Ergo, development of Marcellus Shale leaseholds will grow in importance to Cabot: in addition to known reserves, the region offers longer-life wells with attractive economics. How will suspension of activity in PA affect total additions to reserves?
Smithfield Foods (SFD-$13.46) will continue to raise hogs and produce fresh pork, but management is intent on changing the cyclical nature of profits. Going forward, packaged-meats sold under the Armour, Butterball, and LunchMakers (among other) brands, will playing a larger role. Uncertainty exists at to whether CEO Larry Pope & his current management can “get the job done. ” In the first-quarter of 2010, packaged-meat sales of pork products actually declined two percent, as increases in average selling prices could not offset a 9 percent decline in volumes. Read More at BNET Food Industries….
To further develop its Big 4 shale leaseholds, Chesapeake Energy (CHK-$28.14) plans to operate an average of approximately 101 rigs in 2010 to drill up to 795 wells. The current operating rig count is 83. The company has had some success in raising cash - and lowering its own drill bit costs - by selling investment interests on some of this acreage. For example, the company expects that its joint venture partner, StatoilHydro, will pay 75 percent of drilling costs in the Marcellus for 2010. If weak natural gas prices persist during the next two years, can the company live within its cash resources? Read More at BNET Energy….
Lower yields resulting from declining fuel surcharges are expected to hurt 2010 sales at FedEx Corp (FDX-$73.38). The package-delivery giant plans to increase shipping rates in January 2010. Continue Reading at BNET Travel….
With only about 21 percent of anticipated 2010 gas production hedged, Chesapeake Energy (CHK-$28.11) is gambling that an economic recovery will push demand for natural gas – and prices – higher in coming quarters. The largest domestic producer of natural gas currently carries a Ba2 bond rating by Moody’s. Higher energy prices, however, could change the company’s credit rating picture…. Continue Reading at BNET Energy….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
The health of Cephalon (CEPH-$58.49) going forward could be influenced by more than just the drugmaker’s initial success in switching sleep-disorder patients from its blockbuster Provigil (modafinil) to long-term Nuvigil (armodafinil) users prior to the patent clock running down on its flagship drug. Adding to an already restless sleep for stockholders, the 10-Q Detective has identified potential intangible assets sitting on the balance sheet whose value is questionable.
At June 30, goodwill and intangible assets, totaling $1.14 billion, accounted for 25.4 percent of total assets. In my opinion, Cephalon has been ‘less-than’ transparent in adjusting the carrying amounts of certain assets, including the anticipated useful lives of certain products:
Cephalon is carrying $26.0 million in Actiq marketing rights, which is a fentanyl lollipop used to treat “breakthrough” pain in opioid-tolerant cancer patients. The company has estimated the drug has a useful life in the range of 10 – 12 years—even though generic alternatives have been available since June 2006. A price increase of 15 percent did little to offset a year-on-year 32 percent decline in sales.
Net carrying amount of the anticonvulsant Gabitril is $41.6 million in product rights. In the second-quarter ended June 30, sales of Gabitril in the U.S. decreased 25 percent from the prior year period, as prescriptions declined 19 percent. A late-stage clinical trial failure in patients with generalized anxiety disorder lessens the likelihood that the drug will find greater acceptance among primary care physicians who treat anxiety. Throw in the fact that two key patents expire in 2011 and 2012, and estimated useful life of between 9 – 15 years is obsolete.
$374.4 million in Ception Therapeutics product rights—but should its most promising drug candidate, a humanized monoclonal antibody (mAb) against interleukin-5 (IL-5), reslizumab, disappoint in clinical trials as an effective treatment for eosinophilic esophagitis in pediatric patients, expect asset impairment charges to follow.
The company is amortizing the $46.2 million intangible assets of its Durasolv orally disintegrating tablet (ODT) technology, a delivery system that permits the medicine to dissolve quickly in the mouth without chewing or the need for water, over an estimated economic life of 14 years. SPI Pharma’s Pharmafreeze ODT, Catalent Pharma Solutions’ Zydis ODT, and FlashDose (Fuisz Technologies) —a multitude of competing mouth dissolving options are flooding the market. That fact, combined with ongoing litigation against KV Pharma’s OraQuick tablet formulation [not going in Cephalon’s favor], suggest Cephalon might not be successful in protecting its intellectual drug delivery property—raising the risk a test of the useful life of this asset is coming (read charge-off).
Although impairment charges of such intangibles are non-cash in nature, such write-downs do affect stockholder equity and possible debt covenants—and could signal deteriorating fundamentals lay ahead. As if jet-lagged Cephalon stockholders donot have enough worries to keep them up at night.
Web Buzz: A working capital surplus of $1.07 billion and cash flow from operations of $313.5 million for the first six-months will not throw off enough cash sufficient to repay $750 million of convertible notes (if presented) and other cash obligations coming due in the next 12-18 months. Read More at BNET Pharma….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
In the opinion of the 10Q Detective, there is no better source to directly educate consumers on identifying and avoiding the deceptive and predatory income traps of multi-level marketing (MLM), pyramid, and Ponzi schemes than Robert L. Fitzpatrick, President of Pyramid Scheme Alert. Responding to our recent analysis on Medifast, “Ultimate Weight-Loss System or Pyramid Scheme,” we offer Mr. Fitzpatrick’s perspective on the financial consequences to self and our economy when the FTC and SEC fail to regulate or enforce existing laws against pyramid scams and Ponzi operators:
“Writing about pyramid schemes and stocks presents a strange dilemma. I have been asked to offer my views to various financial analysts regarding publicly traded pyramid selling schemes. Investors tend to view the pyramid scheme question with ambiguity. On the one hand, they don't want to be investing in a scheme that will collapse. However, given the pyramid's great capacity for rapid "growth", they do want to cash in on the revenue it generates. The issue of inherent fraudulence and harm caused is usually not on the table, only the question of timing for investment.
Pyramid selling schemes transfer money, causing losses to many and profits to a very few, without value being exchanged. In this sense, they cannot be called "businesses."
In the guise of selling products, they leave the victims with products they would not have normally bought, at prices they would never have paid in the open market, and with months or years of wasted time trying to make money from recruiting other "salespeople." The schemes use the fraudulent "endless chain" proposition, a per se fraud, as their main "selling" tool to induce the purchases and the futile, misdirected and uncompensated marketing work of the "last ones in" (who are 80-95% of the total at all times).
It is sad to me to see that these fraudulent practices, which, by design, concentrate wealth and derail real entrepreneurship, have become imbedded in the economy. When they come to Wall Street, they gain new stakeholders who are betting on cashing in as they rise. They constitute a "Main Street Bubble" of perhaps $15 billion each year, causing losses to about 10 million Americans each year. Today, this bubble, much like our mortgage bubble a few years ago, has a large lobby in DC, in the Direct Selling Association. This Main Street Bubble can sustain itself longer than a Wall Street bubble, as long as it upholds a facade of a "legitimate business" and enough people believe they offer an "opportunity", which currently millions still do. Losses tend to be hidden and so while it causes enormous harm, the structure itself remains intact to continue preying on people (and so, as you noted, continue to reward shareholders.)
China is the only country that has banned them outright and is using the force of the state to keep them out of the economy. In the end, I see them as a self-destructive force in our country, hitting us at the grass roots where maximum damage is inflicted to the heart of the economy. They are sapping wealth, a form of economic cancer. Predators are feeding off the savings or debts of many others. Nothing is being invented, produced. No true growth is occurring and certainly true value is not being exchanged.”
H&R Block (HRB-$17.52) performed miserably in the 2009 tax season, handling 5.8 percent fewer in-store, retail tax returns, as clients sought lower-cost IRS filing alternatives due to difficult economic conditions. Can the largest provider of tax preparation services in the U.S, with almost 13,000 retail outlets, draw more customers to its stores for the 2010 tax season by re-focusing marketing and operational initiatives back towards its core, store-front business? … Continue Reading at BNET Finance Industries….
Editor David J Phillips does not hold a financial interest in any stocks mentioned n this article. The 10Q Detective has a Full Disclosure Policy.
