Did Force Protection (NASDAQ:FRPT) just admit defeat? It sure sounds like it.
Midday Wednesday, the tiny manufacturer of really big armored trucks announced it will take a $2 million charge for severance payments as it downsizes its operations in order to "align the company's cost structure to current and planned vehicle production and to improve operational efficiencies in the area of Total Life Cycle Support."
Translation: "First General Dynamics (NYSE:GD), Lockheed (NYSE:LMT), and Navistar (NYSE:NAV) beat us on JLTV. Then Oshkosh (NYSE:OSK) up and swiped M-ATV. Apparently, we can't win any contracts to build anything big. So instead, we're gonna just service the stuff we've already built."
And that's great news.
Not the part about Force being unable to win big Pentagon contracts, of course. But the fact that management has acknowledged the problem, reconciled itself to the facts, and made the necessary decision. According to Force, realigning its business away from mass-scale production of armored vehicles will slice $40 million off of its annual operating costs.
Although Force will continue building vehicles -- notably, its Buffalo business seems to be going great guns -- the company will refocus its efforts toward "sustainment and supply chain management" and "spares logistics functions."
Not all good news
Investors reacted positively to Force's announcement yesterday, bidding the shares up even as the rest of the market fell. And I admit I'm optimistic about the changes myself. That said, we must understand that companies do not make drastic changes like these on a whim. General Electric (NYSE:GE) didn't try to spin off its appliances division because things were going great. Nor is AIG (NYSE:AIG) holding a fire sale on its many divisions because it's embarrassed by all the profits they're making. Force is downsizing because it couldn't compete with the big boys. It failed.
Therefore, we must be prepared for the next shoe to drop. If Force taking $2 million in charges to save $40 million in costs sounds too good to be true, it probably is. The charges relate only to the third quarter of 2009, after all, while the announced restructuring hopes to be "substantially complete ... in the first half of 2010." That leaves plenty of time for more severance charges to crop up. For Force to announce additional charges for bad investments in Cheetah capacity. For who knows what else.
Foolish takeaway
Force made the right decision this week, but it's not out of the woods yet. As good as this news was, I expect we'll hear a whole lot more bad news in quarters to come. Stay alert.
