It's been well over a year since I last wrote about body-armor manufacturer DHB Industries
On the critical end, the company has come under fire from shareholders for everything from failing to manage its inventory efficiently, to failure to translate its revenues into profits efficiently, to failure (seeing a pattern here?) to put the interests of its shareholders ahead of its chairman and namesake David H. Brooks' very healthy appetite for bargain-priced stock warrants.
Meanwhile, DHB fans point to the company's series of multimillion-dollar government contracts as proof that, despite its "management issues," DHB still has the potential to make investors money. Unfortunately, yesterday was not proof of that.
According to its Q2 2005 results, announced yesterday, revenues grew just 2.4% against the year-ago quarter. Profits per diluted share flatlined at $0.17 -- the same amount DHB earned last year, despite the company paying taxes at a lower rate in Q2 2005 than in Q2 2004.
Bad news? It sure looks like it -- but hold off on judging for a sec, because I actually do see a silvery nimbus surrounding this cloud.
It was quite a long time ago, but if you recall, in a column last year I wrote that DHB was doing great business producing body armor for the U.S. military in Iraq. But at the same time, DHB was falling victim to the government contractor's curse: a slow-paying customer whom you can't afford to pressure because you really need the business. (Remember the old banking adage? If you owe your bank $1,000, you have a problem. If you owe your bank $1 million, your bank has a problem.)
Well, one year later, it appears that Uncle Sam has dug his old bills out of the hall closet and decided to pay up. According to DHB's balance sheet, accounts receivable have now fallen to $37.6 million -- an 18% sequential improvement against last quarter, and a 36% improvement against the situation one year ago. With those government checks now arriving in the mail, DHB may finally be able to generate some positive free cash flow to back up its usually solid GAAP earnings numbers.
Speaking of which, DHB mentioned that it generated $13.2 million in cash from operations this quarter. Once the company files its 10-Q, with its cash flow statement included, we'll want to check back and see how much of that cash was spent on inventories and capital expenditures -- and how much remained "free cash flow." Stay tuned.
Fool contributor Rich Smith does not own shares in DHB.