Agility battles headwinds

Agility battles headwinds Logistics company distracted by fraud case as it seeks to improve financial performance.

By Eric Kulisch and Eric Johnson


      The U.S. government's fraud case against Agility Logistics for its work as a military contractor has the company on its heels, but should not knock the company from its perch as one of the world's top 10 providers of outsourced logistics services, according to industry observers and precedent.
      A grand jury indicted the Kuwait-based company for allegedly submitting inflated bills and false claims under a huge contract to procure and deliver food and grocery items to U.S. soldiers in the Middle East. Agility has also separately provided warehousing, distribution, heavy vehicle lift, fuel delivery and other logistics services to the U.S. military.
      The U.S. Justice Department began investigating Agility in 2007 after a whistle-blower lawsuit by a former business associate and cousin of Chairman and Managing Director Tarek Sultan.
      The U.S. government quickly suspended Agility from bidding on Defense and other contracts until the legal proceedings are concluded, but the company is allowed to complete the term of any existing contracts.
      Agility, which entered a plea of not guilty, is trying to settle the case out of court, but had not negotiated an agreement with the Justice Department as of mid-May.
   The Justice Department is also conducting an informal investigation into whether cost reimbursement requests under two separate contracts were proper.
      The company has previously stated that its high food prices are the cost of operating in a war zone, and that pocketing instant discounts for markups from suppliers is a normal practice in the food industry and the Middle East ' and allowed by its contracts.
      It has asked a court to rule on whether the Justice Department followed the law by serving notice of the indictment through a U.S. affiliate instead of the parent company itself.
      Opinions differ among analysts about the extent to which the fraud case will hurt Agility's ability to retain existing customers and gain new ones. In reality, the commercial business is separate from the Defense & Government Services division and its growth more likely depends on Agility's ability to better serve shippers.
      Major Agility customers include BP, Epson, General Electric, Halliburton, Nestle, Nike, Princess Cruise Lines, Shell Oil, Siemens and Wal-Mart.

Defense Angle. In April, the Defense Logistics Agency (DLA) awarded the prime food supply contract that Agility had been handling to Anham, a Dubai-based conglomerate with ties to the United States. Anham is a contracting company created by the principals of the Saudi Arabia-based Arab Supply and Trading Co., Vienna, Va.-based HII-Finance Corp., and the Munir Sukhtian Group of Amman, Jordan. It operates in 20 countries.
      Two other bidders ' Kuwait Global Link (a management consulting, investment, technology services and outsourcing firm), and Intermarkets Global (a Jordanian conglomerate with logistics holdings) ' quickly protested Anham's selection, potentially delaying for several months the transition to a new supplier. The Government Accountability Office, which handles such proceedings, has until Aug. 4 to rule on the protest.
      Agility, which offers freight forwarding, contract logistics, customs brokerage, transportation management, supply chain management and other services, has held the prime vendor food contract since 2003. Kuwait-based Public Warehousing Co., as Agility was known before it became a global third-party logistics provider, received more than $3 billion under the initial contract and followed it in 2006 with a second contract worth $8.5 billion over five years to provide food and dry goods to U.S. military forces. The contract is scheduled to expire in December. Agility was also bidding for the third contract when the Justice Department handed down its indictment in November, knocking it out of the race.

Anham

Anham, the contractor tabbed by the Defense Logistics Agency to assume Agility's role as food supplier to troops in Kuwait, Iraq, and Jordan, is working, or has worked, on a wide variety of contracts in Iraq and Afghanistan, including:       ' A $350 million contract with the Iraq Joint Forces and the Iraqi Ministry of Defense to establish a national logistics depot in Taji, Iraq. Anham has set up the Taji Vocational Institute and is scheduled to train more than 700 Iraqi Army junior enlisted and warrant officer personnel between 2008 and 2011.       ' A $258 million deal to supply equipment to the Iraqi military, including vehicle rolling stock, armor, night-vision equipment, fire control, VHF/UHF communication and spare parts for all supported equipment. The contract included the supply of parts and operations manuals, and training sessions in product usage.       ' A $121 million contract to build a security infrastructure to protect the oil industry throughout Iraq.       ' A $45 million contract to supply the U.S. government with trucking services throughout Afghanistan, with Anham providing local truck and driver resources for the contract.

      Under the new contract, the winning vendor will provide food and support services to U.S. military personnel and other federally funded customers in Kuwait, Iraq and Jordan. The supplier is responsible for procuring and delivering everything from fresh fruits and vegetables to so-called Meals Ready to Eat (MREs) and other rations.
      The initial contract period is for 18 months, with the Defense Department holding four option periods to renew the contract for up to six years.
      The contract is estimated to be worth $2.1 billion to Anham, including options if exercised, with the maximum value of the contract ranging up to $6.4 billion.
      Anham spokeswoman Trish Wexler said Anham has completed a number of government contracts since its inception six years ago, and is involved in several more in the Middle East.
      '(We have) successfully executed several major contracts, many of which (were done so) under exceptionally difficult conditions,' Wexler said. 'Anham has not only completed 100 percent of its contract obligations, but has consistently done so on time and on budget.'
      Wexler said she was unsure whether any of Anham's previous contracts involved the supply of food to U.S. troops, but Managing Director David Brauss told Reuters in late April that the company intends to build on the successful food supply bid, which is the biggest by dollar value in the company's history.
      'We are bidding for 20 to 30 contracts with the U.S. government,' Brauss said. 'We expect to win additional contracts there.'
      Brauss said Anham had been bidding for the food supply contract for two years and that the price tag may appear higher than it is, with the cost of food inflating the final bill.
      'Even though it is a very large contract it is somewhat overstated, and includes surges if more troops come in,' he said.
      Wexler refused to predict how the competitive landscape might change if Agility is prohibited from participating in government logistics contracts.
      'There are highly capable contractors in this arena, and the market is fiercely competitive. But what I can tell you is that we at Anham look forward to a continued partnership with the Department of Defense, and to meeting or exceeding their expectations ' as well as those that we serve every day ' on this contract,' she said.
      Meanwhile, a DLA official said the agency has for years been working to improve oversight of vendor conduct.
      'With respect to this particular food service contract, among the improvements are increased contract oversight and a price evaluation for every item available for delivery, rather than a representative sampling of items,' spokesman Dennis Gauci said. 'Also, our subsistence supply chain has negotiated pricing agreements directly with food suppliers.'
      Aside from these developments, Gauci said DLA started to require invoices be submitted 100 percent of the time ' in essence, asking for the bills to back up the costs.
      'The Defense Logistics Agency operates under the philosophy that American taxpayers shouldn't pay a penny more for logistics services than is absolutely necessary,' Gauci said. 'Over the past few years, we incorporated additional safeguards in our acquisitions to address vulnerabilities exploited by contractor fraud. For example, DLA has completely separated product price from the fixed distribution price for its future prime vendor contracts and requires manufacturer invoices for 100 percent of products. We've also established a 'Center of Excellence in Pricing' and we do multiple reviews and audits of prime vendor contracts at regular intervals to ensure the integrity of the pricing process.
      'Moreover, we have a new financial system in place to include new software that doesn't have the vulnerabilities found in the previous system. The system is designed to help us identify potential fraud activities.'
      Wexler said heightened scrutiny by the DLA is welcome.
      'Anham has received the highest evaluations and recommendations from both private and public institutions who cite the company's ability to execute contracts consistently on time and within budget,' she said.
      Agility's Defense & Government Services division has lost a significant number of opportunities to win business, beyond the food supply contract that went to Anham, because it has been unable to pursue new government contracts for the past six months.
      'Prolonged suspension could have a material impact on the group's government-related business and may result in the associated assets being impaired,' Agility said in its 2009 annual report.
      Agility is also in a dispute with defense contractor DynCorp International, which dropped the 3PL from its team in December after winning a large task order last summer to provide logistics services to the Army in southern Afghanistan under the controversial LOGCAP program.
      The Logistics Civil Augmentation Program was originally awarded by the Bush administration as a sole-source contract to Halliburton subsidiary Kellogg Brown & Root to provide logistics services during the early days of the war in Iraq. DynCorp was one of three companies that the Army pre-qualified to bid for work in the latest version of the contract.
      Agility argues that government rules allow it to continue work under existing contracts. DynCorp said in July that the one-year deal was worth $643.5 million. Agility has said four option years bring the total value of the contract to $5.9 billion. Agility was to receive 30 percent of the contract for airfield support.
      But, as Mark Twain might say, reports of Agility's potential demise may be greatly exaggerated. Companies have been indicted for defrauding the U.S. government or violating other laws and continued to survive and thrive. The ability to rebound usually depends on whether the illegal activity was rampant or contained to a few bad apples, and how quickly the company implements stricter internal compliance policies and oversight.
      Since 2005, the top 10 defense contractors in the United States have settled 55 civil, criminal or administrative cases involving contract fraud, and environmental, ethics and labor violations, and have all resumed business with the U.S. government, according to a database maintained by the independent Project on Government Oversight. Agility, which received $2.1 billion from the U.S. government last year, has only one instance of misconduct since 1995 compared to 50 for Lockheed Martin, the world's largest defense contractor.
      Agility's attempt to settle the dispute suggests it is trying to ensure a path to reenter the government marketplace as quickly as possible.
      Even if Defense & Government Services is barred from U.S. government work for a while, it still has clients among non-governmental relief organizations and international agencies, as well as militaries in Europe and the Middle East.
      In the logistics sector, Swiss freight forwarder Panalpina has dealt with the fallout of being accused of providing bribes to government officials in Nigeria to secure preferential customs treatment without any noticeable defection of customers concerned about its long-term viability or ethical practices.
      In late April, Panalpina said it had nearly completed a settlement agreement with U.S. authorities over alleged violations of the Foreign Corrupt Practices Act in Nigeria, Saudi Arabia and Kazakhstan, and had reserved $110.7 million to cover anticipated fines, penalties and legal expenses. Panalpina's behavior in Nigeria is also under investigation by the European Commission.
      The company has taken steps to prevent future payments to foreign officials, such as instituting tighter internal controls, pulling out of Nigeria and restructuring operations in West Africa.
      Price-fixing scandals in recent years have also plagued dozens of air cargo carriers, air freight forwarders and U.S.-flag carriers such as Horizon Lines and Sea Star that provide coastal shipping to Puerto Rico and other locations.
      'If you're doing a good job with commercial clients and you credibly communicate that something went sideways, we've corrected the situation and it won't have an impact, you can survive,' said Brian Clancy, managing director for MergeGlobal, an Arlington, Va.-based company that provides strategic consulting for the transportation and logistics industries.
      'I think they'll live to fight another day. This industry is very relationship oriented and if you're doing business with someone who is doing a good job, you'll probably continue to do business with them,' said Tom Connolly, a principal at transportation investment advisor Eve Partners.
      Agility's misstep is more serious because it affects the company's core business compared to Panalpina's skirting of the rules in order to conduct business in some developing economies, logistics industry consultant Dick Armstrong insisted.
      'Everyone knows that Nigeria is corrupt. You know in Africa, to stay alive, you have to know who to pay off to get anything accomplished. One way or another, you're going to have to take care of the local guys or you're not going to do business.
      'Trying to do business in a place like Nigeria in the way you do it in Amsterdam is pretty tough,' said the head of Stoughton, Wis.-based Armstrong & Associates.
      Agility's problem is that its logistics contracts with the U.S. military were worth billions of dollars and fueled a significant acquisition spree that transformed the Kuwait-based warehousing company into a full-service, global logistics player. Now Agility is losing out on lucrative military business at a time when the commercial logistics operations are not performing well and taking up the earnings slack.
      Even without the legal challenges, Agility faces a decline in defense sales as the U.S. accelerates its troop withdrawal from Iraq and large government contracts, which accounts for 25 percent to 35 percent of Agility's annual revenue, expire this year.
      Armstrong suggested that the black eye from the fraud case may not cost Agility existing customers, but could make it more difficult to win new ones.
      'The problems they had will hurt them in a lot of RFP (request for proposal) processes and its one more thing to overcome when trying to win new business,' he said.
      Agility's global integrated logistics division has also experienced a decline in revenues and many of the new acquisitions outside the Middle East haven't produced revenue and profit growth as anticipated.
      In 2005, PWC began using proceeds from its military work to diversify into project and trade show logistics, infrastructure development and freight forwarding in North America, Europe and Asia, with a focus on emerging markets. The biggest acquisition was the $454 million investment in GeoLogistics, a troubled forwarder based in California that had an extensive network of offices around the world.
      The 3PL has about 35,000 employees in more than 550 offices and 120 countries, although the loss of some contracts in the Middle East has recently led to layoffs of some truck drivers and other hourly labor.
      Net income fell 52 percent to $61 million, with net revenue down 17 percent in the first quarter of 2010 from a year earlier. Defense & Government Services revenue fell 28 percent as falling U.S. volumes could not be supplemented with new revenue from Afghanistan or other parts of the world.
      Last year, Agility's revenues fell 7.1 percent to 1.7 billion Kuwaiti dinars ($5.9 billion) primarily due to a drop in commercial freight volumes compared to 2008. Revenue was down 13 percent for the Global Integrated Logistics division. Net income increased 10.7 percent to $537 million.
      Profits previously declined for three years starting in 2006 even as revenues climbed, culminating with an 8 percent drop to $485.5 million in 2008. That fell short of Agility's stated goal of achieving $8 billion in gross revenues and $800 million in net profit by 2008.
      The company picked up new contracts in 2009 with major customers such as Nokia and Mattel. It also acquired its Mexican forwarding partner Trafinsa S.A. and its U.S. affiliate, a Brazilian company to gain a Latin American presence.
      Sultan, the company's top executive, recently said that the company's goal this year is to grow organically, reduce costs and maximize yields on its core operations. He suggested the company 'would need to assess all strategic options' for the Defense division if a settlement in the fraud case cannot be reached.

Michael Bible chief executive officer, Americas Region, Agility
'We've made significant investments and the expectations is that we should produce a return on those investments. A much more significant contribution should be coming from commercial logistics.'

      'The focus now is more on execution and growth. The logistics business really has to perform and it's a critical time for us,' Michael Bible, chief executive officer of Agility Americas Region, said in an interview.
      'We've made significant investments and the expectation is that we should produce a return on those investments. A much more significant contribution should be coming from commercial logistics,' he said.
      To that end the company has made several noteworthy hires, including former APL Logistics and DHL Express USA chief Hans Hickler in March to be CEO of the Asia-Pacific region.
      In the Americas, Bible appointed Michael Robinson as chief operating officer of the U.S. logistics operation in late 2008 and recently promoted him to CEO. Robinson brought on industry veteran Michael Gargaro from UPS Supply Chain Solutions to build up its non-vessel-operating common carrier business. Agility had a strong ocean wholesale operation in Asia, Europe and the Middle East ' with about 600,000 TEUs of volume per year ' but was still weak in the U.S. market. The group also added Michael Harradine as senior vice president to lead a more aggressive sales organization for the Americas. He was global account manager for Agility's biggest customer, General Electric.
      Agility removed Mark Soubry as CEO of the Canadian unit in December and in May brought in Mario Cavallucci, the number two executive from Agility Europe. Bible said the move was made because the Canadian organization wasn't performing well and had struggled with lost volumes.
      Agility Americas has also lost several top executives during the past couple of years, including retail logistics leader Rosa Hakala, formerly of the Home Depot and now with Best Buy; Rich Anchan, global director of enterprise initiatives; and Massimo Columbo, the vice president of Latin American trade lanes, who recently left to join Panalpina.
      About 15 mid-level managers and two vice presidents were laid off this year as Agility collapsed its four operating regions in the United States down to two to better align the organization with business volumes and become more efficient, Bible said.
      The restructuring is expected to save about $2 million, most of it in personnel costs. Agility Americas has also added logistics operations staff in Miami and the Midwest because of new contracts and business with Brazil. Bible said he expects to hire more front-line sales and operations people this year.
      Another way the Americas region is trying to cut costs is by supporting shared services such as information technology and finance at the regional level to minimize the size of each country organization. That step is expected to save about $1.5 million, Bible said.
      'The North American organization has not met Agility's expectations,' Bible admitted. 'In 2008, we were on a pretty good growth curve, but lost some of our traction with the recession. Now, we have much stronger leadership. But we still have work to do. So we're trying to accelerate the pace of growth to be a stronger help to the overall network' by bringing in more freight volumes.