Executives Predict Slower Growth

Chief executives downright gloomy about U.S. economy; say profit growth will slow in second half of the year. Plus: Corporates borrowing like crazy, Timothy Rigas pleads innocent, and guess what KPMG is spending to flog BearingPoint?

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Virtually all the respondents (94 percent) in a U.S. Business Council survey expect U.S. growth will slow dramatically in the second half of the year. The annualized GDP growth rate registered during the first half of the year was a healthy 3.2 percent.

More worrisome: 2003 looks to be no better than the second half of 2002. Only 19 percent of the respondents expect a GDP growth rate greater than 3 percent next year. About 65 percent of the executives expect the U.S. economy to grow at a modest clip in 2003. The number? Anywhere from 1.5 percent to 3 percent, say the CEOs.

In addition, the majority of the respondents (63 percent) expect profit growth will slow in the second half of this year, while nearly 40 percent expect profit growth to slow next year as well. By comparison, only 26 percent anticipate faster profit growth next year.

Despite the modest growth expectations, most respondents expect consumer prices to be either stable or higher than they are now. In fact, 31 percent of respondents anticipate that consumer prices will increase by 2 percent or more in the coming year, up from the current year-on-year rate of 1.5 percent.

However, many council members expect that sales growth at their companies will either accelerate somewhat (53 percent) or notably (5 percent) during the upcoming year. Another quarter figure sales growth will remain constant. Around 18 percent of the respondents anticipate either slowing sales growth or outright sales declines at their own companies next year.

Most respondents also expect their own companies’ profit margins to either be stable (43 percent) or improve (38 percent) next year. Even so, more than half (51 percent) say their pricing power will remain stable, while 26 percent say it will decline.

As far as employment trends go, most companies anticipate their new hiring pace to remain stable (42 percent) to slow (12 percent), while 19 percent actually expect a reduction in staffing.

Nearly two-thirds (65 percent) figure wage gains to remain stable or to slow somewhat (31 percent).

When it comes to capital spending, 39 percent of the executives expect to keep it stable. A fair number—about 40 percent—anticipate a decline in capital spending.

Interestingly, about half the respondents said the weakening equity market has caused their companies to either delay or alter business plans.

Almost all respondents (95 percent) reported that their companies had not altered business plans because of corporate-governance issues. What’s more, 81 percent said new federal legislation had not affected their business plans, while most others (16 percent) indicated that it was too soon to tell if the new laws have any impact on their businesses.

Not surprisingly, a large majority (83 percent) of respondents reported that security costs have risen in the wake of September 11.

$2.5 Billion in New Bond Issues

With interest rates at record lows, at least three companies jumped into the fixed-income market on Wednesday, raising a combined $2.5 billion.

Clearly the big beneficiary of the low coupons was ConocoPhillips. The largest refining and marketing company in the United States borrowed $2 billion in a three-part global private placement.

Led by Banc of America Securities, J.P. Morgan, and Salomon Smith Barney, ConocoPhillips issued $400 million of 5-year notes priced to yield 3.648 percent, or 95 basis points over comparable Treasuries. The company issued another $1 billion in 10-year notes priced at par to yield 4.75 percent, or 105 basis points over Treasuries. The third tranche was a $600 million, 30-year issue priced at 125 points over comparable Treasuries.

All of the tranches were rated A3 by Moody’s and A-minus by Standard & Poor’s.

Meanwhile, Emerson Electric Co. priced $250 million of 10-year notes at 98 basis points over comparable Treasuries. The utility’s new paper was rated A2 by Moody’s and A by S&P.

And Southern California Gas Co. priced $250 million of 10-year first mortgage bonds at 108 basis points over Treasuries. The bonds were rated A1 by Moody’s and A-plus by S&P.

In credit news, Moody’s raised several ratings for Trump Hotels & Casino Resorts Holdings LP.

“The upgrades reflect Moody’s expectation that Trump Hotels & Casinos will remain current on all debt service obligations given the positive impact that recent cost cutting and marketing efforts had on the company overall,” the rating agency noted.

On the other hand, Moody’s placed the ratings for billionaire Paul Allen’s Charter Communications Inc. and its subsidiaries under review for possible downgrade.

The rating agency cited concerns about the company’s high debt levels and large capital-investment needs. Moody’s also pointed to Charter’s recent announcement that the company’s operating cash flow in the third quarter will fall short of earlier projections.

SEC Files Complaint Against CFO, Three Others

Yesterday, the Securities and Exchange Commission filed a complaint against four former senior executives of FLIR Systems. Included in the gang of four: the onetime CFO of the government contractor.

The suit charges that the four former executives engaged in a wide-ranging scheme to inflate FLIR’s earnings in 1998 and 1999.

The ex—FLIR executives named in the complaint are former senior vice president of finance and CFO J. Mark Samper; former president and CEO J. Kenneth Stringer III; former vice president of sales for airborne products worldwide William N. Martin; and former director of sales operations Steven R. Eagleburger.

Ex-CFO Samper, along with Martin and Eagleburger, settled without admitting or denying the allegations in the complaint.

FLIR makes infrared-imaging equipment used for surveillance and reconnaissance, among other things. The company restated its 1998 and 1999 financial statements three times in 2000 and 2001.

The commission’s complaint alleges that the four individuals engaged in fraudulent accounting practices throughout 1998 and 1999 to help meet revenue and earnings projections. The SEC says the actions taken by the four executives caused FLIR to report false financial information in the company’s annual and quarterly reports in 1998 and 1999.

The complaint alleges that as a result of this scheme, FLIR’s pre-tax earnings in 1998 and 1999 were overstated by between 25 percent and 578 percent. In one quarter FLIR reported a profit of $411,000 when the company actually had a loss of $325,000, according to the commission.

Under Samper’s settlement, the onetime FLIR CFO is barred from serving as an officer or director of a publicly traded company, and he was ordered to pay $52,500 in disgorgement (representing his 1998 bonus), $8,859 in prejudgment interest, and $110,000 as a civil money penalty.

The complaint alleges that as CFO, Samper was responsible for FLIR’s financial record keeping and reporting. The commission claims he signed authorized revenue recognition for false sales, placeholders, rentals, consignment sales, and bill and hold sales with insufficient commitments from customers. The complaint also alleges that Samper caused the double-booking of two transactions, used suspense accounts to inflate FLIR’s results, and lied to the company’s auditors.

Short Takes: Adelphia Pleas, BearingPoint Pays, Northwest Cuts

  • Adelphia Communications Corp. founder John Rigas, two of his sons, and two other former company executives pleaded innocent to charges of defrauding the sixth-largest U.S. cable-television operator of more than $2.5 billion. The executives were indicted on September 23. Timothy, the son of the elder Rigas, was the cable company’s chief financial officer.
  • Sears, Roebuck and Co. restated its first- and second-quarter results to refine its method of determining its allowance for uncorrectable accounts. The retailing giant said it initially recorded the charge as a cumulative effect of a change in accounting principle as of the beginning of 2002. However, after receiving interpretive guidance from the SEC, Sears said it amended its filings to report the effect of the refinement in the allowance methodology as a change in estimate instead of a change in accounting principle. As a result, Sears increased first-quarter net income by $191 million and reduced second-quarter earnings by the same amount.
  • KPMG Consulting Inc. has spent about $5 million to $6 million devising its new name, BearingPoint. According to published reports, KPMG Consulting’s management plans to spend up to $40 million for a rebranding campaign. That’s relatively cheap compared with other Big Five rebranding efforts. Deloitte Consulting, for example, reportedly plans to spend about $60 million to change its name to Braxton. Accenture Ltd. is believed to have spent more than $100 million in changing its name from Andersen Consulting. Management at Monday, the consulting unit of PricewaterhouseCoopers, was said to be budgeting more than $100 million on its rebranding campaign. All bets are off, however, now that IBM has acquired that company.
  • Northwest Airlines Corp. said it will cut up to 1,600 flight-attendant jobs due to weak demand stemming from the September 11, 2001, terrorist attacks.
  • The worldwide packaged software market will see a modest recovery in 2003, generating an average compound annual growth rate (CAGR) of 10 percent to 12 percent by 2006, according to IDC. Application development and deployment will be the fastest-growing markets with a CAGR of 11.5 percent, exceeding that of system infrastructure and applications, according to the research firm.

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