Next Year No Better Than This, Say Finance Chiefs

CFOs, CEOs, and the OECD don't see a recovery until 2004; finance chiefs say they'll keep on cutting. Elsewhere: Fleming finance executives resign, more debt offerings, and employees look to retirees for help.


For those hoping the economy will turn around in 2003, here’s some bad news. CFOs think next year will be just about as bad as the current model.

Indeed, more than two-thirds of middle-market chief financial officers believe that in 2003, the economy either will stay flat, act erratically, or decline further. This according to an American Express survey of 485 middle-market CFOs.

As a result, the finance executives see managing indirect costs as one of the biggest challenges to improving their overall financial health in the coming year, reports Amex.

“With cautious to negative economic expectations, most senior financial managers polled in our survey will rely on containing costs as much as growing revenue to maintain the financial health of their organizations during the next year,” said Anre Williams, senior vice president and general manager (U.S. middle market) of American Express Corporate Services.

“This is a marked departure from the late 1990s when companies placed phenomenal growth and increased revenues over cost containment,” noted Williams. “In today’s environment, in order to put their houses back in financial order, executives have refocused their attention on expense management.”

American Express surveyed 485 senior financial managers at midsize organizations with average revenues of $181 million.

The results jibe with what CEOs apparently see coming down the pike.

In a recent survey by the Business Roundtable, a majority of CEOs said they expect weak gross domestic product (GDP) growth, declining employment, and flat capital spending in 2003. “Our companies are in the business of creating jobs and contributing to economic growth, but we have grave concerns about our ability to do these things in this fragile economic environment,” noted John T. Dillon, chairman of the Business Roundtable and CEO of International Paper.

Further proof of the lousy economy: the Organization for Economic Cooperation and Development (OECD) reported in its November Economic Outlook that the U.S. economy would not pick up until 2004. The OECD is predicting a 2.6 percent GDP growth next year (up slightly from 2.3 percent in 2002), with a 3.6 percent gain in 2004.

For their part, many CFOs say they’re having trouble just sizing up next quarter. More than half of the respondents in the Amex survey said they have encountered obstacles to forecasting operating budgets accurately. Nearly a quarter admitted that they have steady problems or a critical issue with their ability to forecast operating budgets, according to the survey.

As a result, the majority of polled CFOs intend to focus on streamlining internal processes, negotiating better deals with suppliers, and improving the management of capital to contain direct and indirect costs.

In addition to controlling their own internal costs, respondents said they are looking for ways to wring costs from their vendors. As proof, 85 percent of the survey’s participants said they are not getting the best possible rates from their vendors of indirect goods and services.

Why’s that? Because of a perceived lack of buying power, adequate negotiating staff, or aggregated spending data, respondents said. (To see how some companies are applying purchasing strategies to travel and entertainment spend, read’s upcoming special report on T&E cost management, airing December 1.)

Even so, few organizations have actually established and enforced spending policies within their companies. One reason: 42 percent said the lack of tools to monitor employee compliance with spending policies has caused problems managing expenses, either occasionally or regularly.

Still, three out of four of the survey respondents said a major priority is to contain or reduce indirect expenses such as office supplies, express shipping, telecommunications, travel and entertainment, computer equipment, and other nonproduction services and goods, which the CFOs rate as being equally important as finding new sources of revenue. (To see which companies are the best at controlling internal costs, use our interactive benchmarking tool, CFO PeerMetrix.)

Interestingly, some 44 percent of the respondents said they will place tighter restrictions on indirect expenses other than T&E, while 29 percent said they will further restrict T&E spending.

Other findings from the BRT survey:

  • 60 percent of CEOs expect their employment to drop in 2003, 28 percent expect it to remain the same, and 11 percent expect employment growth.
  • 57 percent of CEOs expect their U.S. capital expenditures in 2003 to be the same as 2002 levels, while 24 percent expect a decline. Only 19 percent expect higher capital spending.
  • 64 percent expect GDP growth rates of less than 2 percent in their 2003 planning, while 36 percent expect GDP growth of more than 2 percent.
  • 19 percent expect their 2003 sales to be flat compared with 2002, while 9 percent expect sales to be lower. 71 percent of the CEOs expect higher sales in 2003.

Fleming Finance Exec Resigns

Yet another accounting scandal has cost a finance executive his job.

This time it’s Tim Otte, chief financial officer of the retail operation of Fleming Cos., who resigned on Wednesday. Keith Durham, president of the retail operation at the Dallas grocery distributor, also resigned. The resignations were reported in Dow Jones, citing company spokesman Shane Boyd.

Durham hadn’t been at Fleming very long. He joined the company in July after serving as vice president of operations at Costco Wholesale Corp. He become president of the retail operation in September.

The two executives actually left the company about a week before Fleming management learned the company was the subject of an informal inquiry by the Securities and Exchange Commission, Boyd told the wire service.

The company said last week that the probe is related to media reports of Fleming’s vendor trade practices and its previously reported second-quarter 2001 earnings and 2002 earnings. The commission is also looking into the grocery distributor’s accounting for drop-ship sales transactions with an unaffiliated vendor in Fleming’s discontinued retail operations, as well as the company’s calculation of comparable store sales in its discontinued retail operations.

“There’s no relationship there,” Boyd reportedly said of the resignations and the SEC inquiry. “They left because we’re selling the retail stores.”

Fleming management recently announced it is paring the company’s retail operations, noting it will sell 28 grocery stores it owns in California for $165 million.

Do They Want the Gold Watch Back, Too?

Delta Air Lines recently announced plans to cut back on retiree benefits. The move did not surprise many benefits experts, however.

An increasing number of companies have started to introduce retiree medical accounts (RMAs) as an alternative to their traditional retiree medical benefits, according to a new study of retiree benefits conducted by Watson Wyatt. Indeed, Delta’s move is part of a growing corporate trend of reducing retiree medical benefits.

The study found that only 2 percent of large employers have RMAs for current retirees. However, 7 percent have adopted them for future retirees and 13 percent have RMAs for new hires. Most of these plans limit participation to employees who have met minimum age and service requirements, concentrating benefits on older, longer-tenured workers.

Under an RMA, an employer contributes a fixed dollar amount to an account, which the retiree uses to purchase health insurance. Contribution formulas differ, but employers typically credit a fixed dollar amount for each year the employee participates in the plan, explains Watson Wyatt.

It found from a sample of 56 large employers that annual credits ranged from $750 to $2,500 per year of participation, and interest rates on the accounts ranged from 5 percent to 7.7 percent, both before and during retirement.

“At a time when employers are looking to rein in health-care costs and place more decision-making into the hands of retirees, retiree medical accounts are a viable alternative to traditional retiree health-care plan designs,” said Joe Martingale, national health-care strategy leader at Watson Wyatt. “These accounts encourage retirees to be more judicious consumers by giving them more autonomy, better information, and a financial stake in the cost of their health care.”

(Editor’s note: How are companies controlling the health-benefit costs of current employees? To find out, read “Ill Wind: The Health-Benefits Crisis.”)

Short Takes

  • More than 65 percent of respondents polled on the recent changes in accounting standards believe the past year’s accounting scandals have significantly damaged the profession’s reputation. The survey was taken at the Chamberlain Hrdlicka 25th Annual Tax & Business Planning Seminar held earlier this month.

According to the poll, 55 percent of respondents believe that the Sarbanes-Oxley Act of 2002 and other SEC changes will help to achieve the goal of encouraging public companies to produce more accurate financial statements. However, when asked if malpractice or other concerns would cause accounting firms to adopt the Sarbanes-Oxley standards (even if a firm would not otherwise be covered), 63 percent of those surveyed said no.

“From this survey, it is clear that there are mixed opinions about the state of the accounting industry,” said George Hrdlicka, co-founder and shareholder of law firm Chamberlain Hrdlicka.

  • Metromedia International Group Inc. announced it will delay submitting its third-quarter financial report because it wants to review goodwill amortization accounting rules. The company’s management also said it wants to examine long-lived assets impairment regulations.
  • Another big debt offering hit the street on Wednesday. IBM raised $2 billion in a two-part global debt deal, led by J.P. Morgan, Morgan Stanley, and Salomon Smith Barney. It issued $1.4 billion in 10-year notes, priced to yield 4.98 percent, or 93 basis points over comparable Treasuries. It also issued $600 million in 30-year bonds, priced to yield 6.045 percent, or 110 points over its benchmark. Big Blue’s paper was rated A1 by Moody’s and A-plus by Standard & Poor’s.
  • Household Finance Corp., the finance arm of Household International Inc., issued $1.25 billion in a two-part global debt deal. Each tranche has a step-up provision, increasing the coupon rate by a preset amount should the proposed takeover of Household by HSBC Holdings Plc fail, according to Reuters. Last week, HSBC announced plans to purchase Household for $14.2 billion. Household International owns HFC and Beneficial, and is the largest independent consumer-finance company in the United States.

HFC issued $1 billion in 10-year notes, priced to yield 6.462 percent, or 250 basis points more than comparable Treasuries, and $250 million in 30-year bonds, priced to yield 7.351 percent, also 250 points over Treasuries. Both issues were rated A2 by Moody’s and A-minus by S&P.

Kraft Foods Inc. issued $750 million in two-year floating rate notes, up from an originally planned $500 million. Led by ABN Amro and Lehman Brothers, the notes priced at 20 basis points over Libor. They were rated A2/A-minus. Kraft will no doubt pour the money right back into the business. According to CFO PeerMetrix’s optimal cash ranking, Kraft carries only two days’ worth of operating expenses in cash.

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