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CFOs Slightly More Upbeat, Survey Says

CFO confidence on upswing; less than half planning capital investments, however. Plus: bankruptcies down, SEC zeroing in on video game makers, and former World Bank CFO moves to Capital One.
Stephen Taub, | US
August 8, 2003

Top corporate finance executives are becoming much more confident about the economy. But they still seem unwilling to do their part to prime the pump.

These are the conclusions from a new quarterly survey of 150 CFOs and managing directors of U.S.-based multinationals by PricewaterhouseCoopers.

In the second quarter, 63 percent of senior executives polled said they are optimistic about the U.S. economy — a huge jump from the first quarter, when only 34 percent of the respondents said they we sanguine about future economic prospects.

"For the first time in four consecutive quarters, more than half of executives have a positive outlook toward business in the upcoming 12 months," said Frank Brown, PricewaterhouseCoopers global leader for assurance and business advisory services, in a statement.

In addition, 42 percent said they were optimistic about the world economy, up from 28 percent in the previous quarter.

Nevertheless, just 26 percent of the executives described the economy as growing, while a majority (54 percent) said it remained stagnant, and 20 percent said it is declining.

Specifically, executives set their 12-month revenue growth target at 7.1 percent, the same as the previous quarter.

While these executives are very upbeat about the future, they are clearly reluctant to do their part to assure that economic growth will be sustained or accelerate.

Only 41 percent of the top execs said they are planning major new investments over the next 12 months, up slightly from 37 percent in the first quarter.

What's more, the level of new investments remains unchanged at 6.3 percent of revenue among the companies represented in the survey.

And just 35 percent are planning to increase their workforce, which is actually down from 37 percent in the prior quarter. What's more, nearly a quarter (22 percent) will be reducing workers, up from 19 percent who planned to do so in the prior quarter. The remaining 43 percent are planning no change.

Indeed, those surveyed still list five main barriers to corporate growth over the next 12 months:

"Weak demand continues to temper executives' optimism," acknowledged Brown. "While they have faith that better times are ahead, executives are looking for a sign — like a boost in consumer spending prompted by lower federal tax withholding — that growth has returned."

The PwC survey was released the same day the Labor Department reported a sharp rise in worker productivity in the second quarter. According to the DOL, employee productivity (that is, output per hour per worker) increased at an annual rate of 5.7 percent, more than double the first quarter's 2.1 percent gain.

Bankruptcies Declining
Still more research from PwC: public company bankruptcy filings are expected to reach a four-year low in 2003, according to PricewaterhouseCoopers' six-month update of its 2003 Phoenix Forecast.

In the first half of 2003, 76 public company filed for Chapter 11 bankruptcy protection, the fewest bankruptcies during any six-month period since the first half of 2000. Bankruptcy assets at filing totaled only $38 billion, compared with $104 billion for the first half of 2001. In the first half of 2002, that number was more like $147 billion.

PwC predicts the decrease in bankruptcies will continue, too. It forecasts just 160 filings for all of 2003, compared with 189 in 2002, a record 257 in 2001, and 179 in 2000.

"Many companies have taken advantage of a low federal funds target rate and increased investor appetite for corporate bonds in order to reduce corporate interest rates and improve balance sheets," says Carter Pate, managing partner of PricewaterhouseCoopers financial advisory services. "Internal corporate governance and corporate board changes may have also contributed to a decline in unanticipated bankruptcies, as new corporate directors have taken on increased authority to remove management suspected of financial manipulation."

Filings resulting from corporate governance issues have declined substantially in 2003, according to the study, as have filings by companies with $3 billion or more in assets and those with investment-grade-rated debt.

Distressed industries identified in PricewaterhouseCoopers' 2003 Phoenix Forecast accounted for 41 percent of the filings in the first six months of 2003.

They include: telecommunications (primarily wirelines and wireless carriers), accounting for 27 percent of total bankruptcy assets in the first half of 2003; machinery and equipment production (mostly semiconductor and communications equipment manufacturing); business services (mainly computer software and management consulting); and industrial metals and mining (primarily steel and aluminum).

Other industries that experienced a high proportion of bankruptcies included health and wholesale and retail trade.

SEC Targets Video Games
The Securities and Exchange Commission apparently has the video game industry in its crosshairs.

In the past few weeks, at least four of the industry leaders, including Activision Inc., THQ Inc., Midway Games Inc. and Acclaim Entertainment Inc., have revealed that they are being investigated by the regulatory agency.

None of the companies gave much in the way details, although THQ management said in a regulatory filing: "The investigation appears to be focused on certain accounting practices, with specific emphasis on revenue recognition."

According to Newsday, however, the SEC is interested in two specific accounting issues: reserves set aside for unsold goods and capitalization of development expenses.

All four companies received the same request for information, which could suggest that the SEC is looking into a possible industrywide pattern, according to the paper.

Last year, Take-Two Interactive Software Inc. restated seven quarters of revenue through July 2001 because it improperly booked sales of games that were returned.

Video game publishers, along with record companies and software makers, typically set aside part of their revenues to account for products that, ultimately, won't sell or will have to be discounted in stores. The size of this reserve represents the company's best estimate of what customers won't buy.

For unproven titles, publishers reserve more just to be safe, while they tend to set aside less for titles that are widely anticipated.

"There's no hard-and-fast rule," Phil Ames, a music industry accountant and royalty auditor, told Newsday, because every artist is different.

Millennium Chemicals to Restate Results
Millennium Chemicals reported it will restate its financials after finding errors in its deferred tax accounting.

Specifically, the errors relate to the company's investment in Equistar, the calculation of its pension liability, and its accounting for a multi-year precious metals transaction.

The company said its independent auditor, PricewaterhouseCoopers LLP, agrees with the decision to take these actions.

Although the restatement will not affect Millennium's cash flow, it will result in approximately $75 million of deferred tax charges in 2002 and an increase in Millennium's deferred tax liability, currently estimated at between $400 million and $450 million, with a corresponding decrease in shareholders' equity at the end of 2002.

Millennium also indicated its principal actuarial firm, Hewitt Associates LLC, incorrectly utilized participant data in its 2002 actuarial valuation and underestimated the accumulated benefit obligation at December 2002 for Millennium's largest domestic pension plan.

Millennium used Hewitt's actuarial valuation as the basis for recording its pension expense for 2002 and Hewitt's estimate of the ABO was used to determine Millennium's minimum pension liability as reflected in its December 2002 balance sheet. Hewitt has provided Millennium with a revised actuarial valuation and, based on the revised valuation, Millennium management estimates that its 2002 pension expense should be increased by about $2 million and that its minimum pension liability as reflected in its 2002 year-end balance sheet should be increased by about $53 million.

The pension adjustments will decrease shareholders' equity by approximately $35 million at December 2002. However, pension plan funding in 2003 will not be affected by this liability increase.

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