New Chairman-CEO David Bell said shuttering Octagon Motorsports is one option under consideration as Interpublic looks to jettison the U.K. tracks, bought in 1999 in an ill-fated acquisition. In an analysts' conference call, he warned Interpublic may take additional racetrack write-downs.
Interpublic's business is slowing. Chief Financial Officer Sean Orr revised a December assessment of flat `03 revenue to a forecast of a 1% to 4% revenue drop, with earnings per share of 68¢ to 72¢, far below Thompson First Call's 91¢ analysts' consensus. He noted clients have delayed or cut spending lately over geopolitical uncertainty.
The company reported fourth-quarter net income of $20.3 million, down 78.9% from a year ago; it had earnings per share of 5¢ vs. analysts' 18¢ forecast. Revenue fell 3.8% to $1.7 billion. The earnings drop was mainly due to weakness at McCann and at the tracks, said Mr. Bell. McCann's non-ad businesses had a "disastrous" year, and its Japan and Latin American units showed shortfalls, he said.
Net income for 2002 was $99.5 million vs. an `01 loss of $534.5 million; revenue fell 8.7% to $6.2 billion. U.S. revenue fell 10% for the year but rose 0.4% in the fourth quarter; international revenue dropped 8.8% in the quarter and 6.8% for the year.
"These results are unacceptable ... a turnaround is what is required," Mr. Bell said in his first conference call with analysts. He cited four priorities "for the first 100 days and beyond": Improve the balance sheet; "financial reliability"; improve margins; focus on organic growth. More job cuts are likely as Interpublic reduces costs.
Interpublic last quarter reduced debt $300 million to $2.6 billion; it should fall more with the pending sale of NFO WorldGroup. Standard & Poor's, however, March 7 cut the corporate credit ratings to junk status, which could raise borrowing costs. It cited falling revenue, weak cost control, high debt vs. profits and the likelihood that profit improvement "could take longer than anticipated."
Interpublic's latest restatement consisted of a $135.8 million pretax charge for racing asset write-downs and expenses, mainly in third-quarter 2002; and $29.9 million in other charges for write-downs and accounting from 1997 to 2002. The Octagon write-down was in line with expectations of a $100 million to $200 million charge (AA, Feb. 17). The charge is in addition to three restatements totaling $181.3 million made since August for accounting problems and other issues back to 1997.
In a report, Salomon Smith Barney analyst William Bird warned issues hurting the stock will take time, but "problems are fixable over time."
Interpublic issued results after the market closed March 6. The stock slumped that day to $8.59; in after-market trading, even as Mr. Bell spoke with analysts, it fell to $7.81, the lowest point since 1991. It recovered to close at $8.45 March 7, down 12.4% for his first week on the job.
March 7 close: $8.45
Market cap: $3.3 B
4Q '02 EPS: 18¢ forecast 5¢ actual
4Q '02 revenue, % change: $1.67 B, -3.8%
4Q '02 income: $20.3 M
4Q '01 income: $96.4 M
Management forecast a 1% to 4% revenue decline for '03 and fullyear EPS of 68¢ to 72¢