CBS Inc., ravaged by heavy losses in its toy division and an unexpectedly sharp decline in broadcast advertising revenue, Wednesday reported a net loss of $114.1 million for the third quarter--its first quarterly loss in at least 32 years.
The red ink for the quarter ended Sept. 30 means that the broadcast, record and magazine giant will be only modestly profitable for all of 1985, CBS Chairman Thomas H. Wyman told a gathering of Wall Street securities analysts late in the day.
To staunch the losses, the company said it would discontinue the three divisions in which they were concentrated. These are CBS Toys, a chronic trouble spot that lost $114.6 million from operations and disposal-related write-offs in the quarter; CBS Theatrical Films, which lost $21.1 million, and CBS Software, which lost $7.5 million.
The three remaining businesses that the company now defines as its “core” operations also showed sharp quarterly declines in profits. CBS Broadcast Group reported $46.9 million in pretax income, a drop of 28% from the same quarter a year ago; CBS Records reported income of $12.5 million, a 24% decline, and CBS Publishing had $41.2 million in income, a 13% decline that the company attributed largely to acquisition costs and amortization of “goodwill” from its purchase of 21 consumer magazines in February from Ziff-Davis Publishing.
In all, earnings per share from the company’s continuing operations--that is, broadcast, records and magazines--will be slightly more than $7 this year, compared to $10.04 last year, executives said. Wyman said CBS expects to post an overall profit, including the discontinued lines, of between $1.75 and $2 a share for the fourth quarter ending Dec. 31, which means that the company’s overall net profit for 1985 will be a slim 64 cents to 98 cents a share, down from 1984’s $7.15.
Revenue for the third quarter rose 4% to $1.12 billion from a year ago. For the first nine months, revenue was up 3% to $3.41 billion.
A Difficult Year
The dismal third quarter may serve as the improbable climax of a year in which CBS has been buffeted by legal and takeover battles that made its stock one of Wall Street’s most volatile. Executives said Wednesday that what they wryly termed the company’s “defense spending"--the cost of successfully fighting off cable-TV entrepreneur Ted Turner’s takeover campaign--will come to about $12 million this year.
The network beat Turner with a costly program to repurchase 21% of its stock, and it hopes to have quelled further takeover speculation with an agreement by which Loews Corp. will buy a total of 25% of its stock. On Wednesday, CBS formally placed Loews Chairman Laurence Tisch on its board, but Loews has apparently not advanced far beyond the 11.7% stake that it held when the arrangement was announced Oct. 16; Loews now owns about 11.9%, CBS executives said.
The quarterly loss, company spokesmen said Wednesday, is the only one apparent from corporate records that extend back to 1953. CBS was founded in 1928. Nevertheless, a sense that CBS was poised to report a major loss had been circulating for some time in the investment community, and few Wall Street professionals were particularly surprised even at its size.
“There were rumors that it would be as high as $100 million,” said Edward Atorino, a broadcast analyst for Smith Barney, Harris Upham & Co. “This company has some problems, and they’re solving them the hard way.”
CBS stock rose $2 a share to close at $120 in moderate trading Wednesday on the New York Stock Exchange, although the earnings report was available after noon. The previous day, in the teeth of a stock market rally, the stock had lost $2.25 to close at $118.
Wyman left little doubt that the losses in the company’s troubled divisions reflected poor managerial judgment, particularly in failing to disband the toy division.
Chairman Takes Blame
He said CBS made a major blunder in purchasing Ideal Toy in 1982, when the division’s problems were already apparent. “It was clear that we had to get out (of the business) or increase the scale of our activity,” he said. “Quite obviously we took the wrong fork in the road.”
Had CBS shut down the unit a year ago, its overall results this year would be improved by $20 million to $25 million, he said. “Our effort to turn the business around was unsuccessful and expensive. The responsibility for that decision is mine.”
Part of the toy business is to be sold to Hasbro, the companies announced Wednesday. Hasbro said it has agreed to buy CBS’ Creative Playthings brand line for $25 million; Wyman said he hopes to record a gain of about $100 million, including tax benefits, from that and other sales. That would make a major dent in the network’s mandate, incurred as part of its defense against Turner’s takeover attempt, to gain $300 million from asset sales by mid-1986.
Wyman said CBS would book some gains from the liquidation of its film business--particularly in the sale of its 29% interest in Tri-Star Pictures, which it owns jointly with Time Inc. and Columbia Pictures. The network’s stake is reportedly valued at $50 million to $60 million; although no buyer has come forward publicly, the two partners have the right of first refusal.
Tri-Star has had some hits lately, including “Rambo: First Blood Part II,” the Sylvester Stallone film. But CBS’ theatrical films unit has few, if any, successes to claim as its own among its 12 productions.
“We have no demonstrable skills to differentiate us from a number of powerful competitors” in the movie industry, Wyman said.
CBS’ problems in its ancillary businesses have been compounded by weak performances in its major lines.
Broadcast advertising revenue has been particularly meager, said broadcast group chief Gene Jankowski. Revenue for the three networks will decline this year by more than 3.5% from last year, he said, for the first negative year since 1971, when cigarette advertising was ruled off the air.
Television ad revenue for July and August was down 11% and 35%, respectively, from year-earlier periods.
“We have seen the disappearance of $100 million to $200 million in revenues from the advertising marketplace,” he said.