The Profit Picture Is Getting Ugly

And, so far, the next quarter isn't looking much better

How the mighty have fallen--and the not-so-mighty, too. Across the corporate landscape, earnings are plummeting, brought down by the slowing U.S. economy, the stubbornly strong dollar, and high energy costs. BusinessWeek's flash-profit survey of 122 bellwether companies shows that first-quarter net income sank 19%, despite a sales increase of 14%. And even that dismal performance includes a lift from highfliers in the energy sector such as Exxon Mobil Corp. (XOM ) Without those anomalous gains, year-over-year results fell 25%. "It's good to have this one behind us," sighs John V. Faraci, chief financial officer at International Paper Co. (IP ), after reporting a 93% plunge in first-quarter earnings, to $18 million.

The worst isn't over, however. The second quarter is likely to be just as humbling, and analysts widely predict third-quarter profits will be down, too. Economists at Standard & Poor's Corp. estimate that the net income of the 500 companies in its benchmark index tumbled 18% in the first quarter. That's on top of a 5% slide in last year's final period. Worse, they forecast another 10% drop in the second quarter--marking the first double-digit earnings decline in two consecutive quarters since 1992, when business was still recovering from a recession.

DOWNDRAFT. Indeed, the earnings slump is so severe that Federal Reserve Chairman Alan Greenspan is now focusing far more attention on earnings than he has in the past. In explaining its last two interest rate cuts, the Fed singled out shrinking profit margins as a reason to worry.

Why are things likely to get worse before they get better? Already shaken by the stock market's plunge, Americans are growing anxious about jobs. That means consumer spending is expected to drop, especially on durable goods as well as snazzy electronic gadgets. Sears, Roebuck Co. (S ) is caught in the downdraft. Its net income skidded 25% in the first quarter, to $176 million, and the retailer has warned of another double-digit decline in the second quarter.

Corporations, meanwhile, are also snapping their wallets shut as they prop up the bottom line by curtailing capital spending and discretionary outlays. And executives detect that the U.S. malaise is spilling into Europe and Asia--regions that had until now acted as counterweights to mounting domestic woes. "It is a global slowdown," declares Richard Berner, chief U.S. economist for Morgan Stanley Dean Witter & Co. "It is U.S.-centric, but it is global."

There were, of course, a few standouts in the first quarter. Riding high along with the rest of the energy sector, Exxon Mobil netted $5 billion in the quarter, thanks to rising oil and gas prices. Boeing Co. (BA ) and IBM (IBM ) also posted higher results, albeit thanks to easy comparisons with the 2000 quarter.

But there were many more losers. Airlines were among the worst off in the quarter. All but two of the major carriers--Continental (CAL ) and Southwest (LUV )--posted losses, with UAL reporting a jaw-dropping deficit of $304 million as business travelers stayed put or booked cheaper coach-class tickets. Earnings of commodity makers also slid. Net income at DuPont swooned 40%, to $484 million. The car industry hit the brakes, too, with earnings at industry leader General Motors Corp. (GM ) nose-diving 87%, to $225 million. Auto makers remain fearful that dropping consumer confidence will hurt sales for the rest of 2001.

Financial-service firms also took it on the chin, slammed by Wall Street's woes. Earnings at J.P. Morgan Chase (JPM ), for example, were off 38%, to $1.2 billion, as fees on IPOs and mergers dried up. Citigroup's (C ) profits also declined, slipping 7%, to $3.6 billion.

Few sectors fell harder than tech, though, where titans had stood so tall a year ago. Intel Corp. (INTC ) logged an 82% decline in net income, to $485 million, its third consecutive quarter of lower profits. The chipmaker warned that its margins would shrink further in the second quarter. Compaq Computer's (CPQ ) first-quarter profit was off 76% as PC sales stalled, while Motorola (MOT ) reported its first operating loss since 1985.

To keep profits from disappearing altogether, many companies are battling back--with an ax. Motorola, DuPont (DD ), Intel, and Cisco (CSCO ) are among the biggest job choppers. 3M (MMM ), too, plans to lop 5,000 positions this year. Bracing for harder times, the St. Paul (Minn.) conglomerate is also paring capital expenses and putting the arm on vendors. "There are no clear signs the picture is improving anytime soon," warns 3M CEO W. James McNerney Jr. Even a smudged crystal ball can confirm that.

By Michael Arndt in Chicago and bureau reports

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