Profits: This Is So Not the '90s

Corporate earnings cratered in 2001--and things may not improve anytime soon

Corporate profits could have been worse in 2001--but it's hard to see how. With the economy steeped in recession, burdened with overcapacity, and whipsawed by uncertainty and fear after the brutal terrorist attacks of September 11, yearly earnings for BusinessWeek's 900 Corporate Scoreboard companies plunged 59% from 2000. That decline was the steepest since the Scoreboard began in 1973, far outpacing the previous worst annual drop of 19% in recession-wracked 1991. In the fourth quarter alone, earnings plummeted 56%--the third straight quarter that profits fell by more than 50%, year to year.

Virtually every sector in the economy saw profits fall or turn to losses. Technology, transportation, and manufacturing were particularly hard hit. Only three sectors, buoyed by resilient consumer spending, did well--health care, utilities, and consumer staples. Nevertheless, total Scoreboard revenues, which fell 4% in the last quarter, managed only a sluggish 3% climb for all of 2001. And yearlong profit margins crumbled to a paltry 2.6%, from 6.5% in 2000.

Profits took a big hit, owing to JDS Uniphase Corp. (JDSU ), the maker of telecom optical components that posted an unprecedented $58 billion in losses for the year, mostly a result of write-offs from bad acquisitions. But according to Standard & Poor's COMPUSTAT, 35 Scoreboard companies had special pretax write-offs of more than $1 billion in 2001. Scoreboard profits would have sunk 47% for the year, discounting just JDS's net loss, and 22% if all special pretax charges were excluded.

Facing such a bleak picture, corporate executives moved quickly throughout the year to shutter plants, slash capital spending, and lay off workers. But just when many thought the worst was over, the terrorist attacks punished the economy even more. Gross domestic product contracted 1.3% in the third quarter. Employers, who had already cut nearly 1.5 million workers before Labor Day, lopped off another 350,000 jobs after September 11, especially in besieged industries like airlines.

Even some of the most profitable companies last year aren't home free. With energy prices off, Exxon Mobil Corp. (XOM ), which made more money than any company in U.S. history in 2000, saw earnings fall 6%, to $15.1 billion in 2001, a pattern repeated at many oil companies. At General Electric Co. (GE ), which saw earnings grow 11%, to $14.1 billion, CEO Jeffrey R. Immelt expresses concern that the downturn could still affect the company: "We are doing our business planning as if 2002 is going to stay tough the entire year." And while drugmaker Pfizer's (PFE ) profits grew 108%, to $7.8 billion--powered in part by surging sales of its cholesterol-lowering drug Lipitor--profits from such blockbusters are always endangered by patent expirations and competitive products. A new cholesterol drug from England's AstraZeneca PLC (AZN ), for instance, is expected to hit the market later this year.

In the technology sector, 2002 could be just as bad as 2001. As early as last spring, business customers had begun forgoing technology upgrades, putting a serious crimp in the profit-and-loss statements of many computer manufacturers, chipmakers, and telecom enterprises. Slammed especially hard were the telecom-equipment makers, who, after the boom years of the late '90s, have seen profits evaporate. JDS Uniphase's huge loss differed from others' only in scale. Motorola Inc. (MOT ), for instance, racked up $3.9 billion in losses, down from a profit of $1.3 billion in 2000, because of soft demand for its semiconductors and cellular gear. Beleaguered Lucent Technologies' (LU ) loss widened to $13 billion, from $1.1 billion, while VeriSign Inc. (VRSN ) lost $13.4 billion in 2001, after losing $3.1 billion in 2000.

And the telecom operators themselves turned into basket cases as business spending for telecom services skidded. At Level 3 Communications Inc. (LVLT ), the loss grew to $5.4 billion, from $1.4 billion a year earlier, with similar bloodbaths at Sprint (FON ), AT&T (T ), and Qwest Communications International (Q ). And things will likely get worse before they get better. "We're within a few feet of the bottom of the ocean," says James Q. Crowe, CEO of Level 3. But clearly, it will be a long swim back to the surface.

The airlines, already hurt by a cutback in business travel before the September 11 attacks, saw a devastating decline in traffic afterwards. Only one major carrier, low-cost Southwest Airlines Co. (LUV ), made money last year--and its $511 million profit represented a decline of 18%. The biggest loser? UAL Corp. (UAL ), parent of United Airlines, which lost a record $2.1 billion in 2001, even after an emergency government bailout. And AMR Corp. (AMR ), parent of American Airlines, the world's largest airline, lost $1.8 billion for the year--$798 million in the fourth quarter alone. "It does seem that all carriers are feeling the pain," says Thomas W. Horton, AMR's chief financial officer. Horton didn't offer a bright forecast for the first quarter of 2002. "Clearly, the first quarter will be a loss for us and the rest of the industry--and quite a substantial loss."

The auto industry also ran out of gas. Detroit resorted to 0% financing late last year to jump-start sales, but earnings still stalled. Ford Motor Co. (F ), hurt by the massive Firestone tire recalls, saw a $5.4 billion profit in 2000 turn into a $5.5 billion loss in 2001. General Motors Corp. (GM ) fared little better. It eked out a $601 million profit--but that was an 87% decline, year to year, while revenues fell 4%.

The news was better at financial companies with big consumer operations, as low interest rates served to spur lending. Citigroup (C ) saw profits rise 6%, to $14.3 billion. And at Washington Mutual Inc. (WM ), earnings rose 44%, to $2.7 billion, thanks to the refinancing boom. But it was another story on Wall Street. After the fat years of the late '90s, the money train stopped. Morgan Stanley Dean Witter's (MWD ) profits fell 34%, to $3.6 billion. Profits at Merrill Lynch & Co. (MER ) plummeted by 85%, to $573 million.

Despite all the pain, there were faint signs of a rebound in the fourth quarter. Gross domestic product, surprisingly, grew by 0.2%. Consumer spending climbed at a 5.4% annual rate. There was even a small uptick in the technology sector. So the profit picture may, at least, be getting no worse. Says Sung Won Sohn, chief economist of Wells Fargo & Co. (WFC ): "The recession ended in the final quarter of last year. Now we are in recovery." After the pummeling of '01, it would be nice if he were right.

By Julie Forster and Michael Arndt in Chicago, with bureau reports

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