The recession was mild, and the economy is showing definite signs of recovery. But that recovery hasn't hit the bottom line at Corporate America quite yet. With many industries still bedeviled by sluggish demand, overcapacity, and an inability to raise prices, the profit picture in the first quarter was bleak.
For the 900 companies in BusinessWeek's Corporate Scoreboard (also available in an interactive version), earnings fell 2% from a year earlier, hurt especially by weakness in the technology, telecom, oil, and airline sectors. That's the sixth straight quarter of falling profits. It's a vast improvement over the final quarter of 2001, when earnings tumbled 56%. However, sales also fell on a year-to-year basis, by 5%, after a 4% decline the previous quarter. That was the worst drop in revenues for Scoreboard companies in 30 years and only the second time that sales have declined in two consecutive quarters. How to sum it up? "It was a lousy quarter," declares Sung Won Sohn, Wells Fargo & Co.'s chief economist. "Economists say that demand has bottomed and is picking up. Many businesses are saying they haven't seen that yet."
What strength there was came once again from companies that catered mainly to consumers. The top earner, Citigroup, posted a 37% profit gain, to $4.89 billion, helped by its healthy spread between low interest costs on the money coming in from savers and the interest collected on consumer loans. And the largest company in the world, Wal-Mart Stores Inc., managed to dominate its sector. But like many businesses, it also faced some higher operating costs and choosy, price-conscious customers. CEO H. Lee Scott Jr. called Wal-Mart's 9% profit growth, to $2.19 billion, "a good ending to a difficult year." The retailer failed to achieve its stated goal of boosting profits as fast as sales, which grew by 14%.
Of course, the poor showing isn't entirely the result of adverse economic conditions. Investor concerns about the accuracy of corporate accounting have forced managers to be more transparent with their finances. The biggest loser this quarter, in fact, was Tyco International Ltd., which CEO L. Dennis Kozlowski says was hurt by severe weakness in its electronics and telecom markets--as well as by substantial "distraction costs" resulting from the furor over Tyco's complex accounting. That includes an on-again, off-again breakup plan that was panned by Wall Street. Ultimately, the big conglomerate posted a $1.9 billion loss because of $3.3 billion in pretax charges, which included a huge write-down of Tyco's underseas telecom network. The big loss broke a 40-quarter string of earnings gains.
Changes in accounting rules also distorted the profit picture for some companies. That's because they had until the end of the second quarter to write off goodwill costs--the premium they paid for acquisitions--all at once, rather than spreading those charges out over time. That hurt quarterly net income at many companies whose acquisitions have soured, such as AOL Time Warner Inc. (Because charges for distressed assets are aftertax charges, they are not reflected in Scoreboard tables.) On the other hand, such companies as Intel Corp. took those charges last year, so profits showed a big bump-up in the first quarter--a 93% increase for the chipmaker, to $936 million. Because many took the hit last year, Edward F. Keon, chief of quantitative research at Prudential Securities Inc., estimates that the new rule will boost reported net earnings for the Standard & Poor's 500 companies as much as 8% this year.
But put the special issues aside, and the fact is that business is still crawling along in many sectors. Take technology. With few companies willing to make big new investments in information systems, even the strongest tech outfits suffered. Profits at IBM fell 32%, to $1.19 billion. Every one of the company's lines--from business services and software to chips and financing--was off. CEO Samuel J. Palmisano, however, continues to invest in areas he believes will grow, such as software. "While no one can predict the timing of a recovery, we remain optimistic that business conditions will improve later this year," Palmisano says.
Until then, pricing power will be nonexistent in some industries. Energy prices, though rising, were still below last year's levels, putting a serious dent in the earnings of such former champs as Exxon Mobil Corp. (XOM ) The giant's profits for the quarter fell 58%, to $2.09 billion. Altogether, the declines in Big Oil were so dramatic that if the group had been eliminated from the Scoreboard, overall profits would have risen 9% in the quarter instead of falling 2%. Even Big Pharma, which has long been in the winner's circle, had it tough. For the group, revenues rose only 6%, as opposed to the often double-digit yearly gains of the late '90s, as health insurers began clamping down on drug prices. Generic competition also wiped out sales of some previously top-selling drugs, like Merck & Co.'s Vasotec. Merck (MRK ) profits fell 2% in the quarter, to $1.63 billion.
One hint of recovery: Manufacturing showed surprising strength. Strong sales, helped by heavy buyer incentives, helped General Motors Corp. (GM ) show a respectable 9% sales increase. But those incentives were costly--profits fell 4%, to $228 million. Nevertheless, GM says that it still plans to make more autos this year than last. GM now predicts profits of $2.9 billion this year, ahead of its original forecast.
Such optimism remains in short supply, though. That's why many executives are still pushing layoffs and other cost-cutting measures. By lopping 6% of its payroll in the past 12 months, 3M Co. (MMM ) held profits steady at $452 million, although sales dipped 7%. "The focus in the organization is how to do work better, not just trying to hold your breath until the economy returns," says Chief Financial Officer Patrick D. Campbell.
Having held their breath for 18 months already with no sign of a profit pickup, some executives are turning blue in the face. But relief should be on the way. As companies worked to restock inventories in the first quarter, the economy grew at a 5.8% annual rate. Now, Wells Fargo's Sohn sees profit growth of 3% to 5% in the second quarter as businesses once again get ready to shop. If he's right, Corporate America may finally start prospering in this so-called recovery.
By Julie Forster in Chicago, with bureau reports