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A TRIPLE WHAMMY TO THE BOTTOM LINEThe GM strike, rising wages, and Asia's crisis knock net income back by 2%For more than a few quarters, falling profits have seemed a distant concern for Corporate America and U.S. stock investors. No longer. In 1998's second quarter, the 900 companies on BUSINESS WEEK's Corporate Scoreboard earned less than they did in the same period a year earlier--the first time that's happened since late 1995. Net income fell 2% for the quarter, on a 7% rise in sales. Even absent one-time charges and special gains, things didn't look much better: On an operating basis, profits rose only 2%. ''It was a rotten quarter,'' says David Wyss, chief economist of Standard & Poor's DRI. For culprits, look to a costly auto strike, rising labor costs across the economy, and an increasingly worrisome slowdown overseas. General Motors Corp.'s (GM) earnings crashed 81% because of the United Auto Workers strike. Remove the country's largest manufacturer from the Scoreboard, and the rest of the field broke even. U.S. wages and salaries, meanwhile, have surged 4% this year. Up until now, productivity gains have partially offset those higher costs. But the far bigger problem for companies this quarter was the Asia crisis, which has slashed prices and dried up demand for U.S. products from airplanes and cellular phones to cola. Unflappable U.S. consumers helped keep things from getting really dismal. Consumer spending rose 5.8% and business spending was up a respectable 11.4%, though down from 17.8% growth in the previous quarter, according to the Commerce Dept. Still, gross domestic product gained only 1.4% last quarter--to some extent, payback for a strong start to the year. Much of the first quarter's staggering 5.4% GDP growth came from a record $95.5 billion buildup in inventories. Now that demand from Asia is falling off a cliff, U.S. businesses are adding to inventories at half that rate. With industrial production down 0.6% in June, economists are scrambling to lower their estimates for third-quarter growth. HIGH-TECH TRIALS. Some of the biggest disappointments are being posted by companies with a lot of business in Asia. Motorola Inc. (MOT), which took a $2 billion charge to restructure its wireless and semiconductor operations, blamed Asia for its barely breaking even on an operating basis. Coca-Cola Co.'s (KO) profits slipped by 9%, to $1.2 billion. Plunging Asian currencies and the resulting cheaper imports are also hammering U.S. profit margins, which fell to 5.8% of sales last quarter. That compares with 6.4% a year earlier, making this year's second-quarter showing the lowest since 1994. No sector suffered more than high technology. U.S. manufacturers faced cheap PCs and semiconductors flooding the market from Japan, Korea, and Taiwan, which exacerbated cyclical price declines. By including a $3.2 billion write-off related to its purchase of Digital Equipment Corp. (DECPrA), PC maker Compaq Computer Corp. (CPQ) recorded the biggest net loss, $3.6 billion. Commodity prices have plummeted, pounding a broad range of industries. Industrial metals are down. Oil is getting killed. That's good news for airlines and trucking firms, whose profits grew 15% and 30%, respectively. Among the biggest beneficiaries: AMR Corp. (AMR), whose earnings soared 35%, to $409 million. But with crude prices off more than 40% from a year ago, earnings for the oil sector have dropped $2.1 billion. Even companies selling gasoline and other refined products, which have maintained better margins, suffered. At Exxon Corp. (XON), for example, profits were down 18%, to $1.6 billion. That looks bad until you compare it with Texaco Inc. (TX), down 40%, and Amoco Corp. (AN), down 54%. Don't expect a quick turnaround, either. ''The second half of this year will be exceptionally challenging,'' says Jack E. Little, CEO of Shell Oil Co., the U.S. subsidiary of Royal Dutch/Shell Group (RD). Still, some companies and industries are bucking the trend. General Electric Co. (GE) was again a top performer, generating a Scoreboard-best $2.5 billion of profits, up 13% from last year. And despite the carnage in computer hardware, Microsoft Corp. (MSFT) parlayed its fat 34% profit margins into a 28% income gain. Most local phone companies also did well. Carriers SBC Communications Inc. (SBC) and Ameritech Corp. (AIT), which intend to merge, saw year-over-year profit comparisons boosted by last year's huge restructuring charges. SBC went from a loss of $787 million to a gain of $966 million. Ameritech's profits more than tripled, to $1.7 billion. Competition was much more intense in long-distance, where the major carriers all got hurt. AT&T's (T) sales growth was just 1%, for example, and its $1.7 billion after-tax restructuring charge left the company with a $143 million loss. The needs of an aging population boosted drugmakers. Profits at Pfizer Inc. (PFE), maker of the drug Viagra, swelled by 37%, to $628 million. As a group, the industry saw profits double, and all the big drug firms, except Pharmacia & Upjohn Inc. (PNU), posted double-digit growth. With HMOs favoring drug therapy over costlier options like surgery, pharmaceutical companies are among the few industries able to raise prices. That wasn't the case in autos. Even so, Chrysler (C) managed to more than double profits, to $1 billion, thanks largely to deep cost cutting and the continuing popularity of sport-utility vehicles. Ford Motor Co. (F), operating without the Associates First Capital Corp. unit that was spun off in the first quarter, posted 7% lower sales and 6% less profit. Some analysts worry that to make their numbers, the Big Three auto makers likely stole sales from the third quarter by giving customers sweet deals on trade-ins. But keeping consumers happy and spending, in any way possible, may be the only way out of the profit squeeze for U.S. corporations. Otherwise, with labor costs rising and prices stagnant, executives will be hard-pressed to improve profit margins and return to positive earnings growth.
By Andrew Osterland in Chicago, with bureau reports RELATED ITEMS
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Updated Aug. 6, 1998 by bwwebmaster
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