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Why Not Write Off 1991? Everyone Else Did


Corporate Scoreboard

WHY NOT WRITE OFF 1991? EVERYONE ELSE DID

Computer makers eliminated tens of thousands of jobs in 1991. New home construction dipped to its lowest level in 46 years. And Detroit's Big Three auto makers lost $7.8 billion. As if to punctuate a year's worth of bad news, the final three months turned out to be the worst of all for most companies: Fourth-quarter profits plunged 27% from the same period in 1990 on a 1% dip in sales, according to Standard & Poor's Compustat Services Inc. Can it get any worse? "I think we're at the low point of corporate profitability," ventures Stephen S. Roach, senior economist at Morgan Stanley & Co. "From here on out, it will only get better."

That ought to make a lot of people breathe easier. Still, it will be a long time before anyone forgets 1991. For the full year, earnings for the 900 companies in BUSINESS WEEK's Corporate Scoreboard fell a total of 19%, on a meager 1% sales gain. It was the third consecutive annual decline for corporate profits and the worst percentage drop since 1982.

The biggest drag on quarterly and 12-month results can be summed up in one word: restructuring. As the year grew progressively worse, dozens of America's largest companies announced reorganizations. The combined restructuring charges of $16.4 billion, excluding the onetime write-offs many companies took to cover retired employees' health care benefits, sliced a whopping $2.40 a share, or 47%, off profits for the Standard & Poor's 500-stock index in the fourth quarter alone. That compared with restructuring charges of $2.21 a share for all of 1990, reports PaineWebber Inc.

A FIRST. IBM led the list in November, with plans to restructure and take an aftertax charge of $3.4 billion. Big Blue's subsequent $564 million deficit for the year was the first loss in its history. In December, General Motors Corp. said it would shutter 21 plants and lay off 74,000 workers by 1995. Its $1.8 billion quarterly write-down led to a $4.9 billion loss for all of 1991--the biggest since the auto giant was founded in 1908.

It's no surprise, then, that computer companies and auto makers took the biggest earnings hits last year. While computer makers had nothing like the Big Three's multibillion-dollar disaster, they did record $664.9 million in the minus column--vs. profits of $8.4 billion in 1990. Eliminate the computer group from the Corporate Scoreboard results, and last year's fall-off in profits would have been 14.1%.

The corporate restructurings may have laid the foundation for a profit turnaround in 1992, but it will probably be a weak one. Most economists are forecasting profit growth of only 8% in 1992 and 13.4% the following year. That compares with 15% and 19% for the two years following the recession in 1982.

Still, there are more than a few positive signs for sustained growth. Layoffs and voluntary retirements have cut payroll costs. The 32% decline in the prime rate has reduced interest-rate expenses for many businesses, and refinancing of long-term debt has helped improve balance sheets. Plus, inflation is running at a modest 2.6%. "Companies have improved their efficiency and reduced their operating costs," says Lynn Reaser, chief economist at First Interstate Bancorp in Los Angeles. "With an increase in volume, they will see a very considerable increase in cash flow and profits this year."

Then again, plenty of economists predicted an uptick in corporate profits for last year's second half, and it never materialized. The gulf war victory helped ease the economy out of recession during first-quarter 1991, but gross domestic product grew at only a 1.3% annualized rate--the most anemic recovery on record. Result: Both net and operating profits got worse each quarter.

After cars and computers, the industry that suffered the largest dollar decline in earnings was telecommunications, where profits were off almost $3 billion from 1990. Most of that slide came from American Telephone & Telegraph, whose net income fell 83%, to $522 million, because of--what else?--$4.5 billion in restructuring charges and write-downs.

The profit swoon had a measureable effect on the rankings in BUSINESS WEEK's Top 25 earnings leaders. IBM, last year's top profit maker, vanished from the list. Stepping up as No. 1 was last year's runner-up, Exxon, whose 12% growth in net income, to $5.6 billion, set a company record. But the new height had nothing to do with an increase in U.S. oil consumption: 75% of Exxon's profits came from overseas. And nearly all of its earnings increase occurred during the first quarter of 1991, when oil prices spiked to $40 a barrel.

Exxon was followed by General Electric, Philip Morris, and two drug companies, Merck and Bristol-Myers Squibb. Energy and health care companies stacked the list with five each, and the Top 25 company with the biggest year-over-year profit gain was Johnson & Johnson, whose earnings jumped 28%.

ONE BIG WINNER. Among revenue leaders, the trend last year was down. GM, heading the field with sales of $123 billion, was off 1% from the previous year. In second place was Exxon, with a 2% decline in sales, to $104.2 billion. Third-ranked Ford and fourth-ranked IBM also saw sales fall, by 10% and 6%, respectively. Only fifth-ranked GE showed 3% growth, to $60.2 billion, thanks to big increases at its financial-services units. The Top 25 company with the biggest revenue gain for the year was megaretailer Wal-Mart Stores, whose sales rose 35%, lifting profits to $1.6 billion.

Wal-Mart wasn't the only lucky one. A record year for the stock market propelled the financial-services group to the greatest dollar gain in profits for all industries, up $2.2 billion, or 41%, over 1990. Merrill Lynch led the bullish pack with a 263% jump in profits, to $696.1 million. By contrast, the previous year's top industry group, oil companies, saw earnings decline 17%. The prize for top percentage-rebounder among industries went to the savings-and-loan group, whose profits soared 242.6% from a year earlier. True, the growth came off a low base, $192.5 million in 1990. The industry was lifted by lower interest rates, which helped S&Ls boost margins on loans and rack up $659.6 million in total profits.

In nearly all industries, the big variable for 1992 is consumer demand. About 25% of all U.S. households say they directly experienced some form of unemployment last year. This was reflected in last month's Conference Board survey of consumer confidence, which dipped to its lowest level since 1974. Still, most economists are calling for stronger GDP growth in the second half of this year. Maybe that will make it easier to forget nightmarish 1991.THE LEADERS IN 1991 SALES AND PROFITS

THE TOP 25 IN SALES

1991 sales Percent change 1990

Millions of dollars from 1990 rank

1 GENERAL MOTORS $123,056 -1 % 1

2 EXXON 104,217 -2 2

3 FORD MOTOR 88,286 -10 3

4 IBM 64,792 -6 4

5 GENERAL ELECTRIC 60,236 3 6

6 SEARS, ROEBUCK 57,242 2 7

7 MOBIL 56,432 -4 5

8 PHILIP MORRIS 48,064 8 8

9 AT&T 44,651 2 13

10 WAL-MART STORES* 43,887 35 14

11 CHEVRON 40,900 -4 9

12 DU PONT 38,695 -3 11

13 TEXACO 38,322 -8 10

14 KMART 34,155 5 15

15 CITICORP 31,839 -17 12

16 CHRYSLER 29,400 -4 16

17 BOEING 29,314 6 18

18 PROCTER & GAMBLE 28,229 9 19

19 AMERICAN EXPRESS 25,763 6 20

20 AMOCO 25,325 -10 17

21 KROGER 21,350 5 26

22 AMERICAN STORES 21,315 -6 21

23 UNITED TECHNOLOGIES 21,262 -2 22

24 CONAGRA 20,485 15 35

25 ITT 20,421 -1 24

THE TOP 25 IN EARNINGS

1 EXXON $5,600 12 % 2

2 GENERAL ELECTRIC 4,435 3 3

3 PHILIP MORRIS 3,927 11 4

4 MERCK 2,122 19 10

5 BRISTOL-MYERS SQUIBB 2,056 18 11

6 MOBIL 1,921 0 8

7 PROCTER & GAMBLE 1,787 3 12

8 COCA-COLA 1,618 17 20

9 WAL-MART STORES* 1,608 25 23

10 BOEING 1,567 13 18

11 AMERICAN INTL. GROUP 1,553 8 17

12 GTE 1,529 -6 15

13 BELLSOUTH 1,507 -8 14

14 JOHNSON & JOHNSON 1,461 28 24

15 FEDERAL NATL. MORTGAGE 1,455 24 28

16 DU PONT 1,403 -39 6

17 AMERICAN HOME PRODUCTS 1,375 12 26

18 BELL ATLANTIC 1,332 1 21

19 ELI LILLY 1,315 17 29

20 TEXACO 1,294 -11 16

21 CHEVRON 1,293 -40 7

22 AMOCO 1,220 -36 9

23 AMERITECH 1,165 -7 25

24 SOUTHWESTERN BELL 1,156 5 30

25 3M 1,154 -12 22

DATA: STANDARD & POOR'S COMPUSTAT SERVICES INC.

* Fiscal year ended January, 1992

Bruce Hager in New York


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