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"The First Quarter Was Just Horrible"


For months now, Federal Reserve Chairman Alan Greenspan has been trying to engineer a soft landing for the U.S. economy.

But you wouldn't know it from Corporate America's crash-and-burn performance in the first quarter. The earnings of the 900 companies on BusinessWeek's Corporate Scoreboard plummeted 25% from a year earlier, despite a 15% sales gain. Take out the booming fuel sector, and profits fell by fully a third. The first-quarter profit plunge was the Scoreboard's sharpest quarterly drop since the 1990-91 recession.

The dismal showing isn't hard to explain: Businesses have been cutting spending for months amid rising labor costs and persistently high energy costs, and now consumers are beginning to follow suit. That penny-pinching has helped wreak havoc on everything from technology companies to airlines to broadcasters. Stellar performances from the energy, aerospace, and beverage sectors weren't enough to offset falling profits at a litany of other industries. "The first quarter was just horrible," says Kamalesh Rao, an economist at Moody's Investors Service.

A WRITE-OFF. And the pain may not be over yet. The second quarter is expected to be as bad as or worse than the first, and many economists are predicting that third-quarter earnings will be down, too. In all, analysts expect companies in the Standard & Poor's 500-stock index to see an average 2.9% drop in earnings this year, vs. 16.2% growth in 2000, according to earnings tracking firm First Call Corp. "We're expecting negative numbers through the first three quarters," echoes Wells Fargo & Co. chief economist Sung Won Sohn, who is predicting a 7% earnings drop for 2001. "We might as well write off this year."

A glance at some major economic indicators suggests that earnings shouldn't have been so bad. For instance, first-quarter growth in gross domestic product was healthier than anticipated at 2%, double the 1% growth in the last three months of 2000. But that represents a dramatic slowdown. After increasing 5.3% during the year ended March, 2000, real GDP growth slowed to 2.7% in the following year. Similarly, the 3.1% rise in first-quarter consumer spending seems solid. But analysts say it came at the expense of profitability, as many companies resorted to heavy rebating, particularly in the auto industry, and deep price cuts to move goods.

Likewise, the strong performance at some big corporate earners crumbles with a closer look at the numbers. Kaiser Aluminum Corp. (KLU) racked up one of the biggest percentage increases in first-quarter profits, with a rise of 922%, to $119.6 million. But strip out a one-time gain from the resale of power, and the company actually lost $9.1 million.

More impressive was the 626% profit gain logged at Juniper Networks Inc. (JNPR), whose Internet routers compete head-on with those of giant Cisco Systems Inc. (CSCO) Even as the tech industry slowed, Juniper continued to gain market share during the quarter, which helped lift profits to $58.6 million. Meanwhile, Cisco's profits rose 7%, to $874 million.

Exxon Mobil Corp. (XOM) once again takes the crown as overall earnings champ, raking in $4.96 billion in the first quarter, up 64% over a year ago. Fueled by high crude-oil and natural-gas prices, the earnings were the second-largest ever for ExxonMobil, topped only by the $5.12 billion profit posted in the fourth quarter, the U.S. record. Rising energy prices also helped lift revenues for utilities by 119%, though a $1 billion quarterly loss by PG&E Corp. led to a 1% earnings decline for the sector.

Citigroup Inc. (C) reported the next-highest profit for the first quarter, $3.58 billion, but that was still 7% lower than its earnings a year earlier. Strong growth in the consumer division wasn't enough to offset slowing private-client revenues and losses in its corporate loan portfolio. Third place went to General Electric Co. (GE), which earned $3.02 billion, a 16% gain from a year ago. Although profits fell in GE's more cyclical businesses, that was more than offset by double-digit gains in financial services and such long-cycle businesses as power turbines and medical equipment.

The aerospace and defense sector was also a bright spot, with Boeing (BA), Lockheed Martin (LMT), General Dynamics (GD), and United Technologies (UTX) all delivering solid performances. At Boeing Co., for example, income rose 196%, to $1.24 billion. That was driven by 122 commercial aircraft deliveries, vs. 75 in the same period a year ago. The reason: an engineers' strike during the first quarter of 2000, which slowed deliveries.

BAD VISIBILITY. The first-quarter picture wasn't so pretty for many of Boeing's customers. Airlines did terribly during the quarter: All but two of the major carriers--Southwest Airlines Co. (LUV) and Continental Airlines Inc. (CAL)--lost money. Hardest hit was UAL Corp. (UAL), which racked up a $304 million deficit during the quarter, vs. a $111 million profit a year ago. A big factor was the 27% jump in fuel prices over the past year. "That is something we did not predict," says UAL President Rono J. Dutta. "The cost side has taken us by surprise."

The auto industry fared even worse, as layoffs and stock-market losses continued to gnaw at consumer confidence. At No. 1 auto maker General Motors Corp. (GM), earnings tanked 87%, to $225 million, as sales dropped 9% and pressure to keep prices down increased in the key North American and European markets. Ditto at Ford Motor Co. (F), the world's second-largest auto maker, where earnings sank 45%.

The carnage was worst in the telecom and tech sectors. A collapse in prices for long-distance service caused a $1.56 billion loss at AT&T (T). In the year-ago period, the telecom giant posted $1.74 billion in net income. And as companies put the brakes on capital spending (box), telecom-equipment maker Lucent Technologies Inc. (LU) lost $3.38 billion for the quarter. The slowdown in tech spending also hit Motorola Inc. (MOT), which posted its first quarterly operating loss in 16 years, and Intel Corp. (INTC), which racked up an 82% decline in first-quarter net income, to $485 million. Profit at Compaq Computer Corp. (CPQ) dropped 76%, to $78 million, as PC and server sales stalled. The first quarter, says Chairman and CEO Michael D. Capellas, was an "extremely rocky start" to the year.

And it could get rockier. First Call says warnings of second-quarter earnings disappointments are up 49% over a similar point during the first quarter. "That's a pretty ominous sign," says research director Charles L. Hill. In other words, there's no soft landing in sight for this earnings recession. By Stephanie Anderson Forest in Dallas, with bureau reports


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