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A Big Crimp in Cash Flow


Look out, investors: The recession is bodyslamming Corporate America in a new and troubling way. Not only are earnings falling but, for the first time in a decade, sales are dropping, too. Indeed, even though health-care companies and some consumer products firms booked double-digit sales gains in 2001's fourth quarter, overall revenues tumbled at an unprecedented rate.

How bad is it? Fourth-quarter sales of the 153 companies in the Standard & Poor's 500-stock index that have reported results are off 3.9% from a year earlier. That might not look like much compared with the expected 22.1% plunge in fourth-quarter profits among S&P 500 businesses or the 32% earnings dive in BusinessWeek's flash profit survey of 100 bellwether companies. But the revenue decline is almost four times the 1% decrease in 1991's fourth quarter, the last time aggregate sales slipped. It's also the biggest drop in the nearly 40 years that BusinessWeek has tracked quarterly earnings. The villains: September 11, in part, but the bigger problems were slumping prices and collapsing demand in a slowing economy.

Despite the gloom for investors, there has been a silver lining for consumers. As companies have cut prices to generate sales, shoppers have been getting more bang for their buck. Just ask anybody who's bought a wildly discounted airline ticket or computer lately.

Of course, if sales continue to sag, the negatives will eventually outweigh the positives. Corporations will have less cash coming in to meet expenses, service debt, and invest in new ventures or gear. That could easily retard an economic recovery as companies cut costs and jobs further. "This is really worrisome," says Sung Won Sohn, chief economist of Wells Fargo & Co.

The fourth-quarter sales slump was sharpest among high-tech firms and old-line manufacturers, two industries already pummeled by the recession. Technology-sector revenues sank 20%, while sales by basic-materials producers were off 12%, according to estimates from Thomson Financial/First Call. Next in line were transportation companies, with sales down 11%.

But sales also declined at many service-sector businesses, indicating that the downturn broadened in the final months of 2001. And a large swath of the nation's blue-chip giants made the list of companies whose fourth-quarter revenues shrank: Alcoa (AA), American Airlines (AMR), Citigroup (C), Duke Energy (DUK), DuPont, Exxon Mobil (XOM), Ford Motor (F), General Electric (GE), IBM (IBM), Intel (INTC), International Paper (IP), J.P. Morgan Chase (JPM), Lucent Technologies (LU), Motorola (MOT), Sears (S), 3M, Weyerhaeuser (WY), and Yahoo! (YHOO).

Still, some sectors forged ahead. Merck & Co.'s (MRK) quarterly revenues were up 10%, while medical-products wholesaler McKesson Corp. (MCK) boasted a 20% jump in sales. And Archer Daniels Midland Co.'s (ADM) quarterly sales grew 12%. But these gains may not be repeated. Many pharmaceutical producers, for instance, are cautioning their 2002 numbers will be hurt by the loss of patents on blockbuster drugs.

Most companies' bottom lines are already looking awful. Charles L. Hill, research director at Thomson Financial/First Call, reckons that fourth- quarter earnings cratered 22.1% from a year earlier. That's even worse than the third quarter's 21.7% drop and places 2001 in the record books as the first year since 1982 when income fell every quarter.

Moreover, Hill predicts profits will decline again in the current quarter, by 8%. That would make this earnings recession the longest since 1969-70. Tyco International Ltd. (TYC) has cautioned that revenues in its flagship electronics unit could plummet 20% or more in the current quarter. Boeing (BA), meantime, is already warning that sales could skid 7% in 2002. IBM, which stunned investors with an 11% plunge in fourth-quarter revenue, sees no quick comeback, either. Notes John R. Joyce, IBM's chief financial officer: "The first half of this year, at minimum, doesn't appear to have a much different economic look to it."

No wonder so many companies feel like they're on the ropes. They are. By Michael Arndt in Chicago


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