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Still Waiting for the Profit Rebound


Anyone thinking this was the quarter when Corporate America would shake off its slump is about to be sorely disappointed. Even with consumer-product and health-care companies boosting sales by upping prices, overall revenues tumbled. For the 122 companies in BusinessWeek's flash profit survey, sales fell 6% from a year earlier. While preliminary, that's even worse than the 4% decline during the fourth quarter of 2001--itself an unprecedented drop.

Chalk it up to weak demand in a slow economy. Indeed, in the 30 years that BusinessWeek has tracked quarterly revenues, this is the biggest falloff ever. If the pattern holds as more companies report, it would be only the second time that sales have fallen two quarters in a row.

What about profits? They actually rose 6%, in part because of aggressive cost-cutting and improved efficiencies. One of the biggest profit winners, Citigroup (C), boosted earnings by 37%, thanks to reduced spending and the lift low interest rates gave to margins in its consumer-lending arm. But profits also got a hand from the winding down of the practice of goodwill amortization, through which companies regularly reduce earnings to reflect the cost of past acquisition premiums. An accounting rule change leaves the amortization expense in last year's results, giving a head start to this year's profits.

Another accounting shift also forced some companies, like AOL Time Warner Inc. (AOL), to reduce net income through huge onetime charges on assets whose values have fallen sharply. But such post-tax accounting charges are not included in the flash profits-table.

With the stock market limping along and merger activity moribund, investment houses like Morgan Stanley Dean Witter (MWD), Goldman Sachs (GS), and Merrill Lynch (MER) all saw earnings plunge by more than 20%. High-tech companies posted an 11% profits drop as businesses held off on tech spending. And the post-September 11 falloff in business travel continued to hurt: AMR (AMR), UAL (UAL), Delta Air Lines (DAL), Continental Airlines (CAL), and Southwest Airlines (LUV) all saw double-digit sales declines. Only Southwest eked out a profit.

Some companies, though, turned in a strong performance. With its sales leaping 18%, to $4.19 billion, Abbott Laboratories (ABT) is one of the few drug companies to maintain profit and revenue growth. It had net income of $854.3 million, up from a net loss of $223.6 million a year earlier. Rising health-care costs gave hospital operator Tenet Healthcare Corp. (THC) a 45% jump in earnings. And Citigroup wasn't the only financial-services firm riding interest-rate cuts to a tidy profit. Capital One Financial Corp. (COF) and FleetBoston Financial Corp. (FBF) both saw big gains, too.

Still, it will take more than a few strong performers to lift corporate profits out of their rut. "We'll see another drop in corporate earnings in the second quarter," says RBC Dain Rauscher's managing director, Vincent Boberski. When will the gloom lift? Not until demand picks up and business investment rises. Keep your fingers crossed for the second half. By Darnell Little in Chicago, with Michael Arndt in Chicago and David Henry in New York


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