Big Companies' Profit
Fell 67% in 2nd Period
Toll From Economic Slowdown,
Tech Bust Could Delay Recovery
By Steve Liesman
Staff Reporter of The Wall Street Journal
NEW YORK -- Net income at the nation's largest corporations plunged by two-thirds in the second quarter, as companies continued to take massive write-offs and charges to reflect the slowing economy.
Total net income for the companies, which includes all items that companies call one-time expenses, dropped 67% to $32.4 billion in the second quarter from $98.6 billion a year earlier. The latest decline eclipsed the 46% drop in first-quarter profit and was the worst showing in more than a decade, though first-quarter results are expected to be revised sharply lower to reflect news last week that JDS Uniphase Corp. would write down its earnings by $38.7 billion for the quarter ended March 31.
These preliminary tabulations were made by Dow Jones & Co., parent company of The Wall Street Journal and the online Journal, which tracks 1,700 of the nation's largest public companies. These companies make up the U.S. portion of the Dow Jones Global Market Index. As of Wednesday, 1,138 of the companies had reported second-quarter earnings and were included in the tabulations. Final results for all 1,700 companies will be released later this summer. In all, 17 companies, most from the technology sector, each registered losses in excess of $500 million.
The magnitude of the second-quarter decline raises the possibility that the much-anticipated economic recovery, which some economists had hoped would take hold during the fourth quarter, could be put off until at least next year, as more companies concentrate on survival rather than on growth. In this kind of environment, "corporations ultimately end up thinking more about defense than offense, retrenchment rather than growth, about how to be there for the next up cycle," said John Ryding, economist at Bear, Stearns & Co.
Technology companies racked up staggering losses of $41.6 billion in the second quarter, a sharp turnaround from the industry's $9.4 billion in profit in the second quarter of 2000. The industry also showed a marked deterioration from the $15.6 billion in losses reported for the first quarter, excluding the JDS Uniphase restatement. VeriSign Inc., a seller of Web addresses and Internet security software, led the way down with an $11.2 billion loss that was the largest for any company yet to report. Most of the losses resulted from write-downs in the value of companies VeriSign had acquired with its high-price stock during the tech boom.
The Dow Jones figures include one-time charges and write-offs on items and events such as restructurings, investment losses and inventory liquidations.
Excluding those charges and looking at what some analysts call operating income -- a measure followed more closely on Wall Street and preferred by companies because they believe it gives a clearer picture of operations -- also presents a gloomy picture. With most firms reporting, the operating income per share for Standard & Poor's 500 companies declined 17% in the second quarter from a year earlier, according to Thomson Financial/First Call. That was the steepest drop since the third quarter of 1991, just after the end of a recession. Coming on the heels of a 6.9% decline in the first quarter of this year, it also marked the first time since 1991 in which the First Call figure declined in two consecutive quarters.
What is unique about this corporate-profit recession, said Joseph Kalinowski, equity strategist at Thomson Financial/First Call, is the steep profit decline in an economy that is still growing, albeit moderately. Going back to 1969, Mr. Kalinowski said, every double-digit percentage decline in S&P earnings has coincided with or followed a recession.
This time, corporate profit is leading, not following, the economy down. Economists attribute this to the investment-spending boom of the late 1990s, which created massive overcapacity, and the tight labor markets that preceded the slowdown. Capacity utilization in the technology sector has fallen to 67.5% in June, compared with 90% a year earlier, according to Mr. Ryding, the steepest drop since 1982. This suggests to economists that an investment rebound is several quarters away, even if demand for the products picks up sooner, because large amounts of capacity remain to be absorbed. Companies will lack pricing power when demand returns, because of excess capacity.
"As the economy as a whole comes back, there will still be an overhang that will keep growth subpar," said Mr. Ryding. Meanwhile, tight labor markets preceding the slowdown made companies reluctant to lay off workers. Companies waited almost four months after the economy slowed to begin paring staff, said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, a New York-based economic-forecasting company. High employment levels, along with rising health-care costs and a slowing global economy, cut into profit faster than companies could reduce costs, he said.
Indeed, health-care providers registered the largest gains for any sector, with profit up 428% in the quarter, compared with a year earlier. Big oil companies, along with the oil-drilling and equipment firms, also saw large gains. Exxon Mobil Corp. earned $4.5 billion, beating out General Electric Co.'s $3.9 billion to earn the most money in the quarter of any U.S. company.
The worst-hit industries were those that serve other businesses. Profit in the commodity-chemicals sector declined 94%, while earnings for the advertising industry plunged 79%.
Write to Steve Liesman at steve.liesman@wsj.com
Fell 67% in 2nd Period
Toll From Economic Slowdown,
Tech Bust Could Delay Recovery
By Steve Liesman
Staff Reporter of The Wall Street Journal
NEW YORK -- Net income at the nation's largest corporations plunged by two-thirds in the second quarter, as companies continued to take massive write-offs and charges to reflect the slowing economy.
Total net income for the companies, which includes all items that companies call one-time expenses, dropped 67% to $32.4 billion in the second quarter from $98.6 billion a year earlier. The latest decline eclipsed the 46% drop in first-quarter profit and was the worst showing in more than a decade, though first-quarter results are expected to be revised sharply lower to reflect news last week that JDS Uniphase Corp. would write down its earnings by $38.7 billion for the quarter ended March 31.
These preliminary tabulations were made by Dow Jones & Co., parent company of The Wall Street Journal and the online Journal, which tracks 1,700 of the nation's largest public companies. These companies make up the U.S. portion of the Dow Jones Global Market Index. As of Wednesday, 1,138 of the companies had reported second-quarter earnings and were included in the tabulations. Final results for all 1,700 companies will be released later this summer. In all, 17 companies, most from the technology sector, each registered losses in excess of $500 million.
The magnitude of the second-quarter decline raises the possibility that the much-anticipated economic recovery, which some economists had hoped would take hold during the fourth quarter, could be put off until at least next year, as more companies concentrate on survival rather than on growth. In this kind of environment, "corporations ultimately end up thinking more about defense than offense, retrenchment rather than growth, about how to be there for the next up cycle," said John Ryding, economist at Bear, Stearns & Co.
Technology companies racked up staggering losses of $41.6 billion in the second quarter, a sharp turnaround from the industry's $9.4 billion in profit in the second quarter of 2000. The industry also showed a marked deterioration from the $15.6 billion in losses reported for the first quarter, excluding the JDS Uniphase restatement. VeriSign Inc., a seller of Web addresses and Internet security software, led the way down with an $11.2 billion loss that was the largest for any company yet to report. Most of the losses resulted from write-downs in the value of companies VeriSign had acquired with its high-price stock during the tech boom.
The Dow Jones figures include one-time charges and write-offs on items and events such as restructurings, investment losses and inventory liquidations.
Excluding those charges and looking at what some analysts call operating income -- a measure followed more closely on Wall Street and preferred by companies because they believe it gives a clearer picture of operations -- also presents a gloomy picture. With most firms reporting, the operating income per share for Standard & Poor's 500 companies declined 17% in the second quarter from a year earlier, according to Thomson Financial/First Call. That was the steepest drop since the third quarter of 1991, just after the end of a recession. Coming on the heels of a 6.9% decline in the first quarter of this year, it also marked the first time since 1991 in which the First Call figure declined in two consecutive quarters.
What is unique about this corporate-profit recession, said Joseph Kalinowski, equity strategist at Thomson Financial/First Call, is the steep profit decline in an economy that is still growing, albeit moderately. Going back to 1969, Mr. Kalinowski said, every double-digit percentage decline in S&P earnings has coincided with or followed a recession.
This time, corporate profit is leading, not following, the economy down. Economists attribute this to the investment-spending boom of the late 1990s, which created massive overcapacity, and the tight labor markets that preceded the slowdown. Capacity utilization in the technology sector has fallen to 67.5% in June, compared with 90% a year earlier, according to Mr. Ryding, the steepest drop since 1982. This suggests to economists that an investment rebound is several quarters away, even if demand for the products picks up sooner, because large amounts of capacity remain to be absorbed. Companies will lack pricing power when demand returns, because of excess capacity.
"As the economy as a whole comes back, there will still be an overhang that will keep growth subpar," said Mr. Ryding. Meanwhile, tight labor markets preceding the slowdown made companies reluctant to lay off workers. Companies waited almost four months after the economy slowed to begin paring staff, said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, a New York-based economic-forecasting company. High employment levels, along with rising health-care costs and a slowing global economy, cut into profit faster than companies could reduce costs, he said.
Indeed, health-care providers registered the largest gains for any sector, with profit up 428% in the quarter, compared with a year earlier. Big oil companies, along with the oil-drilling and equipment firms, also saw large gains. Exxon Mobil Corp. earned $4.5 billion, beating out General Electric Co.'s $3.9 billion to earn the most money in the quarter of any U.S. company.
The worst-hit industries were those that serve other businesses. Profit in the commodity-chemicals sector declined 94%, while earnings for the advertising industry plunged 79%.
Write to Steve Liesman at steve.liesman@wsj.com
