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EARNINGS
Quarterly earnings are once again down from the year-ago period at many of the chemical companies reporting thus far. But looking at the numbers optimistically, hidden within the declines are a few signs that an earnings recovery may be beginning.
In most cases, sales either were down by a greater percentage than were earnings or earnings showed an increase even as sales fell--thus, profit margins improved at two-thirds of the reporting firms. That means that cost cutting, restructuring, and other measures undertaken in recent months are having their desired effect: improved profitability. Dow Chemical, for instance, notes that cost reductions and synergies from acquisitions helped offset a margin squeeze caused by a $1.4 billion decline in prices that outpaced a $1.1 billion decrease in feedstock and energy costs. As sales declined 15% to $6.26 billion, Dow had an 82% increase in earnings, excluding one-time items, to $62.0 million, doubling its profit margin to 1.0%. Considering that most companies, like Dow, have had cost-cutting initiatives in force over the past year or so, there is a potential for good earnings growth when markets do improve. DuPont, the second largest U.S. chemical producer behind Dow, was typical of firms with both declining sales and earnings but increasing profitability. DuPont's quarterly sales fell 10% to $6.14 billion, but earnings declined only 3% to $552 million, raising the company's profit margin to 9.0% from 8.3% in the same period last year. CEO Charles O. Holliday Jr. says, "It is clear that the actions we took last year are beginning to pay off. We have removed costs from our company, focused on businesses where we can win, and increased our competitiveness in a way that is real and sustainable." Some companies had rising sales and earnings in the quarter, and when that happened, earnings growth was generally impressive. At Lubrizol, where sales rose 3% to $468 million and earnings surged 61% to $29.8 million, the company's profit margin rose to 6.4% from 4.1% as businesses improved. "We are pleased that our North American and European business strengthened as the quarter progressed and that we have seen partial relief from the escalation in raw material costs that negatively affected our results since late 1999," says Lubrizol CEO William G. Bares. But he warns, "Even at the current levels, we are below historical profit margins." However, some companies are still in a recessionary pattern. Cabot Corp. had a 24% sales decline to $350 million while earnings fell 30% to $28.0 million. Yet, CEO Kennett F. Burnes says, "Our chemical businesses appear to be showing some signs of recovery from a very weak December. We are seeing improvements in our utilization rates, although we continue to experience lower volumes than last year." In all, it seems the first quarter may mark a transition from recession to at least moderate growth, with some businesses beginning to show improvement while others continue to languish. And there is one other good sign: So far, none of the companies has reported a loss.
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