Sunday, March 18, 2001

Economy batters local companies


Half suffered losses or lower profits in '00

By John J. Byczkowski
The Cincinnati Enquirer

        Half of Greater Cincinnati's largest companies lost money in 2000 or saw profits drop from the year before, an Enquirer analysis of financial reports shows.

        The poor performance underscores a weakening economy in which companies, coming off flush years, are cutting costs, laying off workers and restructuring operations. Every business - from manufacturing to software - is examining new ways of doing more with less.

        Thirteen companies lost money in 2000 - compared with six in 1999. Six more companies saw profits fall in 2000 from the year before. Eighteen posted profits gains over 1999, according to the analysis of financial reports of the region's 37 largest publicly owned companies.

        No one type of business was hardest-hit. Difficulties cut through businesses including retail, insurance and banking.

INFOGRAPHIC
Tristate profits fall
        Broadwing Inc., owner of Cincinnati Bell, lost the most — $377 million in 2000. It wasn't alone. Federated Department Stores lost $184 million; Chiquita Brands International Inc., $95 million; Ohio Casualty Corp., $79 million.

        Other large companies turned a profit, but a considerably smaller one than the year before. Among them were some of the biggest companies in town: Procter & Gamble Co. and Cincinnati Financial Corp.

        “The numbers look bad, but I think it's not as bad as it looks,” says Joe Evelo, director of investments with investment adviser Salomon Smith Barney's downtown Cincinnati office.

        “It's more important that overall sales are up, and they are up in Cincinnati,” Mr. Evelo says. As long as sales grow, profits will follow, he says.

        Sales did grow at 33 of the 37 companies. And combined sales of all 37 rose 8 percent, to nearly $162 billion, in 2000. But when balanced against expenses, total profits fell 12 percent from 1999, to $6.5 billion.

        That defies a national trend: Economists estimate profits for all U.S. companies rose 11 percent in 2000.
       

P&G, Kroger dominate

        The picture is even darker if you take out P&G and Kroger Co., which together make up half of the region's total sales and two-thirds of its profits. Sales grew 10 percent for the remaining 35 companies, but profits fell 35 percent, or $1.1 billion.

        Increased energy costs and conversions to new technologies contributed to the dismal financial showings. So did stiff competition that prevents companies from raising prices.

        For this analysis, the Enquirer reviewed each company's bottom-line profits, called “net earnings” in accounting parlance. Net earnings are what's left over from sales after all costs of doing business, including taxes and interest on debt, are subtracted.

        Earnings and expenses for “extraordinary items” also are included. They include the costs of unusual events such as any profit made on the sale of a business or the cost of layoffs and closings.

        Locally, each company has a different story as it tries to find its way through a changing economy.

        P&G's sales grew a paltry 1 percent, as every product of the consumer-goods giant faced stiff competition in every corner of the globe. The region's most valuable company - worth $84 billion on the stock market — made $3.6 billion last year. But that's almost 3 percent less than profits in 1999.

        Broadwing's revenues rose 23 percent over 1999. Yet the communications company still lost $377 million from heavy investment in an 18,500-mile, fiber-optic network.

        And who would have guessed that the Cincinnati company hit hardest by the “tech wreck” in the stock markets would be venerable Federated Department Stores? The company last year had to admit it overpaid for Fingerhut Cos. Inc., the catalog and Internet retailer it acquired in 1999, which turned into an $800 million expense.

        Not every local company struggled. Kroger Co. had a spectacular year, with profits up 43 percent. Ashland Inc.'s profits doubled, and Convergys Corp.'s profits were up 42 percent.
       

Two-faced economy

        Still, today's uncertain economy is a challenge for every business, even the region's most profitable company, Fifth Third Bancorp.

        Fifth Third keeps as profit 35 cents for every dollar of revenue, allowing it to continue hiring and increasing stock dividends. The company last year made the biggest acquisition in its history - the $4.75 billion purchase of Old Kent Financial of Michigan - and paid chief executive officer George Schaefer a $1.5 million bonus.

        The CEO sees a dual economy: Unemployment is low, and people are working, spending, borrowing and investing — all things usually good for banks. But higher oil prices and interest rates also have converged to slow the economy, and that means trouble for banks.

        Ninety-day delinquencies are rising, and fraud losses are up as consumers have trouble paying their bills.

        “If you have a hard time paying your car payment now, what's it going to be like when your heating bill triples?” Mr. Schaefer says.

        Federated Department Stores CEO James Zimmerman says 1999 was the best year in the company's history, and 2000 would have been even better were it not for Fingerhut.

        Sales at the company's more than 400 department stores grew 2 percent, to more than $2 billion. But the company, he says, fought for every dollar - and did it without price increases.

        Nationwide, apparel prices have fallen 2.6 percent since 1998, according to the Bureau of Labor Statistics.

        “We haven't had a price increase in so long I don't know how to spell it,” Mr. Zimmerman says, blaming intense competition. “I'm not sure that's going to change.”
       

Pressure to cut costs

        Across the Tristate, even companies that are doing well are cutting costs wherever they can.

        AK Steel earned $131 million last year, a 127 percent increase in profits from 1999. Even so, the Middletown steel maker is “looking under every rock” to cut spending, spokesman Alan McCoy says.

        A slower economy means slower auto and appliance sales nationwide, which means slower sales.

        The industry is so competitive that AK Steel can't raise prices to cover increasing energy costs. So the company cut its dividend in half, and will cut its $175 million capital spending budget to as low as $100 million.

        “We're hopeful, but looking out the first half (of this year), we don't see much in the way of optimistic signs,” he says.

        Frisch's Restaurants Inc. made $7.2 million in 2000, a 32 percent increase from 1999. Yet Frisch's increased prices at its 86 restaurants last month to help cover the rising cost of labor, the company's largest worry.

        “We have not seen much resistance to those price increases the last four years,” Donald Walker, the company's chief financial officer, says. Hiring workers also “is still very difficult.”
       

Making more with less

        With workers hard to find and pressure to improve profits, most companies are focusing on getting more out of the workers they have.

        “Whenever you're in a situation where your operations are under pressure, you take a second look at productivity,” says Mark Lanning, vice president and treasurer at Hillenbrand Industries. The company, which makes hospital beds and caskets, made $154 million last year, a 24 percent increase from 1999.

        Cinergy's sales were up $2.4 billion last year, but they didn't help profits a nickel. The company's $400 million profit last year was down 1 percent from 1999.

        Best known as the parent of Cincinnati Gas & Electric Co., Cinergy is pushing into other energy areas. It's buying natural gas and electricity and selling it to other utilities. But profit margins on those businesses are thin, and a $1.6 billion rise in natural gas costs hurt.

        But Cinergy CEO James Rogers also says Cinergy needs to become more productive, getting more out of its people and power plants.

        To do just that, Cinergy is tying its power plants to the Internet. Plant managers today can instantaneously track market prices for electricity — and when prices are high, they can run plants longer, boosting profits.

        Ventures into new technology haven't gone as well at Cincinnati Financial, where 2000 earnings were down 54 percent from 1999. In 1996, the commercial insurance company set out to build a database of its policies that agents could access and update online.

        Last year, the company was forced to admit that system will never work. It took a $39 million pretax write-off and is starting over to design a new system.

        “We haven't been able to get to that one system that would really ramp up benefits,” says Kenneth Stecher, the company's chief financial officer.
       

Outlook: cautious

        Will 2001 be a better year for Cincinnati-area companies? In some ways, it can't help but improve.

        Executives like to heap bad news into one year, so the next one will look better by comparison. In the fourth quarter last year, Federated said it would close its Stern's stores division, Provident Financial Group set aside $100 million to cover bad loans, and software maker Structural Dynamics Research Corp. announced a $45 million restructuring.

        For those companies, 2001 almost has to look better.

        Beyond that, the outlook is mixed. A slowing economy will hurt some companies more than others.

        Salomon's Joe Evelo says he believes all the bad news in 2000 — the restructurings, the layoffs, the write-offs - signals a trough in performance and not the start of a continuing slide.

        “The downside is over,” he says.

        Says Federated's James Zimmerman: “We're hoping for a better second half. We do not view this as a bad year. We view it as a difficult year and one where we can make progress.”

       



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