Mild recession perhaps, but Cincinnati companies' bottom line dropped again in 2001. The region's 40 locally based public companies collectively earned about 80 percent of what they did two years before.

        Profits declined for the second straight year, an Enquirer analysis shows. Annual profits fell almost 9 percent in 2001 after a 13 percent drop in 2000.

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• Company profits drop for second year

        “Sometimes the best thing you can say about a year is that it's over, and 2001 definitely fit in that category,” says James M. Zimmerman, CEO of Federated Department Stores. The parent of Lazarus lost $276 million last year.

        Retail, manufacturing and technology fared the worst, while banking performed the best. Still, widespread financial problems touched almost all Tristate industries.

        The global slowdown and sluggish sales after Sept. 11 contributed to falling profits. So did one-time or unusual expenses that companies took in 2001. With most of those troubles behind them, companies already are hinting at a more profitable 2002.

        Any upturn would be welcome, far beyond those who work and invest in the 40 local companies.

        Stronger profits typically translate into more and better paying jobs in the community and higher charitable contributions and community involvement.

        Weak profits often lead to layoffs, less community investment and plummeting stock prices. As profits fell in 2001, for instance, unemployment rose in Greater Cincinnati — climbing in January to 4.8 percent, about 1 percentage point over the year before.

        How bad was 2001? The Enquirer's analysis finds that:

        • Thirteen of the 40 lost money. Of the 13, nine were in the red two years in a row, and four lost money after a profitable 2000. Broadwing Inc. lost the most last year: $286 million.

        • Thirteen companies made a profit in 2001 — but less than the year before. Procter & Gamble Co.'s nearly $3 billion profit in 2001 was down $642 million from 2000.

        • Only 11 companies improved profits from the previous year. Another two made money after losing it in 2000. (Earnings reports were not available for one company.)

        Despite the disappointing year, Greater Cincinnati companies fared better than the rest of corporate America. Problems in the technology and telecommunications industries — which are not as influential here — pulled down profits nationally. The 500 largest U.S. companies earned only half last year of what they earned in 2000.

        “Despite being a mild recession, these have been tough times for U.S. corporate earnings,” says Chuck Hill, director of research at Thomson Financial/First Call, which tracks earnings and compiles analysts' earnings forecasts. “This may have been the worst earnings downturn at least since World War II.”
       

"Restructuring'

        The Enquirer analysis makes clear that one-time expenses and special charges contributed to the companies' financial woes. Such “restructuring” is costly: Companies will pay millions to close stores, sell subsidiaries, pay severance to laid-off employees — all expenses taken now that are expected to save the company money later.

        Take Broadwing Inc. The telecommunications firm lost $286 million in 2001. Sales were up almost 15 percent, but Cincinnati Bell's parent also claimed a $242 million restructuring charge. In November, the company decided to trim 900 jobs, 15 percent of its work force, and close some offices.

        Telecommunications companies grew too fast in the 1990s, expecting the exploding Internet demands to continue. But when that mania cooled, companies like Broadwing found that they over-built their networks.

        Retail struggled, too. Federated not only reported a 15 percent drop in sales, but also a $770 million expense to shut down its embattled Fingerhut catalog unit.

        Federated bought Fingerhut in 1999 hoping to expand its online sales. But the catalog company ended up being a big money-loser. Federated said Fingerhut lost $14 million after taxes in 2001 and was headed toward a bigger loss had Federated not shut it down in January. At week's end, lawyers were still working to close a deal with a potential buyer.

        Federated was one of nine local companies to lose money at least two years in a row. But that doesn't mean the companies aren't viable.

        When companies operate in the red, they stay afloat a number of ways, such as paying expenses with cash on hand or going deeper into debt by issuing new bonds. Often, a company may record the expense in one accounting period even though the cash won't actually leave the company until another accounting period.

        Like Federated, Procter & Gamble also restructured in the face of lower sales. It still made money, just less than in 2000. P&G's $642 million drop in profits was the largest single dollar loss of any Tristate company.

        Relative to the size of a company as measured by sales, however, LCA-Vision reported the biggest change in losses. The laser eye surgery provider in Kenwood boosted its sales 7 percent in 2001, but its net loss widened from $2.4 million to $23.4 million.

        It, too, cites restructuring and special charges. LCA-Vision wrote off $1.7 million in expenses to close at least two of its centers and to write off a bad loan. It took another $15.3 million expense to write off a deferred income tax asset.

Bank's profits cut

        Even the most profitable company in Greater Cincinnati made less money last year, the result of large one-time expenses. Fifth Third Bancorp, which keeps as profit almost 17 cents of every dollar that comes in, saw net income fall 4.2 percent, to $1.09 billion in 2001 from $1.14 billion in 2000.

        The bank's 2001 profits were cut because of $293.6 million in expenses tied to its purchase of Old Kent Financial Corp., a Michigan bank. Revenues and operating earnings grew to record levels, despite a recession.

        Fifth Third's profit margin is the best in Greater Cincinnati and is largely responsible for a 10 percent gain year-to-date in the stock price, Mr. Schaefer says.

        The local companies with the second— and third-highest profit margins also were banks: First Financial Bancorp, parent company of First National Bank of Southwestern Ohio, and Winton Financial Corp., the Monfort Heights savings and loan.

Other gains

        Strong gains also were made by chemical and oil refiner Ashland Inc.; Cincinnati Gas & Electric's parent Cinergy Corp.,; Fairfield-based insurer Cincinnati Financial Corp.; hospital bed and casket maker Hillenbrand Industries; grocery giant Kroger Co.; and nursing home servicer Omnicare Inc.

        There were smaller success stories, too. Frisch's Restaurants, home of the Big Boy, and uniform company Cintas Corp. posted modest gains on profits. And insurer Ohio Casualty Corp. and Kendle International Inc., a drug-testing firm, returned to profitability after a year of losing money.

        Kendle's turnaround from losing $2.1 million to earning $4.2 million came on a 28 percent gain in its sales.

        “It was very encouraging,” says Tom Stilgenbauer, Kendle's executive vice president and chief marketing officer.

        Mr. Stilgenbauer attributes the loss in 2000 to an uncertain drug industry that let up on its demand for Kendle's testing services. It was the kind of external problems plaguing other local companies in 2001.

Optimism rises

        Analysts are optimistic that more companies will increase profits this year. Three months into 2002, companies already are issuing fewer earnings warnings and analysts are raising their expectations, Mr. Hill says.

        “In almost all cases, these same companies' prospects look favorable, if not excellent, because of the actions they took over the past two years,” says Joe Evelo, a portfolio manager and senior vice president at Salomon Smith Barney/Evelo Group.

        If there was any doubt that restructuring works, just ask executives at LanVision Systems Inc. The company lost money every year after it went public in 1996 until 2000, when it barely broke even. But its profitability soared in 2001 after the company slashed costs and revamped its business.

        The medical records software maker switched to distributors from the direct-sales force it had spent so much time and money to build. The move allowed it to lower costs while keeping revenues steady.

        The results are undeniable: LanVision's profits soared to $210,360 in 2001 from $20,893 in 2000. The 907 percent gain was Greater Cincinnati's largest.

        “It took us a long time to climb out of the hole,” Brian Patsy, LanVision's chairman and CEO, says, adding the company expects its profits to continue to grow.

        “What you're seeing is just the tip of the iceberg.”

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