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Tuesday, May 24, 2022

Earnings

Earnings/27″/dt1st/mark2nd

By JASON BOOTH

Staff Reporter

Economic problems overseas continue to take a bite out of L.A.’s bottom line, according to recently released financial results.

Oil companies and exporters, in particular, saw their earnings decline in the three months ended Sept. 30, while those companies that reported gains tended to be mid-size firms that focus on the domestic market.

The total net income of the 42 L.A. companies in the LABJ 100 stock index that have released figures for the July-September quarter is $2.03 billion, up 6 percent from the like period a year earlier.

But that figure is inflated by a $1 billion exceptional gain posted by Atlantic Richfield Co., due to its sale of Arco Chemical. If Arco’s one-time gain is excluded from the equation, net income for L.A. companies is actually down by more than 28 percent.

“What we see in this sample is a mixed bag in terms of profits,” said Gregory Range, managing director of Duff & Phelps LLC, which compiled the earnings summary for the Business Journal. “It is a reflection of what we see in the broader economy.”

Anil Puri, regional economist at California State University, Fullerton, says a slowdown actually began in the second quarter and reflects the economic problems in Asia. “You can’t continue to produce the pace of profit increases that you have seen in the last few years,” he said.

Corporate profits on a national level rose just 0.4 percent in the third quarter, according to a poll by The Wall Street Journal. When a one-time gain at ITT is excluded, net income at the 506 companies surveyed fell 1.8 percent.

Larger companies with overseas exposure are proving to be the most vulnerable. The weakening of many overseas currencies makes U.S. products that much more expensive in other countries, leading to a drop-off in demand. Weaker currencies also mean that the value of money earned by U.S. companies operating overseas is worth less.

Oil companies were by far the biggest losers in the third quarter. Asia’s economic turmoil, which has reduced energy demands in the region, is one reason for the decline in oil revenues. Continued overproduction, in many cases by cash-strapped countries that need oil revenues to keep their economies afloat, also have depressed prices.

The price for crude oil stands at around $14 a barrel, its lowest level in 12 years.

Arco reported net income of $872 million for the third quarter ended Sept. 30, up from $516 million in the like period a year earlier. But when exceptional items and discontinued operations are stripped out, net income falls to just $61 million, compared with $313 million a year earlier.

Arco’s difficulties have led to layoffs and persistent reports that the company is a likely takeover target.

Los Angeles-based Occidental Petroleum Corp. also is suffering, with net income for the quarter of $38 million, down from $130 million a year earlier.

Local firms that depend on overseas sales for a large portion of their profits got whacked as well.

Third-quarter earnings at Hilton Hotels Corp. fell 16 percent, to $79 million, with the company citing declining revenue at its hotels in Asia, along with weakness at hotels popular with Asian tourists in places like San Francisco and Las Vegas.

Herbalife International Inc. suffered a drop of more than 50 percent in profits as its aggressive expansion plans backfired in Russia and Indonesia.

Similarly, Ameron International, which produces heavy construction material, has blamed the Asian slowdown for weaker profits throughout the year.

Internet high-flier Earthlink Network Inc. reported a loss of $18.8 million in the most recent quarter, more than twice as large as the $7.2 million loss it posted in the like period a year ago. GeoCities also saw its losses almost double, to more than $4 million in the quarter.

More trouble may be in store, as other local public companies that have not yet reported their earnings warn of bad news.

Dole Food Co. Inc. announced earlier this month that its third-quarter profits will be down 35 percent from a year earlier, in part because of a drop in demand for bananas overseas. Profits at Walt Disney Co. are expected to be weaker as well, analysts say, because of less demand for its films and products in other countries.

Besides decreases in overseas demand, the decline in profitability at U.S. firms is being blamed on a rise in labor costs here at home.

“It was inevitable that as unemployment has dropped to the 5 percent level, the upward pressure on labor costs has been magnified,” said Ross DeVol, an economist at the Milken Institute in Santa Monica. “Now we are seeing the impact on profit margins at a time when sales growth is slowing.”

He said high-tech firms are feeling the heat, with many local companies being forced to offer sky-high wages to lure experienced executives from the Silicon Valley.

Banks and financial institutions, meanwhile, saw a combined loss of around 19 percent during the quarter.

That included a $3.1 million loss posted by Inglewood-based Imperial Bancorp. The parent of Imperial Bank owns a 24 percent stake in Imperial Credit Industries Inc., which lost $109 million during the quarter in large part due to the stock market downturn.

Beverly Hills-based City National Corp., the parent of City National Bank, fared better, with a 22 percent increase in earnings. Likewise, GBC Bancorp, which largely serves the Chinese-American business community, saw its net income increase 24 percent.

Real estate-related firms outpaced the rest of the economy, with profits boosted by demand for homes and rising home prices earlier in the year. As a group, the four real estate-related firms that have so far reported have seen a jump of more than 77 percent in the quarter to over $94 million.

Real estate investment trust Arden Realty Group Inc. reported the biggest gain, with net income more than doubling to $25.5 million in the quarter. Another winner was homebuilder Kaufman & Broad Home Corp., gaining 84 percent to $28 million.

While reporting season is not yet over, economists fear that the slowdown in third-quarter profits could be a harbinger of a wider cooling of the local economy.

“We saw profit margins peak in the third quarter of 1997 and since then, they have been declining,” said DeVol. “We now see a risk of a major decline in profits going into 1999.”

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