Earnings Surge at Chemical Firms

The first quarter of 2004 provided strong earnings growth for most of the 15 largest U.S. chemical companies. In fact, it may have been the quarter they have been waiting for--the quarter that finally indicates a change in the fortunes of the industry.

The results came in an expanding economy. Gross domestic product rose at a 4.2% clip in the first quarter, according to a preliminary estimate released by the government last week. Although this rate is below the 5% expected by many economists, it is slightly better than the 4.1% growth seen in the final quarter of 2003.

The brighter economy spurred demand for chemicals and provided a basis for increased prices. This climate, coupled with the industry's cost-cutting efforts, has produced one of the best quarters in years for many companies, despite still rising raw material and energy costs.

Rohm and Haas CEO Raj L. Gupta sums it up: "We continue to see the benefits of an improving global economy, resulting in higher demand across most businesses. The strong demand across our businesses, as well as the favorable impact of currency, more than offsets the impact of much higher raw material costs." He notes, however, that the company's profit margin of 6.2% is still below target. Rohm and Haas's earnings rose 39% to $114 million on a 13.6% sales increase to $1.83 billion.

Industry leader Dow Chemical is the extreme case in point. The company says sales volumes rose 7% versus the same quarter in 2003, while prices increased 8%. These increases more than offset a nearly $100 million jump in feedstock and energy costs. These results plus cost cuts--including a reduction of about 3,600 employees during 2003--produced a 451.8% increase in earnings before unusual items to $469 million on sales of $9.31 billion, up 15.2% from the year-earlier quarter. Dow plans to cut an additional 3,000 positions this year (see page 13).

Dow did not have the largest percentage increase in earnings. That honor goes to FMC Corp. with a 631.6% rise to $13.9 million as sales grew 16.5% to $506 million. CEO William G. Walter says: "We had a great start in 2004, a year that we expect to be a major turning point in our financial performance. We significantly exceeded the expectations set at the beginning of the quarter, due to the outstanding performance in our agricultural products segment."

While the triple-digit earnings growth at Dow and FMC was not typical, double-digit increases were. Of the 15 companies, 10 had earnings growth ranging from 16.9 to 56.7%.

At W.R. Grace, percentage growth is not measurable because earnings went from a $2.3 million loss in the 2003 first quarter to a gain of $15.8 million this year.

The remaining two firms, Cytec Industries and Engelhard, had single-digit increases of 8.3% and 9.1%, respectively. "Although general economic reports are encouraging, several of our markets continue to reflect weak demand," Engelhard CEO Barry W. Perry says.

a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items. b After-tax earnings as a percentage of sales. def = deficit. nm = not meaningful.