First-Quarter Profits

Stockholders and Wall Streeters found last week's flood of first-quarter reports not all beer and skittles. True, combined profits of 345 top-flight companies (as tabulated by New York's National City Bank) were $377,372,000, up 17 1/2% above 1940's first quarter, best since 1929. But this bare statistic hid many ands, ifs, buts.

Biggest hidden item: taxes. As intended, they siphoned off profits almost as fast as business boosted them. Not all companies report tax reserves by quarters, but the first 90 to volunteer this breakdown earmarked $151,912,000, four times the $41,392,000 tagged in 1940's March quarter. In contrast to the $110,520,000 tax jump, profits of the same companies were up only $28,484,000 or less than 15%. The Government took 43% of pre-tax earnings (1940 figure: 19%)

Other costs have mounted too. Wages reached an all-time high. The National Industrial Conference Board put hourly factory-worker pay in February at 76-c-, 4-c- above a year ago. The Bureau of Labor Statistics' price index of industrial raw materials (August 1939--100) stood last week at 138.1, up 20% in twelve months.

Net result of this combination of rising taxes and costs has been an economic phenomenon: for the first time industrial production is going up faster than profits. In other periods of expanding business, profits have outrun production: in 1937's March quarter, when production was 28% over the corresponding period of 1936, profits rose 47%; a 20% production rise in the final quarter of 1933 boosted earnings 900%; even in 1929's first quarter a 14% rise in production lifted profits 27%.

Taxes or not, many a corporation found lush diggings in the first quarter. Biggest industrial profit booster was the steel industry. Despite soaring taxes, first 28 steel reports showed combined profits of $82,638,000, double March 1940's $40,030,000. Exception was Bethlehem whose earnings dropped from $10,891,000 to $10,436,000 while tax allowances rose from $2,855,000 to $7,200,000. But U.S. Steel profits were up $19,446,000 to $36,560,000 (best since 1929) even though taxes were up $16,031,000 to $27,603,000 (highest ever). Since last month's 10-c--an-hour wage boost there is slim chance steel profits can hold the pace.

Profits of the long downtrodden railroads (TIME, April 7) rose even faster than steel earnings, almost trebled in the first quarter. Reasons: 1) carloadings were up 25%; 2) the tax-weary carriers got their first tax break in years because all but a few will escape the excess-profits levy entirely.

> Prime war babies of World War II are the aircraft makers. But first quarter profits of leading companies were erratic, went up, down, sideways. Although taxes jumped from $501,000 to $8,517,000, United Aircraft doubled its profits, from $2,380,000 to $4,806,000 (best ever). But Glenn L. Martin profits fell from $2,163,000 to $1,861,000 when its tax allowance rose almost sevenfold to $3,967,000; and Douglas Aircraft earnings remained virtually unchanged at $1,820,000.

> Air transportation's first-quarter profits were lower although passenger miles rose 25% to record levels. But taxes were not the reason. The No. 1 carrier, American Airlines, earned only $71,000 ($223,000 less than year ago) because it increased depreciation by $172,000, had no profit ($110,025 in 1940) from sale of old equipment. T.W.A. lost $988,000 v. a deficit of $255,000 a year ago; United had a $228,000 deficit compared with $14,000 profit last year.

> General Motors saw first-quarter auto sales jump 45% to an all-time high of 608,702 cars and trucks but net income dropped from $67,052,000 to $64,663,000. Reason: Taxes and contingencies totaled $75,152,000 v. $18,303,000 in the first quarter of 1940. In all of 1929, G.M. paid only $28,120,908 in income taxes. Stude-baker's first-quarter deliveries rose one-third to a record of 30,298 cars and trucks while net profits dropped from $512,000 to $180,000. But some automakers bucked the trend. Nash-Kelvinator--which pioneered low refrigerator prices in 1939, followed through with a low-priced auto in 1940--saw record sales lift profits from $383,000 to $1,041,000 (best since 1937).

> With factory building rivaling the 1920 peak and home construction best since 1929, building-material companies flourished. First-quarter profits of 23 companies were $11,254,000, up from $7,563,000 last year. Johns-Manville (with one-third of sales going to defense) did even better than many, cleared $1,562,000 v. $778,000 even though taxes jumped 350% to $2,004,000.

> To Wall Streeters, biggest profit disappointment was the booming chemical industry. First-quarter output rose 40% to new peaks but profits of 25 companies ($50,813,000) were down 4% from year ago. Even giant, well-managed Du Pont (with spectacular new successes like nylon and neoprene to help out), found quadrupled taxes eating away profits faster than they could be made, saw net drop from $23,727,000 to $20,754,000.

> With gasoline taxes rising, prices at the lowest levels in eight years, and bigger write-offs of foreign investments a necessity, oil companies had the toughest sledding of all. Combined profits of 14 firms were $26,621,000, down 24% from a year ago. Only big company to show a good gain was Union Oil ($1,273,000 against $766,000), which had no Old World investments to write off.

> Paradox of first-quarter reports was the fact that companies with big defense orders were often backward profitwise. The railroad-equipment industry is stuffed with tank, gun, heavy war castings orders; yet profits rose only 5%. General Electric (which claims to make more separate defense items than any other U.S. company), lifted sales 35% to $129,861,000 while profits dropped to $11,378,000 from $11,951,000.

For the duration profits are in a race with taxes; President Roosevelt said that $3,500,000,000 in new taxes this year "represents the minimum of our revenue requirements."

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