Corporate America: "What Recession?"

Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash, and less burdened by debt -- but they're hiring overseas.

* A version of this article appeared April 9, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: For Big Companies, Life Is Good by Scott Thurm at scott.thurm@wsj.com

An analysis by The Wall Street Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis.

Deep cost cutting during the downturn and caution during the recovery put the companies on firmer financial footing, helping them to outperform the rest of the economy and gather a greater share of the nation's income. The rebound is reflected in the stock market, with the Dow Jones Industrial Average at a four-year high.

"U.S. companies became leaner, meaner and hungrier," said Sung Won Sohn, a former chief economist at Wells Fargo & Co.

The performance hasn't translated into significant gains in U.S. employment. Many of the 1.1 million jobs the big companies added since 2007 were outside the U.S. So, too, was much of the $1.2 trillion added to corporate treasuries. Two-thirds of Apple Inc.'s $82 billion in cash and marketable securities as of Sept. 30 was held by foreign subsidiaries, for example.

The Labor Department said Friday that employers added fewer jobs than expected in March, reigniting concerns that the economic recovery would stall again. Much of Europe is in recession and growth is slowing in China. Even before Friday's report, analysts expected earnings from S&P 500 companies to rise 9% this year, down from 15% last year.

Overall, though, the Journal found that S&P 500 companies have become more efficient—and more productive. In 2007, the companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.

Consider Agilent Technologies Inc., a Santa Clara, Calif., maker of scientific equipment, that was suffering from the shock of the economic crisis. In 2009, the company laid off 4,000 employees, or 20% of its work force, as revenue plunged 22% and the company posted a loss.
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When revenue began to rebound in 2010, Agilent resumed hiring—but primarily outside the U.S., in countries such as China and Brazil. Last year, Agilent's revenue was 22% higher than in 2007, boosted by its 2010 acquisition of Varian Inc. But Agilent employs fewer people than in 2007, even after absorbing Varian's work force. And Agilent had more than $3.5 billion in cash on Oct. 31, 2011, nearly twice as much as four years earlier.

But hiring? That's another matter. Chief Executive Bill Sullivan says he remains "very, very cautious" about hiring while the recession's scars are fresh. "That's a lesson current leaders of industry will not forget," he says.

The Journal's analysis is based on data gathered by Standard & Poor's Capital IQ from corporate filings with the Securities and Exchange Commission. The analysis includes the 468 companies of the current S&P 500 that have reported financial results for last year.

The analysis also found a rebound in capital spending, that is, spending on new plants and equipment. Agilent, for example, boosted capital spending more than 50% last year, to $188 million from $121 million.

For the S&P companies as a group, capital expenditures rose 19% last year, more than double the 9% increase in 2010. The sharper increase brought capital spending back to 5.8% of total revenue for the companies in the Journal's analysis, equal to its level in 2007.

Analysts say the recovery is favoring big companies, like those in the Journal's analysis. Many smaller companies are struggling to stay competitive or to obtain financing.

"It's a real winners-versus-losers phenomenon," says John Graham, a professor of finance at Duke University. Mr. Graham directs a quarterly survey of chief financial officers, with CFO Magazine. The March survey found that finance chiefs of companies with revenue of more than $1 billion were significantly more optimistic about the U.S. economy and their own companies' outlooks than their counterparts at smaller companies.

The Journal's analysis may overstate the health of American corporations by looking only at the companies that survived the recession.

Some of the growth in revenues and earnings resulted from mergers. The analysis excludes former titans like Lehman Brothers Holdings Inc. and Circuit City Stores Inc., which failed or Anheuser-Busch Cos., which was acquired by a foreign rival.

Many companies continue to struggle. Revenue at home builders is less than half the peak levels from the last decade. Medical-device maker Boston Scientific Corp. has shed more than 3,000 jobs since 2007, but its revenue continues to decline and the company posted losses in four of the past five years.

A Boston Scientific spokesman declined to comment.

One reason for optimism among bigger companies is their global reach, which helped many cushion the impact of the recession.

Revenue at McDonald's Corp. and Starbucks Corp. declined in 2009, then rebounded on strong sales outside the U.S. At McDonald's, international revenue rose 24% since 2009, three times as fast as in the U.S. At Starbucks, international revenue jumped 35% the past two years, more than double the 14% increase in the U.S.

The two consumer companies also boosted profit margins by closing locations during the recession and adding menu items. Such moves are spawning considerable amounts of cash. McDonald's spent $24 billion to pay dividends and repurchase shares since 2007—and still boosted its cash holdings 18%, to $2.3 billion.

Foreign corporations also are looking at the U.S., pushing American companies to be more nimble globally. When Chief Executive Paul Bisaro arrived at generic-drug maker Watson Pharmaceuticals Inc. in 2007, virtually all of its manufacturing was in the U.S. Mr. Bisaro bought a U.K. drug maker, closed factories in North America and moved half of Watson's manufacturing to India, in part to be closer to non-U.S. customers.

Mr. Bisaro kept four U.S. plants to make Watson's most sophisticated products, installing new equipment and retooling the manufacturing process. In 2007, the company's Davie, Fla., factory used 866 employees to crank out one billion extended-release pills and capsules. Last year, 937 workers produced 2.5 billion items.

Watson was sheltered from the worst of the recession—its annual revenue never declined—and could add employees while becoming more efficient. Other companies didn't have that luxury.

Revenue at Union Pacific Corp. plunged 21% in 2009 as the recession cut railroad shipments. Union Pacific idled locomotives, shut rail yards and eliminated more than 4,000 jobs—roughly 10% of its work force. By last year, revenue rebounded to 20% above the 2007 level. But Union Pacific still employs 10% fewer workers than before the recession.

A Union Pacific spokesman says the company plans to increase capital expenditures this year " to focus on customers' logistics needs as well as our own operating efficiency."

Such efficiency moves are essential for companies. But economists warn that improved efficiency and continued executive caution are slowing the recovery.

"What's best for an individual firm may not be best for the overall economy," says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.