Washington-area companies adjust for the slowdown


Deltek chief executive Kevin Parker says his customers are watching to see what the federal government does about its spending. (Jeffrey MacMillan/For Capital Business)

Deltek entered the second quarter with the wind at its back. The Herndon-based provider of project software had just completed a $26 million deal for the federal contracting consultancy Washington Management Group and its affiliate FedSources, following several key acquisitions in the prior year aimed at broadening its offerings.

On an earnings call in May, Deltek chief executive Kevin Parker told analysts, “Our acquisitions, new solutions ... give us a more robust and compelling platform for growing our business as the market continues its recovery.”

That recovery, however, is now in question as looming federal budget cuts and market turmoil threatens to upend what up to now has been one of the nation’s strongest regional economies.

Where does the leave Deltek? Like a lot of other companies in the region, engaged in a game of wait-and-see.

“There’s a general slowdown while many of our contracting customers wait for the federal government to move forward with its plans,” Parker said in a phone interview.

Before the recent whirlwind of financial trouble, the Washington area’s recovery was chugging along at a steady pace, compared with other markets. The regional economy outpaced the nation in key measures such as employment and housing values. Revenue at the region’s largest public companies during the first half of the year grew an average of 4.4 percent and profits jumped an average of 18.4 percent.

Starting from such a relatively healthy position has left many business leaders feeling optimistic about the region’s prospects for weathering a slowdown. They, like Parker, are mindful of the turmoil creeping into the financial system, but are not scrambling to adjust their strategies for the remainder of the year — at least not yet.

Looking back on the recession in 2008, Ron Packard, founder and chief executive of Herndon-based K12, recalls slowing the pace of investment in the online education company. This time, however, he doesn’t anticipate putting on the brakes.

Much like Deltek, K12 has been on a tear, buying six companies in the past year, and has the capacity for more acquisitions thanks to a recent $125 million investment.

“To have cash on the balance sheet and not have any debt helps insulate you a lot; it allows you to invest at the same rate regardless of where the economy is,” Packard said. “I don’t see a double-dip recession ahead, but we are going to be in a period of extended slow growth.”

Many business leaders said they have already adjusted to that new reality, well before the latest rough patch. After all, economic troubles — rising oil prices, anemic global growth and shaky consumer confidence — have plagued the market for months.

Contracting Goliaths such as Lockheed Martin have been shifting priorities for some time now. And area companies with extensive global footprints, such as Marriott International, are hedging against pockets of economic disruption by turning to stronger markets.

“You have strengths in some parts of the world, especially Asia-Pacific right now, that even if you have a slow down domestically, you won’t fall off a cliff, so to speak,” said Carl Berquist, executive vice president and chief financial officer at the Bethesda hotel giant.

Marriott, despite some weakness in markets such as Washington, recorded a 16.8 percent increase in profit over the first six months of the year. A majority of the region’s largest public companies reported even higher revenue and lower losses during that period.

“Earnings have been really strong in this region,” said William Walker of the mortgage finance company Walker & Dunlop in Bethesda. “When I talk to CEOs of other companies, they say things are good, they have plenty of cash, but they are being cautious in their growth.”

Donald C. Wood, president and chief executive of Federal Realty Investment Trust, noted that over the past three quarters the Rockville-based shopping center owner has been able to raise rents based on higher retail sales. Before the stock market’s recent big swings, including last Thursday’s 419-point drop in the Dow, he was bullish on the region’s recovery. Now, he adds a caveat.

“The momentum that was built up in the first half of the year is fragile,” Wood said. “As long as the markets settle down, that fragile optimism can be sustained.”

According to a survey released by the Greater Washington Board of Trade in July, consumers have grown more pessimistic about the region’s economy, with the association’s Consumer Confidence Index hitting a three-year low. Sixty-three percent of those surveyed in July said employment conditions are poor.

Unemployment in the Washington area has been slow to disappear. It stood at 6.2 percent at the end of June, compared with 6.3 percent a year earlier, according to the most recent data from the Labor Department.

“Businesses have learned how to get more out of their existing workforce after slashing payrolls dramatically,” explained Kurt Rankin, an economist at the PNC Financial Services Group in Pittsburgh, who studies this region’s economy.

Coming out of the recession, the federal government was adding jobs at a steady clip that has since reversed in the face of budget pressures. Those pressures are likely to grow before they ease, as a congressional panel gets to work trying to figure out how to cut as much as $1.5 trillion in from the federal budget.

If the so-called “super committee” is unable to reach an agreement by November, it would trigger automatic reductions in the defense budget.

Paul Cofoni, president and chief executive of CACI International, a defense contractor in Arlington, has already factored in the first round of cuts into the company’s outlook, and believes the trigger is a remote possibility.

“It would be a suicide mission for both parties and the president to allow that to occur,” Cofoni said. “The number one national priority is national security, without that the wolf is always at the door and its only through having strong defense that we can protect our way of life.”

Danielle Douglas covers the banking industry for The Washington Post.
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