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Companies Assess Economy's Impact

By Dan Beyers
Washington Post Staff Writer
Monday, May 12, 2008

The Federal Reserve has its beige book, a periodic report on the state of the economy based on interviews with business leaders across the country. We can call on The Post 200, our annual list of Greater Washington's largest companies and organizations. Many of the public companies on the list have offered their assessments of the economy in recent weeks.

What follows are excerpts from their remarks to analysts during conference calls on their financial results. Many painted a painful picture, even if individually they remained upbeat about their own ability to weather what may come. The exception was the big defense contractors, who remained bullish about their prospects.

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W. Edward Walter, president and chief executive at Host Hotels & Resorts, said short-term business and leisure travel appeared to be slowing.

We did experience a general weakness in business travel across many markets, as overall corporate bookings and special corporate bookings declined by roughly 5 percent. We also saw greater weakness on weekend nights as compared to weekdays, suggesting that domestic leisure business was soft. On the positive side, we see a general increase in international business in our gateway market, which is helping to offset some of the impact of the U.S. economic slowdown.

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John F. Remondi, above, chief financial officer for Sallie Mae, said the turmoil in the credit markets has taken its toll on the student loan business.

To say that the funding environment is difficult is a tremendous understatement. Market conditions have made the issuance of even government guarantee, student loan asset-backed securities a massive challenge.

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Gary L. Perlin, the chief financial officer for Capital One, said the credit card company is bracing for higher rates of delinquencies and bad debts.

There has been clear evidence of a steadily weakening economy throughout the quarter, which causes us to expect further credit deterioration and led us to increase our loan loss allowance.

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Not everyone was lowering his expectations. Nicholas D. Chabraja, chief executive of General Dynamics, said the mammoth defense contractor has plenty of work to tide it over.

Arguably, the best thing about the quarter from a forward-looking perspective was the strong order intake. As a result of nearly $10 billion of orders, our backlog grew by $3 billion to almost $50 billion.

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Likewise, Bruce L. Tanner, the chief financial officer at Lockheed Martin, hinted that it's always good to be buying when everyone else is selling.

I think someone once described our acquisition practice as building a string of pearls and the like; I think that's a pretty good analogy. I still see that as we go forward, the ones we are looking at are probably on the $0.5 billion list, bolt-on niche acquisitions that give us access to either some technologies we didn't previously have, customer intimacy, customer access, those sorts of things. So what we are planning on doing is probably no different than we have done in the past, but there could be a greater volume of those coming up in the not too distant future.

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Most companies outlined their plans for dealing with the downturn. Robert Levin, Fannie Mae's interim chief financial officer, said the mortgage finance company was "very focused on identifying and attacking the trouble spots in the business."

Let me use Florida as an example, and I'll be blunt about this. Florida is very over-built. It will take a long time to correct. Values continue to fall and delinquencies continue to increase, hitting 232 basis points in March, up from about 160 basis points in December, and up from 49 basis points a year ago. We are attacking this problem with three main strategies. First, we are making sure every delinquent borrower is contacted and offered a work-out.

Secondly, we are performing underwriting reviews on defaulted loans and if the loans were not underwritten to our guidelines, we will require the servicer to buy them back or make us whole. And third, we are pursuing deficiency judgments against investors and second-home borrowers.

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Arne M. Sorenson, above, chief financial officer for Marriott International, summed up what many firms expressed.

Our philosophy in an environment like this is very simple. While we cannot make our lodging business immune to a weaker economy, we can strive to outperform our competitors.

Staff researcher Richard Drezen contributed to this report.

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