The headaches of CFOs
Executives still are feeling the effects of the recession
- July 28, 2010
Regardless of their industry, the worries and woes of many Virginia CFOs can be traced to the recession and the slow pace of economic recovery. From the still-recovering real estate market to stricter lending restrictions, downsizing and rising health-care costs, it’s all economic fallout.
Virginia Business talked with some of the nominees in its fifth annual Virginia CFO Awards program to find out what’s keeping them awake at night. The magazine presented awards to executives in five categories at a dinner July 1 at The Jefferson Hotel in Richmond. (See profiles of the winners and a list of all 47 nominees beginning on page 64.)
At The Homestead resort in Hot Springs, CFO Suzy Carder says that in the hospitality industry, “our major concern is the economy because if the guests that come to the hotel think they can’t afford to come, then they won’t spend that extra money for a vacation.”
A resort with 1,500 employees, The Homestead is a destination that has long been popular for conferences and meetings. But over the past two years, the resort saw a sharp decline in group reservations. That business has just started to come back. “We don’t want to see it turn and go the other way. We’re happy with what we’re seeing,” Carder says
She hopes that a new local meals tax — another byproduct of the recession — won’t dampen the return of guests. To help offset declining tax revenues, the Bath County Board of Supervisors instituted a local 1 percent meals tax on top of the state’s 5 percent tax. “The more you tax, the more money that is out of [the guest’s] pocket, and it could keep them from coming here again,” Carder says. “It helps the local economy but it’s a little tough on our guests.”
For Hampton-based Measurement Specialties, the European debt crisis has been cause for worry. CFO Mark Thomson notes that Europe provides the biggest market for his company’s sensors (accounting for 40 percent of its business). So, he’s keeping a close eye on the Euro zone crisis sparked by Greece, Portugal and Spain, which has been a major issue. “It has really caused a lot of consternation throughout the European community and has put downward pressure on the Euro, which affects businesses that have a lot of foreign exchange. … We’ve seen a rapid decline in the valuation of the Euro relative to the U.S. dollar.” That can cause profit margins to erode in some sectors while creating headwinds in others.
Measurement Specialties, a publicly traded manufacturer of sensors and sensor systems, employs nearly 2,200 people worldwide and had revenue of $209.6 million last year. With manufacturing facilities in Germany, Switzerland, France and Ireland, its European revenues totaled $83.2 million. The company has remained “relatively balanced” through the debt crisis, Thomson says, but he’s still worried by the uncertainty among investors on a macro scale. “It has certainly caused Wall Street to react, and they’ve in part penalized businesses who’ve got content over in Europe.”
For Sandy L. Winkler, CFO and senior vice president for The Garrett Cos., a Stafford-based development company, a major concern has been the housing crisis. “It’s been devastating on our market,” she says. “We’re a developer, and we sell lots to other developers, to national home builders, so when the market did what it did, our contracts fell through with our national homebuilders.”
Consequently, Garrett was forced to downsize. Like most businesses, the company is “doing more with less revenue, less profit, less personnel to sustain us through this economy,” Winkler says. “Everyone is working harder. … You’re requiring substantially more from everyone.” The company’s staff, many of them long-term, has managed to weather the storm. “Even though we still continue to work through the difficult market conditions, we believe we will prevail and come out on the other end more successful,” Winkler says.
The real estate slump also affected business at nonprofits, such as Westminster-Canterbury in Richmond, an upscale retirement/assisted-living community that employs about 700 people.
“Favorable trends in the real estate market help our business,” explains CFO Russell Gardner. Many older people use proceeds from home sales to pay entrance fees to nursing homes and retirement communities. So when real estate prices fell in 2009, they waited to sell. “We’re seeing some turnaround in 2010,” says Gardner. “We’re seeing the sell cycle improve in the local Richmond market, but folks would sure debate that point because it depends on what part of town you’re in and how you go about pricing your house. So we don’t have a negative outlook, but I wouldn’t go so far as to say it’s positive.”
Gardner also worries about artificially low interest rates. To the extent that Westminster-Canterbury’s debt portfolio is linked to variable-rate bonds, he wonders what will happen when rates climb back up.
Another concern is re-evaluating how Westminster-Canterbury should plan ahead. “We’re seeing our normal business plans having to change, and we’re having to be more flexible,” Gardner says. “You don’t know what the market is going to be from quarter to quarter.”
While his company used to develop an annual plan that relied on the 80-20 rule [an economic principle that claims that 20 percent of one’s input yields 80 percent of output], that rule no longer applies. “Folks will tell you your budget is dead on arrival,” says Gardner. “You spend 90 days making the thing in advance of your fiscal year, and all of us are getting into our fiscal year and realizing [unanticipated] revenue pressures or cost pressures.”
Rising health-care costs are another challenge, especially among companies that have experienced downsizing. Stephen Tobash Jr. of Arlington-based IT defense contractor MTS Technologies Inc. says that after the election of President Obama, its government contracts fell off dramatically. That prompted the company to cut its 250-person work force to about 100 employees. Annual sales fell from a high of $25 million to $15.7 million last year. And with rising health-care costs and a declining work force, “it’s a struggle to negotiate better rates with the health-care companies,” Tobash says.
Because business has fallen off, MTS also struggles with “managing our cash and managing our banking relationships,” Tobash adds. The company has been forced to borrow to fund operational costs, and banks are “getting a lot stricter not only with their reporting requirements but their lending requirements.”
At Measurement Specialties, Thomson says he hasn’t had trouble getting bank loans for expansions in this economic climate, but that hasn’t been the case for other companies. “Unless you have a very strong cash position,” Winkler says, “it is very difficult for a company … to get financing.”
While many economists have said that the recession is over, Virginia CFOs expect to continue dealing with the aftereffects of the subprime mortgage crisis and the economic meltdown well into next year.
2010 Virginia CFO Award recipients: