Orange County Firms See Slow Growth in ’85

Carmello Santoro, president of Silicon Systems, was looking for big things for 1985. In September, he had visions of 50% profit growth for the year ahead.

Now, he says, those visions were a mirage.

Santoro says he’ll be happy to get his Tustin-based computer electronics firm out of fiscal 1985 with flat earnings. With a general lethargy in the personal computer business and increased competition from abroad, “we’ve had six months of nothing but depressing news,” Santoro said.

Although Santoro’s case may be an extreme example, a growing number of Orange County executives say the recovery is side-stepping their companies. “Grow slow” seems to be latest motto of the normally explosive local banking industry and many area executives--from retailers to defense contractors--have scratched 1985 as a big growth year.

Many say they would be tickled just to get through 1985 showing some profit.

The biggest roadblock is general economic uncertainty. With a cloudy outlook, executives are slow to order materials, make products and hire workers. Proposed tax reform also has many executives twiddling their corporate thumbs in 1985, as do continued high interest rates.

One thing is certain: Foreign competition has never been stronger, and this has forced prices down, eating away at profit margins.

Although there are some notable exceptions, 1985 is generally viewed as a year to gear up for what is hoped will be a more favorable 1986.

California Employment Development Department officials said the plunge in Orange County’s unemployment is over. Although the rate of unemployment dropped about a third in 1984, it is expected to stay virtually stagnant this year. More than 29,000 county residents dropped off the unemployment rolls in 1984. But the tally of unemployed is expected to be cut by fewer than 2,000 in 1985.

This is tough stuff for many firms to swallow.

And Santoro’s Silicon Systems is a case in point. Company profits jumped 150% between 1983 and 1984. All appeared rosy. But massive cancellations of orders began pouring in late last year, and the company has been forced to clamp severe restrictions on corporate travel and thin 40 employees from its 650-person payroll. Santoro said it took years to assemble a skilled semiconductor work force. “I’m very hesitant to go through with a massive ax.”

Smith International Inc., however, has not been at all hesitant to tighten its ranks as the oil-service business continues to shrink. Since January, the Newport Beach company has laid off nearly 1,000 of its 8,000 workers. Most of those handed pink slips were from the tool division in Irvine.

Late last year Smith projected that U.S. domestic oil drilling would fall 13% in 1985 because of soft oil prices. “Things are going just about as we had feared they would,” said Paul Russell, a Smith vice president. “We hope further layoffs will not be required, but no company can make unequivocal promises.” As a cost savings measure, last month the company moved its headquarters to smaller offices.

Orange County’s biggest employer, Hughes Aircraft Co.’s Ground Systems Group, is facing a year dotted with question marks. With the company up for sale, the 14,300 workers at its local division in Fullerton are wondering what the future holds, and possible cuts in defense spending are making Hughes officials jittery.

Indeed, the gravy days at Hughes appear to be over. “We’re not looking for the phenomenal growth that we saw seven years ago,” a company spokesman said. In fact, growth has slowed markedly. The value of new contracts, which jumped 212% in 1978 and 25% last year, is expected to rise just 8% this year.

Although the company recently signed a $24-million contract to build torpedoes for the Navy and is negotiating with the Air Force on a $1-billion contract to build satellite platforms, it lost out on some major defense contracts last year when it was under-bid by competitors.

Just four months ago Fluor Corp. Chairman David S. Tappan Jr. cited growing order backlogs when he pronounced, “The economic recovery has finally reached our industry.”

But now Fluor’s future is uncertain. On one hand, orders for the first quarter of 1985 are up nearly 100% compared with the same 1984 period. On the other hand, the Irvine construction and engineering company posted a $32.6-million loss for the first quarter as the continued decline in energy prices and high interest rates have taken a toll.

Cuts in the company’s 1985 capital spending will be far deeper than had been expected even a few months ago. In November, Fluor said 1985 capital spending would be chopped 47% compared with 1984. In a revised statement, Fluor now says high interest rates have forced a 65% drop in capital spending plans for the year.

As part of its strategic plan, Fluor will continue to take cost-cutting measures in 1985 and sell more corporate assets, a spokesman said. In October the company sold its corporate headquarters for $340 million to Trammel Crow Co. of Dallas and last month sold some Gulf Coast oil and gas production tracts to a Shell Oil Co. subsidiary.

But it is probably the local banks, more than any Orange County industry, that tell the true tale of economic uncertainty. Senior executives at two Orange County banks said that instead of opening branches on every corner, in 1985 they’d prefer to show stockholders that they can turn profits.

“A few years ago, banks thought that every time they opened a new branch their stock value went up,” said Lance Blue, vice chairman of CommerceBank of Newport Beach. That is no longer the case, he said. CommerceBank plans “very controlled growth” in 1985 of about 10%.

“It’s truly a matter of survival for all banks,” said Blue. “Growth and assets don’t impress anyone anymore. We have to show the public that we can generate good profits.” As a result, the bank plans no new branches this year but may add a few new residential mortgage services.

At the same time, Wayne Miller, president of Orange National Bank, said his bank recently decided to stop chasing the depositor with big money for certificates of deposit because interest demands are so high. “The guy with $300,000 in CDs is no longer as appealing to us as the guy with $2,000 in his checking account,” Miller said.

The bank, which also has no expansion plans for 1985, hopes to attract more customers by forming a personal banking services department later this year. “Growth is no longer the buzz word,” Miller said. “Profitability is.”

But not all Orange County companies are satisfied with slow-growth scenarios. Nor is everyone projecting off years.

Taco Bell, for example, has decided to take advantage of the poor year that many of its competitors are suffering. Dollar-conscious consumers are eating at home more and increased competition within the industry has affected everyone. In February, restaurant business nationwide suffered an unusual drop, down a full percentage point compared with the previous February, according to the most recent industry statistics.

“When things are down for others, you can make a significant gain in market share,” said John Martin, president of Taco Bell, an Irvine-based subsidiary of Pepsico Inc. “We’re going after all we can get.” The company had planned to build an additional 180 company-owned stores in 1985 but that figure has been increased an additional 11% to 200 stores.

And Taco Bell’s advertising budget, which was supposed to increase 40% this year, has just been bumped up to a 50% increase, in part to push new products at a time when some struggling competitors are narrowing their own product lines.

While most of the fast-food industry reported a soft first quarter, Taco Bell chalked up the best first quarter in the company’s history. “We’re in the enviable position of being on a pretty good roll while everyone else is struggling,” Martin said.

By contrast, Anaheim-based Carl Karcher Enterprises will spend most of 1985 regrouping after suffering the financial pains of trying to grow too fast in 1984. The company recently reported flat earnings for its 1985 fiscal year and a 35% drop in profits for its fourth quarter ended Dec. 31, 1984, compared with the year-earlier quarter.

The owner and franchiser of nearly 450 Carl’s Jr. restaurants introduced a number of costly new products in 1984, most of which sold poorly. The company has already dropped many of these new entries and will try to recapture its audience by once again emphasizing its basic best seller, the hamburger, said Loren C. Pannier, the company’s chief financial officer.

Meanwhile, owners of local tourist attractions say that last summer’s Olympics appear to have helped boost tourism this year. Some tourists who put off visiting during last year’s Summer Games have rescheduled their trips for this summer, and others who watched the events on television were impressed by what the cameras showed them of the Southland, and they have planned trips here this year.

As a result, Disneyland is on target to reach an all-time attendance mark of 12 million visitors in 1985. The park’s yearlong, $12-million gift giveaway is expected to help boost attendance there 20% compared with that of 1984. During Easter week, the park had a record number of visitors for the seven-day period, said Bob McTyre, director of marketing and entertainment.

Some industries are virtually unaffected by the economy, and alternative health care appears to be one of them. As a result, Caremark Inc., a Newport Beach company that specializes in home health services, expects its annual 30% growth rate to continue, a company spokesman said. “People can put off having their nose fixed or their wart removed, but a decision to be on intravenous therapy cannot be postponed,” the spokesman said.

For the rest of 1985, “it should be pretty much sunshine and rose blossoms,” the spokesman said. Among the blossoms already harvested this year by Caremark are the acquisitions of a Massachusetts health care company and a mail-order pharmaceutical company. “Health care has its own economy,” the spokesman said.

Back in November, Thomas Nielsen, president of the Newport Beach-based Irvine Co., said his development company was “taking a big risk” by acting on the assumption that interest rates will not rise in 1985.

That assumption has, so far, held fast and if interest rates remain at the present level, “the housing side of our business will continue to stay strong.” He said the company hopes to double the number of single-family homes it builds in 1985 compared with 1984.

But with the glut of office buildings rising in Orange County, Nielsen expressed concerns about how much office space the local market can bear. The Irvine Co. has office projects under way in the John Wayne Airport area and at Fashion Island. “Office buildings always seem to be built in cycles,” Nielsen said, “but they seem to be counter-cyclical to tenants wanting to move in.”