Cablenomics Introduction

Think back just a year or so ago to the start of the new millennium. Coming off a roaring stock market, anything even remotely tied to technology seemed to be an upward spiral, with no end in sight for double-digit growth.

Unfortunately the world of 2001 is fundamentally different, with technology out-of-favor, capital spending on telecommunications dropping quickly and growth forecasts over the next 3-4 years unlikely to exceed 1-2%, if not completely flat. George W. Bush has inherited a very difficult economic climate, something that many people in our cabling industry are experiencing first-hand. Interest rate and tax cuts are obviously beneficial but do not make an immediate impact on telecommunication decisions. Realistically we at Gerber & Company, LLC are not anticipating a “bottoming” of the economy until mid 2002.

Given these economic conditions what should companies do? Here are some thoughts from Gerber & Company, LLC, though any specific changes must be carefully evaluated before their implementation. Contact Ron Gerber, President of Gerber & Company, LLC at 212-879-6808 or rgerber@gerbercompany.com if you would like some expert guidance.

Customer Retention versus Customer Acquisition. We strongly recommend that companies, be they manufacturers, distributors or contractors, focus on increasing/maintaining sales to existing customers – and reduce if not eliminate all sales/marketing costs related to new customer acquisition. It is extremely expensive to acquire new customers, both in pre-sale SG&A and generally lower profit margins on the initial orders. This approach can be followed until the beginning of 2002, when the economic recovery will start to emerge.

Employee Compensation and Staffing Levels. One benefit from the telecommunications downturn is a dramatically improved labor market, at least from the viewpoint of a company owner. It is no longer a “sellers” but a “buyers” market. Employer can now restructure their staff and compensation arrangements to reduce fixed labor costs. For example, compensation can be adjusted and based primarily on results/profits. Some of your workforce can be placed on reduced workhours. All of these actions can lower your fixed labor costs – and it is highly unlikely that you will lose some of your trusted employees to your competitors in today’s market.

Bank Financing. Sharply lower interest rates can offer significant advantages to company owners. For example you may want to refinance your mortgage or term loan at lower rates. At the very least you should make sure that your working capital revolver loan is based on a variable interest rate.

Merger & Acquisitions The next 12-18 months will be difficult. Company owners should nonetheless consider the sale of their company to larger, well-financed entities. This will ensure the long-term viability of your business. Many of these transactions are structured based on a reasonable up-front payment, with a significant portion of the purchase price tied to the future performance of the business. Realistically, upfront payment will be lower today than 12 months ago but the total possible payments will be comparable and this option should be seriously considered by all owners.

Here are some insights from other leading structured cabling and telecommunication firms, who all share Gerber & Company, LLC’s realistic outlook on future orders. These insights are not intended to be overly pessimistic but to motivate company owners to take appropriate actions in light of current economic conditions.

Belden

Belden Inc. (NYSE:BWC - news), which makes wire, cable and fiber optic products, reported a 23 percent drop in second-quarter earnings as customers cut their spending and said it expects weak demand to continue through the rest of the year. The company, which earlier this month warned of lower than expected earnings, said its net income was $9.6 million, or 39 cents a share, compared with $12.5 million, or 50 cents a share, a year earlier. Analysts' forecasts had ranged from 38 cents to 43 cents a share, with a mean estimate of 40 cents, according to research firm Thomson Financial/First Call. The company is now projecting third-quarter earnings of 30 cents to 35 cents a share, compared with 60 cents a year ago. It said revenues will be down as much as 15 to 20 percent from a year ago. ``Unless we see an increase in our order rates soon,'' Belden said it expects full-year 2001 earnings in the range of $1.60 to $1.70 a share, compared with $2.14 reported for last year.

CDT

Cable Design Technologies (NYSE:CDT - news), which makes products for connecting computer networks, said that it cut 600 jobs and expects to incur a fourth-quarter charge of $7 million or 10 cents per share related to the workforce reductions. Cable said it also expects to report charges of $9.4 million, or 19 cents per diluted share reflecting the impairment of goodwill and also a fourth-quarter charge of $3.6 million, or 5 cents per diluted share for bad debt and inventory adjustments due to harsher industry conditions. Cable said it had so far cut its global workforce by a total of 15 percent or about 900 jobs, during the calendar year.

It expects fourth-quarter sales of $160 million to $165 million and before charges, earnings of 7 cents to 12 cents per fully diluted share. Wall Street analysts polled by research firm Thomson Financial/First Call expected earnings of 16 cents a share.