Bruised networking player Cabletron Systems (CS) announced today that it will slash 600 employees from its workforce, close two plants, and take up to a $30 million charge as it realigns the company for future growth, executives said.
News of the cuts and closings come after a tumultuous period for the company, during which time it has been hit with an industry slowdown, longer sales cycles, and a significant miscalculation of manufacturing production needs. The austerity measures come less than four months after new president and CEO Don Reed took over Cabletron's helm at the Rochester, New Hampshire-based firm.
Cabletron's stock price, meanwhile, has been cut in half over the past month, reflecting the rattled nerves of its investors. A cascade of unsettling news has battered the firm's stock price--it hovered in the mid-30s as recently as October but has plummeted to the teens of late. The stock was up less than half a point by midday on news of the latest actions, after closing at 14 yesterday.
The two plants affected by the closing are located in Nashua, New Hampshire, and Andover, Massachusetts. The job cuts represent less than 10 percent of Cabletron's total workforce.
The company said it expects to take a one-time charge of $25 million to $30 million during its fiscal 1998 fourth quarter. But the workforce reduction and plant closings are expected to yield between $50 million and $60 million in annualized savings, according to the company. Cabletron noted that the first effects of the realignment are expected to be felt during the fourth quarter.
Earlier this month, Cabletron announced that fiscal third-quarter earnings would not meet expectations. A revised estimate compiled by First Call pegs the company's third-quarter earnings at 11 cents per share, down from earnings of 44 cents per share reported for the same period last year. The company will release final results next week.
Analysts said the job cuts and restructuring are not surprising given Cabletron's recent history. Furthermore, they said, the cuts are an obvious reaction to a networking market that is not experiencing the breakaway growth it once took for granted.
"This is not like the wounded out on the battlefield picking up a stray bullet," said Fred McClimans, CEO of market watcher Current Analysis. "They need to get the ship in order. They seem to be taking all the right steps to clear the decks, so to speak, and become a leaner operating company. I think they're in reasonable shape at this point."
Others agreed that Cabletron is now headed in the right direction, but expressed concern about the fact that the company is only now getting around to correcting problems it ignored for too long.
"Basically, they're not growing as fast as they were, and their old model is obsolete," noted Michael Davey, a Wall Street consultant. "It sounds like they really didn't have a sharp pencil before."
"I think this is what's needed and Reed is doing what he needs to do to get the company on stable ground," Davey added. "I think the business is much firmer than the recent volatility indicates."
In August, Cabletron cofounder, chairman, and CEO Robert Levine voluntarily stepped down, stating that it was time for the company to add an experienced CEO to its executive mix.
In October, a class-action suit was brought against Cabletron for allegedly misleading shareholders about the company's prospects. The suit stems from a June announcement that Cabletron would not meet earnings expectations for its first fiscal quarter, which the following day sent the company's stock into a free fall that resulted in a 33 percent one-day loss of value.
Previous to the announcement, Cabletron could always be counted on to meet Wall Street estimates.
Last month, Cabletron purchased the internetworking component of Digital Equipment's business for $430 million in cash, stock, and product credits. Company executives were quick to note that the cuts and closings would not affect the integration of Digital's business into Cabletron's product portfolio.
Industry observers said that the latest woes at Cabletron could reignite acquisition rumors involving the company, with giants Lucent Technologies and Northern Telecom topping the list of potential suitors.