Settling for the Unsettling The year began with more of the same, now everything’s different. By SHELLY GARCIA Senior Reporter The new year rolled over without much fanfare. Sure, there were concerns over the energy crisis; and the demise of dot-coms. Venture capital funding was getting tighter and the stock market was weakening. But there were signs of strength too, and if some winds had begun to shift, well, those were transitory. Fast forward. What once seemed temporary and unusual now appears ordinary, even normal. A Dow in the mid-9,000 range sounds about right, though it was only Dec. 26, 2000 when the index stood above 10,600 points. Bad news from the semiconductor sector is predictable. Never mind that we couldn’t buy those stocks fast enough a year ago. We don’t expect much office leasing activity, even though vacancies teetered in single digits and landlords were getting two and three offers on prime space less than a year ago. Profit warnings are an everyday occurrence, even for the blue-chip companies that last year seemed untouchable. So are layoffs. Somehow, somewhere, between the time we began to ask what the dawn of the new millenium would bring and the time we forgot what it was about Y2K that worried us, the economy and the world changed in some striking ways. We stopped arguing about whether George Bush really won the election. We forgot about what Gary Condit did or didn’t do. We quit expecting consumers to keep shopping and companies to keep turning profits. We quit traveling. We even stopped expecting peace. Somehow, somewhere in 2001. “It’s been a strange year,” said Gloria Lothrop, W.T. Whitsett professor of history at Cal State Northridge. “To think that we were in a position where we were arguing about how to spend the surplus, and how we now find ourselves in a situation where we are expending the nation’s wealth in self-protection and waging war. And, of course, facing declining revenues as we feel the ripple effects of 9/11.” A mere three out of every five of some 50 publicly traded companies in the San Fernando and Conejo valleys turned a profit, either in the first half or the first nine months of 2001. Forty percent of those saw profits decline compared to last year. Another 24 percent of Valley companies reporting first-half or nine-month performance as of this writing saw revenues decline. The percentage rises to 32 when those reporting flat sales are included. So what did it take to make it through 2001 relatively unscathed? “Luck, good management skills and probably being in the right space as far as the industry is concerned,” said Brent Reinke, managing director Crosby Heafey Roach & May’s Westlake Village office and the chairman of Gold Coast Venture Forum. Illuminated by hindsight, companies that weathered the year’s economic storms often shared several things in common. – They continued to invest in research and development. – They anticipated the sales slowdown in 2000, and began making adjustments in operating expenses early. – They worked harder and longer when business began to sour, and they didn’t listen to prognostications about how bad it would get. – They stuck to their knitting and did not try to venture into new territory, no matter how attractive that new arena seemed. Consider the performance of footwear-maker K-Swiss Inc., where earnings rose 6 percent to $18.7 million and sales increased 12 percent to $67.7 million for the nine months ended Sept. 30, in spite of the slowdown in consumer spending. “We did exactly the same thing as we did the year before and the year before that and the year before that,” said Steven Nichols, K-Swiss president. “We’re in a highly competitive business, and the first thing is we do not sell to anybody who price-promotes brands. So in good times and bad, most retailers earn higher margins on our shoes.” K-Swiss, which is running about 20 percent ahead on future orders, Nichols said, also continued to pump funding into research. “We probably do more research dollar for dollar of any company in the U.S. on what the consumer wants and doesn’t want,” said Nichols, “and by the time we offer shoes to the retailers, all the bad shoes are weeded out.” Not surprisingly, some of the best performers of the year were companies in industries that were least affected by the economic slowdown: real estate companies like Newhall Land and Farming Co. where earnings increased more than seven-fold to $76.9 million for the nine-month period and homebuilder The Ryland Group with a 71-percent earnings rise to $87.1 million for the nine months; restaurants like The Cheesecake Factory Inc. with a 25-percent increase in net income to $28 million; and health care companies like WellPoint Health Networks Inc. with a 20-percent jump in earnings to $304.8 million in the nine months. But a number of companies made their way through 2001 successfully by introducing new products in their respective niches. A number of life sciences companies, for example, continued to invest in research and development and launched new medical devices that contributed to a strong bottom line. At CHAD Therapeutics Inc., earnings increased to $80,000 for the six months ended Sept. 30, from a $2.4 million loss in the comparable period last year, thanks in part to a new oxygen-conserving device for the health care industry. Syncor Corp. saw net income rise 27 percent to $29 million due partly to the acquisition of additional imaging facilities and a new pharmaceutical distribution agreement. Amgen increased net earnings by 3 percent for the nine months to $956.7 million. Amgen recently introduced a drug to treat certain forms of anemia. While some firms continued to invest, others anticipated the slowdown early, and began making adjustments to their operating expenses as early as last year. “Those that began to slow down with the economy are coming through this,” said Roberto Barragan, president of the Valley Economic Development Center. “Those that continued to push expansion are having problems.” Companies like Trio-Tech International and Optical Communication Products Inc., both involved in the highly volatile telecommunications industry, credited aggressive cost management programs, even as they reported unusually strong results for the industry. Trio-Tech reported net income of $1.1 million on sales of $36.1 million for fiscal 2001. Optical Communication saw a 5-percent increase in net income to $26.4 million on sales of $144 million for the same period. But the events of 2001 also required working harder. “I had my best year ever this year,” said James Ashton, president of AFC Commercial Real Estate Group Inc., who figures he did between 100 and 125 deals during the year and earned about 40 percent more than he did last year. “You have to cold-call more. You have to talk to a lot more tenants because there’s a smaller percentage of tenants making deals, so you have to talk to a lot more prospects to make the same number of deals.” Despite the recessionary climate, Ashton said he closed about 16 deals at The Grove, the retail center under development by Caruso Affiliated Partners, a company he represents, within a 60-day period in the last quarter of the year. But he also spent a lot more time on each deal than would have been customary during the fat years. “If I used to spend five hours or four hours to get a tenant, I would say it was probably at least 50 percent to 100 percent more. I did a lot more handholding, I provided a lot more information to give them much more of a comfort level.” By all accounts, Ashton isn’t alone. If 2001 brought anything, it was a new mandate: do more with less, and don’t expect the luxury of pulling back anytime soon. “What I’ve seen is you have to be out there working twice as hard to maintain what you have,” said Reinke. “It’s industry-wide. It doesn’t matter what you’re doing.”