I
TE
M 1.
BUSINESS
Overview
We
are one of the largest distributors of specialty wire and cable and related
services to the U.S. electrical distribution market. During 2007, we served over
2,800 customers, including virtually all of the top 200 electrical distributors
in the U.S. We have strong relationships with leading wire and cable
manufacturers and provide them with efficient access to the fragmented
electrical distribution market. During 2007, we distributed approximately 23,000
SKUs (stock-keeping units) to over 8,200 customer locations nationwide from
eleven strategically located distribution centers in ten states. We are focused
on providing our electrical distributor customers with a single-source solution
for specialty wire and cable and related services by offering a large selection
of in-stock items, exceptional customer service and high levels of product
expertise.
We
offer products in most categories of specialty wire and cable, including:
continuous and interlocked armor cable; control and power cable; electronic wire
and cable; flexible and portable cords; instrumentation and thermocouple cable;
lead and high temperature cable; medium voltage cable; and premise and category
wire and cable. We also offer private branded products, including our LifeGuard™
low-smoke, zero-halogen cable. Our specialty wire and cable is primarily used in
repair and replacement, also referred to as maintenance, repair and operations
("MRO"), related projects and is increasingly purchased for larger-scale
projects in the utility, industrial and infrastructure markets. Our specialty
wire and cable is used within a diverse range of industries, including the
communications, energy, engineering and construction, general manufacturing,
infrastructure, petrochemical, transportation, utility and wastewater treatment
industries.
Our
value-added services include:
|
•
|
Standard
same day shipment from our extensive inventory and distribution
network
|
|
•
|
Application
engineering support through our knowledgeable sales and technical support
staff
|
|
•
|
Custom
cutting of wire and cable to exact specifications at no additional
charge
|
|
•
|
Inventory
management programs that provide job-specific asset management and
just-in-time delivery
|
|
•
|
Job-site
delivery and logistics support
|
|
•
|
24/7/365
customer service
|
|
•
|
Customized
internet-based ordering
capabilities
|
Our
wide product selection and specialized services support our position in the
supply chain between wire and cable manufacturers and electrical distributors
and their customers. Offering the breadth and depth of specialty wire and cable
that we do requires significant warehousing resources and a large number of
SKUs. An electrical distributor, however, typically sells a wide variety of
electrical products ranging from lighting to MRO supplies, and only a small
percentage of these items represent specialty wire and cable. In addition, given
their bulk and weight, specialty wire and cable require a disproportionately
high percentage of warehouse space and materials handling capabilities compared
to the sales volume they generate for an electrical distributor. Instead of
dedicating larger amounts of warehouse space to inventory and making the
investments in employee training, same day shipment capabilities for specialty
wire and cable, end-user support, and information technology needed to maintain
industry leading levels of service, our distributor customers rely on us to
supply much of their specialty wire and cable. At the other end of the supply
chain, while manufacturers may have the space and capabilities to maintain a
large supply of inventory, we do not believe that any single manufacturer has
the breadth of product that we offer. More importantly, manufacturers
historically have not offered the services that our customers need, such as
complementary custom cutting and same day shipment, and do not have multiple
distribution locations across the nation. As a result, we believe that we serve
an important role in the supply chain for specialty wire and cable and that it
would be uneconomical for manufacturers or electrical distributors to compete
with us, given our nationwide product and service capabilities.
Our Cable
Management Program addresses our customers’ growing demand for more
sophisticated and efficient processes for product procurement, in order to meet
budgets and reduce expenses. This program entails purchasing and storing
dedicated inventory, so our customers have immediate product availability for
the duration of their projects. Some advantages of this program are extra
pre-allocated safety stock, firm pricing, zero cable surplus and just in time
delivery. Used on large construction and capital expansion projects, this
program combines the expertise of our cable specialists with dedicated project
inventory and superior logistics to finish complex projects on time and within
budget.
History
We were
founded in 1975 and have a long history of reliable customer service, broad
product selection and strong product expertise. In 1987, we completed our first
initial public offering and were subsequently purchased in 1989 by ALLTEL
Corporation. In 1997, we were purchased by investment funds affiliated with
Code, Hennessy & Simmons LLC. In June 2006, we completed our second
initial public offering. During our 32 year history, we have successfully
expanded our business from one original location in Houston, Texas to eleven
strategic locations nationwide.
In
2000, we acquired our largest direct competitor, the Futronix division of
Kent Electronics Corporation. In 2003, we implemented a new sales and
marketing strategy to expand our sales force, to introduce new private branded
products and to work in concert with our distributor customers to generate
demand from end-users in our targeted markets, including the utility, industrial
and infrastructure markets. As part of this initiative, we are partnering with
our distributor customers and strengthening our relationships with project and
specifying engineers to generate demand for our specialty wire and cable. For
example, in the utility markets, we seek to capitalize on increased spending on
new power generation assets and environmental compliance initiatives. In
addition, in the engineering and construction market we work with specifying
engineers to drive specialty wire and cable specifications in large capital
projects and market our cable management program as a tool to manage wire and
cable at those projects.
U.S. Industry
Overview
We
operate within the U.S. electrical distribution market, which
Electrical Wholesaling
magazine estimates had industry-wide sales of $89.1 billion in 2007.
Electrical distribution has historically been a growing segment of the
industrial distribution industry, with a compound annual growth rate (“CAGR”) of
4.
7
% since 1985.
Within
the electrical distribution industry, our business focuses on specialty wire and
cable. According to the U.S. Census Bureau, the total value of manufacturers'
shipments of specialty wire and cable totaled approximately $9.4
billion in 2006. The
specialty wire and cable we sell generally consists of continuous and
interlocked armor cable; control and power cable; electronic wire and cable;
flexible and portable cords; instrumentation and thermocouple cable; lead and
high temperature cable; medium voltage cable; and premise and category wire and
cable. These products are often highly engineered and require sophisticated
knowledge to insure proper application. Examples of primary end-markets for
specialty wire and cable include the communications, energy, engineering and
construction, general manufacturing, infrastructure, petrochemical,
transportation, utility and wastewater treatment industries.
The
sales channel for specialty wire and cable depends on a number of factors,
including order type, product selection, service level expectations, inventory
management and delivery requirements. The greater the need for customization and
high service levels (represented by the right side of the following diagram),
the more likely the transaction will involve a specialty wire and cable
distributor such as us.
In
certain circumstances, manufacturers of specialty wire and cable sell their
products directly to the end-user. These transactions typically consist of a
bulk volume of wire and cable, involve little or no customized services and may
require long lead times between order and delivery. An example of this type of
transaction would be the purchase of full reels of cable with manufacturing lead
times ranging from 8 to 16 weeks after receipt of the order. More frequently, an
electrical distributor serves as the sales channel directly between the
manufacturer and the contractor or end-user. The typical sale by an electrical
distributor may involve a commonly purchased item that is specifically
designated by the end-user and shipped from stock along with a variety of other
electrical products. It is generally most economical for electrical distributors
to carry in their inventories only those wire and cable SKUs that are commonly
ordered and do not require high levels of specialized knowledge or
services.
For
customers requiring highly specialized wire and cable, custom cut lengths,
technical expertise, short lead times or additional services, electrical
distributors will generally source products from a specialty wire and cable
distributor. We believe that the increasing complexity of specialty wire and
cable specifications and the growing need for just-in-time delivery and
logistics support will drive further growth in purchases through specialty wire
and cable distributors.
Targeted
Markets
Our
business is driven, in part, by the strength, growth prospects and activity in
the end-markets in which our products are used. We have targeted three of these
markets—the utility, industrial and infrastructure markets—in our recent sales
and marketing initiatives.
Utility
Market.
The utility market includes large
investor-owned utilities, rural cooperatives and municipal power authorities.
While we do not distribute the power lines used for the transmission of
electricity, we sell many products used in a power plant and in the related
pollution control equipment. As such we are positioned to benefit from
expenditures for new power generation needed to satisfy a growing population
with increasing energy demands and to comply with federal mandates to reduce
toxic outputs from power generating facilities. We expect to benefit from this
trend as our customers utilize our cable management services to support the
distribution of specialty wire and cable required for the construction of new
power plants and upgrading of existing power plants. For example, large
coal-fired utility plants across the U.S. may be retrofitted with flue gas
desulphurization systems (commonly referred to as scrubbers) to comply with
pollution-control initiatives. This type of project requires the specialty
instrumentation, power and control products that we distribute.
Industrial
Market.
The industrial market is one of the
largest segments of the U.S. economy, comprised of a diverse base of
manufacturing and production companies. Based on a compilation of January 2008
Industrial Information Resources reports, spending on industrial capital
projects in the U.S. during 2008 is expected to total $123 billion. We help
our electrical distributor customers provide specialty wire and cable to
industrial companies with large, complex plant maintenance, repair and
operations requirements and for new capital projects. We offer specialty wire
and cable that is specifically designed for a variety of industrial
applications, and we are benefiting from on-going capital spending due to
factory and plant upgrades. For example, in petroleum refining and other
harsh-environment operations, we distribute specialty cables specifically
designed to endure exposure to caustic materials or extreme
temperatures.
Infrastructure
Market.
We believe that significant infrastructure
improvements and additions to support population density and growth will be
needed over the next several years. For example, the U.S. Conference of Mayors
Water Council’s 2007 National City Water Survey report states, “More than $82
billion was spent in 2005 on water and sewer services and infrastructure, and
from 1992 to 2005 total expenditures exceeded $841 billion”. This report further
stated, “Annual local government spending may exceed $110 billion by 2010”. We
expect to benefit from this trend given that the specialty wire and cable we
distribute is used in the construction of wastewater treatment facilities and
throughout other major infrastructure projects. We are assisting our customers
to further penetrate the engineering and construction market by working with
application engineers to drive specialty wire and cable specifications in these
large construction projects.
LifeGuard™
Market Opportunity
We
believe that the market for low-smoke, zero-halogen products is in its infancy
in the U.S. and represents a significant market opportunity across our targeted
markets. Low-smoke, zero-halogen cables have been used extensively in Europe and
Asia for many years. We are leading the development of the market for low-smoke,
zero-halogen cable in the U.S. In addition to other threats, when traditional
cable burns, the acid gases produced are particularly destructive to electrical
and electronic equipment, which represents a significant investment for many
businesses. In contrast, low-smoke, zero-halogen compounds provide significant
flame resistance, minimal smoke production and substantially reduced toxicity
and corrosiveness when burned, as compared to traditional wire and cable. We
sell our LifeGuard™ products across most of our end-user markets.
Our
LifeGuard™ cable has been accepted for use by several hundred end-users,
including leading engineering and construction firms, and is increasingly
included in specifications for utility, data center and industrial related
projects. LifeGuard™ can be used in harsh environments for power, control and
lighting circuits in a broad range of commercial, industrial and utility
applications. We are currently marketing LifeGuard™ to the utility industry for
use in power generation and co-generation; to industrial plants for
petrochemical, pharmaceutical and wastewater treatment related uses; to general
industry for use in data centers, such as computer rooms, switching centers and
central offices; and to the engineering and construction market for use in
highly populated facilities such as multi-story buildings, schools, hotels,
hospitals, sports centers, airports and mass transit stations.
Competitive
Strengths
We
are a nationally recognized, full-service distributor of specialty wire and
cable and related services. Through eleven strategic locations across the United
States, we provide same-day shipment to a broad customer base including, among
others, Border States Electric Supply, Consolidated Electrical
Distributors, Inc., GEXPRO (formerly GE Supply Company), Graybar
Electric Company, Inc., HD Supply, Inc., Mayer Electric Supply
Company Inc., Rexel, Inc., The Reynolds Company, Sonepar USA and WESCO
Distribution, Inc. We operate in a highly fragmented market, and we believe that
the following competitive strengths have helped us achieve our leading position
in the market and a strong reputation among manufacturers and
customers.
Comprehensive
Value-Added Services and Product Expertise
Our
business model focuses on providing our customers with comprehensive value-added
services and high levels of expertise across a broad range of our suppliers'
products. Our services are designed to provide maximum efficiency and
flexibility for our customers and include extensive product knowledge and
application engineering support, inventory management, custom cut capabilities
and 24/7/365 customer service. We help our customers achieve efficient and
effective procurement of specialty wire and cable on terms that typically
include short lead times and the ability to ship a high percentage of the
products ordered within 24 hours. Critical to our success is our
application engineering support, in which our knowledgeable sales people help
customers match products based on intended use, cost and performance
specifications. We have developed the expertise, infrastructure and
relationships to provide extensive customer service that we believe would be
costly to build and support without the scale we have achieved.
Strength
and Tenure of Specialized Sales Force
We have
invested in developing a sales force of highly knowledgeable professionals with
considerable industry expertise. As of December 31, 2007, our sales force
consisted of 54 field sales personnel and 90 inside sales and technical support
personnel. The size of our field sales force has increased significantly since
2003 and is aligned according to targeted industries, geography and select
customer relationships. Our sales personnel receive ongoing, comprehensive
training about innovations in specialty wire and cable as well as changes
affecting our targeted markets. We use a consultative selling approach that
leverages our extensive product expertise and knowledge of our customers' needs
in the markets in which the products are used. Our sales effort is designed to
augment the sales efforts of manufacturers as well as those of our distributor
customers. We believe that our sales approach results in increased demand for
the products we distribute and maximizes our reputation as a highly
knowledgeable source of specialty wire and cable information.
First-Mover
Advantage with LifeGuard™ Cable
We
believe we have established a first-mover advantage in the U.S. with our
LifeGuard™ line of low-smoke, zero-halogen cable products. We believe our
LifeGuard line of cable has the potential to become the industry standard in the
U.S. for low-smoke, zero-halogen cable needs. Since its introduction in 2003,
our LifeGuard™ line of cable has been accepted for use by several hundred
end-users, including leading engineering and construction firms, and is
increasingly included in specifications for utility, data center and industrial
related projects. We have identified a substantial potential market for these
products and believe that our early entrance into the market provides us
with
a significant
competitive advantage.
Operating
Efficiency
Our
ability to offer a high level of customer service is due in part to our highly
efficient and effective operations that leverage centralized back-office
administration and purchasing, a scalable information technology platform,
automated warehouse operations and electronic product tracking. The products we
carry are bar-coded with exact product specifications and length and tracked on
a real-time basis in our system, which allows us to cost-effectively route
orders to our warehouses across the country based on delivery distance,
availability and quantity of product. Our process minimizes waste by targeting
specific locations and reels for optimal custom cut orders. Efficient purchasing
and management of our products have helped us increase our average inventory
turns from 3.37 in 2003 to 3.97 in 2007 and improved our gross margin during the
same period from 23.6% to 25.9%. In addition, by leveraging our national
infrastructure and implementing back-office initiatives, we have decreased our
operating expenses as a percentage of revenue from 20.4% in 2003 to 12.0% in
2007. Based on data for 2006 reflected in the 2007 Performance Analysis
Report (“PAR Report”) published by the National Association of Electrical
Distributors (“NAED”), we compare favorably to the electrical distribution
industry averages across several metrics, including average sales per employee
of approximately $1,201,000 in 2007 versus $548,000 for the industry in
2006.
Extensive
Product Offering and Strong Supplier Relationships
In
2007, we sold approximately 23,000 SKUs, representing a broad and deep selection
of high-quality specialty wire and cable. Our products include national brands
of continuous and interlocked armor cable; control and power cable; electronic
wire and cable; flexible and portable cords; instrumentation and thermocouple
cable; lead and high temperature cable; medium voltage cable; and premise and
category wire and cable. We also offer several products under our private
brands, including our LifeGuard™ line of low-smoke, zero-halogen cable. Our
strategy is to maintain a wide breadth and depth of inventory, allowing us to
ship a high percentage of the products ordered within 24 hours. We believe
that our vast product offering and value-added services are significant factors
in attracting and retaining many of our customers. In addition, we have strong,
often decades-long, relationships with large wire and cable manufacturers such
as Belden CDT, General Cable Corp., Nexans, Service Wire Company and
Southwire Company. Because of our national scale, market leadership position and
specialized services, we believe we provide an important function in the supply
chain and are critical to our suppliers' sales efforts. We also believe that our
strategic decision to concentrate our purchases with our top suppliers allows us
to solidify our relationships with these vendors while optimizing our vendor
rebates.
Strong
and Diversified Customer Base
During
2007, we served over 2,800 customers, including virtually all of the top
200 electrical distributors in the U.S. We have experienced exceptional customer
retention, and we believe that we are the primary supplier of specialty wire and
cable to a majority of our customers. Each of our top ten customers in 2007 has
purchased products from us every year over the last decade. Our direct customers
are electrical distributors, and our products are used within a diverse range of
industries including the communications, energy, engineering and construction,
general manufacturing, infrastructure, petrochemical, transportation, utility
and wastewater treatment industries. We believe that the strength of our broad
customer relationships provides us with a significant competitive
advantage.
Experienced
Management Team
Our
highly experienced team of executive officers and key management has an average
tenure with us of over 15 years. This continuity strengthens our
relationships with our customers and suppliers and enables us to provide our
customers with a high level of product and industry expertise. Our management
team is led by our President and Chief Executive Officer,
Charles Sorrentino, who joined us in 1998. Working with Mr. Sorrentino
is a team of industry veterans who have been instrumental to our strong growth
and success to date and will enable us to leverage our competitive strengths and
pursue further strategic growth opportunities.
Growth
Strategies
Since
implementing our new sales and marketing strategy in 2003, our revenue has
increased from $149.1 million in 2003 to $359.1 million in 2007, and
our operating income has increased from $4.7 million to $49.7 million.
We intend to continue to leverage our competitive strengths and pursue select
strategic initiatives to drive growth in revenue and profit.
Generate
Demand from Targeted Markets
During
2003, we realigned our sales efforts to work in concert with our distributor
customers to generate demand directly from end-users in our targeted markets,
including the utility, industrial and infrastructure markets. We believe that
our sales and marketing programs and product application expertise can help our
distributor customers drive demand from their customers. In select target
markets, we are assisting our customers in forming relationships with project
and specifying engineers to create demand for our specialty wire and cable. For
example, in the utility market, we are positioned to capitalize on the increased
spending on new power generation assets and environmental compliance
initiatives. Additionally, we are marketing our cable management program to the
engineering and construction market as a tool to manage supplies at large
capital projects. We also believe that many of these new relationships have been
awarded to us based on the range of value added services that we are able to
provide. We believe that our ability to help generate demand and manage the
logistics of delivering our specialty wire and cable increases the value we
bring to our customers and suppliers alike. We believe that the relationships we
have developed with specifying engineers enhance our role in the sales and
marketing process and established a platform to accelerate sales of our private
branded products through our distribution channels.
Expand
Our Sales Force
As
part of our ongoing strategy to penetrate new markets, we expect to continue to
expand our sales force and further focus our sales and marketing efforts on
supporting our distributor customers in our targeted markets. We typically hire
experienced personnel for our sales force, and since 2003 we have significantly
increased the number of our field sales personnel. Based on data for 2006
reflected in the 2007 PAR Report published by the NAED, our sales personnel
outperformed industry averages with average sales per sales employee of $2.2
million in 2007 versus $1.1 million for the industry in 2006. We believe we are
in the early stages of penetrating additional sales channel opportunities in
targeted markets and will continue to add specialized sales personnel to
generate demand for our products.
Increase
Sales of Private Branded Products
Beginning
in 2003, we spearheaded the development and marketing of select private branded
products, including LifeGuard™, a low-smoke, zero-halogen line of cable;
Houwire®, a low-cost sound and security wire; and DataGuard®, a high-end
electronic cable product line. Low-smoke, zero-halogen cables have been used
extensively in Europe and
Asia
for many years. While we are still in
the early stages of selling these product lines, we believe the possible markets
for these products are significant. Since its introduction in 2003, our
LifeGuard™ line of cable has
been accepted
for use by
several hundred
end-users, including leading
engineering and construction firms, and is
increasingly included in
specifications for utility, data center and industrial related
projects.
Focus
on Efficient Operations and Cost Control
We
seek ways to reduce costs, increase efficiency and ultimately enhance our
ability to serve our customers. For example, we continuously measure our
performance and implement best practices across our organization to improve our
operations. We tie a portion of our manager compensation to profitable growth.
In addition, we have invested in highly flexible and scalable information
systems, which have been instrumental to the efficient integration of our sales,
distribution and logistics capabilities. Improvements in our inventory
management have created capacity in our warehouses that can be used to support
our continued growth. We believe that our dedicated focus on efficient
operations and scalable technology will help us drive productivity improvements
and cost savings in the future.
Selectively
Pursue Acquisition Opportunities
Our
senior management team has experience in identifying and integrating acquisition
targets. In 2000, we acquired our largest direct competitor, Futronix, from
Kent Electronics. Following the acquisition we successfully integrated
operations, including the elimination of seven Futronix warehouses. While we are
not dependent on acquisitions to achieve our growth plan, we will selectively
pursue acquisitions that leverage our established infrastructure and allow us to
strategically address select target markets, grow our product and service
offering, expand geographically and leverage our efficient distribution and
operations platform.
Products
Through
our relationships with many of the large wire and cable manufacturers, we have
access to a full spectrum of specialty wire and cable, allowing us to
consistently meet the needs of our customers. Our focus is on specialty wire and
cable that is engineered for specific usage and supplies critical power and data
to end-users across diverse markets. We custom cut our wire and cable to exact
specifications so that they can be installed as soon as they arrive at the
destination. Our product strategy is to carry an extensive array of specialty
wire and cable to meet the diverse, dynamic and time-sensitive needs of our
customers. In addition, our infrastructure is designed to respond to short lead
times with high levels of product availability and same day
shipment.
Product
Categories.
We distribute a wide array of wire and
cable types for a host of applications, including:
|
•
|
Continuous Armor.
Continuous armor cable is available in low voltage and medium voltage
constructions and is used in harsh environments where maximum conductor
protection is required. The corrugated seamless aluminum armor prevents
the
entrance
of water, gas and corrosive elements into the electrical core of the
cable. Continuous armor cable is used in a wide variety
of applications including industrial power distribution, pulp and
paper, utility and petrochemical operations. This product can beused
indoors and outdoors, aerially, in conduits, ducts, cable trays and direct
burial applications.
|
|
|
•
|
Control &
Power.
Control and power cable is 600 volt single or multiple
conductor cable used in a broad range of commercial, industrial and
utility applications. Applications include lighting, control and power
circuits in wet and dry locations in conduits, ducts and raceways.
Control and power cable is chemical, gasoline and oil resistant, and may
be directly buried or installed in cable
trays.
|
|
•
|
Electronic.
Electronic
cable is primarily used in audio, control, instrumentation and computer
applications. It is highly engineered cable that provides specific
electrical performance characteristics for a broad range of data,
communications and industrial
applications.
|
|
•
|
Flexible & Portable
Cord
.
Flexible and portable cord is a highly flexible and durable single or
multiple conductor cable used in heavy-duty industrial applications. These
cables are commonly used for energizing mobile mining equipment, diesel
electric locomotives, lifting magnets, cranes and loaders, as well as for
portable power distribution for tools, equipment, small motors and
machinery.
|
|
•
|
Instrumentation &
Thermocouple.
Instrumentation and thermocouple cable is 300 volt or
600 volt, twisted pair or triad cable used to transmit signals for
instrument, process and control, or heat sensing instruments. It may be
used in wet and dry locations, indoors or
outdoors,
aerially, in conduits, ducts, cable trays or 600 volt direct burial
applications.
|
|
|
•
|
Interlocked Armor.
Interlocked armor cable is available in low voltage and medium voltage
constructions and is used in harsh environments where maximum conductor
protection is required. The protective sheath is made from a thick
corrugated metal tape that locks together as it is wrapped around the
cable core. It is used in a wide variety of applications including
industrial power distribution, pulp and paper, utility and petrochemical
operations. This product can be used indoors and outdoors, aerially, in
conduits, ducts, cable trays and direct burial
applications.
|
|
•
|
Lead & High
Temperature.
Lead and high temperature cable is 600 volt single
conductor cable used to create or complete electrical circuits. Many of
these cables are capable of withstanding flame temperatures in excess of
2,000°C or higher. This product is commonly used for power, control, and
instrumentation circuits in iron, steel, glass, aluminum and refining
applications, and in industrial heating and cooking
equipment.
|
|
•
|
Medium Voltage.
Medium
Voltage cable is a single or multi-conductor cable that is rated for 2,001
volts to 35,000 volts. This power cable can be used in open air, conduit,
duct, cable tray (when CT rated), wet and dry locations or be directly
buried in earth. It is commonly used in chemical plants, refineries, steel
mills, industrial plants, commercial buildings, utility substations and
generating stations.
|
|
•
|
Premise & Category
Wiring.
Premise wiring is used for general purpose remote control
signaling and voice and data applications. Category cables are used for
high speed data transmission of voice, data and telephony
information.
|
Our Private
Branded Products.
We also sell our own private
branded products, LifeGuard™, DataGuard® and Houwire®, across many of the
product categories identified above.
|
•
|
LifeGuard
™.
LifeGuard™ cable is a
low-smoke, zero-halogen cable constructed with highly engineered polymers.
LifeGuard's™ properties exceed those of standard cable construction, and
it has excellent electrical and mechanical characteristics. The jacket on
LifeGuard™ cable is highly flame-retardant, produces very small amounts of
smoke when burned and contains no halogens. LifeGuard™ is used in harsh
environments for power, control and lighting circuits in a broad range of
commercial, industrial and utility applications. LifeGuard™ cable is ideal
for applications where a high degree of safety and equipment protection is
required. We are currently marketing LifeGuard™ to the utility industry
for use in power generation; to industrial plants for petrochemical,
pharmaceutical and wastewater treatment related uses; to general industry
for use in data centers, such as computer rooms, switching centers and
central offices; and to the engineering and construction market for
use in highly populated facilities, such as multi-story buildings,
schools, hotels, hospitals, sports centers, airports and mass transit
stations.
|
|
•
|
DataGuard
®
.
We introduced our
DataGuard® product line in 2006 to address the data and communications
wire and cable market. These expansive and performance driven markets
require cables with exacting electrical characteristics. Our DataGuard®
products are premium quality, highly engineered cables specifically
designed to meet these demanding requirements and are used in a broad
range of audio, control, instrumentation and computer
applications.
|
|
•
|
Houwire
®.
Our Houwire® product
line has been custom tailored for the sound, security and fire alarm
market. Houwire® products are low-voltage cables that have been value
engineered for multiple applications in both industrial plants and
commercial facilities. These competitively priced items have helped to
position us for additional penetration into the broad and expanding sound
and security market.
|
Services
In
addition to the broad selection of specialty wire and cable that we distribute,
we offer a wide array of value-added services to our customers to assist them
with their wire and cable requirements. These services allow customers to use
our industry expertise to efficiently manage their wire and cable requirements
with improved service and minimal waste and expense.
We
believe our inventory depth and breadth, distribution capabilities and
value-added services are critical to our customers' wire and cable procurement
needs and significantly reduce their cost by:
|
•
|
eliminating
long lead times typically required by
manufacturers;
|
|
•
|
reducing
on-site labor costs;
|
|
•
|
fulfilling
small orders without subjecting customers to purchase order minimums and
price premiums;
|
|
•
|
reducing
waste through our cut-to-length service
offering;
|
|
•
|
moderating
inventory carrying costs by offering next-day delivery for SKUs which take
up substantial warehouse space;
|
|
•
|
providing
access to restricted and exclusive
brands;
|
|
•
|
offering
technical resource capabilities through our product specialists'
24-hours-a-day, seven-days-a-week, 365-days-a-year service;
and
|
|
•
|
managing
large, intermittent product orders through our cable management
program.
|
Our value-added services
include the following:
|
•
|
Application Engineering
Support.
Our sales personnel have significant technical knowledge
of the specialty wire and cable we distribute and their applications and
specifications. Our sales staff assists customers with selecting the
appropriate wire and cable products based on the intended use, cost and
performance specifications.
|
|
•
|
Standard Same Day Shipment
from Our Extensive Inventory.
Through our nine distribution
facilities and two third-party logistics providers, it is our standard
practice to ship product the day it is ordered, and we generally have it
delivered by ground the next business
day.
|
|
•
|
24-Hours, 7-Days-a-Week,
365-Days-a-Year Service Anywhere in the United States.
Our sales
offices and distribution facilities provide
customers with around-the-clock customer support and can deliver
customized orders on short notice from any of our
locations.
|
|
•
|
Custom Color Striping.
We provide custom striping services, including color-coding products for
circuit design applications.
|
|
•
|
Cut-to-Length Capabilities at
No Additional Charge.
We estimate that approximately 90% of
our stock orders are cut-to-length, which eliminates excess labor costs
and remnants for our customers.
|
|
•
|
Wire & Cable Training
Programs.
We are actively engaged in wire and cable training both
for our distributor customers and for their end-user customers. Typical
training activities include wire schools at both supplier facilities and
our own, plant and site tours at our facilities and our suppliers'
facilities and on-site product training with cable
engineers.
|
|
•
|
Full Extranet
Capabilities.
We give our customers internet-based, password
protected access to select areas of our real-time ERP system, which allows
them to check product availability, obtain pricing, and confirm order
status—including detailed shipping information identifying the carrier
used and shipment tracking number.
|
|
•
|
Cable Selection System.
Our cable selection system is an internet-accessible order release site
that allows customers to self-manage their cable requirements such that
they arrive just-in-time at the job site and allows customers to initiate
release of wire and cable via our website. With our cable selection
system, the customer can request the exact circuit lengths to which cable
is cut, project inventory status is available for review at any time, and
the project engineer or field manager can submit changes to their orders
from the field.
|
|
•
|
Cable Management
Program.
Our cable management program is an inventory system that
pre-allocates specialty wire and cable for a customer's specific
project and includes a custom program designed to manage all of the wire
and cable requirements for a customer's project. The major benefits of our
cable management program include guaranteed availability of materials,
plus safety stock; immediate shipment of material upon field release; firm
pricing and a dedicated project manager. As part of the program, wire and
cable stock is reserved in our warehouse and identified with a unique part
number to ensure it is available for sale when requested by the customer.
In addition, customers can review a project's inventory 24 hours a
day via a secure internet site and can obtain details on items such as
individual circuit cut history, shipment and order tracking information.
Our cable management program allows customers to better manage their large
projects and helps to eliminate job site theft, expenses associated with
delayed shipments of materials and surplus
materials.
|
Customers
During
2007, we served over 2,800
customers,
including virtually all of the top 200 U.S. electrical distributors,
representing over 8,200 customer locations nationwide.
Our
customers' primary end-markets include the communications, energy, engineering
and construction, general manufacturing, infrastructure, petrochemical,
transportation, utility and wastewater treatment industries. While downturns or
cyclicality in the markets our distributor customers serve could affect our
business, we believe that the market and geographic diversity of our end-users
helps to mitigate risks associated with regional or sector-specific cycles. In
2007, our largest customer, Wesco Distribution, represented approximately 12% of
our sales. No other customer represented more than 10% of our 2007
sales.
Suppliers
We
obtain products from most of the leading wire and cable suppliers. We believe we
have strong relationships with our top suppliers. Although we believe that
alternative sources are available for the majority of our wire and cable
products, we have strategically concentrated our purchases with four leading
suppliers in order to maximize product quality, delivery dependability,
purchasing efficiencies, and supplier incentives. As a result, in 2007
approximately 65%
of our annual purchases
came from four suppliers. We do not believe we are dependent on any one supplier
for any of our wire and cable products.
Our top
five suppliers in 2007 were Aetna Insulated Wire Company, Belden CDT, General
Cable Corp., Nexans, and Southwire Company. Products we purchased from Belden
CDT, General Cable Corp., Nexans, and Southwire Company each generated more than
10% of our sales in 2007.
We
believe that our national distribution presence and value-added services make us
an essential partner in the supply chain for our suppliers. In addition, we
believe our role in the supply chain, through our national distribution channel
and value-added services, provides our suppliers cost savings by:
|
•
|
eliminating
the need to maintain their own asset intensive distribution system across
the U.S.;
|
|
•
|
placing
large orders, which allow suppliers to have efficient and cost-effective
production planning;
|
|
•
|
reducing
their marketing and sales functions and expenses;
and
|
|
•
|
allowing
them to rely on our technical specialists to provide technical support to
our customers and end-users.
|
Sales
and Marketing
Sales
Strategy
The
primary objectives of our sales process are (i) to continue to generate
market awareness, (ii) to identify profitable specialty wire and cable
markets and (iii) to penetrate targeted markets through cost benefit
analyses and customized service offerings. Our sales force is trained to
identify the needs of our customers and develop a single-source wire and cable
solution that meets their needs while creating a competitive advantage for
us.
Sales
Organization
In
order to meet our growth initiatives and manage the corresponding increased
contact with customers, we invested heavily in sales resources (including
significantly increasing the size of our field sales force from 2003 to 2007).
We have also transformed our compensation programs to drive a more proactive
sales process. For example, we have realigned the incentives for our field sales
force by tying more than 50% of their incentive-based compensation to new
business. Our inside sales force compensation structure focuses on monthly
adjusted gross profit dollars and margin percentage targets.
We
have expanded our sales channels to support our electrical distributor customers
as "channel partners" to penetrate our targeted markets, including the utility,
industrial and infrastructure markets. In cooperation with these distributors,
we are implementing a pull-through sales strategy to increase demand for our
products and services among selected end-users.
As of
December 31, 2007, our sales and marketing staff consisted of approximately
168 employees. We market our specialty wire and cable through an inside sales
force located throughout our regional offices and a field sales force located in
key geographic markets throughout the U.S. By operating under a decentralized
process, regional managers are able to adapt quickly to market-specific
occurrences, allowing us to compete effectively with local competitors. We
believe the breadth and depth of our sales force is critical to serving our
fragmented and diverse customer and end-user base.
Our
field sales force focuses on developing demand for our products. In addition to
adding field sales resources, since 2003 we have reorganized our sales
organization to service our customer base more effectively and to penetrate new
and larger end-markets. Our sales force optimization plan has
involved:
|
•
|
driving
the specification of our private branded products such as
LifeGuard™;
|
|
•
|
developing
targeted account lists within regional sales
territories;
|
|
•
|
adding
sales managers in larger regions to assist regional
managers;
|
|
•
|
adding
support personnel for the development of our targeted
markets;
|
|
•
|
partnering
with leading electrical distributor marketing groups to target Fortune 100
companies;
|
|
•
|
revising
the sales commission plan to motivate and compensate personnel for
profitable incremental growth;
|
|
•
|
adding
national account managers to service our largest customers;
and
|
|
•
|
implementing
a customer relationship management platform to help target and develop new
accounts.
|
Our
inside sales force's primary objective is to maintain, service and develop
existing accounts. Our inside sales personnel assist customers and end-users
with selecting the appropriate wire and cable products based on intended use,
cost and performance specifications. With our national presence, the inside
sales force also has the ability to designate the distribution facility that
will process a customer's order, which helps to reduce freight charges and
transportation time. In addition to assisting customers with proper product
selection, our inside sales personnel facilitate the designation of our products
in project specifications, increasing the utilization of our products. Part of
our inside sales force consists of our National Service Center
(“NSC”), an outbound call center located in Houston, Texas, that is focused on
developing smaller or less active accounts. The NSC cultivates our customers
using a cost effective and consistently applied sales and marketing process. We
believe the NSC represents a valuable, hands-on and profitable training ground
for the development of our current and future sales force.
Through
the NSC, we offer continuous in-depth training for our entry-level sales
personnel. In addition to our NSC training, we offer our sales force extensive
training and education, including training on ISO 9001:2000 standard
sales-related procedures, a hands-on multi-department orientation, an in-house
wire school facilitated by in-house experts and factory engineers, and
attendance at the "Belden College of Wire Knowledge" at Belden CDT's
manufacturing facility. All sales professionals are educated on our regimented
sales process with complete protocols, requirements and controls.
Marketing
As
a result of the initiatives we adopted in 2003, we have augmented our marketing
activities and functions by:
|
•
|
creating
an executive marketing position responsible for continual strategic
analysis of our marketing channels, customers, products, and brand
awareness;
|
|
•
|
implementing
a sales and marketing organizational infrastructure driven by corporate
market managers and segmented by targeted
markets;
|
|
•
|
introducing
a marketing services manager to handle customer-specific marketing
programs;
|
|
•
|
adopting
pricing matrices and controls;
|
|
•
|
developing
marketing plans to target new markets and customers;
and
|
|
•
|
developing
new private branded products, such as LifeGuard™, DataGuard® and
Houwire®.
|
Our
marketing materials include a master catalog, targeted mini-catalogs, product
brochures, direct mail and an online presence that includes an e-catalog,
company overview and LifeGuard™ cable informational videos. The extranet access
we provide allows customers to obtain custom pricing, inventory availability and
information on shipping and order-tracking. We also regularly participate in
trade shows.
We
employ database mining techniques to identify new business development
opportunities and customers. We utilize our own data as well as third-party
provided data. Our database contains over 23,000 contacts from over 8,200
accounts at electrical distributors nationwide. In addition, we have
approximately another 18,700 contacts of engineering and procurement
professionals. We believe we possess one of the largest databases of contact
information for electrical distributors of specialty wire and cable in the
U.S.
We
are members of various national marketing groups that represent hundreds of
electrical distributors across the U.S. As a supplier member of these groups, we
are recognized as a preferred supplier to these customers. We believe that our
relationships with these groups are strong. We also maintain direct
relationships with all of our customers who are distributor members of these
groups.
Operations &
Facilities
Purchasing
To
maximize purchasing efficiencies, we utilize a centralized purchasing function
located at our corporate headquarters in Houston, Texas, which manages each
distribution facility's unique product profile and inventory levels. The
purchasing department is led by the Vice President of Sales and Marketing, who
oversees a Director of Purchasing, senior buyers who are responsible for
purchasing specific product groups, length allocation specialists, who are
responsible for efficient reel selection, and a logistics and product analyst,
who is responsible for inventory optimization initiatives. Additionally, the
corporate market managers and sales personnel provide feedback on product lines
to the Vice President of Sales and Marketing and the Director of Purchasing. Our
ability to consolidate demand and purchase large quantities of wire and cable
provides substantial manufacturing scale for our suppliers and results in
competitive prices including attractive rebate programs.
Our
centralized purchasing function is supported by our ERP system, which notifies
the senior buyers of required inventory purchases through the use of a real-time
inventory forecasting system. Under this system all inventory items have a
classification based on sales frequency, which is customized for every SKU.
Based on a particular item's classification, demand analysis is developed from
usage history, minimum acceptable safety stock and projected manufacturing lead
times.
Logistics
Our
logistics process is highly automated through an ERP system that enables the
seamless integration of operating functions. In 1999, we implemented a radio
frequency bar-coded inventory system. This bar-coding system has facilitated our
length allocation process, which audits all customers' orders prior to their
release into the distribution facilities and subsequently directs warehouse
personnel to particular reels for cut-to-length orders. This process reduces
wire and cable remnants, ensures accuracy and maintains our real-time inventory
system for sales personnel.
We
process customers' orders the same day they are received. Our strategically
located distribution centers generally allow for ground delivery nationwide
within 24 hours of shipment. Orders are delivered through a variety of
distribution methods, including less-than-truck-load, truck-load, air or parcel
service providers, direct from supplier and cross-dock shipments. Freight costs
are typically borne by our customers. Due to our shipment volume, we have
preferred pricing relationships with our contract carriers.
Information
Systems and Technology
We
utilize scalable information systems and technology to provide support for all
of our operations. We utilize a proprietary state-of-the-industry ERP system.
Over the years, the system has been upgraded and customized for our operations
and allows for the seamless integration of financial, operational and
administrative functions. Each of our locations is connected to our computer
networks through dedicated data lines. These systems are protected by the
support of recognized security systems, and we maintain a disaster recovery
system that provides for the back-up of our data.
Our
automated bar-coded inventory system allows us to track and manage our inventory
on a real-time basis. With more than 48,000 reels across eleven distribution
facilities, our information technology systems allow complete traceability of
our products through the entire supply chain from our suppliers to delivery to
our customers. We also developed a proprietary cable management system that
allows our customers to review online the wire and cable products designated for
specific projects, release orders for shipment and review previous
shipments.
In
2004, we augmented our ERP system with the implementation of a CRM platform for
customer relationship and sales force management, which allows for advanced
customer management in a secure environment.
We
have an experienced and dedicated information technology department, including
on-site programmers and other network professionals.
Employees
As of
December 31, 2007, we had 304 employees, of which approximately 82% were
sales or warehouse personnel.
Our
employees are not represented by a labor union or covered by a collective
bargaining agreement. We believe that our employee relations are
good.
Competition
Like
the general U.S. electrical distribution market, the specialty wire and cable
market is highly competitive and fragmented, with over 200 specialty wire and
cable distributors serving this market. The product offerings and levels of
service provided by the other specialty wire and cable distributors with which
we compete vary widely. We primarily compete with other specialty wire and cable
distributors on a regional and local basis. Most of our direct competitors are
smaller companies that focus on a specific geographical area or feature a select
product offering, such as surplus wire. In addition to the direct competition
with other specialty wire and cable distributors, we also face, on a much more
limited basis, competition with the hundreds of electrical distributors and
manufacturers that sell products directly or through multiple distribution
channels to end-users or other resellers. In the markets that we serve,
competition is primarily based on product line breadth, quality, product
availability, service capabilities and price.
Website
Access
Our
internet address is
www.houwire.com
.
Information contained on our website is not part of, and should not be construed
as being incorporated by reference into, this Annual Report on Form 10-K. We
make available, free of charge under the “Investor Relations” heading on our
website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as well as proxy and information statements, as soon as
reasonably practicable after such documents are electronically filed or
furnished, as applicable, with the Securities and Exchange Commission (the
“SEC”). You also may read and copy any material we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at
www.sec.gov
that
contains reports, proxy and information statements and other information
regarding issuers like us who file electronically with the SEC.
Government
Regulation
We
are subject to regulation by various federal, state and local agencies. These
agencies include the Environmental Protection Agency, Department of
Transportation, Interstate Commerce Commission, Occupational Safety and Health
Administration, Department of Labor and Equal Employment Opportunity Commission.
We believe we are in compliance in all material respects with existing
applicable statutes and regulations affecting environmental issues and our
employment, workplace health and workplace safety practices.
I
TE
M 1A. RISK FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully
consider the following factors, as well as other information contained in this
Form 10-K, before deciding to invest in shares of our common stock. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment in our common stock.
Downturns
in capital spending and cyclicality in certain of the markets we serve could
have a material adverse effect on our financial condition and results of
operations.
The
majority of our products are used in the construction, maintenance and operation
of facilities, plants and projects in the communications, energy, engineering
and construction, general manufacturing, infrastructure, petrochemical,
transportation, utility and wastewater treatment industries. The demand for our
products and services depends to a large degree on the capital spending levels
of end-users in these markets. Many of these end-users defer capital
expenditures or cancel projects during economic downturns. In addition, certain
of the markets we serve are cyclical, which affects capital spending by
end-users in these industries. For example, in late 2005, our sales benefited
from the cleanup and rebuilding efforts following Hurricanes Katrina and Rita,
but this increased demand waned as construction activity returned to more
typical levels. A downturn in the general economy, or in one or more of the
end-markets for our specialty wire and cable, could have a material adverse
effect on our financial condition and results of operations.
We
have risks associated with inventory.
Our
business requires us to maintain substantial levels of inventory. We must
identify the right mix and quantity of products to keep in our inventory to meet
customer orders. Failure to do so could adversely affect our sales and earnings.
However, if our inventory levels are too high, we are at risk that unexpected
changes in circumstances, such as a shift in market demand, drop in prices or
default or loss of a customer, could have a material adverse impact on the net
realizable value of our inventory.
Our
operating results may be affected by fluctuations in commodity
prices.
Copper
and petrochemical products are components of the wire and cable we sell.
Fluctuations in the costs of these and other commodities have historically
affected our operating results. We estimate that approximately one-fifth of the
growth in sales from 2005 to 2006 and between $4.5 million and $6.5 million of
net income in 2006 was attributable to higher commodity prices for certain
components of our products, principally copper and polymers. In contrast, there
were minimal changes in the average price of copper and petrochemical products
during 2007 and we estimate that these items had no measurable impact on the
increase in sales during 2007 or on the net income for the year. To the extent
higher commodity prices result in increases in the costs we pay for our
products, we attempt to reflect the increase in the prices we charge our
customers. While we historically have been able to pass most of these cost
increases on to our customers, to the extent we are unable to do so in the
future, it could have a material adverse effect on our operating results. In
addition, as commodity costs increase, our customers may delay or decrease their
purchases of our wire and cable, which could adversely affect the demand for our
products. To the extent commodity prices decline, the net realizable value of
our existing inventory could be reduced, and our gross profits could be
adversely affected.
If
we are unable to maintain our relationships with our electrical distributor
customers, it could have a material adverse effect on our financial
results.
We
rely on electrical distributors to purchase our wire and cable. The number,
size, business strategy and operations of these electrical distributors vary
widely from market to market. The success of our sales and distribution channels
depends heavily on our successful cooperation with these electrical distributors
in each of our various markets.
In
2007, our ten largest customers accounted for approximately 42% of our sales,
and our largest customer accounted for approximately 12% of our sales. If we
were to lose one or more of our large electrical distributor customers, or if
one or more of our large electrical distributor customers were to significantly
reduce the amount of specialty wire and cable they purchase from us, and we were
unable to replace the lost sales on similar terms, we could experience a
significant loss of revenue and profits. In addition, if one or more of our key
electrical distributor customers failed or were unable to pay, we could
experience a write-off or write-down of the related receivables, which could
adversely affect our earnings. We participate in a number of national marketing
groups and engage in joint promotional sales activities with the electrical
distributor members of those groups. Any permanent exclusion of us from, or
refusal to allow us to participate in, such national marketing groups could have
a material adverse effect on our sales and our results of
operations.
An
inability to obtain the products that we distribute could result in lost
revenues and reduced profits and damage our relationships
with
customers.
We
currently source products from approximately 150 suppliers. However, we have
adopted a strategy to concentrate our purchases with a small number of suppliers
in order to maximize product quality, delivery dependability, purchasing
efficiencies and supplier incentives. As a result, in 2007 approximately 65% of
our annual purchases came from four suppliers. If any of these suppliers changed
its sales strategy to reduce its reliance on distributors, or decided to
terminate its business relationship with us, our sales and earnings would be
adversely affected unless and until we were able to establish relationships with
suppliers of comparable products. In addition, if we are not able to obtain the
products we distribute from either our current suppliers or other competitive
sources, we could experience a loss of revenue, reduction in profits and damage
to our relationships with our customers. Supply shortages may occur as a result
of unanticipated demand or production cutbacks, shortages of raw materials,
labor disputes or weather conditions affecting products or shipments,
transportation disruptions or other reasons beyond our control. When shortages
occur, specialty wire and cable suppliers often allocate products among
distributors, and our allocations might not be adequate to meet our customers'
needs.
Loss
of key personnel or our inability to attract and retain new qualified personnel
could hurt our ability to operate and grow successfully.
Our
success is highly dependent upon the services of Charles Sorrentino, our
President and Chief Executive Officer, Nicol Graham, our Chief Financial
Officer, and James Pokluda, our Vice President of Sales and Marketing. Our
success will continue to depend to a significant extent on our executive
officers and key management and sales personnel. We do not have key man life
insurance covering any of our executive officers. We may not be able to retain
our executive officers and key personnel or attract additional qualified
management and sales personnel. The loss of any of our executive officers or our
other key management and sales personnel or our inability to recruit and retain
qualified personnel could hurt our ability to operate and make it difficult to
execute our growth strategies.
A
change in vendor rebate programs could adversely affect our gross margins and
results of operations.
The
terms on which we purchase products from many of our suppliers entitle us to
receive a rebate based on the volume of our purchases. These rebates effectively
reduce our costs for products. If market conditions change, suppliers may
adversely change the terms of some or all of these programs. These changes may
lower our gross margins on products we sell and may have an adverse effect on
our operating income.
Our
private branded products might not continue to gain market
acceptance.
An
important element of our growth strategy is the continued development and market
acceptance of our LifeGuard™ line of low-smoke, zero-halogen cable and other
products sold under our private brands. Our success with our private branded
products, however, depends on our ability to market these products in the
appropriate channels and, ultimately, on the acceptance of these products in the
markets we serve. We have only been selling LifeGuard™ cable since 2003, and our
efforts to develop and market new private branded products might not be
successful. Further demand for our products could diminish as a result of a
competitor's introduction of higher quality, better performing or lower cost
products in the marketplace. In addition, the low-smoke, zero-halogen properties
of our LifeGuard™ line of cable products depend on a highly-engineered
petrochemical material. If there is not an adequate supply of this material, we
may be unable to have our LifeGuard™ products manufactured, or our LifeGuard™
products may be available only at a higher cost or after a long delay. If we
cannot sustain the growth in demand for our LifeGuard™ products, if we cannot
have those products manufactured on acceptable terms or if we do not develop
additional private branded products, we will be unable to realize fully our
growth strategy.
If
we encounter difficulties with our management information systems, we would
experience problems managing our business.
We
believe our management information systems are a competitive advantage in
maintaining our leadership position in the specialty wire and cable distribution
industry. We rely upon our management information systems to manage and
replenish inventory, fill and ship orders on a timely basis and coordinate our
sales and marketing activities. If we experience problems with our management
information systems, we could experience product shortages, diminished inventory
control or an increase in accounts receivable. Any failure by us to maintain our
management information systems could adversely impact our ability to attract and
serve customers and would cause us to incur higher operating costs and
experience reduced profitability.
An
increase in competition could decrease sales or earnings.
We
operate in a highly competitive industry. We compete directly with national,
regional and local providers of specialty wire and cable. Competition is
primarily focused in the local service area and is generally based on product
line breadth, product availability, service capabilities and price. Some of our
existing competitors have, and new market entrants may have, greater financial
and marketing resources than we do. To the extent existing or future competitors
seek to gain or retain market share by reducing prices, we may be required to
lower our prices, thereby adversely affecting our financial results. Existing or
future competitors also may seek to compete with us for acquisitions, which
could have the effect of increasing the price and reducing the number of
suitable acquisitions. Other companies, including our current electrical
distributor customers, could seek to compete directly with our private branded
products, which could adversely affect our sales of those products and
ultimately our financial results. Our existing electrical distributor customers,
as well as suppliers, could seek to compete with us by offering services similar
to ours, which could adversely affect our market share and our financial
results. In addition, competitive pressures resulting from the industry trend
toward consolidation could adversely affect our growth and profit
margins.
We
may be subject to product liability claims that could be costly and time
consuming.
We
sell specialty wire and cable that has been manufactured by third parties. As a
result, from time to time we have been named as defendants in lawsuits alleging
that these products caused physical injury or injury to property. We rely on
product warranties and indemnities from the product manufacturers, as well as
insurance that we maintain, to protect us from these claims. However,
manufacturers' warranties and indemnities are typically limited in duration and
scope and may not cover all
claims that might be
asserted. Moreover, our insurance coverage may not be available or may not be
adequate to cover every claim asserted or the entire amount of every
claim.
We
may not be able to successfully identify acquisition candidates, effectively
integrate newly acquired businesses into our operations or achieve expected
profitability from our acquisitions.
To
supplement our growth, we intend to selectively pursue acquisition
opportunities. If we are not successful in finding attractive acquisition
candidates that we can acquire on satisfactory terms, or if we cannot complete
those acquisitions that we identify, we will not be able to realize the benefit
of this growth strategy.
Acquisitions
involve numerous possible risks, including unforeseen difficulties in
integrating operations, technologies, services, accounting and personnel; the
diversion of financial and management resources from existing operations;
unforeseen difficulties related to entering geographic regions or target markets
where we do not have prior experience; the potential loss of key employees; and
the inability to generate sufficient profits to offset acquisition or
investment-related expenses. If we finance acquisitions by issuing equity
securities or securities convertible into equity securities, our existing
stockholders could be diluted, which, in turn, could adversely affect the market
price of our stock. If we finance an acquisition with debt, it could result in
higher leverage and interest costs. As a result, if we fail to evaluate and
execute acquisitions properly, we might not achieve the anticipated benefits of
these acquisitions, and we may incur costs in excess of what we
anticipate.