Kent Electronics Corporation

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Kent Electronics Corporation

7433 Harwin Drive
Houston, Texas 77036-2015
U.S.A.
Phone: (713) 780-7770
Fax: (713) 978-5892
Internet: http://www.kentelec.com

Public Company
Incorporated: 1973
Employees: 1,191
Sales: $372 million (1996)
Stock Exchanges: New York

SICs: 3679 Electronic Components, Not Elsewhere Classified

Kent Electronics Corporation is a distributor and contract manufacturer of specialized electronic components. Since it became a public company in 1986, it has grown steadily through selected acquisitions and internally to become the largest publicly traded specialty electronics distributor of interconnection and passive component products in the United States in 1996. In October 1996 the company realigned into four business units. The company’s core distribution business, conducted by the Kent Components business unit, distributed electronic connectors, wire and cable, capacitors, resistors, and other passive and electromechanical products to original equipment manufacturers (OEMs) and industrial users in the United States. Another unit, Kent Datacomm, was focused on distributing interconnect wiring products for local area networks (LANs), wide area networks (WANs), and internal communication systems. The company’s contract manufacturing unit, K*TEC Electronics, worked closely with OEM customers to provide fully integrated electronic manufacturing services, including assembly and testing of printed circuit boards, electronic interconnect assemblies, specially fabricated battery power packs, plastic injection molding, and system integration. The fourth business unit, Futronix Systems, was a specialty wire and cable redistribution operation consisting primarily of the recently acquired Futronix Corporation and Wire and Cable Specialties Corporation.

Founded in 1973

Kent Electronics was established in 1973 by Morrie Abramson and James Corporron. The two men, then in their mid-30s, purchased the radio and television parts business from their employer, Sterling Electronics Corporation, located in Houston. They used their own money, persuaded other Houston investors to participate, and borrowed from a venture capital firm, to whom they also sold a partial equity stake.

As the retail prices of radios and televisions fell, demand for radio and television parts slackened in the late 1970s. Kent phased out its radio and television parts business in 1978 and began selling industrial parts, mainly to the oil and gas industry in Texas. By April of 1982, Kent was generating 80 percent of its $8.6 million in sales from selling its broad line of electronics products to the oil service industry. That was the month that oil prices began to slide from a peak price of $35 per barrel. That was also when the phones stopped ringing at Kent. As Abramson told Forbes magazine, “When they started ringing again, the calls were cancellations. We were one of the first dominoes to fall.”

After meeting with his top executives in a marathon session, Abramson and his team decided that the way to keep Kent in business was to reduce the company’s product line. Instead of selling a broad range of electronics products to a single industry, Kent would sell a more focused product line of electronics connectors, such as wire and cable, sockets and receptacles, and other connectors, to a broader base of customers. It was this strategy, which significantly reduced the company’s risk, that guided Kent throughout its steady growth phase in the late 1980s and 1990s, after it became a publicly traded company in 1986.

The company shrank its product line from more than 100 products to 20. As it did so, Kent’s sales force became more knowledgeable about its offerings and was able to provide a higher level of customer service. As stated in its 1989 annual report, “The company as it is today was conceived in adversity in the middle of an economically depressed market. We learned a lot from that experience. We learned that being the best in a niche in the market is better than being everything to everyone in a very large market. We learned that developing long-term relationships with a broad base of customers doesn’t happen overnight. But it happens when you give the customer the same high level of service and products over and over again, no matter how large or small the order.”

Seeking to distribute electronic connectors, Abramson contacted AMP Inc., the leading manufacturer of electronic connection devices, which was located in Harrisburg, Pennsylvania. In late 1982 Kent became the AMP distributor for Texas. As Kent picked up other suppliers, AMP continued to be one of its major suppliers. In fiscal 1996, purchases from AMP represented approximately 22 percent of the company’s total purchases.

Contract Manufacturing in the 1980s

In 1983 the company expanded into contract manufacturing and established K*TEC Electronics in Houston as a wholly owned subsidiary. K*TEC was set up to manufacture passive electronic components, including interconnect assemblies and custom fabricated portable and standby battery power sources. By adding contract manufacturing capabilities, K*TEC allowed the company to diversify within its vertically integrated product niche.

One of K*TEC’s first customers was Compaq Computer Corporation, which Forbes described as “then an obscure computer manufacturer operating out of a small office on the second floor of a suburban Houston bank building.” K*TEC manufactured cable assemblies to Compaq’s specifications for a prototype computer. By 1990, K*TEC was Compaq’s primary supplier of cable assemblies and battery packs. Compaq accounted for approximately 30 percent of K*TEC’s sales in fiscal 1990, and in fiscal 1996 sales to Compaq, by then a leading computer manufacturer, accounted for 12.2 percent of Kent Electronics’ net sales.

K*TEC reflected the company’s desire to provide customer solutions, not just parts. K*TEC’s engineers became closely involved with its OEM customers in prototype development. As the company was wont to point out in its annual reports, K*TEC’s products and services usually accounted for only one or two percent of the sale price of its customers’ products; but the components that K*TEC provided were essential ones. Therefore, K*TEC’s customers sought the involvement of K*TEC’s engineers early on in the development of prototypes for next generation products.

To facilitate prototype development, K*TEC enhanced its computer systems by adding Computer Aided Design (CAD) capability. This allowed K*TEC’s engineers to be online with the OEM’s engineers when developing and changing component designs. In December 1987 K*TEC opened a second manufacturing facility in Dallas, bringing it closer to a large number of OEMs in diversified industries.

K*TEC continued to capture a larger share of the available OEM market throughout the 1980s and 1990s. It benefitted from several market trends, such as the miniaturization of end products that required K*TEC’s advanced technological manufacturing skills. K*TEC was also positioned to take advantage of increased outsourcing by OEMs.

K*TEC also expanded its manufacture of custom fabricated portable and standby battery power sources as it became standard practice to integrate such power sources in a wide range of electronic equipment. The company’s 1988 annual report described how power sources manufactured by K*TEC were used miles in space and thousands of feet below ground, as well as in medical facilities across the United States. As demand increased, a separate division, K*Power, was set up in 1989 to market and manufacture the K*Power line of power sources.

The manufacturing capability that K*TEC brought to Kent Electronics allowed the company to provide customer solutions based not only on the specialty products that it distributed, but also to custom manufacture parts according to customer specifications. As Kent Electronics created new subsidiaries, such as Kent Datacomm, to provide additional solutions to new and existing markets, K*TEC’s manufacturing capabilities could be called on to provide custom fabricated parts as needed by the new subsidiary’s OEM customers.

By 1990 K*TEC had manufacturing facilities located in Houston, Dallas, and Santa Clara, California, in the heart of Silicon Valley. From these three locations, K*TEC was able to make just-in-time (JIT) deliveries to its customers. Its customers included manufacturers of computers and peripherals, electronic products for the telecommunications and medical industries, and other capital equipment and industrial applications. Major customers included Abbott Laboratories, Apollo Computer, Compaq Computer, Control Data, Fisher Controls, and Texas Instruments. It received the prestigious “Texas Instruments’ Supplier Excellence Award” in 1988.

Parts for Voice and Data Communication Networks

Kent Datacomm was formed as a wholly owned subsidiary in 1987 to offer a broad range of equipment, products, and services to the end-user in the growing voice and data communications aftermarket. With demand for LAN interconnection expected to increase dramatically, Kent Datacomm was positioned to serve architects, consulting engineers, electrical contractors, and computer professionals who installed or serviced voice and data communications networks.

Company Perspectives:

The company’s objective is to continually strive to be the best specialty electronics distribution and custom contract manufacturing company —as measured by our service to customers, returns for shareholders, and rewarding work experience for associates —and to consistently maintain these qualities as we grow and expand.

In January 1988, Kent Datacomm launched an aggressive marketing campaign that included distributing a catalog to voice and data communication end-users to increase the new company’s visibility. Datacomm’s large dedicated inventory represented the major vendor lines, including Alpha, AMP, Belden, IBM, and Panduit. It was able to provide customers with immediate off-the-shelf delivery of many voice and data communication products as well as products for the IBM Token-Ring, Ethernet, and other LAN systems. Quality custom fabricated products could be supplied through K*TEC’s manufacturing operations.

As part of Datacomm’s marketing program, inside and field sales representatives in Houston, Dallas, and Austin accounted for a growing number of sales to aftermarket customers for large and small projects in a wide range of industries, including manufacturing, airline, government, food, medical, media, financial, and aerospace. By targeting a broad range of industries, management hoped to build Kent Datacomm into a recession-proof business. It sought a competitive advantage by offering a unique range of services, equipment, and products, including both manufacturing and LAN system design capabilities.

Kent Datacomm was quickly established in southern California in 1989 to take advantage of the still-emerging industry of linking computers together. It continued to expand its product lines to stay abreast of LAN industry advances. For example, it broadened its inventory of fiber optic connectors and cables, which were in greater demand as customers installed faster computer equipment. A further geographic expansion took place in January 1990, as Kent Datacomm entered the Midwest market with a center in Chicago.

Purchases of connectors and cables for voice and data communication networks tended to be complex, since several different manufacturers of computers and peripherals may be included in a network. The individuals who made purchases from Kent Datacomm were primarily system integrators, who typically had to network a variety of computers and peripherals. The company demonstrated its ability to add value through its distribution methods when it received the prestigious “Spirit of Communications Award” from AT&T in 1991, an award that was given to only one AT&T distributor that year.

Throughout the early 1990s Kent Datacomm benefitted from the explosive growth in networking. In 1993 it strengthened its position as a single source for the networking needs of its customers by expanding its offerings to include intelligent products such as hubs, routers, bridges, and modems. Kent Electronics integrated Kent Datacomm operations into several existing components facilities, including those in St. Paul, Phoenix, and Boston. These locations represented new markets for Datacomm’s LAN products. Existing Datacomm facilities were expanded and automated to provide additional distribution capacity and improved productivity.

Into the Silicon Valley in the Early 1990s

Kent launched its strategy to become a multiregional distributor and manufacturer of electronics connectors by purchasing Electro-Sonic Components, located in southern California, in September 1987 for $204,000 in cash and a promissory note for $400,000. Electro-Sonic was a specialty distributor of electronic parts. The acquisition provided Kent with access to many new customers in a wide range of diversified industries. Located in the center of a market that accounted for roughly one-third of all U.S. electronic component sales, Electro-Sonic formed the base for Kent’s expansion into a new geographic market.

In 1989 Kent formed a new subsidiary, Kent Electronics Corporation-West, which entered into an option agreement to purchase all of the assets of Pyramid Electronics Supply, Inc., in exchange for common stock and the assumption of certain liabilities. Pyramid was headquartered in Santa Clara, California, and employed about 135 people at industrial distribution facilities in Redmond, Washington, and Santa Clara, Fullerton, and San Diego, California. It also had a custom contract manufacturing facility in Santa Clara. Pyramid projected revenues of $20 million for fiscal year 1990 (which coincided with Kent’s fiscal year). Kent had reported net sales of approximately $36.5 million for its fiscal year 1989, so the acquisition of Pyramid would substantially increase Kent’s net sales.

Kent completed its acquisition of Pyramid on January 16, 1990, for 166,667 shares (with a market value of $8 per share) and the assumption of certain liabilities. As was the company’s practice when making an acquisition, it proceeded to integrate the operations of the acquired company with its own.

Becoming a National Distributor

Kent moved to become a national distributor and manufacturer in its specialty electronics field when it negotiated an option agreement on April 4, 1991, to acquire Shelley-Ragon, Inc., an electronics distributor located in St. Paul, Minnesota. Under the agreement, the two companies would work cooperatively for up to one year before deciding whether Kent would exercise its option to purchase. Shelley-Ragon had 14 sales offices and distribution centers and two manufacturing facilities in eleven states. In its last fiscal year, Shelley-Ragon reported sales of about $47 million. It employed about 250 people. The acquisition would substantially increase Kent’s sales, complement its product line, and expand the company’s customer base and geographic presence.

Kent completed its acquisition of Shelley-Ragon in fiscal year 1992 (ending March 28, 1992). During the same year it made a public offering of 1.625 million shares, with proceeds of approximately $23.3 million to the company. Kent’s geographic expansion since 1986 had been dramatic, but it was also the result of a disciplined, orderly expansion plan. In 1986 the company served six states representing about ten percent of the U.S. electronics market. Its facilities were located in three Texas cities. With the acquisition of Shelley-Ragon, it was positioned in proximity to approximately 80 percent of the domestic electronics market. The acquisition added distribution facilities in several key markets, including Minneapolis/St. Paul, Denver, Boston, and New York. Kent now had approximately twenty sales offices and distribution centers in twelve states, and five manufacturing plants located in four states. Kent was truly a national organization.

Throughout the first half of the 1990s Kent continued to gain market share by offering a wide variety of materials management services and solutions to an expanding customer base. During fiscal year 1993 it successfully integrated Shelley Ragon’s operations, increasing its geographic presence and adding product lines. Net sales jumped to $154.7 million from $94.7 million the previous year. The company’s product line included connectors, capacitors, resistors, wire and cable, and other electromechanical and passive components. Its suppliers included AMP, AVX/Kyocera, Belden, 3M, Molex, Philips Components, and the Vishay companies.

In 1993 Kent received national authorizations for key lines, including AMP, AVX/Kyocera, Philips Components, and the Vishay companies. This opened up a host of new markets for the company. It also became one of only four AMP Nationally Authorized Distributors. Kent’s entire sales force received training at the AMP Institute in Harrisburg, Pennsylvania.

Noting a trend toward comprehensive materials management services and solutions, Kent entered into a non-exclusive strategic marketing partnership with Anthem Electronics that allowed each company to draw upon the other’s franchised product strengths. The two companies had complementary product lines and similar geographic coverage. Advantages to customers included offering more effective local JIT delivery systems, in-house stores at customer locations, and third-party manufacturing. These were the types of materials management services and solutions that helped customers reduce their overall acquisition costs.

Following the acquisition of Shelley-Ragon, Kent created the Kent Electronics Custom Services Division (KECS). With five locations across the US, KECS provided value-added services to customers needing cable and battery assembles. Shelley-Ragon had provided these types of custom services for 20 years.

Kent reported net sales of $372 million for the fiscal year ending March 30, 1996. That marked 11 consecutive years of growth since the company made its initial public offering in 1986. During that time Kent kept strict control over its costs, and its gross margins typically exceeded industry averages. Just as net sales increased year over year for eleven straight years, net earnings also increased each year. The company reported net earnings of nearly $28 million for fiscal 1996, compared with net earnings of just $410,000 for fiscal year 1986.

Kent began expanding its physical facilities in Texas in March 1995, when it purchased a 66-acre parcel of land with an option to buy an additional 30 acres in Sugar Land, Texas, located near Houston. By January of 1996 the company had completed building some 210,000 square feet of its new facility for manufacturing and warehouse operations and approximately 40,000 square feet for offices. A second phase of building was expected to add an additional 210,000 square feet by the end of 1996. By mid-1996 a new 215,000-square-foot distribution facility, also located at the Sugar Land location, was in the design phase.

Just prior to reorganizing into four business units as described above, Kent entered into an agreement to acquire two specialty wire and distribution companies, Futronix Corporation of Houston, Texas, and Wire and Cable Specialties Corporation of Atlanta, Georgia. The two companies had combined sales of more than $35 million during the first six months of 1996. In October 1996 Kent announced that its fourth new business unit, Futronix Systems, would be headed by Terrence M. Hunt, the founder of Futronix Corporation. This new business unit was expected to serve more than 1,000 electrical distributors through thirteen distribution centers and sales offices located across the United States.