Sterling Electronics Corp.

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Sterling Electronics Corp.

4201 Southwest Freeway
P.O. Box 1229
Houston, Texas 77251-1229
U.S.A.
(713) 627-9800
Fax: (713) 629-3939
Web site: http://www.sterlink.com

Public Company
Incorporated: 1956 as Sterling Radio Products, Inc.
Employees: 655
Sales: $322.1 million (1996)
Stock Exchanges: New York
SICs: 5065 Electronic Parts & Equipment, Not Elsewhere Classified

Sterling Electronics Corp. distributes electronic components and subsystems. Its principal customers, in the mid-1990s, were manufacturers who purchased the company’s parts in order to make such products as personal computers, computer workstations, and computer peripherals; electronic measurement devices; process control systems; medical monitoring equipment; and telecommunications devices. Sterling Electronics was distributing about 80,000 items from about 40 vendors in 1996 and also was custom-assembling some products. It was among the 10 largest publicly owned electronic distributors in the United States.

The Early Years, 1939–66

The company’s forerunner, Sterling Radio Products, was founded in 1939 as a radio-parts wholesaler by Henry M. Spolane. Spolane, who had previously sold radio tubes in Chicago, initially sold tubes and other parts out of the trunk of his car to repair shops in the Houston area and elsewhere in East Texas. Sales were slightly less than $100,000 in 1940. The company thrived during World War II, when such parts were in short supply. By 1950 it had about 10 employees. Henry’s son Michael, a World War II veteran, joined the company in 1946 and became president in 1956, when it was incorporated. Under his direction the product line broadened to include components used in computers and telecommunications equipment. The company name was changed to Sterling Electronics, Inc. in 1959.

Sterling Electronics’ net sales rose from $2.2 million in fiscal 1956 (the year ending October 31, 1956) to $3.9 million in fiscal 1961. Net income grew from $29,157 to $128,066 during this period. In October 1961 the company went public, offering a minority of the outstanding common stock for $5 a share. By then it was also distributing television replacement parts and accessories; designing, engineering, and assembling sound systems for commercial and home use; and selling high-fidelity sound-reproduction equipment and components. Sterling Electronics had more than 3,000 customers in Texas and Louisiana. Headquarters were in Houston.

In the next four years Sterling Electronics acquired four companies, extended its sales area to New Mexico and Arizona, and took up the manufacture of printed circuit boards. By 1964 the company was a retail as well as a wholesale distributor. Its net sales reached $10.2 million in fiscal 1966 (the year ended April 2, 1966), when its net income was $309,219.

Headlong Expansion, 1967–69

Sterling Electronics, Inc. was reorganized as a holding company, Sterling Electronics Corp., in 1967, and Spolane became its chairman the following year. It acquired at least 20, and perhaps more than 35, companies from 1967 through 1969. These acquisitions not only greatly extended Sterling’s distribution business, including taking on machine tools and metals, but also added the manufacture of electronic and electromechanical systems, subsystems, and components as well as electronic data processing and seismic and marine services. Net sales jumped more than sixfold in three years, to $66.6 million in fiscal 1969. To finance its headlong expansion the company offered 375,000 shares of stock at $46.25 a share in 1968 and had assumed long-term debt of $11.8 million by the end of fiscal 1970. Revenues rose to $85.7 million in fiscal 1970.

The Electronics Marketing Group was the biggest segment of the company at the end of fiscal 1969, selling a broad line of parts and components to manufacturers for industrial use, to dealers for resale, and to consumers at retail through company-owned stores. This group—the distribution arm of the company—accounted for 69 percent of total sales and had a nationwide network of 68 distribution points. It was stocking more than 40,000 items. The 32 retail stores stocked such products as radios, stereos, tape recorders, and high-fidelity music systems, as well as accessories, components, and repair parts.

The Components & Systems Technology Group, consisting of 15 manufacturing divisions in many areas of electronics, accounted for 22 percent of sales. Some of the products of this division had vital roles in the manned missions to the moon of the Apollo project. The balance of the company’s revenues was derived from three other groups: Seismic & Marine Services, providing geophysical seismic services in connection with the exploration for oil and other hydrocarbons; Computer Services, providing electronic data-processing services; and Metals & Machinery, selling metals (primarily stainless steel) and new and used machine tools to industrial users and distributors. During the year Sterling Electronics spun off the Computer Systems Group, which became publicly owned Sterling Computer Systems, with the parent company initially holding about 69 percent of the shares.

The 1970s: A Decade of Retrenchment

Sterling Electronics’ growth came to an ugly end in fiscal 1971, when it lost $7.6 million on sales of $65.5 million. It lost another $3.6 million in fiscal 1972. By then the company had begun a long process of selling off subsidiaries, and it did not top the 1969 revenue peak for 20 years. Its stock, trading as high as $55 a share in 1968 after a three-for-two split, dropped as low as 50 cents a share in 1974. Sterling Electronics lost nearly $3.8 million in fiscal 1975 and, after small profits in 1976 and 1977 and a small loss in 1978, fell $2.5 million in the red in fiscal 1979. Its assets dropped from $29.9 million in 1972 to $13 million in 1983.

By the end of fiscal 1973 the wholesaling of electronic parts and equipment to dealers, once Sterling Electronics’ core business, was accounting for only five percent of sales. In that year it sold the major part of this distribution system—the Texas and Louisiana territories—to two of its executives, who founded a company named Kent Electronics Corp. Its West Chester Electric Supply Co. subsidiary, representing about 13 percent of sales, was sold to the unit’s president in 1975 for cash and stock. E & M Laboratories, an unprofitable subsidiary, was sold to TRAK Microwave Corp. in 1976.

In fiscal 1976 the Industrial Electronic Marketing Group accounted for 53 percent of Sterling Electronics’ sales. Customers were principally manufacturers of capital goods containing electronic circuitry such as electronic measurement devices, computer mainframe and peripheral equipment, process control systems, medical monitoring equipment, and communications devices. Product lines consisted of about 40,000 items. Twenty-four percent of sales (but only eight percent of income) came from the Retail Electronic Manufacturing Group, which sold consumer electronic devices, principally for entertainment purposes, through 24 company-owned stores in Texas and Louisiana.

The Component Manufacturing Group was making and marketing a variety of electronic components and subsystems through such subsidiaries as Airmark Plastics Corp., Phaostron Instruments and Electronic Co., and Sterling Electronics and Instruments Co. This group accounted for 19 percent of sales and 27 percent of income in fiscal 1976. The Computer Systems Group was providing data-processing and data-preparation services in Houston through Sterling Computer Systems. It accounted for only four percent of sales in fiscal 1976 but 14 percent of income.

Sterling Electronics sold its chain of retail stores in 1978. The outside businesses and certain assets of Sterling Computer Systems were sold in 1980, and its remaining assets were liquidated in 1984. Also in 1980, the company sold three West Coast distribution branches and the Magnetic Windings division, manufacturer of electronic transformers, power supplies, and coils, of its Sterling Electronics and Instruments Co. subsidiary. This reduced the Component Manufacturers Group to two subsidiary units: Airmark Plastics Corp., manufacturer of precision edge-lighted plastic panels and knobs used in instrumentation displays, principally for aircraft; and Phaostron Instruments and Electronic Co., producer of an extensive line of analog panel meters, avionic mechanisms, and prime flight instruments.

Struggling Through the 1980s

As a result of these divestments and the severe economic recession of the early 1980s, Sterling Electronics’ revenues fell to a 16-year low of $40.2 million in fiscal 1983. It lost money in both the 1982 and 1983 fiscal years. Manufacturing had long been more profitable to the company than distributing and in fiscal 1983 accounted for 64 percent of operating income, although only 16 percent of sales. That year the company added a new subsidiary to sell, install, and service microwave communications, electronic security, fire alarms, and other components to industrial and institutional users in the Houston area. This business was disposed of in 1988.

Company Perspectives:

The total capabilities of Sterling Electronics brings to the marketplace advanced products and services through a unified network of people and facilities, all committed to sound sales and earnings growth.

After two improved years Sterling Electronics lost money again in fiscal 1986, when its sales dipped from $57.6 million to $49.4 million. Prosperity was just around the corner, however, for after netting only $54,686 the following year, the company registered a $1.9-million profit in fiscal 1988—the first time since 1980 it had topped the million-dollar mark. That year, when Sterling Electronics was distributing from only 13 locations, it began an expansion program to place its wholesaling operations in additional geographic markets. It purchased Industrial Components, Inc., a Minneapolis-based electronics distributor, for $1.7 million, and Image Electronics International, Inc. for $4.6 million. But Airmark’s panels failed to pass military tests, so this company was downgraded from a subsidiary to a division of Phaostron.

After a strong fiscal 1989, in which it had net income of $2.8 million on record revenues of $90.7 million, Sterling Electronics saw sales slump because of a glut in computer memory chips. The company, a major distributor of Japanese-made memory circuits, was facing competition from the popular, Korean-made one-megabit Dynamic Random Access Memory (DRAM) chip, found in everything from personal computers and copiers to electronic printers and certain consumer electronics. Sterling Electronics made only $46,000 in fiscal 1990 on sales of $88 million, and its stock plunged to $1.50 a share from as high as $7.50 in 1988, when it was being touted as a takeover target.

Unprecedented Prosperity in the 1990s

During the next two years Sterling Electronics sold unprofitable subsidiaries and focused on its core business—wholesale electronic-parts distribution. A middle-tier distributor, it was specializing in selling to small-to medium-sized electronics firms, especially computer manufacturers. Sales grew nearly 40 percent between fiscal 1990 and 1992, although profits remained modest.

In fiscal 1993 Sterling Electronics raised its revenues to $150.2 million, a 26-percent gain from the previous year, and its net income up 83 percent to $2.2 million. Spread around the country, its 23 warehouses used computerized ordering systems and offered just-in-time delivery. Sales were evenly split among connectors, passive and electromechanical devices, and both memory and nonmemory semiconductors. A popular item was the flat-panel displays used on digital readouts of gasoline pumps. “We don’t want to have all our eggs in any one basket, like semiconductors,” a company executive told a Houston Post reporter. Sterling Electronics’ long-term debt had passed $21 million in 1992, but the soaring price of its shares enabled it to redeem $11.5-million worth of its convertible debentures in October 1993.

Ronald Spolane, one of Michael Spolane’s twin sons, succeeded his father as chairman and chief executive officer of Sterling Electronics in 1993. Michael Spolane died in January 1994. Company revenues climbed 33 percent to $200.6 million in fiscal 1994 and net income 159 percent, to $5.7 million. Spolane attributed his company’s surge to price cuts for personal computers and successful acquisitions. Prominent among these was Passive Technology Sales, Inc., a $7-million-a-year California distributor purchased in 1990 for stock and $900,000 in cash. While expanding its distribution network, Sterling Electronics decided to get out of manufacturing, selling Phaostron Instruments in 1995 to the subsidiary’s president.

Fiscal 1995 was another recordbreaking year for Sterling Electronics, with revenues reaching $242.3 million and net income $7.8 million. In September 1995 Bell Industries, the seventh-largest publicly owned electronics distributor, made a $143-million bid for Sterling Electronics, the lOth-largest. Sterling, distributing Japanese semiconductors, was outperforming Bell, which was distributing U.S.-made semiconductors. Sterling Electronics, which had taken several steps to ward off a takeover attempt, rejected the unsolicited offer.

Sterling Electronics had more good news for its shareholders in fiscal 1996. Revenues soared by one third, to $322.1 million, and net income also increased one third, to $10.4 million. The company’s long-term debt, however, rose to $33.7 billion from $13 billion at the end of the previous fiscal year.

In September 1996 Sterling Electronics announced it would purchase Marsh Electronics Inc., a Wisconsin distributor of electronic parts to industrial customers. Earlier, during 1995, the company had acquired the Samad division of DGW Electronics Corp. Samad was a Toronto-based electronic-components distributor with branch locations throughout Canada.

By mid-1996 Sterling Electronics’ distribution network had increased to 33 locations, covering more than 75 percent of the geographic markets in the United States for electronic components. Five of these locations were in Canada. All were connected by a data-communications network to a computerized, on-line, real-time, order-entry, inventory-management system. The company was selling about 80,000 items, including connectors, integrated circuits, microprocessors, power supplies, resistors, capacitors, relays, switches, and liquid-crystal displays. Semiconductors accounted for 47 percent of sales in 1995; passive and electromechanical products for 31 percent; connector products for 21 percent; and manufacturing-group products for one percent. They were being purchased from about 40 vendors, including Toshiba, Hitachi, and Sharp. Sterling Electronics’ 14,000 customers were mostly small manufacturers of telephone equipment and personal computers. It was leasing properties in Houston, Dallas, Minneapolis, Phoenix, San Jose, California, and Woburn, Massachusetts.