Publicly traded manufacturers and distributors disclose problems, successes as part of third-quarter earnings
Back in April, we reported that the global semiconductor shortage at the time could potentially have a major effect on the security industry. Fast-forward nearly five months, and the supply chain issues are affecting manufacturers and distributors nearly across the board, leading to price inflation, product shortages and more. This trend was confirmed by the many publicly traded security companies as they reported earnings in the past month (all quotes courtesy SeekingAlpha earnings call transcripts).
“I read an article the other day that said (approximately) 95% of all of the global Fortune 500 companies are having some kind of supply constraints,” new Vivint CEO David Bywater said in his company’s recent earnings call. “Were we impacted? We were. But the team did an incredible job of managing through it. The team worked hard and with our partners to find solutions…and we are confident that we (will) navigate through that for the year, but it has been a challenge.”
“When you shut off access to college campuses, hospitals, and commercial buildings for 400 days, you get pent-up demand, and that’s what we’re seeing in the marketplace,” Dave Petratis, Chairman, President and CEO of access control manufacturer Allegion said during his company’s recent earnings call. “The commercial backlog predominantly on the Americas business is double normal. It is like someone turned on a light. We are doing a good job of processing that, but there are supply constraints, and it has resulted in a record backlog that I think we will continue to see.”
Petratis added that Allegion is already returning to pre-pandemic demand levels. “The robust demand is constraining the global supply chain’s ability to fully meet the (demand) for labor and materials, especially electronic components. Allegion is not immune to inflation and the supply chain constraints impacting the industrial markets.”
Distributors Feel the Crunch
Of course, this increase in demand and lack of critical resources among manufacturers has put the squeeze on many distributors as well. Here’s what the four major publicly traded security-related distributors had to say:
ADI: “We continue to manage through significant logistics and supply chain challenges,” reported Jay Geldmacher, CEO of Resideo, which includes major distributor ADI. “While we believe the team continues to do an excellent job delivering for our customers in this environment, our backlog grew in the second quarter and remains at elevated levels. The entire supply chain team, along with senior leadership, are actively engaged with our suppliers and focus on continuing to ensure that we are able to procure more than our fair share of critical components. Our freight costs are also running well ahead of 2020 levels, as the tight supply chain situation and unpredictable ocean freight conditions are necessitating more expediting in air freight.”
Geldmacher added that ADI’s focus on product availability has enabled the business to grab additional sales, and support customers. “While we expect supply and logistics headwinds to continue to create short-term challenges, our teams are focused on ensuring that we deliver for our customers, and turn these macro challenges into long-term opportunity.”
SYNNEX: “There wasn’t a major product category that we serve that has not been affected by supply chain challenges – certainly over the last quarter, but frankly, also over the last 15 to 18 months,” said Dennis Polk, CEO of SYNNEX, a distributor that recently merged with Tech Data. “Our current backlog is still very strong – we know the business is there, it just remains to be seen when it will transact.”
Wesco/Anixter: “We doubled the size of the company in one move – and that increased our scale and global supply chain capability; (thus), we are in a significantly better position to ensure continuity of supply,” reported Wesco Chairman, President & CEO John Engel. “The fact that we’ve added to our inventories consciously and using our newfound and increased scale and very strong global supplier relationships, we are able to provide that continuity of supply as demand is ramping, which is also supportive of not only pricing and gross margins but our sales growth, which is accelerating.”
Engel added that Wesco has increased inventories due to strong sales growth, and the company is focused on inventory availability and fill rates.
ScanSource: “As it relates to supply chain, I would have to say that I’m really pleased with the work we’ve done and what we’ve had to do to navigate the environment over the past several quarters,” ScanSource Chief Revenue Officer John Eldh said. “We managed inventory well over the past two, three quarters, and I believe that we’ll be able to continue to navigate the environment moving forward.”
More from Vendors/Manufacturers
The lack of electronic components is creating a difficult situation for many manufacturers in the security industry. As Allegion’s Petratis pointed out: “Accelerated demand coupled with labor and parts shortages – especially in electronic components – is resulting in elevated backlogs as we enter the third quarter, particularly in non-residential. The timing of when we see the revenue could shift as the industry works through the supply chain constraints.”
As many integrators know, this shortage has led to some price increases.
“The industry has been impacted by various supply chain dynamics. For the remainder of 2021, some material costs may increase – particularly for semiconductors,” said Dror Sharon, CEO of Senstar. “We have long-term procurement agreements in place and are working to secure necessary components and mitigate further price increase.”
Here are some other reports from manufacturers:
George Oliver, CEO of Johnson Controls (Tyco Security Products): “We have managed through significant headwinds related to persistent supply chain disruptions, component shortages, labor constraints, and continued inflation. Our teams have done an excellent job navigating these challenges. From a supply chain perspective, we’re confident in our ability to manage access to critical materials and components. Although lead times and conversion cycles are stretching, we believe conditions will begin to improve over the next couple of quarters.”
Steve Humphreys, CEO of Identiv: “We are confident of our ability to keep our supply chain solid, despite the tough situations facing everyone. We also think that chip shortages we are all dealing with (will be) mostly resolved by next year, at least in the chip categories relevant to our business. Remember, these of course are RFID and NFC related chips, not necessarily the broader base of chip categories across the industry.”
Gordon Mattingly, CFO of Arlo: “The supply constraints are really the story, to be honest. And what we’re doing in Q3 is spending a bit more on air freight in order to get the product to our customers. That’s probably the biggest reason for the slight decrease in product gross margins.”
Patrick Goris, SVP & CFO, Carrier: “Much stronger-than-expected demand, combined with supply chain challenges, negatively impacted factory efficiency. As a result, we bought some materials and components at spot prices and utilized expedited freight. We already announced additional pricing actions to offset rising inflationary pressures throughout our supply chain.”
What Does it Mean for Integrators? Stay Tuned!
Look for a special report in the October issue of Security Business magazine, where veteran integrators will share more of their stories, problems and successes when it comes to navigating the difficult supply chain environment.
Subscribe to Security Business to have it delivered to your mailbox/inbox, or watch SecurityInfoWatch.com for updates!
Paul Rothman is Editor-in-Chief of Security Business magazine. Email him your comments and questions at firstname.lastname@example.org. Access the current issue, full archives and apply for a free subscription at www.securitybusinessmag.com.