Brightpoint and Banking & Finance and Transportation, Distribution & Logistics and Distribution & Logistics

Debt-shedding efforts start to pay off for Brightpoint

November 21, 2009

In late 2008, as the financial crisis worsened, Brightpoint Inc. CEO Bob Laikin huddled with top lieutenants and plotted a plan to slash debt.

The wireless phone wholesaler, co-founded by Laikin in 1989, had survived two prior recessions and recognized the spoils in tough times go to companies with the strongest balance sheets.

Those are the companies that survive and grow through adversity, while weaker competitors fall by the wayside. They’re also the companies favored by vendors, who are eager to do business with cash-rich customers, and by investors on Wall Street.

Laikin

So Brightpoint acted decisively. It froze pay for rank-and-file employees and executives, eliminated their bonuses, and cut its work force 7 percent, or 220 positions. The moves were part of an expense-reduction and cost-avoidance plan aimed at saving up to $45 million this year.

Meanwhile, it lowered inventories, tightened the credit terms it extended customers, and became more disciplined in how it invested its money—moves that freed up more cash to chop away debt.

The upshot: During one of the worst years in the history of U.S. business, Brightpoint has transformed its balance sheet and is having a respectable 2009. Investors have responded by bidding up the stock, which trades for nearly $8, up from less than $3 one year ago.

And the discipline really should start to pay off next year, analysts said, as demand for wireless phones rebounds. This was the first year in the quarter-century-long history of the cell-phone industry when phone shipments declined.

“2010 looks increasingly promising for Brightpoint as industry conditions and company efforts align,” read the headline in a recent report by Citi Investment Research & Analysis’ Jim Suva.

That’s not to say there hasn’t been pain along the way. Laikin said job cuts are bad for morale and leave employees fretting about their future instead of thinking of ways to bolster the business.

But Brightpoint tried to make the bad situation more palatable by emphasizing transparency and fairness. Laikin noted that top brass took the pay hit along with everyone else. And even though the company later reinstituted bonuses for the second half of the year, the change applied only to rank-and-file workers. “We led at the top,” Laikin said, an approach that helped motivate remaining employees.

Laikin, 46, thinks it helped that Brightpoint already had experience with restructuring. It began rethinking operations and hunting for synergies after buying European competitor Dangaard Telecom in 2007 for $385 million in stock and the assumption of $350 million in debt.

That acquisition made Brightpoint the world’s biggest cell phone distributor, and this year it will handle 80 million of the 1 billion wireless devices sold worldwide.

But the deal also swelled the company’s debt. In last year’s fourth quarter, average daily debt was $333 million. The company early this year set out to slash that figure, with the goal of reducing it to less than $100 million this fourth quarter.

Brightpoint won’t quite hit that, primarily because opportunities arose that wouldn’t have been available to a business on more perilous financial footing. Last month, for instance, it purchased its main North American distribution facility in Plainfield from the struggling Denver-based developer Prologis for $31 million.

The 400,000-square-foot property might have fetched as much as $50 million in a robust market.

“We saw a disconnect between the value of the commercial real estate and what our obligations were on a lease that had had about 10 years left,” Laikin said. “If we hadn’t had a good balance sheet, we never would have been able to take advantage of the discrepancy in the market.”

Phone numbers

The 80 million wireless devices expected to move through Brightpoint warehouses this year represent a decline of about 5 percent from the 84 million handled in 2008, its peak year. That’s a smaller setback than experienced by the overall industry, which is expected to be down about 10 percent.

Brightpoint’s revenue through the first nine months of 2009 slid a more dramatic 34 percent, to $2.28 billion, a decline stemming from underlying weakness in the industry as well as accounting rules. The company gets to count more revenue from strict distribution deals than from higher-margin logistics services—such as phone programming—that are becoming a bigger part of its business.

Analysts view the number of wireless devices handled as a better measure of growth. Laikin expressed confidence the industry will grow by a low double-digit percentage next year, with his company faring even better.

It’s not that Laikin forecasts a booming economy. It’s that people have come to see cell phones as a necessity, not luxury.

“I believe that the whole wireless market is as recession-proof as any industry, next to alcohol and cigarettes,” he said.•

 

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