General Cable (BGC)

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Growth in the electric utility market and the increase in electricity consumption in North America has grown at a faster pace than the rate of utility investment. The market for General Cable's energy and industrial products has increased by 34% since 2005 due to the need to upgrade the current electric transmission infrastructure. Investment in the energy grid has grown due to historical power outages in Canada and the United States, and reports from the North American Electric Reliability Council that have emphasized the need to upgrade power transmission infrastructure used by electric utilities.^[2]

[edit] Company Overview

[edit] Business Segments

Business Segments^[3] -- Business Segments

• Industry and Specialty (40%): As manufacturing and raw material consumption rise, the world’s economies are striving to provide the necessary infrastructure to keep pace with industrial expansion. General Cable's cables are used in the production of oil, gas and petrochemicals, construction of new factories and maintenance of existing industrial facilities, factory automation, and specialty applications such as military, nuclear, marine, transit and automotive. General Cable manufactures the broadest range of application-specific power and control cable products in the business. The company's industrial and specialty cable and wire products conduct electrical current for industrial, commercial and residential power and control applications. ^[4] General Cable's electronic cables include hookup wire, computer, coaxial and microphone cables, communications cable, and special designs for fire alarms, security systems, and audio, video, and digital broadcasts. Its Carol® Brand is known for its flexible cords for temporary power, cordsets, portable power cable and premium-grade cable for commercial and industrial applications. General Cable's industrial cables are used in the power generation, natural gas production, steel, pulp and paper, and factory automation markets. It also provides specialty cables that meet specifications for original equipment manufacturers, and custom-designed cable for medical equipment and the automotive market.^[5]

• Energy (40%): General Cable's products are used in power generation and transmission, and the company is the largest energy products supplier in North America. Energy cable products include low, medium and high voltage power distribution and power transmission products for overhead and buried applications.^[6] Globally, investment in exploration, extraction, power generation, and transmission and distribution has been accelerated by increased demand for energy.^[7]

• Communications (20%): General Cable's communications wire and cable products transmit low-voltage signals carrying voice and data. ^[8] General Cable sells its products to major North American telecommunications companies and has long-term contractual agreements. Its fiber optic cables are used in local area networks and campuses.^[9]

[edit] Acquisitions

General Cable has made acquisitions to expand into developing economies. 65%-70% of the company's revenues comes from outside of the United States.

• In August 2006, the Company acquired ECN Cable Group, which is based in Bilbao, Spain. In 2005, prior to acquisition, ECN Cable had global sales of $71.5 million.

• General Cable acquired Silec Cable, which is based in Montereau, France. Silec reported sales of $282.7 million before it's acquisition. ^[10]

• In October 2007, the Company acquired Phelps Dodge International Corporation (PDIC) and increased its operating earnings to $16.9 million - a 59.9% increase from the previous year. ^[11]

• General Cable entered a majority ownership agreement in May 2008 for Enica Biskra, An Algerian company that manufactures low and medium voltage power and construction cables ^[12] This joint venture marks General Cable's rapid growth in the Middle East and North African regions.

Geographic Distribution of Revenues^[13] -- Geographic Distribution of Revenues

[edit] Globalization

After acquiring Phelps Dodge International Corporation (PDIC), General Cable adjusted its management structure along a more geographic basis.^[14] In May 2007 the company was awarded energy cable contracts in the Gulf Region. General Cable’s European branch has focused on the markets of submarine power cables, high voltage underground cables, and products in the oil and gas industry. ^[15] During the first quarter of 2008 the Company spent $6.6 million to shut down a portion of its telecommunications facility in Tetla, Mexico, and has consequently freed approximately 100,000 square feet in manufacturing space which it will use for other cable products in the Americas. ^[16]

[edit] Financial Metrics

Revenue vs. Operating Income^[17] -- Revenue vs. Operating Income

General Cable's revenues were most directly impacted by higher prices of copper and aluminum. The price of aluminum increased from $0.92 a pound in 2005 to $1.23 in 2007, and the price of copper increased from $1.68 per pound in 2005 to $3.22 per pound in 2007. After 2006 net sales were adjusted to reflect the $0.13 increase in the average monthly COMEX price per pound of copper and the $0.01 increase in the average aluminum rod price per pound in 2007, net sales for General Cable increased $874.4 million, or 23%, in 2007 from 2006.^[18] The metal-adjusted net sales increase of $874.4 million was also due to the acquision of PDIC in 2007, and the impact of changes in foreign currency exchange rates of $172 million and increases in selling prices and product mix improvements of about $434 million. These changes were also offset by a decrease in sales volume of about $165 million.

Volume is measured by the number of metal pounds sold, which increased by 10% or 73.6 million pounds from 2006 to 2007. General Cable has reduced operating costs by utilizing manufacturing capacity more efficiently by combining manufacturing assets into fewer plant locations and outsourcing manufacturing processes. ^[19] Operating income increased $130.2 million, or 55%, from 2006. General Cable's increase in operating income was mainly the result of increased selling prices to recover raw material costs, favorable exchange rates that contributed $12.2 million to income, and higher demand for products in the company's energy segment. $21.0 million of the operating income increase was due to acquisitions. ^[20]

^[21]

[edit] Key Trends and Forces

[edit] 2005 U.S. Energy Policy Act

In 2005, the U.S. government passed tax legislation that renewed tax credits for generating wind power and energy legislation to strengthen the transmission grid infrastructure and reliability of power availability, increasing the demand for General Cable's distribution and transmission cables.^[22]

[edit] Deregulation in European Electrical Power Industry

Deregulation in the European Electrical Power Industry increases spending in European countries, as the rest of the developing world will increase spending on infrastructure in order to grow. Overall, global spending on infrastructure and energy increases as nations develop, driving demand for General Cable's industrial products.^[23]

[edit] Increase in raw materials prices

General Cable primarily uses aluminum and copper to manufacture its wire and cable products. The prices of both copper and aluminum have been volatile in the past and have increased in the previous five years. 84% of the company's North American copper purchases and 85% of its North American aluminum purchases come from its two largest suppliers. As a security measure, General Cable requires that the volatility in the prices of aluminum and copper be "recovered" through negotiated price changes with customers. For this reason, General Cable's revenues have not been significantly affected by changes in metal prices, and the Company intends to match metal purchases with sales. ^[24]

[edit] High oil prices

Since 2005, there has been high demand in the mining, oil, gas, and petrochemical markets for General Cable's products. This is in part due to high oil prices, which influence coal-mining, drilling, and research and investment in alternative energy sources such as wind power. Demand for General Cable's products has also increased due to the enormous amount of spending on industrial construction and rebuilding efforts associated with destruction caused by Hurricanes Rita and Katrina in 2005. ^[25]

[edit] Competition

The majority of the Company's products are made to fit industry specifications, and this allows them to be interchangeable with the products of other competitors. ^[26]

Energy:

• Prysmian: Prysmian, based in Milan, Italy, specializes in high-voltage electricity and high speed broadband. It recently signed a contract with the Nexans company to work on a power transmission system project, worth 168 million Euros ($264.5 million), sponsored by the Qatar General Electricity and Water Corporation. Prysmian is rapidly growing with subsidiaries in 36 countries and plants in 21 countries. It's expansion, coupled with its focus on research and development, has caused it to increase its revenues by 33% since 2006. Prysmian's expansion has shut out General Cable from projects, such as the joint project with Nexans, which it could have been sponsored for as well. ^[27]

• Nexans: Nexans is a French company that maintains, designs, and manufactures cables for industrial and construction industries. In 2006, the company invested $13.7 million to expand its manufacturing facility in Chester, NY, which created 53 new jobs. The decision to expand this facility was based on the fact that over half of the United States population lives within 1000 miles of Chester, which gave Nexans an advantage over competitors located further away from this location. ^[28] One primary goal of Nexans is to expand its geographic coverage in China. The company took a major step towards this goal in April of 2007, when it opened up a new plant in Nanning, Guangxi Province, China. This plant mainly manufactures railway signaling cables for China's growing high speed rail system, making it unique amongst its competitors in China. ^[29] Nexans currently has about 600 employees in China. Although General Cable has over 1000 employees in the country, Nexans' rapid growth in China makes it a formidable competitor for General Cable in Asia.

Industry and Specialty:

• Coleman Cable (CCIX): Coleman Cable, based in Chicago, is one of the Chicago metropolitan area's fastest growing public and private companies. The company posted 270% overall growth between 2003 and 2007. Coleman Cable's strongest market is in the United States, where it is the most preferred choice of cable and wire users. Coleman Cable is General Cable's largest competitor in the United States. ^[30]

Communications:

• Optical Cable: Optical Cable's long-term strategy is to expand its product offerings and provide more complete connectivity and cabling solutions. This company emphasizes growth by acquisition, similar to General Cable. It's most recent major acquisition was SMP Data Communications, on May 30th, 2008. SMP will increase Optical Cable's product line to include fiber optic and copper connectivity. Optical Cable competes directly with General Cable for acquisitions and markets for their parallel communications product lines, most notably their fiber optic cable lines. ^[31]

• Belden CDT (BDC)

• CommScope (CTV). ^[32],

^[33]

^[34]

General Cable has had a greater total cumulative return than the companies in its 2007 peer group.

[edit] References

1. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Business" Page 3
2. ↑ [http://sec.edgar-online.com/2008/02/29/0000950152-08-001575/Section3.asp General Cable Corporation (BGC) Form 10-K FY 2007, "Section 3"]
3. ↑ Credit Suisse, "General Cable Corp. (BGC)" 3/30/07
4. ↑ Investorguide.com, “General Cable Company Profile”
5. ↑ General Cable, “Brands”
6. ↑ Investorguide.com, “General Cable Company Profile”
7. ↑ General Cable, “Brands”
8. ↑ Investorguide.com, “General Cable Company Profile”
9. ↑ General Cable, “Brands”
10. ↑ General Cable Corporation (BGC) Form 10-K FY 2007 "Acquisitions and Divestitures" Page 36
11. ↑ General Cable, “General Cable Reports First Quarter Results,” 2/12/08
12. ↑ General Cable, “General Cable Enters Joint Venture in Algeria,” 5/21/2008
13. ↑ [General Cable Corporation (BGC) Form 10-K FY 2007, "Management Discussion" Page 34]
14. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Business" Page 3
15. ↑ General Cable, “General Cable Reports First Quarter Results,” 2/12/08
16. ↑ General Cable, “General Cable Reports First Quarter Results,” 2/12/08
17. ↑ [Google Finance, "Financial Statements for General Cable Corporation," 6/23/08]
18. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Management Discussion" Page 34
19. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Management Discussion" Page 43
20. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Management Discussion" Page 43
21. ↑ [Google Finance, "Financial Statements for General Cable Corporation," 6/23/08]
22. ↑ General Cable Corporation (BGC) Form 10-K FY 2007 "Business Segments" Page 6
23. ↑ [Morningstar Analysis, "General Cable Corporation" 9/18/2007]
24. ↑ General Cable Corporation (BGC) Form 10-K FY 2007 "Business" Page 8-9
25. ↑ General Cable Corporation (BGC) Form 10-K FY 2007 "Business" Page 4
26. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Competition" Page 9
27. ↑ Prysmian, "Key Figures"
28. ↑ "Nexans to expand its wire and cable manufacturing facility in New York"
29. ↑ Nexans, "Nexans Opens New Plant in China"
30. ↑ Cable Directory, "Coleman Cable, Inc, named one of Chicago's Fast Fifty"
31. ↑ Cable Directory, "Optical Cable"
32. ↑ [RBC Capital Markets, "Research Comment: General Cable Corporation" 6/1/06]
33. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Performance Graph" Page 31
34. ↑ General Cable Corporation (BGC) Form 10-K FY 2007, "Performance Graph" Page 31