January 5, 2023
It's newsletter time again! Welcome back, we hope you had a great holiday vacation and had an enjoyable time with your family and friends.
WELCOME TO 2023! We are off and running with several new initiatives and projects for 2023. Last year, 2022, ended on a high with sales of more than 75 million dollars meeting the sales goal set for the year. However, actual revenues for the year will end somewhere in the 73 million dollar range, slightly behind our 76 million dollar goal for 2022. Our backlog will hold at 43 million, up from 35 million at the beginning of 2022 indicating we sold 8 million dollars more projects than we were able to produce. That shortfall is mostly due to supply chain slowdowns. As a reminder: Sales are projects or proposals sold, Revenue is projects or work completed and earned, and Backlog is projects or work we have sold, processed, and in-house but not completed. That makes 2022 a good year for Lone Star having grown 15% organically.
We had growth but not without its problems. We had supply chain issues to deal with last year which made it impossible to finish some jobs on time or more accurately, within our projected timelines. We received product in multiple shipments which forced us to make many more trips than planned leading to inefficiency on some projects and lowered margins on most projects. This hit us the hardest in Arkansas where the trip times to projects were higher than in the more compact metro areas of DFW. In addition, we had inflation of more than 7% for the second year in a row and had to increase payroll to keep our employees from falling behind. Another issue Lone Star had to endure is the hiring shortage. Lone Star had more than 40 openings companywide because of quick growth and needed to fill these positions. We made it an initiative to get these positions filled in the 3rd quarter and we filled most positions by year’s end.
SUPPLY CHAIN CHALLENGES The problem with the supply chain hit us the hardest. Manufacturers and suppliers did everything they could to get us material and products when we asked but all fell behind. Rauland, our biggest supplier of products, had problems getting chips they use to manufacture devices, leaving us short and unable to finish projects. In addition to material shortages, Rauland also experienced problems shipping products via ships and trains and began shipping everything through higher priced but more reliable air and overnight freight services in the latter part of 2021 and continues to pass those increased costs on to us.
Historically, Rauland buys most of its chips directly from the chip manufacturers like Intel, Texas Instruments, etc. But when those manufacturers began rationing shipments of chips, Rauland, like all other producers of lower volume, high-tech products, was forced to turn to the “grey market” for chips. Sometimes if a company buys more chips than it needs, rather than letting them just sit on a shelf, they will sell off the excess supply through a broker or grey market. The grey market is the reseller market of chips and other items and is normally sold through a broker, whose job it is to get the highest price the market will bear. The grey market can be a way for Rauland to continue to buy components to keep production lines operating, but it comes at a higher price. In some cases, the cost increase is nominal, a 2-dollar chip may sell for 5 dollars which is a lot, but that is only one of 125 parts to build a station perhaps. But some of the chips Rauland needs are not as common resulting in a 2-dollar chip costing as much as 150 dollars. That seems excessive, but that is the free market at work. That is where the surcharges are generated, excess material cost, and excess freight.
Lone Star was hit with 15, 20, 25, and 30% surcharges increasing each month through November. Rauland, realizing the chip shortages are not going to be fixed for a long time, looked to other chips that could be used in their products and began a vigorous updating program. This required Rauland to first, evaluate the availability of their chipsets, then redesign the unit, redesign the circuit board, redesign the manufacturing process itself, resubmit to UL and finally, resubmit to the FDA for approval. This all takes time and a lot of expense. As a result, new products are being introduced by Rauland to replace items such as the dome light and domeless controllers. But in the case of the dome light, the price of the unit has doubled. If it were one item, it would be ok, but when there are 200 or 300 dome lights in one job, it hits Lone Star very hard. Between these product price increases, surcharge price increases, and the increased cost of labor, our cost to produce projects has increased. And when you add in the inefficiency of making multiple trips due to material shipments, you have the ingredients of a margin drop.
Through good management, seeing these issues coming, and being proactive, Lone Star still managed to post a profit in most areas in the 4th quarter of the year. It was tough fighting all year, but it came together in some areas, making 2022 a good year overall. Because of that profit, Lone Star distributed a small profit sharing in Grand Prairie and Central Texas and distributed Christmas bonuses in Houston and Arkansas where the margins were thinnest. We will review the year in late January after the books have closed and the taxes paid and see where additional profit sharing can be distributed. Thank you to everyone that worked up to the last minute to get as many projects closed as possible.
PROJECTING GROWTH IN 2023 We are looking for 2023 to be another growth year. Several signs are pointing to a slowdown, but some of our customers are increasing budgets rather than cutting them. Where the customers are cutting budgets, we are looking to other budgets to seek new business. We have several new products and will be working with our existing customers to see where they fit. These products do not fit in the traditional nurse call budget, but our customers have initiatives of their own and we are investigating where we can be of help and sell our Professional Services. Professional Services will see our largest growth as a company in 2023 due to the new offerings we have available.
Lone Star is having its 1st quarter Strategic Planning Meeting the third week in January. We will be reviewing all our initiatives of years past and see what has been completed and what needs to be extended. Also, we will be discussing additional initiatives to be added to this year’s goals to continue the growth in the direction of our BHAG, Big Hairy Audacious Goal, for 2023. The COOs have been doing Starts, Stops, and Keeps in each office with a group from every office. That is the preliminary work we do to bring the issues to SPC for consideration. If you have any ideas or suggestions, please get them to your COO or manager so they can be considered by the SPC.
Lone Star is expecting another big year in 2023. We are now in the software business, the Professional Services or consulting business, and we remain Rauland’s largest distributor in the U.S. distributing, selling, and installing nurse call solutions. It’s going to take everyone we have at the company and many more to bring all of this together, so if you know of anyone that you think would fit with the Lone Star culture, please ask them to apply to become part of the Lone Star team. Thanks, everyone, for what you do every day for Lone Star Communications. 2022 was a challenging year for Lone Star and was a big growth year as well. Please continue to take care of our customers in the best way possible. Please continue to focus on excellence and customer satisfaction. Thank you for being a Lone Star Employee. We appreciate all you do!
Until next time, Ray