For the long-suffering Key Tronic investor - the patient sort who has clung to his or her seat on the roller coaster all these many years - events might be starting to look uncomfortably familiar.
There’s been another change of management. A disappointing Christmas season has turned the personal computer market sour. There’s an expectation of losses during the current quarter. And the stock price is in the tank.
Just like old times, huh?
Not according to Fred Wenninger, Key Tronic’s new president and chief executive officer.
“I’m bullish on this company,” says Wenninger.
Wenninger comes to Key Tronic following an extended vacation. He and his wife spent the better part of the last two years towing a helicopter and a motorcycle behind a giant motor home in an idyllic tour of the Eastern seaboard.
Perhaps to atone for having such a good time, he chucked it all to sign on with Key Tronic, Spokane’s longestrunning corporate imitation of Dr. Jeckyl and Mr. Hyde. Wenninger succeeds Stan Hiller, a tough act to follow on the corporate stage.
During the past four years, Hiller and The Hiller Group reinvigorated a company that was barely breathing back in 1992. They cut back, restructured, rebuilt, expanded and produced profits. They drove stock prices to record levels.
Wenninger’s original plan for reentry into the real world was to acquire his own company: “Something similar to what Stan Hiller found at Key Tronic, something that was sort of in smoke and could use some help to get it turned around.”
So when Hiller asked Wenninger to succeed him here, Wenninger was reluctant.
“That was my question for Stan,” Wenninger says. “How can I possibly make any money and have any fun when you’ve just done what I’m seeking to do?” But the more he looked at Key Tronic, the more intrigued Wenninger was with what he saw.
“I use the analogy of shifting gears,” Wenninger says. “I’ve done lots of gears in my life, and I like them all. And I thought that this is a chance to do a second-to-third gear rather than a first-to-second.
“There was still a lot of work left to be done internally, things I could contribute. I really see an opportunity for the company beyond where Stan and The Hiller Group left it.”
Hiller stepped down as Key Tronic’s chief executive officer in October. As chairman of the board, Hiller continues to be active in the company, but at an arm’s length. And the powerful board of directors Hiller assembled remains intact.
But the responsibility for Key Tronic’s future is squarely Wenninger’s, and even he concedes the first steps have been a little shaky. The bottom line has slipped back into shades of red, and the stock price, which topped $18 in July, is below $6.
“It’s interesting when you come into your first board meeting and you tell your board you’re going to be losing money in a quarter,” Wenninger says. “But this is a very supportive board. I think they understand exactly what cooks.”
Riding the business cycles
The Key Tronic stew has been simmering since 1969 when Lewis G. Zirkle picked the perfect time to put together a company to make keyboards for the emerging computer industry.
Its fortunes peaked in 1985 when Key Tronic earned $11 million on sales of $131 million. That year the company employed 2,500 people at its facilities in Spokane County.
Zirkle’s strategy was to build a company that could do everything itself. He wanted to rely on as few suppliers outside his control as possible. As a result, Key Tronic’s employees did everything from wiring the keyboards to producing the plastic in which they were encased.
But as the computer industry moved toward low-cost offshore production, Key Tronic’s expensive domestic work force and its vertical integration began to drag the company down. Local employment had slipped to about 900 at the end of 1991.
With the price of keyboards pushed lower by these low-cost competitors, Key Tronic lost $11 million in 1988 on sales of $136 million. It returned to modest profitability until 1991 when it lost $7.7 million on sales of $141 million.
The stock price hit almost $15 in 1986. But at the end of 1991, it had sunk to $1.87. Some analysts said the stockholders would get more value out of the company than that if the whole thing was simply liquidated.
At that bleak point, Zirkle turned to Hiller, a California-based corporate turnaround artist with a remarkable history of success in rescuing failing companies.
Hiller took a company that had wandered off into things like plastics and laptops and refocused it strictly on keyboard manufacturing. He dismantled the vertical integration, closing down various component production lines and farming that business out to lower-cost suppliers. He acquired the keyboard division of Honeywell, effectively doubling the size of Key Tronic to 2,700 employees worldwide. The plumb of the acquisition was Honeywell’s Juarez, Mexico, manufacturing facility. Product lines were shifted from Spokane County to Juarez.
These moves sacrificed local jobs, leading to some criticism of Hiller in the Spokane area.
But at the same time Hiller beefed up Key Tronic’s research and development, cutting the time needed to introduce a product. He intensified the company’s focus on engineering. In the process, Key Tronic gained the confidence of giants of the computer world like Microsoft and IBM.
By fiscal 1995, Key Tronic produced a $4.4 million profit and, local employment had been built back to about 975. Hiller declared the restructuring complete.
But problems were simmering.
Wenninger announced last month his expectations of losses in the current quarter. And, according to Robert E. Toomey, an analyst with Piper Jaffray Inc. in Seattle, “The earnings outlook for the next several quarters is pretty bleak.”
Looking for thermals
Wenninger says he and Hiller have a lot of things in common. One of them is helicopters. Wenninger flies them, and Hiller created them.
“You know he was still a teen-ager when he founded the Hiller Helicopter Co.,” Wenninger says with just a note of disbelief.
As a 19-year-old, Hiller - who was once called “a real-life Tom Swift” by Look Magazine - founded the company that would largely take the helicopter from theory to practicality. The lessons he learned there provided the foundation of Hiller’s business philosophies.
And, Wenninger said, those philosophies are the other thing he and Hiller have in common.
“When I first met with Stan,” Wenninger says, “I found his values and my own are coincident.”
Wenninger’s values took shape along a path that started in Alva, Okla. He took an undergraduate degree in physics, and a masters and doctorate in engineering to Hewlett-Packard at the outset of his career.
He was with the company almost 23 years, rising to general manger of the company’s systems division in Fort Collins, Colo.
At Fort Collins, he kept his helicopter in the company parking lot so he could run out after work and check on his wheat farm.
The only job that could pull him away from Hewlett-Packard, he said, was centered around his love of flying. He was lured away to run Allied Signal’s Bendix/King Avionics subsidiary that produced electronic equipment for aircraft. Three years later, he made another shift and became CEO of Iomega Corp., a manufacturer of data storage devices.
After five years there, Wenninger and his wife decided to take their fantasy vacation. “But you can only eat so much ice cream,” he says. “I got tired of just driving around.”
And then Hiller chose him to take over Key Tronic.
Now, instead of flying his helicopter into the nooks and crannies of New England, Wenninger finds himself confined to the desk of a company that is beginning to display signs of slipping back into some very bad habits.
Toomey says Key Tronic’s stock slide is partly due to “the tangible decline in some of their important business.”
A big contract with IBM producing a folding keyboard for IBM’s ThinkPad Notebook didn’t produce expected revenues “because (the ThinkPad) was not a successful product,” Toomey says.
An ergonomic keyboard the company builds for Microsoft has been a huge success, but, Toomey says, sales growth of that product is beginning to flatten out.
And the stock price probably reflects a little market uncertainty about Wenninger.
“He has a good track record,” Toomey says, “but he’s got to earn his stripes here.”
Overcoming Christmas blues
Wenninger’s explanation of Key Tronic’s downturn is succinct.
“We have not lost business to a major competitor,” he points out. “In fact, we are in the process of winning new customers as we speak.”
The immediate problem is a poor holiday season for retailers, he says, that left the pipeline full of inventory, and caused Key Tronic’s major customers to back off their orders.
Short-term fixes - cutbacks in research and development and engineering - might have made the bottom line look better in the next couple of quarters, he says. But the long term solution is to continue the broadening of Key Tronic’s customer base.
He falls back on an aviation metaphor.
A sailplane pilot, he says, seeks out rising columns of hot air called thermals to stay aloft. Outside the thermals are downdrafts that suck a glider toward the earth. When entering a downdraft, a new pilot’s first reaction is to slow the sailplane down in an effort to reduce the rate of descent.
“But that’s the worst thing to do,” Wenninger says. “You want to push the nose down and get the speed up so you get out of there in a hurry and find some lift.
“At Key Tronic, we are basically pushing our nose down and getting our speed up so we can get to the next thermal more quickly.”
While Hiller’s rebuilding of Key Tronic focused on contracts with companies like IBM and Microsoft, Wenninger will reorient marketing efforts toward attracting business from the smaller “second-tier” companies.
While Key Tronic’s 27-year reputation as the best keyboard engineering company in the world is important, Wenninger wants the company to be perceived by the market as a low-cost, high volume supplier.
“When we get in on the front end of these programs, we need to keep the customer through the life of the program, and not have some other producer come in and take our business away when the volume gets up,” he says.
And now that the foundation of the company has been rebuilt, Wenninger says Key Tronic needs to again look toward expanding its product base beyond just keyboards.
“That’s a part of going from second to third gear,” he says.
Toomey says he does not believe Key Tronic is in danger of slipping back into oblivion.
“Stan Hiller certainly got the company turned around and going in the right direction,” Toomey says. “And the things he did to accomplish that - strengthening management, improving research and development, developing new products and improving marketing - remain firmly in place.”
And Wenninger believes that good foundation will perform when it meets up with the right opportunities.
“I think,” he says, “that there are some good thermals out there.”
, DataTimes ILLUSTRATION: Color photo Graphic: Sales up but earnings flat