Key Tronic Corporation

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Key Tronic Corporation

4424 N. Sullivan Road
Spokane, Washington 99216
U.S.A.
(509) 928-8000
Fax: (509) 927-5348

Public Company
Incorporated: 1969
Employees: 2,244
Sales: $207.4 million
Stock Exchanges: NASDAQ
SICs: 3577 Computer Peripheral Equipment, Not Elsewhere
Classified

The world’s largest independent producer of computer keyboards, Key Tronic Corporation manufactures a broad range of key, touch, and voice input devices from its production facilities in Spokane, Washington; Dundalk, Ireland; Juarez, Mexico; and Las Cruces, New Mexico. The company also produces goods through joint ventures in Asia. Founded in 1969, Key Tronic rose to the top of the keyboard industry during the 1970s, when the company captured the largest share of the worldwide market for keyboards. It then battled its way through the highly competitive 1980s and 1990s to reign as the dominant keyboard manufacturer in the world in the mid-1990s.

According to Lewis G. Zirkle, founder of Key Tronic Corporation, he had two choices after he was fired from Litton Industries in 1969, “either go back East or go fishing.” His words, spoken in the early 1980s before a group of financial analysts gathered in Seattle, were deceptive, however, because Zirkle did neither. Instead, he mortgaged his home, withdrew his life’s savings—accumulated from working more than 30 years in the electronics industry—and rented space at the Spokane Industrial Park in Spokane, Washington, where he began his new entrepreneurial career at age 54. Zirkle’s time in the electronics industry had included 24 years as part of General Electric’s production management team. Throughout his three decades of involvement in the industry, he amassed valuable experience that he put to use in his new business venture, which he organized in the fall of 1969 and incorporated as Key Tronic Corporation.

Zirkle’s aim was to manufacture electronic keyboards, products that were then intended for use with digital printers, cathode ray tube display systems, and industrial control systems. As preparations for the start of the fledgling company were hastily made in October 1969, a modest start-up enterprise emerged. Zirkle helped build the walls to house the six employees he would soon hire. Inside the walls, the trappings were meager: Zirkle shared a desk with his secretary, the five other employees huddled around makeshift tables—sheets of plywood balanced atop wooden sawhorses—and all those employed by the company, including Zirkle, swept the floors and scrubbed the toilets. It was a dubious, sketchy start for a former electronics production manager nearing the twilight of his professional career, but in the years ahead another industry dependent upon the electronic keyboards Zirkle was preparing to manufacture would streak into the business world, recording explosive, worldwide growth that would catapult Zirkle’s negligible enterprise with it. The mercurial popularity of personal computers, inoperable without electronic keyboards, proved a pivotal factor in Key Tronic’s development. The inextricable connection between Key Tronic’s product and the growth of the computer industry would fully redeem the sacrifices made in the fall of 1969 and make the company a formidable force in the years ahead.

By November 1969, Zirkle and his staff had completed the design of Key Tronic’s first keyboard, which was then subjected to a battery of tests for the next six months. Once the company’s keyboard design passed inspection, the first shipment of Key Tronic keyboards exited the company’s rented offices in April 1970. As the 1970s unfolded, the popularity of capacitance keyboards like those designed and manufactured by Key Tronic fueled the growth of Zirkle’s company, snatching business away from more expensive solid-state keyboards and drawing the attention of the all-important original equipment manufacturers that did not produce their own keyboards. As the orders poured in, Key Tronic rapidly grew, increasing its payroll to 200 by 1972. By April 1976, six years to the month after the first shipment of keyboards had left Key Tronic’s headquarters, the company recorded its first million dollar sales month; two years later it was recognized for the first time as the leader in the keyboard industry.

In 1978, the year Key Tronic gained recognition as the largest company of its kind in the world, the keyboard industry represented an $80-million business. Key Tronic at this point was generating $23 million in annual sales, enough to give the company a narrow lead over its closest rival, Micro Switch, which recorded $22 million in 1978 sales. Three other keyboard manufacturers battled for the industry’s third spot, each collecting about $10 million in annual revenues. Once it assumed the top position, Key Tronic remained the industry leader into the next decade, when the keyboard industry recorded its most prolific growth.

Annual sales at Key Tronic approached the $50 million mark as the 1970s drew to a close, while the number of workers employed at the company’s facilities eclipsed 1,000. Both physical and financial growth continued into the early 1980s as personal computers began to emerge, marking the beginning of the computer industry’s exponential growth of historic proportions.

In 1982 an important breakthrough occurred at Key Tronic when the company developed the low profile keyboard, a product that would become the industry standard and position Key Tronic as an innovative leader in the global keyboard market. On the heels of this significant event, Key Tronic diversified its product line as the personal computer market began to take shape. The company introduced a range of input devices in 1984 to complement its mainstay low-profile keyboard line, including optical character recognition equipment, mice, bar code, and digitizing equipment.

Between the time that Key Tronic introduced its low-profile keyboard and the time that it embarked on its course of product line diversification, it became a publicly owned company. By this point in June 1983, the company had widened its lead over all other competitors in the industry, controlling by far the largest share of the market for keyboards that computer makers did not manufacture themselves. Annual revenues, which reached $80 million in 1983, experienced even greater growth as the company’s line of mice, optical character readers, and other input devices entered the market and began to contribute to annual sales totals. In 1984—a year in which more than 1.5 million Key Tronic keyboards were manufactured and sold— company sales jumped to more than $125 million.

Although Key Tronic had sprinted to the lead in the keyboard industry during the 1970s, it now appeared that its most prodigious growth would occur during the 1980s. The company’s revenue volume had nearly tripled during the first four years of the decade despite recessionary economic conditions. Encouraged by this success and determined to further widen its lead over other keyboard manufacturers, Key Tronic reacted to the promising financial results of 1984 by expanding geographically in 1985. The global leader in its industry for the previous seven years, Key Tronic became an international manufacturer in 1985, establishing a manufacturing facility in Ireland to carve a larger presence in the burgeoning European market for keyboards. That same year, the company opened a production plant in Taipei, Taiwan, extending its reach into the Far East. With these new overseas facilities and its manufacturing plants in the Spokane area primed for an anticipated increase in demand for keyboards, Key Tronic’s management, still led by Zirkle, waited for the record-breaking financial results for 1985. Instead, the company experienced a grim downturn in its fortunes.

Annual revenues dropped for three straight years beginning in 1985, falling along with the volume of keyboards shipped from Key Tronic’s five manufacturing facilities. Although the company still remained the industry leader during this period, it faltered, primarily because many of its largest original equipment manufacturers (including Wang Laboratories, Key Tronic’s largest customer) trimmed their orders for keyboards.

The problem was not the quality of Key Tronic’s keyboards, nor the attractive powers of another company’s product; rather, Key Tronic was losing money because its customers were embroiled in an increasingly competitive industry that featured pernicious pricing battles and feverish attempts to cut costs. Competitive and pricing pressures would become much more severe in years ahead for computer manufacturers, foreshadowing and engendering similar conditions for keyboard manufacturers in the late 1980s and early 1990s. But even as far back as 1985, Key Tronic’s financial performance was impacted by the affects of this heightened competition. For three years the company reeled from the effects of declining demand for its products, recording successive drops in annual sales and keyboard shipments and watching its 14-year stretch of consistent growth grind to a halt.

During the company’s three-year span of anemic performance, an extraordinary management change occurred wherein Zirkle began to cede some of his authority after nearly 20 years of wielding resolute control over Key Tronic via his positions as the company’s chief executive officer, president, and chairman. In November 1987, Donald J. Meyers was named president of Key Tronic, leaving Zirkle, 72 years old at the time, with the chairman and chief executive posts. The selection of Meyers as president was heralded as the formal beginning of an orderly transition from Zirkle’s leadership, but seven months later, after Key Tronic announced an $11 million loss in June for the 1988 fiscal year, Meyers abruptly departed, and with him an entire level of senior management, essentially stripping the company of all senior management except Zirkle. As industry pundits speculated about Meyers’ sudden departure, theorizing that he had tried to lead the company in a direction Zirkle had chosen not to go, and that he had been too aggressive on the pricing of Key Tronic’s products for Zirkle’s liking. In any case, Zirkle returned to his familiar post of president. He continued to steward the company from his three-seated throne as president, chief executive, and chairman.

While this abortive leadership transition was being played out, Key Tronic effected an important engineering change by incorporating membrane technology into the design of its keyboards. When Key Tronic first began manufacturing keyboards, printed circuit boards were chemically etched and plated manually, a costly and laborious procedure outdated by the pricing pressures of the 1980s. Beginning in 1987, Key Tronic began printing circuits on flexible membrane layers, a technological advancement that enabled the company to substantially reduce the manufacturing costs associated with the production of its keyboards.

Membrane technology represented the keyboard industry’s newest trend during the late 1980s, but Key Tronic’s adoption of the cost-cutting technology offered no panacea to the mounting challenges the company faced in the difficult years ahead. Although Key Tronic’s list of customers included computer industry stalwarts such as Compaq, Wang, Unisys, and AT&T, profit margins in the keyboard industry were becoming increasingly smaller, squeezing the financial vitality out of the company.

In late 1989 Zirkle attempted again to hand the managerial reins of Key Tronic to another individual. His son, Fred Zirkle, was named president of the company as it prepared to enter the 1990s. Less than two years later, however, the younger Zirkle departed abruptly as well, resigning from Key Tronic in August 1991 after citing differences with his father over business strategies. Meanwhile, in an attempt to restore the lost luster of its financial performance, Key Tronic announced its intentions in November 1990 to produce a 386SX laptop computer featuring an integrated KeyMouse pointing device. The new product was scheduled to debut in early 1991. The company’s attempt to branch out into the manufacture of laptop computers was canceled, however, and in the wake of its abortive foray into laptop computer production, Key Tronic’s financial losses continued.

Key Tronic reported a loss of $7.7 million in 1991 and another $7.5 million loss in 1992. Annual revenues slipped as well, falling from $141 million in 1991 to $124 million in 1992. Keyboard prices continued to plunge during the first years of the decade as well, a sign that arresting the company’s slide would be difficult. Key Tronic’s board of directors, which included Zirkle, voted for a management change, hiring Stanley Hiller Jr. in March 1992 to lead the company away from the brink of failure. Head of the Hiller Group, the management organization that took control of Key Tronic, Hiller had earned a reputation as a corporate healer by transforming money-losing companies into profitable enterprises. By cutting costs and improving products, Hiller had substantially improved the financial performance of oil-field equipment maker Reed Tool Co., moving company Bekins Co., and air-conditioner manufacturer York International Corp., achieving results he now sought to bring to Key Tronic.

Hiller trimmed operating and manufacturing costs, automated production, and revamped a stale product line, scoring his biggest success with a low-cost keyboard known by Key Tronic employees as Kermit. The development of Key Tronic’s low-cost keyboard, which wholesaled for $14—compared to $18 for the industry average—was essential to the company’s success in the 1990s. Japanese keyboard makers were flooding the market with inexpensive keyboards, a key factor in the 25 percent decline in keyboard prices between 1991 and 1992. Many U.S. keyboard manufacturers had exited the business as a consequence, leaving only a handful of domestic producers to compete against the formidable Asian manufacturers.

Thanks to Hiller’s cost-cutting and labor-saving steps, Key Tronic began to demonstrate signs of a recovery by 1993. Profitability returned to the long-time leader in the keyboard industry after years of torpid financial performance. As if to demonstrate its new-found vitality, Key Tronic acquired Honeywell Inc.’s keyboard division in 1993 for $33 million, giving the company further ammunition to wage its war in the personal computer market. Although Key Tronic’s net income fluctuated in the wake of Hiller’s decisive changes, the company’s annual sales rose strongly, jumping to $159.5 million in 1994 from 1993’s $123.3 million total.

As the company prepared for the late 1990s and the beginning of the twenty-first century, Hiller’s short reign came to end in 1995, his temporary, stopgap work completed. In July 1995, Key Tronic’s board of directors elected a computer and electronics executive named Fred Wenninger as chief executive, president, and director of the company. With Wenninger in charge of the company’s future, Key Tronic moved forward, hoping to retain its leadership position in an industry it had first dominated nearly 20 years earlier.

Principal Subsidiaries

KT Services, Inc.; KT FSC (Guam); Key Tronic Taiwan Corp. (Republic of China); Key Tronic Europe, Ltd. (Cayman Islands); KTI Limited (Ireland); U.S. Keyboard Company; Key Tronic Juarez (Mexico).