Washington Scientific Industries, Inc.

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Washington Scientific Industries, Inc.

2605 West Wayzata Boulevard
Long Lake, Minnesota 55356
U.S.A.
(612) 473-1271
Fax: (612) 473-2945

Public Company
Incorporated: 1950 as Washington Machine & Tool
Works, Inc.
Employees: 150
Sales: $30.4 million (1995)
Stock Exchanges: NASDAQ
SICs: 3469 Metal Stampings, Not Elsewhere Classified; 3569 General Industrial Machinery, Not Elsewhere Classified; 3829 Measuring & Controlling Devices, Not Elsewhere Classified

Washington Scientific Industries, Inc. (WSI), manufactures complex, high-precision machine parts and subassemblies for a range of industries, including automotive, medical, agricultural, marine, engine, and computer. The company operates primarily on a contract basis for companies that outsource the manufacture of specialty machined parts. WSI was heavily dependent on the computer disk-drive market until the 1990s, when it restructured and diversified.

1950s Origins

WSI was incorporated in Minnesota in 1950 as Washington Machine & Tool Works, Inc. The fledgling venture was established to serve as a contract manufacturer for aerospace, communications, and industrial markets. The company’s name came from the street on which it was originally located, Washington Avenue, in Minneapolis. WSI’s founders planned to profit by emphasizing their expertise in the design and production of high-precision machined parts and assemblies that larger companies lacked the resources or expertise to manufacture. For several years during the 1950s, then, WSI profited as a sort of high-tech machine shop, contracting the manufacture of specialized parts.

Although WSI served several different companies in various industries, its big break came when it began contracting with International Business Machines (IBM). IBM began hiring WSI in the mid-1950s to manufacture parts for its computer systems. The partnership with IBM eventually became the core of WSI’s business and helped it to grow into a multimillion-dollar company during the 1960s and 1970s. IBM hired WSI primarily to build high-precision disk-drives and motor assemblies for its mainframe computers, but also to build other precision parts. As IBM’s growth surged with the computer industry, WSI enjoyed steady sales gains. The expertise it developed working with IBM, moreover, allowed it to get contracts with other computer system makers, making computer components WSI’s primary emphasis.

In need of expansion capital to keep up with rising demand, WSI went public in 1958 (the company changed its name to Washington Scientific Industries, Inc. in 1960). When it went public, WSI was generating roughly 50 percent of all of its revenue from IBM. In fact, every year throughout the 1960s, 1970s, and much of the 1980s, IBM supplied more than 50 percent of WSI’s sales, and in some years contributed more than 75 percent. Parts of WSI’s operations effectively became an extension of the IBM organization, churning out specialized parts in assembly-line fashion that IBM incorporated into its hugely successful mainframe computer systems.

In addition to its thriving (mostly computer-related) parts contracting business, WSI realized gains in developing and producing its own products. Specifically, in 1960 WSI started developing a hydraulic motor. The effort led to the creation of WSI’s Fluid Power Division and, later, its Transmission Devices Division. Those units manufactured proprietary hydraulic and mechanical power-transmission products that eventually grew to represent a substantial portion of WSI’s sales and, at times, contributed significant profits. In an effort to establish its fluid power products, WSI purchased Von Ruden Manufacturing Co. in 1973. Von Ruden was a Texas-based manufacturer of transmission devices used in agricultural and industrial applications. The operation became the hub of WSI’s power-transmission business.

Contracting Business

Throughout the 1960s and 1970s, though, WSI concentrated on its contracting business, particularly for computer components and its lead buyer, IBM. As computer system sales shot up, WSI boosted its sales past $10 million annually. From a relatively small, specialty precision machine operation, WSI expanded to become a high-volume manufacturer. It often produced large runs of parts and assemblies under long-term contracts with IBM, but also with other computer equipment producers; WSI’s customer base eventually included industry giants like Johnson & Johnson and Deere & Company as well as venerable Japanese conglomerates like Sony and Toshiba.

As WSI’s contracting business ballooned, its power-transmission segments waned, particularly in the wake of the recession of the late 1970s and early 1980s. The units were stung by, among other problems, weak demand from the agricultural sector. WSI consolidated the Fluid Power Division and the Transmission Devices Division in 1983 into one unit, dubbed the Power Components Division, which remained stationed in Texas. That part of WSI’s business continued to languish during the 1980s, however, and eventually became a drag on its bottom line. Indeed, while WSI’s contract manufacturing businesses regularly pulled in profit margins well in excess of 10 percent, the power-transmission business eked out margins closer to 5 percent.

WSI’s contracting business remained strong, and by the mid-1980s the company’s annual revenues were swelling toward the $20-million mark. To meet growing demand and to get closer to some of its customers, WSI purchased Rogers & Oling, Inc. in 1985. That firm was a manufacturer of precision machined parts for the computer and aerospace industries. It was operated as part of WSI’s California operations (Washington Scientific Industries of California, Inc.). The California operation encompassed two manufacturing plants; one for high-volume, continuous-run products, and another for low-volume, more specialized parts.

The purchase of Rogers & Oling reflected a change of management, and strategy, at WSI. In 1985 the company promoted Clifford Dinsmore to head the company as president and chief executive. Evidencing the influence of IBM over WSI was the fact that Dinsmore was a former employee of IBM, where he had worked as a purchasing troubleshooter. It was through IBM that he became acquainted with WSI, which hired him away in 1974 and made him a vice-president. Although Dinsmore had worked for IBM and wanted to maintain a good relationship with that customer, he was also wary of WSI’s dependence on a single company for more than half of its revenue.

In fact, by the mid-1980s WSI was depending on IBM for about 75 percent of its annual shipments. The relationship had reached the point at which WSI more closely resembled a subsidiary of IBM than a hired contractor. WSI’s main business had become churning out precision parts and components for IBM’s mainframes, particularly its high-end 3380 units. Dinsmore feared that a downturn in IBM’s business, the computer industry, or both could seriously hurt WSI. Furthermore, he realized that IBM was in a position of power over WSI and could effectively dictate profit margins and other contract terms. Not surprisingly, in fact, WSI’s profits by the mid-1980s were relatively meager and inconsistent: only $376,000 in 1986 from $24.5 million in sales, $1.7 million in profits in 1987, and just $69,000 in profits in 1988. To make matters worse, the undeniable reality by the late 1980s was that the mainframe industry was increasingly under pressure from personal computers and workstations, which were becoming more powerful and were being networked to form powerful, inexpensive, mainframe-like systems.

Engineering a Turnaround in the 1980s

Realizing the gravity of the overall situation, Dinsmore launched a new strategy designed to reduce WSI’s dependence on IBM and the mainframe industry. His plan was to diversify into new markets and to pursue relationships with other large manufacturers. Indeed, because it was among the largest companies in the contracting industry, WSI was uniquely positioned to serve big companies that often needed high-volume production runs.

Dinsmore also wanted to move away from WSI’s low-volume, specialty business and focus on safer, more profitable long-term contracts to produce high volumes of parts and assemblies. The idea was to pursue contracts that required a production volume large enough to merit WSI’s high-tech process engineering, which was one of the company’s competitive advantages. WSI engineers would work with a client to develop a process to manufacture a part and then help the customer install sophisticated machining equipment and implement rigorous statistical process control systems. The engineers would work with the customer to tweak and continuously improve the system throughout the life of the contract.

In keeping with his new strategy, Dinsmore, in 1988, shuttered WSI’s plant in Pasadena, California, which primarily manufactured complex parts in short production runs. It shifted its focus in California to its larger facility in Covina. WSI shut down its power-transmission unit by selling off the still-flailing Power Components Division. Dinsmore believed that the unit no longer complemented WSI’s goal of focusing on process engineering and contracting, rather than on product development, marketing, and distribution.

Among the most significant moves initiated by Dinsmore in the late 1980s was the 1988 buyout of Advanced Custom Molders, Inc. (ACM), a Texas-based manufacturer of precision molded plastic components. ACM brought with it three plants and about 270 employees. The company was profiting at the time by serving the growing list of manufacturers that were setting up low-cost production plants just across the border in Mexico and then bringing the goods back into the United States. WSI invested heavily in ACM, installing a dozen high-tech automated injection-molding machines, among other measures. The addition of ACM helped WSI to increase its sales to $73.6 million in 1990.

By 1990, Dinsmore had succeeded in reducing the total portion of its revenue base contributed by IBM to less than 50 percent, despite continued sales gains to the giant computer company. And Dinsmore was steadily moving toward his original goal of increased diversification and an emphasis on process engineering. But the effects of the company’s restructuring seemed to be having a negative impact on its bottom line. Indeed, despite hefty revenue growth, WSI’s net income slumped to $56,000 in 1990 before plunging to a net deficit of $4.77 million in 1991.

Part of WSI’s problem stemmed from ACM, which was failing to live up to expectations. In an effort to whip the subsidiary into shape, WSI shuttered one of ACM’s three plants and restructured the entire operation late in 1991. Augmenting WSI’s losses at ACM was a downturn in defense markets, particularly the aerospace industry in California. A few months after WSI closed the ACM plant, therefore, Dinsmore announced that the company was going to terminate operations at its Covina, California plant and move all manufacturing to its Minnesota facilities.

Despite WSI’s efforts to restructure, the company continued to lose money, posting net losses of $1.2 million in 1992 and $5.6 million in 1993 (partly as a result of restructuring charges). WSI finally decided to jettison the entire ACM division, selling it off in June of 1993 to Moll Plasticrafters, L.P. One month later Dinsmore resigned as president and chief executive. His shoes were filled temporarily by George J. Martin. Martin had served as president and chief executive of WSI from December 1983 to January 1985 before leaving to head PowCon, Inc., a manufacturer of electronic welding systems. WSI hired Martin back as chairman of the board.

Martin brought in Michael J. Pudil in November of 1993 to act as president and chief executive. Pudil had previously worked as general manager and vice-president of a division of Remmele Engineering, Inc., which was a contract manufacturer involved primarily in machining metal. Pudil went to work consolidating all of WSI’s manufacturing operations in Long Lake, Minnesota, a process already under way when he was hired. WSI sold one of its Minnesota plants, leaving the entire company with just one manufacturing plant. Thus in a few short years WSI decreased its assets from seven production facilities in three states to just one factory in Minnesota.

As its assets declined, WSI’s sales dropped from more than $60 million during the early 1990s to about $30 million by 1994. Still, the company’s strategy remained basically the same: to manufacture high-precision machined parts for a number of companies in different industries. To that end, by 1995 the company had succeeded in reducing its dependence on IBM, which was accounting for less than 25 percent of WSI’s sales. WSI posted its first profit—$945,000—in five years in 1995 and proclaimed in its 1995 annual report that “WSI’s future appears more promising than at any point within the past five years.” In 1996 the company was focusing on strengthening its internal operations and boosting profit margins.