Spokanes Key Tronic Corp., having shed the major distraction of a protracted and bitterly disputed lawsuit over alleged misappropriation of trade secrets, is turning its full attention to restoring its lagging sales and to broadening its customer base.


So far, its encouraged by the results.


The contract manufacturer says it has signed agreements with more than a half-dozen new customers since settling the suit with F&G Scrolling Mouse LLC last fall and is boosting the capability of a production facility it operates in Shanghai, China, to accommodate increased customer demand. A new surface-mount technology production line its installing there for printed circuit board assembly work is expected to be operating within the next month.


Key Tronic attracted no new customers during the 10-month span between when a Seattle federal court jury slapped it with a $16.5 million judgmentlater boosted to $19.2 millionand when it settled with F&G and two other defendants. In the settlement, it agreed to pay $7 million over time and to drop an appeal.


We had that cloud over our heads, but thats behind us now, says Jack L. Oehlke, Key Tronics president and CEO.


To be sure, the company still is leery about making any bold revenue or work-force growth projections. If you could predict the economy, we could give you a fairly good answer, Oehlke says.


The company currently employs about 2,300 people, all but a couple of hundred outside the U.S., and doesnt expect that number to change markedly over the near term. Likewise, it expects its sales to remain in the $30-million-to-$35-million-a-quarter range at least through the rest of its current fiscal year, which ends in June. That sales level is well below previous highs. Furthermore, its stock price remains mired at a little over $1 a share, which compares with a peak of more than $16 a share in the mid-1990s.


Oehlke and other Key Tronic executives note, though, that the company has had profitable operations for a number of consecutive quarters now, and they say the company has lifted a two-year pay freeze and rescinded wage cuts, which together amount to a strong turnabout in a tough economy.


Reducing its dependence


Long dependent on a few customers for the bulk of its business, which made it susceptible to sharp revenue swings, Key Tronic also is making progress in its efforts to dilute that concentration, the companys executives say. By this August, they say, the company hopes to have no single client that accounts for more than 15 percent of its overall sales.


Part of what has the company feeling more upbeat, if not bullish, is the range of products it now is making for clientsfrom the Clorox ReadyMop and childrens electronic books to point-of-purchase transaction printers and control panel assemblies for exercise equipment. Its customers include computer-industry heavyweights such as Hewlett-Packard Co. and Lexmark International Inc. Late last year, it also reached a multiyear agreement to provide manufacturing services to International Game Technology, a big maker of video and slot-machine gambling equipment, and it now is producing circuit boards for that companys gaming machines.


A major departure from its traditional manufacturing work, the Clorox ReadyMop has been a huge piece of business for Key Tronic.


They (Clorox) were so happy with the work we did. We did quite a bit of the design work on this, which was a surprise to them, says Craig D. Gates, Key Tronics executive vice president and general manager.


The company is hoping to use the success of that initial product as a springboard for other contract-manufacturing projects with Clorox, he says.


Key Tronic, founded here in 1969, honed its skills in the design and manufacture of computer keyboards, which requires expertise in areas such as electrical and mechanical engineering, circuit board assembly, tooling, and plastic molding. Now weve transplanted that (broad capability) into as many other products as you can think of, Gates says.


Keyboards now account for only about 10 percent of Key Tronics sales, and contract-manufacturing is about 90 percentalmost a reverse of the ratio of about six years ago, when the company decided to make a strategic shift away from the fast-consolidating keyboard market.


The range of design-build skills the company brought to the electronic manufacturing services market gives it an advantage over competitors its size, Craig claims. Most of the people our size are just PCB (printed circuit board) production houses, he says.


Key Tronic seeks contract-manufacturing work mostly from companies in the $100 million-to-$500-million-a-year revenue range, which is the second smallest of four tiers in that industry, Gates says.


Were in the sweet spot where a (product-manufacturing) program of between $5 million and $50 million is right down our alley in terms of ability to service, he says.


Competing with clients


Although overall growth in the contract-manufacturing industry remains strong, industry maturation combined with the poor economy has caused a number of Key Tronics competitors to go bankrupt over the last year, Gates says. The poor economy also, though, has caused more product makers to begin outsourcing production to companies such as Key Tronic and to shut down or scale back their own in-house manufacturing operations, he says.


While thats a positive trend for Key Tronic, say Gates and Ron Klawitter, the companys chief financial officer, it creates complications by placing the company in competition with clients remaining operational divisions.


In that case, when weve beaten the competitor, weve beaten the customer, which doesnt always sit well among the clients employees who are in jeopardy of losing their jobs, Klawitter says.


To solidify client relationships, which historically have been short term for a variety of reasons, Key Tronic has sought to forge communications with higher-level executives at client companies than in the past, Gates says. That has helped avoid potential misunderstandings that may arise during the course of a design-and-manufacturing project and has created greater trust, which in turn appears to be helping Key Tronic establish longer-term relationships, he says.


We have program managers who are very capable, he says, adding, We have a tough love policy. Tough love says what the customer wants to achieve is right, but the way they want to do it may be wrong.


Only about 170 of Key Tronics roughly 2,300 employees work in the Spokane area and close to 2,000 of them work outside the U.S., in Juarez and Reynosa, Mexico; Dundalk, Ireland; and Shanghai. The Juarez operation, which employs about 1,400, has been a salvation to the company, executives here say, giving it the low-cost production capability it needs to compete globally.


Klawitter says the Shanghai facility, which currently employs about 300, offers even lower-cost production. A lot of our customers think they want to be in China, and some products are well-suited to be manufactured there, he says. There are tradeoffs to the cost savings there, though, he says, such as substantially greater shipping time, which in some cases might not be workable.


Key Tronic posted net income of $74,000, or 1 cent a share, on total revenues of $30.6 million in its fiscal 2003 second quarter ended Dec. 28. That compared with a net loss of $21.6 million, or $2.23 a share, in the year-earlier period, which included huge nonrecurring charges for the litigation judgment and a tax provision.