Kollmorgen Corporation

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Kollmorgen Corporation

1601 Trapelo Road
Waltham, Massachusetts 02154
U.S.A.
(617) 890-5655
Fax: (617) 890-7150
Web site: http/www.kollmorgen.com

Public Company
Incorporated: 1916
Employees: 1,700
Sales: $228.7 million (1995)
Stock Exchanges: New York
SICs: 3621 Motors & Generators; 3625 Relays & Industrial Controls; 3826 Laboratory Analytical Instruments

Kollmorgen Corporation has had its share of ups and downs. Kollmorgen, which has been a primary supplier of periscopes and related equipment to the U.S. Navy and its allies since 1916, is a leading manufacturer of high-performance motion control systems and electro-optical equipment. The company is organized along these two primary business segments. Kollmorgen Motion Technology Group includes the operating units Kollmorgen Motion Technologies US and its divisions; Kollmorgen Artus, based in Avrille, France; and Kollmorgen VMG, with facilities in Blacksburg, Virginia and Bombay, India. The Motion Technology Group designs and produces servo motors and drive electronics for commercial, aerospace, defense, and industrial customers, with applications such as electronic assembly, machine tools, materials handling, robotics, and semiconductor processing serving industries ranging from office equipment and printers to heart pumps, respirators, and other medical and therapeutic systems. Defense and aerospace production includes actuators, drive electronics, power converters, tachometers, and torque motors for military and commercial aircraft, flight controls, space and underwater vehicles and systems. The Motion Technologies Group generally provides the largest share of Kollmorgen’s revenues. In 1995, the Motion Technologies Group accounted for 57 percent of the company’s sales.

Kollmorgen Electro-Optical includes the company’s periscopes, optronic mast systems, weapons directors and stabilized weapon control systems, military optics, such as infrared imaging systems, and vehicle sights. The company’s defense customers include the U.S. military services and their allies. Electro-Optical, which produced 43 percent of Kollmorgen’s sales in 1995, also serves the electric power generation industry with plant-specific and system modeling software. In 1997, the company, in a joint venture with Gretag AG of Switzerland, announced plans to spin off its Macbeth unit, which provided color measurement, color matching, and related technologies, as GretagMacbeth Holdings AG. Kollmorgen retains a 48 percent interest in the new company, which is expected to go public on its own.

Periscope Designer Meets Printed Circuit Maker in 1970

Kollmorgen was founded by Otto Kollmorgen in Northampton, Massachusetts in 1916 to design and make periscopes for the U.S. Navy’s young submarine division. Throughout the company’s history, Kollmorgen remained the Navy’s primary designer and supplier of periscopes, and it quickly began selling these systems to allied navies. The company remained largely a single-product business until the early 1960s, when it began diversifying through a series of acquisitions, including the purchase of Inland Motors Corporation and Photocircuits Corp., bringing the company into the motion technologies, semiconductor, and other fields. By 1970, before the merger with Photo-circuits, Kollmorgen had annual sales of $23 million. Photocircuits, which by then had sales of $15 million, became Kollmorgen’s largest operating unit and introduced a radical restructuring of the company.

Founded by John D. Maxwell in Glen Cove, New York in 1951, Photocircuits, under the leadership of Robert Swiggett, was a pioneer in the emerging printed circuit technology, which would soon revolutionize the electronics industry. In 1953 Photocircuits received a contract to provide half of the circuit boards needed for the installation of the military’s continental air defense system, a contract that would provide some $1 million per year to the company for the next 14 years. Until that point, Photocircuits had been a loosely organized company, operating from a garage, then a cellar, then a basement below a bar. With the company’s first large contract, however, the company hired a business consultant to help form a more traditional, centrally managed structure.

Photocircuits pursued an aggressive research and development program seeking to diversify the company beyond printed circuit boards. By the late 1950s, however, the company faced increased competition for its printed circuit board business, especially for customized orders requiring quick design-to-delivery turnaround times. In response, Photocircuits began organizing small task forces charged with processing customized orders. By 1960, the company institutionalized the task force concept, creating a separate Proto department, which operated independently of the rest of the company’s rapidly expanding operations. The Proto department, with only 35 people, quickly became a profit engine for the company.

Photocircuits’ research and development drive produced a number of new technologies. By 1967, Photocircuits was approaching $10 million in sales, but the company was staggering under the weight of its own growth. As Swiggett told Inc., “Rarely did we meet promised deliveries. Quality problems were enormous; profit performance was erratic; morale was poor. Production managers burned out quickly, functional departments fought with one another. Only the rapid growth of the market and the even more disorganized condition of our large competitors sustained us.”

Swiggett, together with younger brother James Swiggett, who had joined the company in 1953, at first clung to traditional management techniques and looked to the novel computer systems technology to sort out the company’s production scheduling and management difficulties. Photocircuits spent some $500,000 developing a customized version of System 70, produced by IBM, which was installed in 1969. “The complexity of our production routine was so mind-blowing that we thought something like the IBM process control system was what we needed,” Swiggett told Inc. But the effort failed. “Statistically, we got everything we wanted. The computer worked beautifully, but company performance, if anything, got worse. Foremen were preoccupied with printouts instead of people. Managers spent time worrying about internal systems instead of our customers.” Finally, a recession at the start of the 1970s forced Photocircuits to a decision: either slash its research and development spending, crucial for maintaining the company’s edge in the fast-evolving printed circuit board industry, or junk System 70. The company chose the latter course; in the process of abandoning System 70, however, Swiggett abandoned the company’s traditional, central management organization structure as well.

Meanwhile, Photocircuits had been seeking capital to fund its further expansion. The company looked into going public, but found itself valued at only $9 million in a public offering. Then Dick Rachals, president of Kollmorgen, offered to purchase Photocircuits’ printed motor operations. Instead, talks between Rachals and Swiggett led to a merger of the two companies. Terms of the merger valued Photocircuits at $14 million. It was during the merger, however, that Swiggett moved to get rid of Photocircuits’ System 70 system and set to work reformulating the company’s management structure.

“Productization” for the 1970s

Swiggett was inspired by The Human Side of Enterprise, a book published by Douglas McGregor in 1960 that challenged traditional, top-down management techniques. Swiggett also found inspiration in the success of the company’s Proto department. At the start of the 1970s, Swiggett, by then one of three group vice-presidents after the merger with Kollmorgen, set out to reorganize the former Photocircuits operations along the Proto model. He broke up operations into six teams, each with its own manager and responsibility for the team’s production, profits, and losses. Each team dealt directly with its own customers, set its own prices, controlled its own inventory, and negotiated with other team managers for production capacity. The company would eventually label this structure “productization.” But the new structure produced dramatic performance improvements. Within six months, per-employee production had doubled, on-time delivery rates rose from 60 percent to 90 percent, and Photocircuits’ profits were rising. “In the middle of a depression,” Swiggett told Inc., “what could’ve been a disaster turned into a real good moneymaker. So we really had it burned in our souls that small teams could be terribly effective.”

Company Perspectives:

Kollmorgen is a global leader in providing technology-based industrial products in the fields of high performance motion control, analytical instruments and advanced electro-optical systems. Our mission is to profitably grow our businesses by providing superior quality, value and service to our customers. By contributing to our customers’ success, we will forge sustainable competitive advantages in our own markets. We believe that accomplishing this mission will position each of our businesses as a consistent and growing contributor to Kollmorgen and provide superior returns to our shareholders.

Productization arrived just at the right time. By 1971, the newly merged Kollmorgen, hit by the recession, was posting an operating loss and revenues were stuck at around $40 million. Kollmorgen, itself divided into eight divisions, was suffering the same production problems as its Photocircuits unit. Management, shared among Maxwell, Rachals, and Norman Macbeth, whose own company had been acquired by Kollmorgen, was riddled with conflicting styles. In 1972, top management met for a weekend conference to sort out the company’s difficulties. Swiggett, who was fired and rehired during that weekend, convinced management to let him try productization on the entire Kollmorgen operation. Swiggett divided the company’s eight divisions into autonomous teams. Then the company set growth objectives for itself, including the doubling of revenues every four years and a goal of a 20 percent rate of return on equity. As an added incentive, Swiggett introduced a bonus plan in 1975, based on what he called a “return on net assets,” or RONA, which would reward all levels of employees with as much as a 20 percent gain on their annual salaries. This incentive spurred the company to make drastic inventory reductions.

Swiggett, who became Kollmorgen’s president and CEO, quickly proved that his management philosophy could work for the company. By 1976, revenues had jumped to $82 million, providing net earnings of nearly $4.5 million. By the end of the decade, sales had nearly doubled again, to $154.5 million, more than doubling net earnings to nearly $10 million. In 1980, Swiggett published a seven-page pamphlet, titled The Kollmorgen Philosophy, emphasizing the company’s commitment to the team management approach.

Takeover Scare in the 1980s

That commitment to the team management approach, however, would eventually lead the company into trouble in the next decade. The slide into the national recession of the early 1980s reached the company by 1982, and the company saw its earnings begin to drop. Despite doubling sales again, to $326 million in 1984, the company was struggling to remain profitable. But then, as the country was climbing out of the recession, the bottom fell out of the electronics industry—in what was called the industry’s worst depression in two decades—and Kollmorgen’s profits fell, too. The company began posting losses in 1985 and, by 1986, the company was in the red, dragged down in part by its Multiwire division. The team management approach was faulted for some of the company’s difficulties. During the first half of the decade, the company had allowed the Multiwire division to more than double its capacity, building new plants and leasing new facilities, despite signs of the coming slump in the electronics industry. Robert Swiggett, then 68 years old, stepped down as president and CEO, replaced by his younger brother, James Swiggett.

Compounding the company’s losses was the sale, in 1986, of its consistently profitable Photocircuits division, which had accounted for $75 million of the company’s annual sales, to that division’s management. By 1987, Kollmorgen’s sales had slumped to $301 million. The company managed to post a meager profit that year, of $285,000, but by then its stock had fallen from a level in the mid-30s to just $13 per share. The company now found itself vulnerable to the takeover craze of the mid-1980s.

In 1988, Kollmorgen was approached by Vernitron Corporation, a Long Island-based industrial electronics company, which had been taken private two years earlier in a leverage buyout, to merge the two firms. Kollmorgen declined the offer, and Vernitron, which, with approximately $100 million in sales, was only one-third the size of Kollmorgen, went public with a $20 per share takeover bid. Kollmorgen introduced a shareholder’s rights plan as a “poison-pill defense,” leading the two companies into a legal and corporate takeover battle that would last for nearly two years, and rejected the bid. Vernitron countered with a $23 per share offer, then threatened a proxy battle, offering to raise the purchase price to $25 per share if the proxy fight were successful. Meanwhile, Kollmorgen had managed to turn the company around during 1988, raising revenues to $344 million and posting a profit of more than $14 million.

By April 1989, however, Kollmorgen gave in to Vernitron and offered to negotiate a merger of the two companies. Vernitron stayed with its $23 per share offer, and the companies agreed to merge at that price. But, over the next several months, Kollmorgen, which had seen the costs of the takeover battle compound a renewed struggle for profitability, began a restructuring of the company, which included selling off part of its troubled Multiwire division and then combining Multiwire’s leftovers with another division and selling off the newly formed division as well. The costs of discontinuing these operations forced the company into a third-quarter loss of nearly $10 million. In response to Kollmorgen’s mounting losses, Vernitron broke off its merger with Kollmorgen. By the end of the year, Kollmorgen’s revenues had fallen to just below $228 million and the company’s loss for the year neared $19 million. Kollmorgen’s stock, which had neared $24 per share during the takeover battle, crashed to $12 per share. By then, James Swiggett turned over the presidency of the company to John L. Youngblood.

Rebuilding in the 1990s

Vernitron, however, was not quite finished with Kollmorgen. As soon as a standstill agreement between the companies expired in May 1990, Vernitron renewed its bid for Kollmorgen, organizing a proxy fight to replace Kollmorgen’s board of directors and offering to purchase Kollmorgen for $15 per share. This time, however, Vernitron, weakened by the battle (its own sales had slumped to $80 million and its losses from the takeover attempt mounted to $20 million), proved to be easier to resist. As Vernitron owner Stephen W. Bershad told the New York Times, “I don’t think anyone is a winner here. This is a disaster.”

As Kollmorgen emerged from its two-year battle, it was confronted with a new reality: the ending of the Cold War spelled trouble for the company’s critical defense-related business. The company continued to slim down its operations, shedding the rest of its interconnections business, worth nearly $100 million in 1988, and restructuring around its two remaining core businesses, electro-optical instruments and motion control. Youngblood left the company in early 1991, replaced by Israeli-born, Harvard-educated Gideon Argov. As the new decade got under way, Kollmorgen ran first into the global recession and then into the economic uncertainty surrounding the Persian Gulf War. By the end of 1991, the company’s revenues barely cleared $200 million and its losses, compounded by restructuring costs, sank to $36 million.

The company’s losses continued into 1992, as its revenues continued to slide, to $195 million. By 1993, however, Kollmorgen was back in the black, posting a net profit of $4.8 million on $185.5 million in sales, helped by new defense contract awards totaling some $50 million. Toward the mid-1990s, the company continued to rebuild, and it began steering operations toward the commercial sector. In 1995, after its Electro-Optical division received a $35 million contract to build the U.S. Navy’s “photonic” mast system, a type of periscope system that does not penetrate a submarine’s hull, Kollmorgen’s revenues began to climb again, reaching $228 million. After the ups and downs of the past decade, Kollmorgen could still look forward to the company’s future survival and growth.

Principal Operating Units

Kollmorgen Motion Technologies; Industrial Drives; PMI Motion Technologies; Inland Motor Corporation; Artus (France); Virtual Motion Group; SMG (U.S.A.; India); Kollmorgen Electro-Optical; Proto Power Corporation; Kollmorgen Instruments Corporation.