Hytek Microsystems back to profitability

These are tough times for any business, but try running a company that was already stumbling before the economy fell flat.

Just ask Chuck Byrne.

Byrne is chairman, president and CEO of Hytek Microsystems Inc., a manufacturer of electronic components and packages in Carson City.

The 28-year-old company has been on a financial roller coaster for the last several years.

In 1998, it earned over $2 million on revenues of $12.5 million.

The next year its revenues dropped by more than half, to $5.2 million, and the company lost more than $1 million.

In 2000, Hytek was back in the black with revenues jumping over 50 percent to just under $8 million, but last year it faltered again.

Hytek's 2001 revenues rose to nearly $9.5 million but the company lost more than $2 million.

Hytek, however, is dealing with its problems.

Last week it reported its earnings for the second quarter that ended June 29.

The company earned $122,000 on $3.2 million in revenues.

For the first six months it earned $318,000 on $4.1 million in revenues, compared to a $652,000 net loss on $4.1 million in revenues the first six months of the prior year.

The company also restructured its line of credit with Bank of the West and, according to Byrne, is in full compliance with it loan covenants.

In addition, it recently restructured its management, is continuing to broaden its customer base and working to overhaul its manufacturing operations.

"We've been profitable in the past," said Byrne.

"But we've run into major pitfalls." The primary problem, and a recurring one, has been the company's tendency to rely on a few, large customers.

Hytek was founded in 1974 in San Jose, Calif., and started manufacturing a now-defunct product line in Carson City in 1979.

In 1990, the company moved its entire operations to Nevada.

Hytek, in the technology industry's parlance, is a contract manufacturer.

Most of its business comes from packaging electronic components onto boards and subassemblies designed by other manufacturers such as IBM, Chesapeake Sciences Corp.

and Lockheed Martin Corp.

It's easy to see why Hytek fell into the trap of focusing on a few, big-name clients.

The fewer products the company produced, the more efficient it became at producing them.

The more efficient it became, the higher its product yields and gross margins.

But the pitfall, as Byrne puts it, is that the bottom drops out when the company loses one of those customers.

"When you let one customer become 40 to 60 percent of your business," said Byrne, "it means that when he sneezes, you get pneumonia." It happened in the 1980s when Hytek was dependent on a handful of computer companies, including IBM, Hewlett- Packard Co.

and Digital Equipment Corp., one of the computer industry's pioneers that got left behind when the industry moved from minicomputers to PCs.

It happened again in 1999 when Chesapeake Sciences, an oil exploration company and Hytek's largest customer, stopped ordering Hytek components it was using in a towed-array telemetry system for mapping oil reserves underneath the ocean floor.

"Oil prices dropped dramatically to about $11 a barrel," said Byrne.

"When prices drop below $20 a barrel the industry stops exploring.

That brought our business to a screeching halt." That's the year Hytek's revenues were slashed in half and it lost $1 million.

Most recently, the problem has been the turmoil in the telecommunications industry, which made up about 10 percent of the company's customer base and was the only buyer for Hytek's opto-electronic product line.

So the company decided to diversify and made a second mistake, said Byrne, "by trying to be all things to all people." As a result, in March the company reorganized, eliminated to position of chief operating officer and gave Byrne the three titles he now holds.

The company now strives to strike a balance among more customers in a handful of more stable industry sectors.

The military, for example, makes up half of Hytek's customer base, but its military business is spread out among a lot more customers, including Lockheed Martin, Raytheon Co., TRW Inc., and Northrop Grumman Corp.

The company also is focusing on the medical device market and in March announced a $1.6 million order to build a miniaturized radio frequency transmitter circuit for a new monitor used to diagnose acid reflux disease.

"The medical industry," said Byrne, "is immune to a recession." With customer diversification, however, comes more products which makes it more difficult to optimize manufacturing.

To address that, Byrne assembled a team of engineers and production people to improve product yields and gross margins.

He declined to be specific about yields and margins, though he admitted both are below the company's historic highs.

"I'd say our margins could stand a 15 percent boost," said Byrne.

The company's stock price, hovering around $1.75, is up from recent prices but way below a historic high of about $18.

But Byrne is confident the company is on the right track.

In light of its various problems, and the current economic downturn, he said a company like Hytek has to reinvent itself.

"And that," said Byrne, "doesn't happen overnight."