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Sorting 'Key' to business' success

This story was published Sunday, February 20th, 2005, Tri-City Herald

By Jeff St. John, Herald staff writer

In the glass-walled demonstration lab at Walla Walla-based Key Technology Inc., applications engineer Tom Munck used a bucket of fake plastic vegetables to demonstrate the cutting edge of the food processing industry.

"It's a pretty simple demo," Munck said as he fed the mock veggies -- some a healthy yellow, others an unripe green or sickly black -- into the company's Optyx 3000 optical sorter.

But the $150,000 sorter, one of a line of Key machines in use in food processing plants around the world, is far from simple.

As the plastic veggies sped down the machine's central conveyor, two banks of cameras, scanning at speeds of 4,000 images per second, pick out the good veggies from the bad. Then, as the plastic cubes spit off the conveyor's edge, a bank of air guns shot the rejects into a disposal bin below, while letting the cascade of good veggies pass.

Running at speeds of 25,000 pounds of vegetables per hour, the Optyx 3000 is far faster and more accurate than human spotters could hope to be, said Kirk Morton, Key Technology's president and chief executive.

In fact, automated defect spotting and removal have changed the food processing industry so much, "A good yield 20 or 30 years ago would be considered a disaster today," Morton said.

Key Technology has played an important part in these industry-wide changes, industry observers say.

"It's been a pre-eminent engineering firm in its area for a long time," noted Barry Swanson, professor of food science and human nutrition at Washington State University.

"Key Technology is a leader in the development and production of optical sorting equipment," agreed Fred Zerza, spokesman for french fry giant JR Simplot Co. And "optical sorting equipment has revolutionized the french fry processing business."

With about 475 employees -- about 300 of them at the company's headquarters and primary manufacturing facilities in Walla Walla -- and offices in Europe, Asia and Mexico, Key has grown from its 1948 roots as a small manufacturer of conveying and sorting equipment to a publicly traded company with revenues in the $80 million range.

Now Key Technology is banking on international growth, along with a new line of products and the recent acquisition of a company working in a new and growing industry segment, to maintain its lead in the food processing industry.

On Monday, Key announced its purchase of Freshline Machines, an Australian manufacturer of equipment for processors of "fresh-cut" fruits and vegetables such as bagged salads -- a line of business Morton called the fastest growing sector of the industry.

Key also recently opened a new office in Mexico and sees international projects, including orders to supply equipment for a new McCain Foods Ltd. french fry plant in China, becoming a more and more important share of its business.

Last year also saw the launch of Key's new generation of "vision engines" for its machines, which Morton said will offer new and existing customers improved data processing power and new services for the thousands of Key systems in plants across the world.

Things have come a long way from Key's first sorting invention, the Froth Flotation Cleaner created by company founders Claude and Lloyd Key in 1948.

"Today our technology and products are based a lot more on computer processing power and high-speed vision technologies," Morton said.

One of the first breakthroughs came in 1982 with Key's Automated Defect Removal System, the first in its line of optical scanners.

"Machine vision was taking off at that time," Morton explained. "We were among the early ones to apply it" to the french fry industry.

From that start, "today, virtually all the world's fries pass through a Key ADR system," Key's Web site brags. In 1995, Key expanded to processed vegetables with its Tegra line of optical scanners, able to pick out "reject" vegetables by shape, size and color and remove them from the product stream while going at a million objects per minute.

From the french fry and vegetable processing industries, which make up about two-thirds of its revenues, Key has expanded into machines for the tobacco, snack food, beans and nuts, pet food and pharmaceuticals industries, Morton said.

"There are two things we can help out customers with," Morton explained. First, "they need help reducing the cost of their product. Our systems are very efficient, so they don't take a lot of labor.

"But the big thing is, we can also help them with yield management." Taking the french fry industry, "rather than throwing a whole french fry out because it's defective, we can help them hone in on what piece of that can be cut," saving lots of product from the trash bin.

In 1990, the company relocated to the Port of Walla Walla property it now occupies. In 1996 it purchased a Dutch company and opened its Netherlands office two years later.

Now Key builds from 100 to 150 machines a year, priced from about $100,000 to $700,000, at its Walla Walla facility and in its Netherlands plant. Morton said. About 35 percent of Key's revenues come from its inspection systems, about 35 percent from its conveying systems, and another third from parts and service, Morton said.

Key's main competitors include two privately held European companies, as well as divisions of larger industrial companies, Morton said.

Still, Key Technology "enjoys a leadership position in several of its target markets, including the potato, vegetable and snack food markets," said Jim Ricchiuti, a New York-based equity research analyst with Needham & Co. who covers the company.

But Ricchiuti also noted Key's lackluster financial performance in 2004, combined with a loss in the first quarter of its 2005 fiscal year, in advising caution about the company's short-term prospects.

After an "all-time high" in fiscal 2003, when Key reported earnings of $5.8 million on $82.6 million in sales, Key's performance slipped a bit last year, with earnings of $3.7 million on $80.6 million in sales. Morton said. He attributed the results primarily to a slowdown in spending by North American food processors, which have deferred investments in upgrades.

"The U.S. market is the most challenging one right now," Morton said. "Right now we see some encouraging signs in the international markets. There's more and more food processing starting to take place in Central and South America, in Asia, even in Eastern Europe," he said, both to supply U.S. markets and the growing demand for processed food from burgeoning populations in China, India and other nations.

"We operate pretty globally already and our customers are global too. They expect the same level of services and support wherever they build a plant."

Key's revenues are about evenly split between domestic and international sales right now, Morton said, but "I wouldn't be surprised if we swung to 70 percent international and 30 percent domestic" in the next few years.

The other "very deliberate and important part of our strategy" involved a new focus on ongoing upgrades and new services for existing customers, he said.

"That installed base of machines we have in plants around the world, that's a big asset," he said.

Last year, Key rolled out its ADR 4-C, conversion kit to upgrade in-plant automatic defect removal machines, and that line of business doubled revenues in 2004, Morton said in his company's annual statement.

Now Morton is hoping the company's new G6 "vision engine" processing system, available standard on new machines and as upgrades for existing customers, will do much the same thing.

Key has high hopes for future products that will use the G6's increased power to do things like collect statistics on products as they move through the plant, analyze hour-to-hour drops and rises in production rates and pinpoint which product suppliers are providing low-defect and high-defect deliveries.

"We're developing software tools to allow the customer to figure out how they're running the plant," Morton said.

"It will be a bigger and bigger part of what we do."

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