Strength in numbers | Revitalized by new owners, Auburn-based Enefco International pursues a diversified manufacturing market

Casino owners across the country had a problem: Gummed-up infrared eyes inside slot machines were rejecting customers' $5, $10 and $20 bills. Dollar-sized pads sold specifically to clean the bill readers missed the smudged lenses entirely. But casinos wanting desperately to keep their one-armed bandits operating without opening each machine for service had nevertheless boosted the cleaning-card business into a multimillion-dollar operation.

"You know, snake oil, what can I say," said Randy Fromm, editor and publisher of Slot Tech magazine in El Cajon, Calif., of the card-cleaning devices, also called bill validators. "That's the reason up until now I've never really endorsed such a product, nor accepted advertising for any bill validator product."

And that's why Fromm had his doubts earlier this year when Auburn-based KIC Products, a leading cleaning-card maker, knocked on his door. In hand was KIC's new product, a sort of cross-cut, spring-loaded sponge the company calls its waffle technology. Just like its competitors, the waffle fed into bill slots of the Texas Tinas and Swing Time Bettys of the world. Unlike the others, the sponge effectively swabbed the infrared eye clean.

Fromm was sold. He penned an editorial and wrote a multi-page article promoting the waffle, and the phones at Enefco International Inc. ˆ— KIC's parent company ˆ— started to ring. Peter Klein, Enefco's CEO, said the company is now discussing potential long-term arrangements with a "who's who" of gaming device makers and other machine manufacturers. "Companies that wouldn't return our calls before are now calling us five times a day," he said.

The success was one in a string of advances made by Enefco since it was bought last November by a group led by Massachusetts investor Brad Yount, now Enefco's primary shareholder. Originally a tool and die maker serving the footwear trade, the company had begun to diversify under its previous owner. The Enefco Yount purchased consists of four discrete business units ˆ— footwear products, contract manufacturing, tool and die making and cleaning-card manufacturing ˆ— around which new CEO Klein hopes to build an increasingly diversified company. Each of the units has its own management staff and mission, but revolves around a common manufacturing shop and central executive management team.

Klein's strategy following the sale was to begin developing new products for KIC, the cleaning-card manufacturer. He also acquired Enefco's leading competitor in the shoe and boot business, and began to consolidate a high-end tool and die niche, purchasing select companies in an industry devastated by offshore markets. The last of these acquisitions, a deal to buy a St. Louis, Mo. firm, closed in late October.

In total, Enefco currently reports just under $20 million in annual revenues. Klein hopes to boost that to $50 million within five years. KIC Products' cleaning cards, although they look no more sophisticated than a folded paper towel, provide one example of how he intends to get there.

Raw material
The company that is now Enefco was originally Gould & Scammon, founded in 1928 as a maker of molded counters, the heel bed component of shoes and boots. At its high point as a supplier to the shoemaking industry, once an economic powerhouse in New England, Gould & Scammon employed more than 150 workers at its Central Street site in Auburn.

When shoe makers began moving offshore to cheaper labor markets, Gould & Scammon slipped through a series of owners and names, becoming Enefco under Canadian owner Norman Farrar in 1994.

Farrar worked to diversify and hammer out efficiencies at the company. He moved Enefco into manufacturing specialized foam and felt products, such as cosmetic sponges available at drug stores and felt pads for furniture feet. As Farrar looked toward retirement, he bought Virginia-based KIC, folding the company's $1 million per year cleaning-card business into Enefco in March 2003.

The diversity of Farrar's operation was what initially caught the eyes of Yount and Klein, who'd met at a series of CEO roundtable meetings in the Andover, Mass., area. At the time, Klein was chief executive of Andover-based Diomed Inc., a maker of medical lasers; previously, the German-born executive had run medical device companies from California to his home country. Yount manages an Andover, Mass. buyout group that currently owns a plastic cup maker and a construction steel fabrication company, both in New Jersey, and was on the lookout for his next move.

As Yount and Klein looked more closely at Enefco, they realized its most attractive trait was its efficiency ˆ— the company was running four-day work weeks, with plenty of room to grow; nevertheless, it was turning a profit. "Enefco at the time was profitable with an asset utilization of 27%," Klein said. "There are not many around like that."

Klein won't disclose the amount of the purchase last November, nor the price of any of the company's acquisitions. He does say that the shoe business is still the company's largest source of revenue. At the time of the acquisition, Enefco and the Missouri-based Belle Counter Co. were the two remaining makers of molded heel counters in the United States. The new Enefco immediately bought Belle last November, subsumed its customers and boarded up the Missouri manufacturing operations.

"Before the acquisition, there were two companies competing for the business, and nobody really made any money or had good margins," Klein said. "Now we are the only company making fiber and leather shoe counters in the United States."

Combined, the operations led to what Klein describes as "a nice, viable business," one that accounts for about 30% of the company's revenues. Red Wing, Minn.-based Red Wing Shoe Co. Inc. represents 25% of Enefco's footwear sales, followed by Michigan-based bootmaker Wolverine, which currently is booting up U.S. military personnel deployed overseas.

The expanded footwear unit provides a solid base for Enefco's operations, but it doesn't hold out the promise of much growth. Klein's strategy instead hinges upon expanding the company's tool and die, contract manufacturing and KIC Products divisions.

To die for
In a die shop, explains Mike McCoy, Enefco's vice president of operations, people bend steel to make cutting tools, called steel rule dies. In their most basic form, dies punch shapes out of leather, cloth and other materials, usually in extremely high volumes.

The skills needed to hammer out that kind of industrial cookie cutter are basic. While steel rule die makers once were a substantial layer of American industry, many of those jobs have now transferred overseas. Shops without broader skill sets are either going or gone.

Stan Modic, a columnist and former editor-in-chief at Tooling and Production Magazine in Paynesville, Ohio, said the change caught an entire generation of managers and analysts off guard. "I've been covering the industry since 1965," he said. "And if anyone would have asked or told me that the business was going to be like it is today ˆ— on its heels ˆ— I would have told them that they were crazy."

Survivors in today's consolidating industry have either invested in new technology, gone international or both, Modic said. Beyond diversification, size is another factor making or breaking die shops across the industry. "If you make more than $1 million in revenue you can make this a profitable business," Klein said. "But if you are doing $500,000, it is very difficult."

To bulk up and branch out, Yount, Klein and McCoy began scouting companies in high-end niches immediately after the acquisition last year. In July, Enefco bought Industrial Die, a radio frequency die specialist in Atlanta with approximately $1 million in annual revenues. The RF dies can be energized to sonically weld edges on items such as the inflatable life preservers used in airliners.

In August, the company also picked up New Era Die in Red Lion, Penn. A precision, high-end die maker to the automotive industry, New Era had peaked with sales of more than $4 million several years ago, Klein said; since then, its sales had tapered down.
Enefco closed its largest purchase to date on Oct. 29, buying St. Louis, Mo.-based Central Dies Co. The deal hands the company a new set of customers, primarily in the shoe industry.

After the acquisitions, Enefco gathered all its tool and die operations under one name, GlobalDie. It put the new additions to use, developing more complex dies able to deliver designs like the intricate weave of cuts used in the waffle technology cleaning cards.
Klein expects GlobalDie to be a high growth segment of the company, although in the near term most of that growth will come through a roll up of acquisitions. The Central Dies deal alone is expected to increase GlobalDie revenues by 60%

Contracting potential
Still, for the foreseeable future, Klein says KIC Products' waffle technology promises to be Enefco's product to beat. Prior to the waffle card's introduction at the beginning of October, KIC sold various cleaning-card products for bill validators, credit card swipers and boarding pass readers. Its customers include United and American Airlines, Hilton, Marriott, Federal Express, Bank of America and Caesar's Palace. Its biggest customer is the New York City Transit Authority, which uses the cards to maintain automated subway pass turnstiles.

Currently, with a franchise sales force spread from California to Canada, the United Kingdom and Germany, KIC accounts for about 30% of Enefco's revenues. In spite of the fact that the new waffle products are $1.95 each, compared to 60 cents for the old technology, Klein said interest in the new cards ˆ— led by the manufacturers of the machines themselves ˆ— has been overwhelming.

That may bode well for the future of the waffle. But Klein sees Enefco's greatest potential in the means by which those cards were developed: the company's contract manufacturing division.

The division, which Klein considers Enefco's creative hub, revolves around a design team who use computer-aided design technology and a 21st-century cutting tool called a water jet. Enefco engineers use the $300,000 industrial cutting and design tool to fire laser-like streams of water, resulting in exact jewelry-quality cuts and designs in everything from leather to ceramics to composite materials.

With KIC as its client, the crew went to work during the first few months of this year to create a more effective cleaning card. The water jet, automatically linked to the CAD technology, allowed engineers to brainstorm, experiment and turn out prototypes, fast and cheap, until they found a solution.

The company's tool and die outfit then delivered a template cutting tool to the manufacturing operation, and KIC was ready to produce 50,000 to 60,000 of the new cards per day. "It really is an example of how the manufacturing skills we have here can really help another company, in this case the cleaning-card division, to come up with products that make them far more competitive," Klein said.

Contract manufacturing today produces about 25% of Enefco's total revenues. Although it could be the company's most critical long-term profit center and survival tool, an almost unlimited range of potential clients means honing that tool will require a disciplined marketing focus. "We don't know what the products are, and the customers don't know what our skill sets are," Klein said. "So there is a challenge in how to connect the dots."

Previous owner Farrar's knack for efficiency and breadth left Enefco with a notable weak link: marketing. To connect with higher-value work, Klein knows he needs to beef up what is now a one-person marketing operation. Much of the company's marketing effort during the past year has been consumed with moving KIC's waffle technology out the door. The chief executive said Enefco could add two or three more marketers in the coming year, and likely will concentrate on identifying and pursuing front-end design and engineering projects in foam laminates, composite materials and others.

"What we are trying to do, in the contract work, is to find our sweet spot ˆ— a blend of quantity, quick turnaround time and customer service," he said. "The more complex the better."