Turbulence eases for E. F. Johnson as company scores successes

Highlights for the E. F. Johnson Company during 2001 have included a large contract to supply mobile units to South Dakota, customer acceptance of several 800MHz trunked public safety radio systems and a return to positive cash flow.

Those results compare favorably to the Waseca, MN-based company’s difficulties of previous years when Johnson and its parent, Transcrypt International, were beleaguered by allegations of accounting irregularities, stockholder class action lawsuits and a Securities and Exchange Commission investigation. The investigation concluded without penalty, the lawsuits were settled, and new management has resolved concerns about the company’s business practices.

“Our organization is in positive cash flow, and that marks our return to profitability. We’re no longer at risk of losing cash; no longer at risk of being sued by customers with legacy issues; and no longer in trouble product-wise,” said David L. Hattey, president and general manager of the Johnson subsidiary, which accounts for 80% of Transcrypt’s sales.

Hattey came to Johnson in March 2000 as senior vice president and moved up to president in June of this year. He is the first president of the company to live in Waseca since Edgar Johnson. Michael Jalbert fills the triple posts of chairman, president and chief executive of Transcrypt. Jalbert also is E. F. Johnson’s chairman and chief executive, and he carried the title as Johnson’s president until he promoted Hattey to the position. Jalbert works in an office maintained by Transcrypt and Johnson in Washington.

Transcrypt’s turnaround

Three factors made most of the difference in Transcrypt’s turnaround, Hattey said.

“The first thing that saved Transcrypt was the board of directors clearing the decks and rebuilding the management team. The second thing was getting someone of Jalbert’s caliber as chairman, chief executive and president. He’s a fix-it guy. The third thing was leveraging the company’s assets, including leveraging its real estate to cash and leveraging its intellectual assets to a path forward,” Hattey said.

“We came close to the edge, but anyone who comes close to the edge and survives gets stronger. Having come close to the edge and surviving, our organization is stronger,” he said.

Hattey explained that Johnson’s founder, Edgar F. Johnson, reinvented the business many times since starting with a mail-order parts business in 1923. (Edgar Johnson died on Feb. 11, 1991.)

“And what we have is the latest reinvention of the E. F. Johnson Company,” Hattey said. We are now focusing on public safety and government radio communications.”

Reinventing E. F. Johnson

Just as Edgar Johnson made a decision in the ’70s to exit the consumer business, including amateur and citizens band radio, the company’s current managers decided during the past several years to exit the low-end LTR business and contract manufacturing.

“From 1992 to 1994, the market for low-end commercial wireless communications was as much as $4 billion annually. Although it has grown to $10 billion, cellular, PCS and Nextel serve most of the market, leaving only about $750 million for two-way radio manufacturers. That reality led us to get out of the low-end LTR business,” Hattey said.

LTR, or logic trunked radio, is one of several analog trunked radio protocols developed in the ’70s, along with General Electric’s GE Marc V, RCA’s Channel Management System and Motorola’s proprietary trunking protocol. Because LTR signaling could be emulated without violating Johnson’s copyright, many other manufacturers made compatible equipment. The resulting competition and wide product selection made it popular with SMR system operators. That same competition eventually reduced margins below the level targeted by Johnson.

“Our primary focus is on tier-two and tier-three size markets. This is a strategic decision based on our current product offerings. We are, however, capable of participating in tier-one systems today with our digital portables and mobiles,” Hattey said.

Historically, Johnson has supported statewide systems. The company’s plans include supporting the Washington State Department of Transportation’s statewide system and assisting customers with migration to next-generation technologies.

“We can go after $2 million to $10 million system contracts all day long. We have a technology match, and many customers of that size have not yet made the jump from VHF lowband or highband conventional systems. Other companies have fed them conventional while feeding everyone else trunking. We see a market window opening,” Hattey said.

Importance of dealers

Although Johnson has exited the low-end commercial LTR market aimed at small businesses supported by dealers, the company still provides products that give dealers access to public safety customers.

“Many public safety agencies do not maintain their own radio systems. They contract with a local shop. Our team’s job is to convince those dealers with public safety agencies as clients to look at Johnson,” Hattey said.

Hattey said Johnson offers a packaged system called QuickStart. It is based on the company’s Multi-Net II product and meets the APCO 16 standard for trunked systems. Johnson continues to offer SmartNet II, SmartZone and Project 25 digital products that allow dealers to sell new customers and to sell into existing analog and digital trunked systems.

Hattey talked about competing technologies, including TETRA and IDEN, which use time-division, multiple-access modulation and trunked channel selection. TETRA is a comparatively open protocol that originated in Europe. Several companies making TETRA equipment have tried to bring it to North America without yet overcoming intellectual property rights hurdles that block its sale. As for IDEN, Motorola developed it and makes all of its equipment.

“We have no interest in TETRA, and TETRA addresses the same marketplace as IDEN. You don’t see IDEN used for public safety dispatch communications. Europeans view commercial and public safety radio communications differently than Americans. Also, I hear that top-end agencies in Europe are starting to move away from TETRA. It doesn’t provide all the features that a true high-end law enforcement agency needs,” Hattey said.

On the other hand, Hattey said that Johnson is seeing a growing acceptance of Project 25 in the United States and in other parts of the Americas in conventional and trunked systems. The Johnson product platform supports that transition. It gives users with Johnson’s SmartNet and SmartZone radios the ability to change to the Project 25 digital mode with a simple reprogramming of the radio “personality.” Although SmartNet and SmartZone are proprietary Motorola protocols, Johnson has a license from Motorola to manufacture compatible equipment.

IDEN ‘no competition’

Because of Project 25 equipment’s features, functions and fault tolerance, Hattey doesn’t view IDEN as a competitive threat.

“I don’t see a system where the connection to the T-1 circuit is critical and where the loss of that T-1 connection makes the system go down as being that great for public safety. Also, as long as Nextel [the nation’s largest IDEN operator] can sell all the airtime they can create to commercial users for an average bill of $72 per month, I don’t see why they would want to offer dispatch to users who are used to paying $15 to $20 per month. Dispatch users would take up an inordinate amount of time on the IDEN network with one-to many calls that simultaneously require multiple cell sites to carry,” Hattey said.

Meanwhile, Hattey sees the federal government’s commitment to using Project 25 trickling down to state governments because of their incentive for interoperability with federal agencies.

An example of interoperability that he cited was South Dakota’s selection of a digital trunked radio system for statewide coverage on VHF, a frequency band already used by many federal, state and local agencies in the state. The state already had a lot of VHF conventional systems. The U.S. Bureau of Land Management and Bureau of Indian Affairs use VHF in the state, too. Johnson radios can communicate directly with South Dakota’s conventional, Project 25 digital and SmartZone trunked systems with the selection of an appropriate channel and system.

In fact, Johnson scored big with the South Dakota system, winning a contract for 2,000 SmartZone mobile radios for $3.7 million from the state’s mobile unit budget allocation of $5 million. Hattey said that the state government plans to use both state and federal funds to subsidize local government purchases that will facilitate their use of the state’s digital system.

‘Single platform’ strategy

Bringing Johnson’s products to their current level involved returning to an original Edgar Johnson strategy.

“Edgar believed in a single platform. When you study the company’s amateur radio equipment, which we have in our museum, you can see how the company would take pieces and subassemblies from existing models and use them to create another. Through the years, the company had lost that strategy,” Hattey said.

“We didn’t have the strong technical or philosophical leadership that would take us toward good solutions and prudent R&D. We had multiple hardware platforms, functional issues and a lack of customer focus. That’s what we’ve corrected. We’re back on a single platform strategy. It not only serves our needs for efficiency and productivity, but our Multi-Net customers are excited to know that the portables they buy for that application also can be configured for conventional, SmartNet II, SmartZone, Project 25 or Project 25 trunked service,” Hattey said.

Interference problems at 800MHz have not left Johnson untouched. Hattey said the 800MHz systems supplied by the company are affected by interference from 800MHz commercial wireless systems to about the same degree as similar systems supplied by competitors. The main problem is mobile and portable receiver desensitization or overload when they are used near commercial wireless cell sites, primarily those operated by Nextel Communications.

This year, Johnson won a contract worth several hundred thousand dollars to change frequencies used by a customer’s two-site system, including nearly 2,000 subscriber units. The units were moved from frequencies interleaved with those used by Nextel to alternative frequencies that Nextel provided to the customer. The frequency exchange, completed in September, was expected to resolve the interference. It also gave Nextel a more desirable contiguous spectrum in the area. Nextel is said to have paid at least a portion of the cost. The customer, an industrial, rather than a public safety user, asked not to be identified.

“This client had enough overlapping coverage that we didn’t have to set up a duplicate system. We could take one of their towers and change the repeater frequencies, go through the rolling stock to convert subscriber units, and then convert the second tower. We found Nextel easy to work with. They’re trying to be helpful,” Hattey said.

Hattey said that most of his life, he has either been a user of radio communications or a vendor of radio communications equipment. He said that Wallace McKim, a retired Detroit radio officer who later led the engineering team when Hattey worked at Consumers Power Company, taught him a lot about what public safety users need and how communications systems have to work. He said that a lot of technology has changed, but not the fundamental nature of public safety and utility dispatching, which involves connecting the dispatcher with the end user.

“The things I learned from Wally McKim 18 years ago still apply; we just do it a lot differently now,” Hattey said. “And my father was a mentor, too. He taught me to be down-to-earth and to treat everyone as I would want to be treated. He said never to be ‘book smart,’ and apply common sense to every problem, no matter what it is.”

Hattey expressed appreciation for the response from the industry and the company’s vendors during the past year-and-a-half since he joined the company, and as the turbulence of recent years has subsided.

“At the end of the day, this is an industry steeped in tradition with a little emotionalism. Johnson’s a name that’s been there for 78 years. That response has been gratifying for our entire team,” Hattey said.

If the ghost of Edgar Johnson were to walk the hallways at the Waseca facility, what might he say to Hattey?

“I think he would tell me, ‘Keep the path, David.'”

“I think Edgar Johnson would look down and smile at what we’ve done with his grand old girl,” Hattey said. “I feel like I know him from the people on staff who knew Edgar and the legacy that remains.”

For the next year-and-a-half, Hattey said Johnson’s path is set. He said the company has a lot to do to freshen its mid-tier products. And he said whatever the company does, it would be “customer-centric” and would involve land mobile radio.