“Growth, creating new opportunities through greater resources and technological depth, is a continuing objective of the company. Essential to and resulting from growth is profit.”
“Teledyne is entering 1966 with the brightest prospects in its history.”
“In cultivating this limitless field, Teledyne applies itself to certain carefully selected market areas where the rate of growth and degree of opportunity is especially great.”
Henry Singleton exudes the ‘Never complain, never explain’ attitude. He shunned the press, who labelled him The Sphinx.
We can watch and learn how his idiosyncratic philosophy came into being and changed over time first-hand, by studying Teledyne’s annual reports.
This is a rare treat. None other than Mr. Buffett said the following:
“Henry Singleton has the best operating and capital deployment record in American business…if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton’s.”
1965 is his boldest letter yet: the Chairman felt he was on the cusp of something special…
Henry Singleton’s Highlights:
1965 Sales: $86,504,000
1964 Sales: $38,187,127
1965: Net Income before Tax: $6,502,000
1964: Net Income before Tax: $2,979,388
1965 Net Income: $3,402,000
1964 Net Income: $2,545,388
1965 Net Income per share: $1.98
1964 Net Income per share: $2.35
1965 Working Capital: $30,803,000
1964 Working Capital: $14,220,320
1965 Total Assets: $66,544,000
1964 Total Assets: $35,039,515
1965 Shareholders’ Equity: $34,765,000
1964 Shareholders’ Equity: $13,672,200
1965 Average Shares out: 1,681,407
1964 Average Shares out: 1,050,996
1965 Number of Employees: 5,400
1964 Number of Employees: 2,400
“By the end of 1965, Teledyne had acquired 34 new companies and organized them into efficient profit centers. 1965 was the midpoint in Teledyne’s decade of acquisitions, but less than half of the final number of companies had been acquired at that time.”1
You can Have Anything but only One Thing
“In previous annual reports we have emphasized Teledyne’s fundamental dedication to the field of automatic control systems, equipment, and components.”
Teledyne specialized in the following three areas, in 1965:
Aviation Electronics
Industrial Process Control
Earth & Ocean Sciences
What connects these unrelated operations?
No points returning reader, for getting this one right:
“Utilization of electronic equipment and devices is rapidly increasing in all three of these expanding markets.”
Of course, it’s Amelco Inc.'s cutting-edge semiconductors and integrated circuits.
“During the year the technological leadership of Teledyne in the field of semiconductors and microcircuitry was re-emphasized through advances made by our Amelco Semiconductor and Crystalonics divisions.”
Exhibit A:
“Teledyne is pioneering new developments in air data computers and converters, utilizing the advantages of microcircuits.”
The charismatic lieutenant, Mr. Roberts, provides a little more detail for us in his memoir:
“by 1965 [Teledyne] was producing microelectronic hybrids called MEMAs, (Microelectronic Modular Assemblies) with as many as 25 separate integrated circuits, as well as other precision electronic components, on a ¾ inch square substrate. This being done at our Amelco Panama Street facility which was later renamed Teledyne Microelectronics.”2
As we’ve discussed before, George Roberts joined Teledyne in 1966 so its worth treating his statements of fact regarding points in time before his arrival with some scepticism. In this case, the 1965 Teledyne report mirrored his memory: party line intact!
Contracts come Calling:
What enabled Teledyne, a young start-up, to beat industry behemoths, namely Texas Instruments and IBM, to massive government contracts in the 1960s?
There was a logic to Singleton’s acquisitions in a nascent growth market.
“In each case, these acquisitions contributed to the further penetration of our chosen market areas.”
He built a proprietary, industry-leading position in microelectronics and planted advanced integrated circuits and semiconductors inside broader technologies, such as inertial guidance systems. This had the double effect of broadening Teledyne's technical offering whilst making it more efficient than the competition’s systems.
“The compact inertial sensing platform, computer and power supply which compromise the system together weigh less than ten pounds. Microcircuits are used exclusively to achieve this unprecedented size and weight and, for the first time, are mounted inside the gyros and accelerometers.”
Instead of only pursuing quintessential “bolt-on” acquisitions, Teledyne chose to “tuck in” acquired companies too: sometimes multiple companies combined into new Teledyne divisions, single acquisitions became new divisions, or an acquisition added to an existing division.
There was no magic formula.
In 1965, four events were disproportionately affecting Teledyne’s growth, as the Chairman saw it:
Teledyne won the U.S. Navy’s lucrative IHAS contract
Completion of the Flight Reference Stabilization Systems (FRSS)
Installation & Operation of the Large Aperture Seismic Array (LASA)
Continuous improvement of circuits and microelectronic technology
Geodesy Odyssey
“In 1965 we began work on the largest geodetic survey contract we have received, and under which we are surveying for the Army Map Service an area in Iran approximately the size of the state of California.”
If one reads Taleb too early in their intellectual odyssey they might develop a severe case of ABS (academic-bashing syndrome).
Granted, in some cases (economists especially), this may be warranted. But, just like forecasts, often the opinion reflects more about the judger than the judged...
The co-founder of Teledyne, George Kozmetsky, epitomises the mutually beneficial interaction of theory and practice. Just look at the technological hub Austin, Texas is today. Kozmetsky helped to create that.
The U.S. Department of Defense enabled Teledyne to bring products to market … and so too did academic institutions:
“Potentially capable of detecting an underground nuclear explosion anywhere in the world, LASA was installed and is now being operated by Teledyne in cooperation with the Massachusetts Institute of Technology and the Department of Defense.”
The LASA was a collection of 525 seismometers “deeply buried and carefully placed in a series of concentric patterns covering a 15,000 square mile area.”
“The data being reported from these and other seismological stations around the world are digested and interpreted at the Seismic Data Laboratory in Alexandria, Virginia which we operate under government contract.”
This wasn’t the first time Teledyne installed the largest seismic observatory in the world:
“we are continuing to operate the Tonto Forest Seismic Observatory in Arizona, which includes 80 seismometers strategically placed over 23,000 acres. At the time of installation by Teledyne in 1963, it was the world’s largest seismic observatory.”
You can’t help but notice what Singleton values on an equivalent basis to human life (I’ll let you be the judge of that):
“The prediction of earthquakes could lead to great savings in life and property, and is one of the many reasons that the scientific study of the earth and its properties will continue to be one of man’s most rewarding endeavours.”
The Geodetic adventure was just beginning…
“Our activities in earth sciences were further expanded when we acquired Geotechnical Corporation in 1965. We later gave it the name Teledyne Geotech… This was a good example of the family-owned type business that was often amenable to acquisition.”3
… and assisted a pincer movement on the large Petroleum markets. On one side, through seismic topology (e.g. mapping oil reserves), and the marketing of gas detection equipment to petrochemical companies, on the other.
“During the year we also announced, through the Geotech division, our entrance into marine geophysical exploration where seismic techniques have long been used in the search for oil and minerals.”
Two things stand out.
First. Look again at the historical context Singleton places the new addition within. A stark difference from his mentor Charles Thornton of Litton Industries.
See that theme appear again later on in the report:
“Teledyne’s Glenn Pacific division for the industrial market. The division originated the constant potential rectifier type power supply which, through its characteristic of producing uniform wields, is especially suitable for automatic welding applications.”
Second. Notice Singleton’s creep towards resources…
This is also evident elsewhere in the annual report:
“To meet the many applications we manufacture fittings in a variety of exotic metal and alloy versions, as well as in a variety of shapes and sizes.”
More on that, in future annual reports.
A central theme of the 1965 report is the application of technologies beyond the specific domain in which Teledyne is developing them.
Example 1. Telemetry.
“the attributes of speed and reliability that render telemetry the most effective technique for transmitting information and command and control signals to missiles and spacecraft make it equally useful in industrial and commercial applications.”
Example 2. Industrial processing techniques.
“Automatic processing and control equipment is penetrating into every area of commerce and industry, and is making itself felt in every facet of our daily lives.”
Example 3. Flight Control Systems (e.g. FRSS).
“Production cost is expected to be no more than a third of that of existing systems of equivalent capability, while performance and reliability should be greatly improved… this versatile system is applicable to virtually all types of aircraft and helicopters in commercial and military use.”
One interpretation of the above could be that Teledyne, as a defense contractor, was biased to make its technology seem as broadly applicable as possible. Whether that is true is up to you, reader!
Who has the IHAS?
“The growth potential of integrated circuits is so great that a single program on which the company is at work today may ultimately use as many integrated circuits as was produced by the entire industry in 1965.”
Singleton had a unique proficiency in electronic components and inertial guidance systems.
In layman’s terms, inertial guidance (or navigation) systems are a combination of many technologies such as computers, telemetry, and sensors (accelerometers and gyros) that estimate a moving object’s position without referring to external references (e.g. a static object like a tree or building). Estimates of speed, orientation, and position are combined with a plane’s past position to deduce where it currently is.
Teledyne made a major breakthrough in January 1965 because of Henry’s original interest in inertial control systems for aircraft. The system enabled helicopters to take off and land in remote areas without ground navigation aids, to fly in close formation in zero visibility, and to maneuver over difficult terrain without pilot assistance…4
Investing in companies early in their life cycle is a bet on the founder and the people, rather than just the idea (OpenAI a case in point). Look at the following taken from a biogrpahy of Charles “Tex” Thornton (the ‘renewed’ Litton’s founder):
“Working in [Litton’s Electronic Equipments Division] on a project to achieve what was seemingly impossible even to its mentors were several exceptionally gifted innovators, notably Dr. Henry E. Singleton.”
“The impossibility was created by the need for two breakthroughs. One was to develop a virtually frictionless bearing (floating on gas instead of touching metal) to eliminate the cumulative errors of conventional gyros, and the other was to come up with a two-axis, and eventually a three-axis gyro in a single unit.”
“[Charles “Tex” Thornton] summoned up the guts to undertake a development contract for over a million dollars with the Defense Department that obligated Litton to translate theory into practice against a one-year deadline - primarily on Singleton’s say-so.”5
If you were a sleuthing investor at the time, knowing that Singleton had attended MIT and the Naval Academy, worked at ITT, GE, Hughes Aircraft and Litton Industries, and figured out the above, would that be enough to buy and hold throughout Teledyne’s volatile earnings and rapidly changing strategies?
Fast forward just under a decade to Singleton saying this:
“Teledyne’s capability in semiconductors is being applied to the IHAS computer, and we are simultaneously expanding our marketing operations to realize more of the sizeable potential in aviation, space and industrial applications.”
Semiconductors were a tiny piece of the IHAS puzzle. Teledyne even contributed new Microwave Tubes, Litton’s area of specialty, to the massive contract:
“Our travelling wave tubes are used in communication systems, radar, instrumentation and in the vital electronic countermeasures equipments which defend ships and airplanes from enemy radar. Our tubes are the key to the IHAS station keeping radar.”
“A manufacturing and service activity of our Micronetics division, the techniques utilize scale models of the aircraft, and the results allow one to determine how the actual airplane will appear on the radar screen, from any angle and at any distance.”
“It is also useful in designing new aircraft where it is desired to enhance or minimize the reflection characteristics for identification or security reasons.”
This rhymes with the Degaussing technique Singleton created for ships at the Naval Ordinance Laboratory whereby the electromagnetic field of the metal hull was reduced making enemy detection more difficult.
Different decade, same Singleton.
The IHAS then was a massive deal. Call it a (Navy) SEAL of approval: Teledyne launched into the stock-market stratosphere.
“[Teledyne’s] stock soared from $15 a share to $65 within a year. This gave the company resources to acquire much larger companies than it had been able to before.”6
So the IHAS was essential not only for Teledyne’s reputational arrival but also in creating the right circumstances for Singleton’s flair for capital allocation to shine: Teledyne’s expensive stock could now be used to aggressively acquire companies trading at cheaper p/e ratios in the market.
Latent Litton Talent
A lot is made about Teledyne’s concentrated board of exceptional talent. Arthur Rock, Claude Shannon, and George Kozmetsky are often cited.
Most readers are aware that Bob Noyce and Gordon Moore went on to found Intel but what about the other traitorous eight engineers? No less than half of them left Fairchild for Teledyne.
Little is said about the non-household names behind Teledyne’s success. Henry encountered a number of exceptional people in previous roles and brought them with him:
“Teck Wilson, Joe Smead, Allen Orbuch, and Howard Gates were among them.
Teck Wilson joined Teledyne in its very first year… he became very active in Teledyne’s pursuit of government contracts and in searching our new businesses to acquire.
Teck had a bachelor of science degree in electrical engineering from the California Institute of Technology. He was made a corporate vice president in 1966 and contributed greatly to our systems operations over the years…
Allen Orbuch was another of our long-term executives. He had been vice president and director of marketing for Litton’s Guidance and Control Systems division. He joined Teledyne in 1965 as assistant general manager of Teledyne Systems and was made a vice president in 1966, and president in 1970… Allen served the company well for over 20 years.”7
Tidbits:
The company was registered in Delaware despite being specifically placed in the Bay Area by Jay T. Last and Jean Hoerni. Sometimes, companies listed on an exchange in a different location to their HQ can be a red flag. Why might companies choose to register in a different state, namely Delaware?
Total Long-term Term Debt and subordinated Debt was 17,442,000 minus the current portions that totalled 1,804,000.
Teledyne met its debt requirements in 1965. $3,532,000 was available for payment of dividends but none were paid!
Did you know Singleton penned and published a poetic sci-fi newsletter at MIT in the 1940s called Nepenthe and faked his own death?
Teledyne:
1965 Return on Equity: 18.70%
1965 Return on Assets: 5.89%8
1965 Inventory Turn Ratio: 4.2. So its inventory equalled ~ 86 days.9
Litton:
1965 Return on Equity: 16.92%
1965 Return on Assets: 6.03%
1965 Inventory Turn Ratio: 7.1. So its inventory equalled ~ 52 days.
Teledyne’s internal rate of return hurdle rate in its later years as an established conglomerate was reported to be 20% ROA. If the local managers didn’t exceed this bar, then capital had to be sent to HQ.10
Dear Intelligent Investor, thank you for reading.
All emphasis added is my own.
This project is possible due to the generous sharing of reports by Adam Mead11
If you enjoyed this week’s article, I’d appreciate you sharing it.
Interesting Ideas
George Roberts, Distant Force (2007), pg. 46.
Roberts, Distant…, pg. 31.
Roberts, Distant…, pg. 42.
Roberts, Distant…, pg. 47.
Beirne Lay, Someone Has To Make It Happen (1969), pg. 143.
Roberts, Distant…, pg. 47.
Roberts, Distant…, pp. 21-22.
Return on Assets can be simply calculated by Net Income / Total Assets
Remember that net income is the final figure at the bottom of the income statement. Further up the statement, Interest payments can be deducted from EBIT, if the company uses debt — a liability, not an asset.
(Of course, intelligent capital allocators turn leverage into an asset and the ideal capitalization structure includes leverage. I digress.)
If we take net income before interest payment deductions and assume a Federal Corporation Tax Rate of 48%:
https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/
This measure is most often used with retailers. Conglomerates have vastly different products so why use it?
https://www.hvst.com/posts/dr-henry-singleton-and-teledyne-wm4T112d
You can access this annual report and many, many more here:
https://theoraclesclassroom.com/