October 31st, 1962: Teledyne’s operating results have exploded. How has the founder, only in his second year as CEO, more than tripled its gross profit, doubled its earnings per share, and raised its net worth by half?
Whenever I read Henry Singleton’s written or spoken word, I find his lucidity captivating and mysterious. He says so much with so few words. That fits the narrative we are told, by the media and investors alike, that Henry was a genius dreaming up ideas in his corner office. Like Warren today, Henry was undoubtedly gifted in ways most of us are not, but I question the mythical status many investors give to Henry. More on that, later though.
As we discussed in the first chronicle of the Teledyne Bizstory, cash is the source of life for businesses. Revenue does not produce cash. Therefore, investors may argue that one should go under the hood of revenue statistics and focus on the largest profit-producing business unit to classify which industry the business operates in.
The truth is… it depends. If a company has recently entered a new market and is heavily reinvesting in R&D or capital expenditure in one segment, sales is the more accurate metric to use to classify the business. This is due to delayed gratification. The company is sacrificing present profits to make more in the future, hence the aggressive upfront investment. This is what was happening at Teledyne during its second year. Therefore, it should be classified as an electronic systems and equipment manufacturer.
However, if an intelligent investor were to classify Crane Company (before the de-merger), it would make more sense to look under the hood at its cash and profit-generating segments rather than its highest sales segment (though in that case, both would yield the same result). That’s because the company was founded in 1855 and has well-established lines of mature business.
With that out of the way, let’s focus on the facts. Henry jumps straight to the pertinent operating results and rattles off the key statistics for the year again:
Henry Singleton’s Summary Statistics:
1962 1961
1962 Sales $10,438,367 1961 Sales $4,491,431
1962 Net Income $331,518 1961 Net Income $133,190
1962 Total Assets $10,843,760 1961 Total Assets $3,730,811
1962 Shareholders’ Equity $3,527,448 1961 Shareholders’ Equity $2,476,781
1962 Average Shares Out. 654,857 1961 Average Shares Out. 519,550
In the annual letter to shareholders, Henry writes to us that the “systems and equipment business during the fiscal year accounted for approximately two-thirds of our total sales volume.”1
The second area of revenue generation is where things start to get juicy. Precision components “accounted for approximately one-third of total sales.” Henry then further classifies this segment into four parts:
Electromechanical devices
Hydraulic and pneumatic aircraft and missile fittings
Transformers
Semiconductor devices and integrated circuits
Amelco Inc. was acquired in 1961 and formed the Electronic Devices Division of Teledyne Inc. A year later, its size, measured by the number of people employed in the business, increased 4 fold from 50 to 200.2
Note the origin of the explosive growth:
“An important element facilitating this unusually rapid expansion has been the development and production of high-performance silicon planar transistors for our own computers and data systems.”3 (emphasis added)
This product was first developed for the Teledyne engineers and was the fastest silicon planar transistor available. This reflects Henry’s philosophy that profits are a second-order effect of a company’s actions. More specifically, he believed the purpose of a company was to exploit technology.
“we believe that our achievement of successful volume production of silicon field effect transistors represents a major step forward in device technology, and that these field effect devices may someday be as widely used as conventional transistors are today.”4
Henry was a scientist who loved to quantify things. The statistics he frequently cited to measure the operational performance of the business are instructive as to how he viewed the business:
“the company now has approximately 1,500 shareholders.”
“We acquired a thirteen-acre site in Hawthorne, California for the expansion of our Electronic Systems Division. We have 45,000 square feet in operation there now, and can add an additional 200,000 square feet as the occasion arises.”
“Floor space now occupied by the company totals approximately 180,000 square feet.”5
When humans are reduced to numbers, people might assume sweatshops are involved. However, investors should pay more attention to the people and the people systems (culture) than they currently do. At the most fundamental level, humans are the individual components of the economy. It sounds a little robotic but my point is companies are human systems, like markets, wherein creativity and competence are the forces that unlock economic value. Humans are the origin and execution of this process.
As our intelligent investors are aware, the subtle differences in format between annual reports implicitly convey what is important to the producers of the document. Henry loved pictures. Pictures of components. Pictures of processes in action. Pictures of technology at a microscopic level of detail.
Value investors frequently throw around the term boring like it is a badge of honour. The company with the most barebones HQ or the most drab annual report is likely to be a good value investment, goes the reasoning. Again, it depends. Most tend to learn about investing by reading and frequently there are lofty slogans or authoritative figures preaching aphorisms. These can be useful at the beginning. But the more one studies investing the more one realises there are few hard and fast rules. In this case with Teledyne, Henry was passionate about Technology and that spilled over into his presentation of the annual results each year. If someone decided not to invest because there were photos in the annual report that would’ve been a costly mistake.
1962 Acquisitions:
Linair Engineering – in exchange for Teledyne Stock. This was a bolt-on acquisition for the precision components segment. It added to their pneumatic aircraft and missile fittings ability.
Crittenden Transformer – in exchange for Teledyne Stock, pooling of interest accounting. This acquisition was used to improve Teledyne’s transformer offering. Transformers enable electrical energy to be transmitted between circuits without having to rely on a physical connection of materials (conduction). Energy is passed between two objects that aren’t actually touching!
American Systems Incorporated (renamed to Teledyne Systems Corporation) – all of the convertible preferred and nearly all of the common stock, for cash. This was acquired for digital computing know-how, electromagnetic systems technology (one can see the link with transformers), and control instrumentation for propellant and oxidiser vapours.
1962 Investments:
Micronetics, Inc. (generation, detection, and utilization of extremely short pulses of microwave energy) 20% acquired with the option to purchase the rest under specific conditions.
Stock Options
In 1962, Henry showed the level of candor we should expect from all CEOs. He understands owners may be frustrated by the use of options but he explains why they were essential at the beginning of the company’s life:
“The use of stock options to attract outstanding key personnel to our company has proven to be particularly effective. Without this ability it would have been extremely difficult, if not impossible, to have brought into the company so many highly qualified technical and management personnel in such a short period of time. The careful use of our option plan has been especially beneficial during the early stages of the company’s growth. As the company gains size and recognition, the number of options needed to serve our purpose of course diminishes.”
“At 31st October 1962 there were a potential 85,000 shares available for key employees to acquire for a total consideration of $1,080,450… We believe that the number of shares remaining of the 150,000 originally reserved by the shareholders for stock options will be adequate to serve the company’s needs for several years to come. None of the directors have stock options.”6 (emphasis added).
The last sentence is especially important. Options are for those who do not have equity in the business. Through his actions, Henry is revealing his strategy for retaining exceptional people - skin in the game. Though his stance is different to Buffett’s on option compensation, you can see Henry’s thought process and execution respected the owners.
The Myth of Henry Singleton
Stories are problematic; especially so, when the narrator laces truth with exaggeration, and distorts reality, to make the story more memorable or potent. This happens with social media all the time: call it the vulgarity of virality. The most visible “influencers”, thought leaders, or modern marketers are often steeped in half-truths because that is what brings and maintains eyeballs. This is not a critique of creators or storytellers per se as they may intentionally do that to ensure the truth is heard.
Ever since Nassim Taleb demonstrated that mainstream media used the same evidence to explain a cause-and-effect relationship between diametrically opposed outcomes, namely the bond market performance due to Saddam Hussein’s capture, I have been sceptical about the veracity of stories I hear.7
The first time I read The Outsiders by William Thorndike though, goosebumps rippled across my body and the hairs on the back of my neck stood to attention. I was sitting in a heated office. It was an unfettered emotional reaction. This should’ve caused my scepticism to kick in but it didn’t. I loved this narrative of the cold, calculating, and unconventional genius so much that I explained the erroneous facts as the author simply embellishing the truth in order to teach the right lesson.
The Outsiders is an exceptional capital allocation call to action for any budding investor. However, the narrative is based on factually wrong information. On multiple occasions, Thorndike states that Henry Singleton did not issue a dividend for the first 26 years or split the stock.8 Hint: he did both in the same year… keep reading the future Teledyne Bizstories to find out which one.
This was simple enough to see if one read the notes of Teledyne’s financial statements. In the notes of the 1962 annual report, the following was written in regard to the terms of Teledyne’s loan (this will be important when we analyse the subsequent annual reports):
“The company has also agreed (1) to assign the proceeds of its defence production contracts to the bank as security for the bank loan, (2) to sell a minimum of $500,000 in subordinated debentures which will be subordinate to bank borrowings and to apply the proceeds from such sale against the bank borrowings, and (3) not to declare or pay dividends except dividends payable in capital stock of the company.”9 (own emphasis added).
That last sentence is important when Henry is slowing down his acquisition maelstrom and deciding how to allocate capital in the late 1960s. Your low-IQ author misinterpreted the stock dividends as a way for Singleton to increase his ownership in the company as he was simultaneously buying back shares in the company! That was certainly the effect but I am not sure it was the initial intention.
The narrative on Henry presents investors with an untouchable genius operating in his corner office. No doubt, Henry had mental faculties that even the most intelligent of investors couldn’t keep up with but the story is overly-potent and presents the facts in such a way as to manipulate the reader. There is a lot to learn from Henry … he doesn’t have to be an inhumanely talented, analytical machine that is impossible to replicate; we can learn from him.
Thank you for reading, intelligent investor!
What I’ve recently enjoyed reading:
Why don’t you just sell all your stock and buy ETFs, you’ll probably have better performance? by Connor Mac made me reflect on why investing piques my interest.
Best Investing Books That Will Make You a Good Investor by Gary Mishuris offered many essential investing classics as well as new additions for my anti-library.
San Juan Basin Royalty Trust (SJT) by Six Bravo always provides excellent write-ups on hard asset capital-light business models… check out that staggering dividend on SJT!
Henry Singleton, Teledyne Inc. 1962 Annual Report, pg. 3.
Henry Singleton, Teledyne Inc. 1962 Annual Report, pg. 4.
Henry Singleton, Teledyne Inc. 1962 Annual Report, pg. 4.
Henry Singleton, Teledyne Inc. 1962 Annual Report, pg. 5.
Henry Singleton, Teledyne Inc. 1962 Annual Report, pp. 3-5.
Henry Singleton, Teledyne Inc. 1962 Annual Report, pg. 6.
Nassim Nicholas Taleb, The Black Swan (2007).
William Thorndike, The Outsiders (2012), pp. 37-58.
Teledyne Inc. 1962 Annual Report, pg. 14.