In Its Own Defense : Beleaguered Aerospace Firm Teledyne Has New Strategies to Uplift Profits

The mysterious and secretive Henry Singleton retired 2 1/2 years ago as chairman of Teledyne Inc., and the company he founded and guided for three decades has not been the same since.

Based in Century City, Teledyne was a Wall Street darling during the Singleton era that gave exceptional autonomy to the company’s 100-plus divisions. A master at buying and selling assets, Singleton built a conglomerate that was far-flung, free-wheeling and prosperous for its stockholders--among them Singleton himself.

Case in point: In early 1990, Teledyne spun off its insurance lines to its holders, creating a new entity named Unitrin Inc. and swelling the investors’ returns once again.

But what’s left of Teledyne today is another story. After earning $259 million in 1989, the company did not come close to matching that profit during the next three years combined. Its stock, closing at $24.625 a share Friday, is down sharply since the Unitrin deal.

Teledyne today also stands at the center of a series of defense-fraud scandals that so far have cost the company more than $25 million in legal fines and settlements. Its name has often been in the news, even though it ranks but 37th in size among the nation’s defense contractors.

And despite two restructurings since Singleton’s departure from daily management (he remains on Teledyne’s board), the company still resembles the old-fashioned conglomerate that was so popular in the 1960s but since has been largely abandoned by corporate America.

So, Teledyne--involved in everything from electronics to exotic metals but best known to the general public for its dental products and shower heads--is trying to fix things once again.

The burden now falls on Chairman William P. Rutledge, 51, a blond, broad-shouldered man with degrees in metallurgical engineering and financial management. After a 15-year career with machinery maker FMC Corp., Rutledge joined Teledyne in 1986 and began climbing its top executive ranks in 1990.

Last March, Rutledge got outside help by hiring as president Donald B. Rice, 54, a rail-thin former secretary of the Air Force who earlier was president of RAND Corp., the Santa Monica-based think tank, for 17 years. Rice lacked management experience with manufacturing companies but brought valuable know-how about the Pentagon at a time when Teledyne’s defense ties are frayed.

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Unlike the enigmatic Singleton, Rutledge and Rice are willing to discuss their problems publicly--and they don’t mince words. Teledyne’s profits--drained by legal expenses, excessive operating costs, recession and the defense-spending slowdown--are “absolutely unacceptable,” Rutledge said.

Little more than two weeks ago, Teledyne announced plans to shrink its 65 remaining divisions to 21 and eliminate a thick layer of middle management. That means 1,200 people--5% of Teledyne’s work force--will be laid off, including 500 in Southern California. (Teledyne’s plants include sites in Northridge, Pomona, San Diego, Moorpark and Los Angeles.)

But Teledyne says it will save $70 million in annual overhead costs and the newly merged units will be more efficient. Examples: By bunching up, divisions will better share technology and get more volume price cuts from suppliers.

The move “is exactly the kind of change that needed to take place,” said R. Jackson Blackstock, an analyst with First Boston Corp. “Will they be successful? I believe so. Teledyne had become unmanageable just because of its diversity.”

Indeed, Teledyne last year earned $33.2 million on sales of $2.9 billion--one-tenth the profit it generated 12 years earlier on the same sales. In this year’s second quarter, profit from operations (before taxes and one-time gains and charges) skidded 34% from a year earlier, to $13 million.

Rice said the company’s overhaul is “not any kind of conscious departure from the way Henry Singleton or anyone else” ran Teledyne but rather was needed “to change with the times.”

He also denied that the divisions’ autonomy had contributed to the defense-fraud claims. Added Rutledge: “I don’t think we thought (the company) was too autonomous.”

Still, the latest steps reveal Teledyne’s belief that its empire of independent states no longer worked. “You lose a lot of autonomy just going from 65 divisions to 21,” said analyst Sidney Heller, who follows Teledyne for Lehman Bros.

Even with the changes, Teledyne will still be spread across several industries. It makes guidance systems for jets and spacecraft, engines for missiles and light planes, military tank engines, the Water Pik line of toothbrushes and Shower Massage shower heads, to name just a few of its products.

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The company, which gets about one-third of its sales from Uncle Sam, also is a leading maker of zirconium used in nuclear weapons and conventional ordnance, and it makes critical avionic and electronic gear for the military.

But even if Teledyne’s latest shake-up helps, its legal woes undermine assumptions about the firm’s outlook. The problems “are the largest risks to this company, no question,” said Blackstock.

Two Teledyne divisions have pleaded guilty in recent years to felony charges related to buying influence for defense contracts and phony testing of electronic switches. In the switch case--involving the Teledyne Relays unit--Teledyne paid a $17.5-million fine, and the unit was barred in April from bidding on government contracts for a year.

Teledyne removed another legal hurdle Wednesday, when it agreed to pay $10 million to settle government claims that another Teledyne unit failed to make certain tests on missile components.

But several other civil suits, seeking millions of dollars in damages for alleged defense-contract fraud, are still pending. The company says it can’t estimate the cases’ financial impact, and Rutledge declined to discuss them.

But Rutledge had a sharp rebuke for suggestions that the suits signaled a pattern of corruption at Teledyne. That notion, he said, is “completely absurd and frankly is offensive in the worst way.”

Rice, meantime, dismissed any suggestion that he was hired mainly to improve Teledyne’s reputation at the Pentagon.

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“I came in here to do a management job,” he said, noting that after he left the military in January, he was barred from representing Teledyne to the Defense Department for a year and the Air Force for two years.

Rutledge said, despite the streamlining steps, Teledyne’s units will still be entrepreneurial and execute their own strategies.

Teledyne also plans to keep its businesses diverse. Lehman’s Heller said Teledyne would be hamstrung even if it wanted to focus on just one or two areas, because average sales for its 21 remaining divisions will still be only $120 million. That means “they don’t have anything big enough to hang onto as a core business,” he said.

Singleton? Now 76, he spends much of his time at his New Mexico ranch. He was unavailable to comment.

But it’s likely he’s in favor of anything to help Teledyne. He remains its biggest stockholder, with a 13% stake, whose value has tumbled 20% since the Unitrin spinoff in early 1990--to about $178 million today.

TELEDYNE’S SHRINKING PROFITS

After peaking in the mid-1980s, Teledyne’s earnings have shriveled in recent years because of the defense slowdown, recession and heavy legal expenses. Teledyne’s 1992 profit was one-tenth of what it earned 12 years ago on the same level of sales.

1992: $33.2

Source: Company reports