Talley Industries, Inc.

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Talley Industries, Inc.

2072 North 44th Street
Phoenix, Arizona 85008
U.S.A.
(602) 957-7711
Fax: (602) 852-6978

Public Company
Incorporated: 1960 as Talley Defense Systems
Employees: 2417
Sales: $249.2 million (1994)
Stock Exchanges: New York Boston Philadelphia Chicago
SICs: 2879 Pesticides & Agricultural Chemicals, Not Elsewhere Classified; 3264 Porcelain Electrical Supplies; 3312 Steel Works, Blast Furnaces (Including Coke Ovens), & Rolling Mills; 3483 Ammunition, Except for Small Arms; 3489 Ordnance & Accessories, Not Elsewhere Classified; 3519 Internal Combustion Engines, Not Elsewhere Classified; 3548 Electric & Gas Welding & Soldering Equipment; 3589 Service Industry Machinery, Not Elsewhere Classified; 3621 Motors & Generators; 3625 Relays & Industrial Controls; 3714 Motor Vehicle Parts & Accessories; 3764 Guided Missile & Space Vehicle Propulsion Units & Propulsion Unit Parts; 3812 Search & Navigation Equipment; 3965 Fasteners, Buttons, Needles & Pins; 6552 Land Subdividers & Developers, Except Elsewhere Classified

Talley Industries Inc. is a diversified manufacturer of a wide range of proprietary and specialized products sold to defense, industrial, and commercial markets. Its offerings include mini-mill steel products, ceramic insulators, vehicle air bag components, welding equipment, electronic assemblies, rocket propellants, insecticides, air fresheners, and metal buttons. The company also derives income from real estate investments as well as royalties -from licensing its vehicle air bag technology. Talley restructured during the late 1980s and early 1990s, following a series of setbacks, and returned to profitability in 1994. The company’s curious history is punctuated by unique and diversified ventures.

Origins and Early History

Talley began in 1960 as a tiny aerospace engineering firm in the desert north of Mesa, Arizona. The company was founded by German-born engineer Franz G. Talley and an experienced group of his associates who were also engineers. The venture, which was backed by some technically oriented investors, began with the specific purpose of developing various solid-propellant actuated devices and systems that could be used to help pilots and their crews escape from military aircraft in emergency situations. Talley prospered throughout the decade by developing advanced solid-propellant mechanisms and gas generators, which were purchased by the U.S. military and incorporated in numerous machines. Talley’s sales rose from $1.2 million in 1960 to $16.7 million by 1967.

By the early 1970s Talley Industries had grown to become a Fortune 500 company, but the organization didn’t achieve that status through sales of its propulsion devices. Instead, it grew rapidly during the late 1960s and 1970s largely by acquiring other companies, many of which operated in industries completely unrelated to Talley’s core defense operations. Franz Talley initiated the growth strategy as a means of diversifying away from the defense sector. His ultimate goal was to reduce the company’s dependence on military products to less than 50 percent of sales within three years. At the same time, he wanted to boost Talley’s total sales volume to $100 million. Both of those objectives were accomplished within two years, vaulting Talley into the Fortune 500.

Among the first acquisitions was the 1968 buyout of The Waterbury Companies, a diversified manufacturer whose products ranged from metal buttons to insecticides. Then, in 1969, Talley added Adorence to its portfolio. Adorence was an importer of lower-priced women’s and men’s apparel. The acquisition that put Talley Industries on the map, however, was the 1970 takeover of General Time Corporation. General Time was a large manufacturer and marketer of clocks and timing devices, among other products. Venerable brand names assembled under the General Time umbrella included Westclox Seth Thomas. The merger was achieved as the result of a protracted proxy battle that angered many of General Time’s shareholders. In fact, the Securities and Exchange Commission later sued to force Talley to pay those stockholders more money. The important result for Talley Industries, however, was that its revenue base was tripled as a result of the merger.

Thus, in the span of just a few years, Talley had grown from a relatively small defense products supplier to a diversified, multinational corporation with annual sales of nearly $300 million per year. That growth reflected a trend during that period toward the creation of multinational conglomerates. The thinking at the time was that, by combining diverse operations, a corporation could realize various benefits related to, for example, economies of scale and decreased vulnerability to business cycles in specific industries. However, Talley gagged on its acquisitions in the early 1970s, and its organization began to become unwieldy, so it postponed its rapid growth campaign for a few years, streamlined its holdings, and jettisoned some non-performing divisions.

Continued Growth through Real Estate and Acquisitions

Franz Talley resumed the conglomerate strategy in 1973, when he became involved in real estate investing and development. Talley Industries jumped into the real estate business with the acquisition of the renowned Arizona Biltmore hotel and more than 1,000 surrounding acres. The sale included the 53,000-square-foot Wrigley mansion, which had been built in 1931 and was owned by the Wrigley (chewing gum) family until the 1970s. After the purchase, Talley hired a team of land planners and real estate professionals who expanded the hotel and developed a master-planned community around it. Throughout the 1970s Talley sold off chunks of the property to developers and even sold the Biltmore Hotel itself in 1977. The project was ultimately a success.

Meanwhile, Talley Industries continued to grow internally and to acquire new companies. Importantly, in 1976 Talley purchased Sencel Aero Engineering Corporation, a designer, tester, and manufacturer of aircraft ejection seats and air crew escape systems. The purchase was an obvious complement to Talley’s original propulsion business, which was still marketing cutting-edge solid-propellant-activated devices in the mid-1970s. Those operations, combined with Talley’s other diverse holdings, pushed the company’s revenues past $400 million by 1977 (fiscal year ended March 1978), as profits rose to a record $16.7 million. Shortly after posting those record results, Franz Talley died suddenly of a heart attack at the age of 59.

Surmounting Difficulties in the Late 1970s

Franz Talley’s death signaled the start of a serious decline in Talley Industries’ financial performance. Indeed, the global recession of the late 1970s hammered several of Talley’s key industries. Just as important, though, Talley’s rapid expansion and simultaneous inattention to operating efficiency was hurting its bottom line. Talley’s board brought in B. Paul Barnes to try to turn the lagging company around, but the problems just got worse. In fact, the company lost money in 1978 and continued to do so for four straight years. Frustrated, the board dismissed Barnes in 1981 and hired Bill Mallender to head the company. Mallender returned Talley to profitability and maintained leadership of the organization into the mid-1990s.

Prior to joining Talley in 1973, Mallender had practiced law in New York for nine years. He met Franz Talley in the 1960s, when Talley hired the Wall Street firm for which Mallender was working at the time. Mallender was putting together a mutual fund in Florida when Talley lured him away to join Talley Industries. Mallender initially served as general counsel and did much of the legal work related to the disposition of the Biltmore property. Talley respected his insight, though, and Mallender eventually became intimately involved in the company’s key decisions.

The 1980s: A New Era

Mallender moved quickly after accepting the head post at Talley. Within three weeks he eliminated half of the company’s 104 headquarters employees. Within 12 months, moreover, he sold off eight companies that were engaged in industries ranging from heating and cooling to specialty plastics and apparel, and reorganized other subsidiaries. Although he kept some parts of Talley’s clock division, he began to restructure it to compete in the new business environment. Indeed, the clock industry, like many other consumer products segments, was under increasing pressure from low-cost Asian manufacturers. Within 15 months Mallender had reduced long-term debt by 38 percent and had restructured some of the company’s other obligations. Sales declined to $264 million in 1982 as a result of his efforts, but the company finally posted a positive net income of $8.2 million.

Company Perspectives

From a vision in 1960, Talley Industries has evolved — maturing through seasons of growth and restructuring. Confidently it faces the future, poised for exciting and profitable growth in the years ahead.

Having restored the health of Talley’s balance sheet, Mallender and fellow executives resumed the company’s acquisition drive in 1983. Their plan, though, was to purchase smaller companies in growing industries. Among Talley’s first purchases was a California manufacturer of automated welding systems. Talley also jumped into a promising stainless steel minimill venture. Late in 1983, moreover, the company added to the still-intact real estate division with the purchase of a 66-acre parcel in Phoenix that included a large mall. By 1985 Talley was generating $316 million in annual sales and $12 million in earnings, and employing a work force of about 4,300 people. Government and technical sales accounted for about 50 percent of that sales volume, while realty made up roughly 25 percent and commercial goods and apparel accounted for about 20 percent and five percent, respectively.

Talley continued to buy and liquidate businesses going into the late 1980s. Importantly, the company jettisoned its apparel and clock divisions, giving it an emphasis on real estate and technical products (including many defense-related goods) by the late 1980s. Talley also made some odd moves, such as the purchase of the East-West Federal Bank, a $300-million (assets) savings bank and mortgage lender that served the Chinese-American community in Southern California. Despite the turbulence, Talley’s revenues hovered around the $350-million-mark throughout most of the late 1980s and early 1990s.

Profits from Air Bag Technology in the Late 1980s

The most important development for Talley during the late 1980s was its success in the vehicle air bag business. Demand for air bags by vehicle manufacturers throughout the world began to surge during the late 1980s, signaling the development of a giant new industry. Interestingly, Talley was poised to become a leader in the rapidly growing niche. Talley had been involved in the industry since its inception and was considered a pioneer of safety air bags. The company had started working on air bags in 1967 when Chrysler Corporation sought Talley’s help in developing a compound to inflate its experimental air bags.

Talley’s designers tried gunpowder and freon, but the result was a poisonous gas. After other failed efforts, they finally devised a workable system that utilized a sodium azide propellant. Talley patented the system, but Chrysler had lost interest by then, so Talley approached General Motors (GM). During the mid-1970s GM ordered 22,000 air bags from Talley that it installed in Buicks, Cadillacs, and Oldsmobiles. After that, the air bag movement lost momentum as federal regulators and automakers squabbled. Meanwhile, Talley integrated the technology into its defense-related products and set the vehicle air bag on the back burner. Finally, the Department of Transportation ordered all carmakers to equip their cars with air bags by the late 1980s. Talley was suddenly positioned to significantly influence a soon-to-be-giant industry.

Talley toyed with the idea of manufacturing its own air bags. It was obvious to Talley executives, though, that they would have trouble competing with massive automobile manufacturers and suppliers that would inevitably compete against them. Rather than try to compete as a manufacturer, Talley decided in 1989 to license its patented technology to TRW Inc. In a huge transaction, Talley agreed to let TRW use its technology for 12 years. In return, TRW paid Talley nearly $100 million in cash and agreed to pay Talley about $1.15 for every air bag system that it sold, and about half that amount for every air bag sold by companies that it allowed to use Talley’s technology. Talley expected to receive a total of $200 million to $300 million throughout the term of the agreement.

Talley’s air bag deal occurred at a pivotal time, just as other of Talley’s operations were beginning to plummet into economic turmoil. Importantly, the bottom dropped out of the commercial real estate market in the late 1980s and early 1990s. Talley, which had bet heavily on future gains from its real estate investments, was left sitting on acres of devalued land and property. At the same time, an economic recession was battering some of the company’s smaller markets for goods like insecticides and buttons. Although Talley’s defense and technical products division remained relatively healthy, the net result was that the company became strapped for cash and was forced to default on some of its major loans.

Overcoming Financial Difficulties in the Early 1990s

Talley was able to restructure its debt during the early 1990s and to pay down some obligations by selling off its bank and an advertising subsidiary. Still, the company posted a string of ugly losses: $50 million in 1990, $43 million in 1991, and about $20 million in 1992 and 1993 combined. Fortunately, its technical products and defense-related operations continued to profit from demand for rocket motors, propellants, and other high-tech devices, and its steel operations and other industrial businesses remained strong. Income from those segments, combined with a slowly growing air bag royalty income, helped Talley avert bankruptcy and even return to profitability by the mid-1990s.

Talley narrowly escaped bankruptcy in the early 1990s. The company, still under Mallender’s direction, scrambled to streamline and reorganize. By 1994 all of its divisions were producing profits except for the real estate business, which Talley was in the process of exiting. Importantly, in 1994 Talley enjoyed more than $17 million in royalties (pure earnings) from its air bag business, making that segment one of the company’s most profitable. Its government products and services division contributed about $18 million in profits, while the industrial and specialty products divisions earned about $7.5 million and $5 million respectively.

Talley continued to report earnings gains in 1995 from its operations. In addition, the company received a substantial boost when a jury decided to make TRW pay Talley $138 million for failing to live up to its end of their original air bag agreement. Satisfied with the verdict, Talley forged ahead with its plan to reenter the air bag industry by teaming up with a division of General Motors to develop a more environmentally safe air bag. Talley also landed a major contract with the U.S. Navy in 1995 worth about $190 million. With its debt under control and improvements in key markets, Talley was positioned to boost earnings through the mid-1990s.

Principal Subsidiaries

Amcan Specialty Steels, Inc.; Rowe Industries, Inc.; Waterbury Companies, Inc.; Electrodynamics, Inc.; John J. McMullen Associates, Inc.; Dimetrics, Inc.; Diversified Stainless Steel of Canada, Inc.; Universal Propulsion Co., Inc.; Talley Defense Systems, Inc.; Talley Metals Technology, Inc.; Talley Real Estate Co., Inc.