In 1962, Litton led with the balance sheet, again. The financial statements were wedged between glossy pictures of English Cathedrals, Swiss Mountain Towns, and Canadian Parliaments.
The words “liberty,” “freedom,” and “free” (not cashflow) were used over 34 times.
This felt more like reading Christina Singleton’s San Cristóbal: Voices and Visions of the Galisteo Basin than an annual report. You sense the tension of the 1960s, and Litton ideologically defending the West.
Charles “Tex” Thornton’s Operational Highlights:
Why did Thornton present the number of stockholders? If anything, it signals dilution. Perhaps this was a tool to insinuate the company’s growth.
Company Plants, Conglomerate Gardens
“The company’s sales of microwave and display tubes this year reached the highest total in our history.”
Companies with deep moats survive poor management. A moat can result from a company’s structure and vice versa. The structural form can be a moat, also. They are, however, not the same thing.
In the case of decentralized organizations, the structure often precedes and reinforces the moat. Take a franchise like Domino’s Pizza. Franchisees, within certain limits, are responsible for the operation of their stores as they see fit and take on the capex risk. HQ focuses on growing the compounding machine by identifying geographic locations for new stores, training new franchise owners, and investing in marketing campaigns. Operations and strategy are separate.
However, a decentralized structure alone doesn’t constitute a moat. Domino’s convenience, pricing, and consistency all factor into its share of mind. If all quick-serve restaurants adopted a decentralized structure, there would be no moat. Howard Marks’ convention matrix springs to mind. For a business’ structure to be a moat it has to differ from the competition (at the beginning, at least).
This is why conglomerates, or serial acquirers, are exceptional. They can acquire or invest in multiple markets in a way that typical, singular businesses can’t, or don’t.
Typical business metaphors don’t apply to conglomerates…
Companies are living organisms and humans are their fundamental building blocks (anomalies, e.g. land trusts, SPACs etc., exist). The following metaphors capture that aliveness:
George Roberts described Teledyne as a branching tree. James Nisbet, one of Teledyne’s “Finders” described Allvac Metals, which became Vasco Metals and later Teledyne Inc., as a plant.
Yet, the allegory of a garden is most apt for conglomerates. It permits not only the foundational flux but also the cross-fertilization, diworsification, and cross-sterilization that occurs in a collection of companies. The single-organism image doesn’t capture how the roots of a conglomerate can change.
To extend the garden metaphor:
The founder is the architect/builder who leaves idiosyncratic traces of their personality in the garden’s (company’s) foundations. The gardener (capital allocator), who isn’t necessarily the founder, determines the exposure of plants, trees, and animals to the strongest sunlight or nutrients, how to arrange and combine the garden’s elements, and whether to add or remove parts. The gardener maintains the garden but is also a vessel for change.
With that in mind, let’s look at Litton’s revenues by category in 1962:
Business machines and related, 32%
Electronic systems, equipment, and services, 32%
Nuclear submarines & marine, 14%
Commercial electronic equipment, 11%
Electron tubes & precision components, 11%
The largest contributor to sales was the Business Machines Division, made up of the following:
Monroe Calculating Machine Company
Monroe Sweda Cash Register
Svenska Dataregister AB
Cole Steel Equipment Company
A. Kimball Company
Integrated Data Processing, Inc
Simon Adhesive Products Corp
Eureka Specialty Printing Company
I draw your attention to Cole because it was an office furniture company. A far cry from avionics; Litton is often lambasted for that.
Monroe Sweda's point-of-sale products enjoyed their highest margin in its history. It makes you question how decentralized this operation was: did this record margin performance occur due to market dynamics or Litton’s top-down actions since 1960?
Here is a list of customers for Litton’s business machines:
Bond houses,
Stock brokerage firms
Dairies and soft drink bottlers
Electrical manufacturers
Inventory control
Oil companies
Banks
Electronic components manufacturers
Aerospace firms
Electronic firms and steel manufacturers
Poultry ranchers
Drug firms
Public warehouses and manufacturers
U.S. Post Office
Other than feeding their staff at lunchtime, how many banks, Post Offices, or poultry ranchers required electronic components?
Charles Thornton acquired Litton in 1954 for its brand name and reputation for producing high-quality electron tubes. Despite 1962 being the best year in Litton’s history for the tube segment, it only contributed ~10% to overall sales. If the tubing business was the sole sunflower in the garden post-WWII, there were a host of sunflowers, rose bushes, and willow trees that existed, in 1962.
Geo-Marketing Decentralization
Last week, I touched on how Litton and Teledyne had contrasting marketing strategies. Both worked.
In 1962, Litton publicized a Joint Venture with the British company Elliott Automation and promoted the French products of Lignes Telegraphiques et Telephoniques.
Individual divisions were responsible for selling their own products:
“A new Triad Distributor division, specializing in marketing of catalog items manufactured by both Triad and Utrad, and the shifting of production of some of these items to Utrad, left Triad with more latitude to develop and market military and industrial magnetic components.”
“Triad Transfomer Corporation, had the highest sales and backlog in its history.”
Tex bet heavily on globalization and believed Litton’s products were universal. He felt no specific international marketing was required:
“[Tex became convinced that the traditional geographical view of markets had become obsolete. Each division of Litton, he directed, should consider its market as not only nationwide but international.”1
Note Litton’s aggressive European infrastructure growth in a short period:
“Since the Sweda name became a part of Litton in fiscal 1960, the manufacturing facilities in Stockholm have been more than doubled, sales have been doubled, and the number of sales and service outlets have been increased by 50%”
The same tactic was applied to Fritz Hellige’s medical devices in Germany:
“... resulted in the expansion of the division’s original facilities and in the erection of new buildings totaling 80,000 sq. ft. This new facility will house the most modern electronic production equipment and clean room in Europe.”
To summarize the international expansion:
“By the close of the year, the company had 67 manufacturing plants and major research and engineering laboratories. Forty-six of these were located in 15 states of the U.S. and 21 were in nine foreign countries, with the area devoted to plants and laboratories totalling 6,150,685 sq. ft.”
This was diworsification. Capital-intensive businesses require a nuanced understanding of how to maintain supplier relationships, communicate with customers and regulatory authorities, and execute growth initiatives in countries with significantly different cultural, linguistic, and socioeconomic norms to the parent.
Some of Litton’s international expansion was diversification rather than diworsification. The application of data systems and telemetry (the measurement and transfer of data using sensors) to geographical land surveying was applied globally, in the 1960s. This operation resembled a professional service rather than a capital-intensive business.
There were two types of topography: airborne and marine.
Aero Service, which Litton acquired in 1961, received contracts in Chile, Africa, Canada, and Australia. Governments and Federal agencies used Litton’s aerial mapping service to gauge and photograph the lay of their land. That supported large infrastructure projects, new-nation mapping, and mineral exploration. The business model was contractual: less time, resources, and local understanding were required compared to the physical buildout and continuous supervision of Sweda and Hellige plants.
Western Geophysical Company performed the marine oil explorations. In 1962, Western expanded into Mauritania, Africa, and Qatar.
To summarize, Litton’s physical European growth contradicted its marketing strategy in 1962. Top-down decisions to increase square footage were paired with the philosophy of leaving marketing to the individual divisions.
Space in Texas
The Aero Service was applied to space projects with an extreme level of detail:
“Aero established, to within the thickness of a pencil line, the precise location of the Telstar antenna in relation to existing U.S. geodetic stations. A location error of 1/50th of an inch in selecting the exact position of the 160-foot-tall radome and antenna could have resulted in complete inability to track the Telstar satellite in its orbit 3,000 miles away.”
Another division contributed to Litton’s aerospace offering: shipbuilding. Litton acquired Ingalls Shipbuilding in 1961, though it wouldn’t be confined to seaborne vessels:
“To Tex the move was a logical extension of his philosophy of thinking under broad headings rather than in terms of products. Ingalls was not “ships” but a part of “transportation.” Ships, like other units of transportation, represented new opportunities for the application of Litton’s electronic and other technological expertise.”2
The company started strongly…
“During its first nine months as a division of Litton Industries, Ingalls Shipbuilding Corporation greatly strengthened its position in the shipbuilding industry by winning contracts to build seven new vessels.”
“During the year the division completed and delivered the largest all-welded aluminium marine vessel ever built. The vessel is now in regular service transporting chemicals to various areas in the south.”
“Ingalls is the largest specialized shipbuilding activity on the Gulf of Mexico.”
… and its infrastructure was applied to oceans outside Earth:
“[Ingalls’] geographic location, supplemented by the broad technical skills and research capabilities of Litton Industries, gives it an advantage that is important to military and commercial, as well as space customers. Houston, Texas, has been selected as the focal point of NASA space activities.”
“The combination of Ingalls fabrication and metallurgical facilities, and its proximity to new Saturn assembly plants in New Orleans, gained the division its first work for the nation’s space program.”
To summarize, geographic location, literally, positioned certain contractors to support large institutional projects outside their specific product domains.
Extras & Stats
Gross Margin 25.85%
EBIT Margin 8.58%
ROE 15.85%
ROA 6.02%
ROIC 16.31%3
Working Capital Turnover 7.8
Capital Turnover 3.8
Inventory Turnover 7.4, implies 49 days to sell
Depreciation as a % of Op Profit 25.23%
Depreciation as a % of Net Fixed Assets 13.54%
10 board members, 40% are officers
15 officers, ~27% are board members
Foreign customers represented 25% of sales
Foreign manufacturing facilities 15% of sales
50% sales in defense, 50% sales in commercial markets
Though Litton purchased the outstanding stock of Ingalls, the acquisitions of Eureka Specialty Printing Company, Aero Service Corporation and Poly-Scientific Corporation used Litton stock.
“the public betting on growth was willing to buy Litton stock at the high price-earnings ratio of 30- to 40-1, which has become a Litton fixture.”4
“These facts, along with the vitality of the economic environment in which we function today throughout the world, enable us to view the future with confidence.”
Dear Intelligent Investor,
Thank you for reading.
You can access this report and more due to the generosity of Adam Mead here:
Some Excellent Content
Beirne Lay, Somone Has To Make It Happen (1969), pg. 164.
Lay, Someone…, pg. 163.
Invested capital can be messy to calculate. Here I’ve used total equity + total debt - goodwill.
Lay, Someone…, pg. 166.