“Never in all history have mankind’s material opportunities been so limitless.”
“For the greatest opportunities still await.”
“The cascading technology of today portends a tomorrow more abundant in the new developments, progress and growth than any era the world has ever known.”
noun: opportunity; plural noun: opportunities
a time or set of circumstances that makes it possible to do something.
Derived from the Latin word “opportunus” – four definitions:
Advantageous
Liable / Exposed
Suitable
Useful, Fit, Favourable, Ready
op- toward, at
portus - port, harbor
Harbor vessels are ready.
In Litton’s 1963 annual report, ‘opportunity’ (or its plural) appeared over 42 times and ‘contract’ appeared over 31 times.
The report is formed of 5 ‘opportunity’ chapters.
Tex reverted to leading with the income statement, in 1963.
Charles “Tex” Thornton’s Operational Highlights:
In 1958, Thornton discussed earnings plus depreciation. In 1963, he termed that “cash flow” ($35mm). No brownie points for delineating EBITDA and cash flow, intelligent investor.
A quick way to judge depreciation tomfoolery is to cross-check what the company siphons off each year from its accounts with what it actually spends on physical assets — “Expenditures- for property, plant , and equipment other than that added through acquisition totaled approximately $26 million.” – over 2x the depreciation charge of ~11.5mm.
An anomaly, perhaps?
Litton started reporting its ‘statement of source and application of funds’ (cash flow statement) in 1970. From the annual reports I currently have, only 3 other data points exist:
1970: D&A charge ~$61mm. Capex spend ~$152mm. ~2.5x
1979: D&A charge ~$105mm. Capex spend ~$158mm. ~1.5x
1989: D&A charge ~$204mm. Capex spend ~$249mm. ~1.2x
A pattern.
There’s a chance these were the three worst years. Survivorship bias could be obfuscating the truth.
How did the student (Singleton) compare with the teacher (Thornton)?
Teledyne first reported its “statements of changes in financial position” in 1971 and used the “principally straight-line” method. The charge to D&A was ~$33mm whilst the property and equipment additions were ~$32mm. In 6 out of 9 years in the 1970s, Teledyne charged more to depreciation than it spent on capex.
From 1971 to 1990, excluding 1980-1985 missing data (nod to survivorship bias, again), Teledyne spent ~$109mm more on physical assets than depreciation. Aggregate spend on d&a was $931mm in that period (excluding missing 6 years in the 80s).
On seven occasions, Teledyne spent more on capex than depreciation. The grossest difference was in 1978:
~57mm depreciation charged
~102mm added to physical assets
So in the company’s largest known example of bad behavior over a 14 year period, Teledyne spent 1.78x depreciation on new physical assets. From Litton’s 3 years of available data, the company’s worst was 2.5x.
1963 was a year of unusual organic growth for Litton. If shareholders took the following at face value, perhaps the aggressive capex investment was justified in 1963:
“About two-thirds of the growth achieved in 1963 was derived in this manner, greater than the company’s historical average of about 50%.”
We know that organic growth is the by-product of past reinvestment so 1963’s growth implicitly point to previous aggressive capex.
Where does that leave us?
The issue is not so much the aggressive reinvestment in Litton’s operations but the liberal, or understatement, of depreciation that served to increase Litton’s reported earnings in the short term.
Teledyne was considerably more conservative in its treatment of depreciation than Litton, even though both Thornton and Singleton scrutinized depreciation to determine what cash was available.
Space: Lindy & Tubes
Tex saw space as “the largest and the least explored” opportunity.
Look at the Lindy Effect at play in 1963:
Litton’s contract to design “hard” space suits for NASA.
Litton had designed the soft spacecraft suits for astronauts in the past — it was trusted to work on a new technology in the same domain.
Litton Radcom’s contract to design, fabricate, and test beacon antennas for the Apollo command module’s return to Earth.
Litton was awarded this “largely because of its previous performance in designing and manufacturing high temperature antennas for the Gemini two-man space vehicle.”
Litton Radcom’s design of the centrifuge for the Apollo voyage’s centrifuge.
Radcom successfully designed the centrifuge for previous astronaut training on Project Mercury.
Minuteman contract to develop underground launching sites for intercontinental ballistic missiles.
“Litton was selected to develop the Minuteman electronic memory because of the high reliability of similar systems developed for aircraft.”
Here is a space publication reporting on Litton’s Radcom antenna developments in Fall 1963:
Note the new NASA Manned Spacecraft Center was in Houston but Radcom was based in Maryland.
That seems to challenge the thesis that geographical location was critical to contract awardance. Why in this example did location not matter?
Lindy. Past contractors, considering they are competent, are more likely to be chosen in the future than competitors even if they have never produced the new technology before.
Did Litton’s electron tubes, the foundation of the company’s prestige, exhibit Lindy dynamics?
Litton supplied klystrons for the Ballistic Missile Early Warning System (BMEWS) near the Arctic Circle, for many years. In 1963, it won a new contract from the US Army Electronics Material Agency for “electrostatically focused klystron.” The power to weight ratio improved by a factor of five: electromagnets formerly required to focus the electron beam in high-power klystrons were eliminated.
The Tube division received an order for barratrons - a new, proprietary product:
“In other programs, the Electron Tube division produced the world’s highest power L-band klystron for use in a radar missile tracking system.”
“The division also delivered the world’s largest electron tube.”
Sea: Secret Strategy
Ingalls shipbuilding division bridged the gap between space and sea. As part of the space effort, it produced nine giant aluminium Y rings for the Saturn V (Apollo’s booster).
In terms of ships, Ingalls delivered or was due to deliver a total of 8 nuclear submarines, in 1963. It also manufactured surface vessels, like USS Holland, that served submarines.
Ingalls was the first private shipbuilder to win contracts for amphibious assault ship and dock ship contracts.
Tex was proud of Ingalls new shipbuilding process:
For simple metalwork, 1/100 scale glass negatives of full size templates marked the steel plates of ships, “the images of these negatives are projected in a darkened workroom and traced onto the plate by workmen.”
For more complex jobs, the same 1/100 scale negatives are used alongside a machine “which precisely scans them and guides cutting torches automatically over steel plates. Ingalls is the only private shipbuilding firm in the United States with both of these technologically advanced processes.”
Claude Shannon’s observation on Henry Singleton comes to mind:
“He always tries to work out the best moves… and maybe he doesn't like to talk too much because when you're playing a game, you don't tell anyone else what your strategy is.”1
Tex took the opposite, more promotional, approach and revealed details, plans, and proprietary technology whereas Singleton shunned the media.
Look at Thornton’s desire to reveal a new plasma generation process that originated from Litton’s Space Sciences Laboratory plasma thrustor engine.
“As a byproduct of these and other plasmas physics programs, the Space Sciences Laboratory discovered a process for generating plasma in an electromagnetic field. The company believes the new process holds great promise for new applications in the field of plasma dynamics, both in space vehicle propulsion and in research involving temperatures greater than that of the sun.”
Moving back to the ocean, Litton won two significant contracts in geodetics to build magnetic profiles and gather data on the earth’s geologic structure in specific regions of the world:
The Aero Service division completed a 144,000 square mile survey of the North Sea whilst utilizing the Guidance division’s technology: “an interior navigation system… has been installed on the aircraft to help guide it on flight lines of unprecedented precision.”
Western Geophysical Division also received “The largest single contract for seismic surveying ever awarded” for 14,440 square miles search for oil in the Persian Gulf.
Amos Atmosphere
Litton’s strategy was to win secondary market contracts that defense firms with greater resources cared less about. Look at the reason why Litton won the F-111’s navigation and attack system contract:
“Because of its previously demonstrated competence in aircraft navigation systems, the division was selected through competition, prior to the awarding of the prime contract, as the leading candidate for this aspect of the F-111 program”.
The painting of Litton as being on the wrong side of a technological paradigm shift towards semiconductor technology is an oversimplification. In 1963, Litton received a contract for Phoenix’s (weapon) computer and display system on the Navy’s version of F-111.
“This computer will make extensive use of advanced microelectronic circuit techniques and will have an all solid state random access memory of large capacity.”
Technology developed by military contractors was dispersed to general civilization also. For example, air computers were supplied to Boeing 727 jet airliners in 1963:
“the Guidance and Control Systems division installed a modified version of its high production inertial guidance system on a Pan American World Airways jet airliner.”
The various commercial tests were sponsored by the Federal Aviation Agency. The Agency also sponsored Litton's research and product development in communications antennas to solve the problem of information transmission between airports and aircrafts. The Radcom division won contracts for 17 air traffic control beacon antennas in Canadian airports and radio and broadband antennas in Europe.
Tex believed that lasers were the future of communications systems. The electron tube division introduced a commercially available gaseous state laser… “the coherent light source of the Tube division’s laser operates in the visual and near infra-red regions.”
Here is an example of combinatorial evolution. Multiple divisions collaborated to bring about a new technology: the Electron Tube and Airtron divisions provided the laser pump and Airtron supplied the crystal for the calcium tungstate laser.
Earth
The Aero Service division continued with its aerial mapping services and electromagnetic surveys.
“In these projects Aero not only gathers basic data such as photographs and magnetic readings, but also performs the vital functions of integrated, objective interpretation and evaluation of the information obtained.”
Western Geophysical designed and built a proprietary seismic data processing analog computer wherein seismic signals were brought back via magnetic tape.
A new division called Atherton, separated from the Electron Tube division, was created specifically for microwave commercial use. It manufactured and marketed equipment for institutional and commercial cooking and heating of food.
Business
Business Machines was Litton’s second largest segment in terms of sales in 1963. The product driving its growth was the Monrobot XI computer.
“During the fiscal year, 60 more units were ordered by oil companies alone, helping make the Monrobot XI the most widely used small scale business computer in the world.”
Litton began programming the computer to meet the requirements of specific business problems in different industries with “packaged, or predesigned, programs.”
Monro-Card magnetic record card doubled the memory capacity of the Monrobot XI computer.
Another large contributor to the business machines segment was calculators:
“Monroe-Matic 8F-213, the most compact fully automatic calculator ever offered, and three new models designed specifically for statistical work.”
Monroe-Sweda introduced a new Dataregister, 30-total point of sale recorder. The Dataregister had a couple of large orders in the U.S. For example, a large U.S. motel chain ordered 100 Dataregisters and a retail store ordered 1,000 point of sale machines also.
Litton created a new division for electrosensitive and thermosensitive production called Commercial Papers, Inc.
Tex continued his emphasis on expanding the sales organization of Litton too.
“In five U.S. cities, the Group opened sales offices which make available, in one central location, the products of all of its divisions: Monroe calculators and other business machines; Monroe/Sweda point-of-sale equipment; Kimball merchandise tags and tag punching and making machines; Eureka Specialty Printing business forms; and a variety of other products.”
Accompanying the centralization of sales were steady improvements to many products in the business machines segment:
Fritz Hellige’s 12-channel electroencephalograph for brain surgery, and cardiac phonocardiograph for recording heart phenomena
Data/Log MC 10-40 printer of Monroe for the medical devices markets - “the world’s fastest data printer.”
Triad Transformer division won a 350,000 transformer contract
Westrex Recording division phonograph records created a new StereoDisk Recorder model.
Stats:
10 Board of Directors, 16 Officers, 4 were both…
10% of Board are Directors, 25% of Officers are Directors
Gross Margin 25.18%
EBIT Margin 8.81%
ROE 19.10%
ROA 6.59%
ROIC 14.98%
WC Turnover 4.6
Capital Turnover 4.5
Inventory Turnover 5.0, 73 days to sell
Dep as % of Op Prof 23.54%
Dep as % of Net Fixed Assets 13.35%
Segment Sales:
Advanced defense electronic systems 40%
Business machines & office equipment 25%
Nuclear submarines & marine vessels 15%
Electron tubes & precision components 11%
Professional equipment and services 9%
Defense 55%, Commercial Applications 45%
20% of products delivered for use outside of the United States while 15% originated in other countries.
Dear Intelligent Investor,
Thank you for reading.
You can access this report and more due to the generosity of Adam Mead here:
Worth Reading
Ronald Soble, ‘Teledyne’s Singleton: He Plays it Close to the Vest’, Los Angeles Times, Sunday, August 1st 1976, Part IV, pg 2.