“The effort and money invested during previous years in extensive research programs have been rewarded by important development contracts in a number of areas of our activity.”
“In almost all of the more than 100 different magnetron and klystron models we manufacture we are the principal source.”
“We see a broad potential in the years to come for the production and sale of our computing equipment, of our “building block” components, and of complete automatic control systems, both for military and for industrial automation applications.”1
Headquartered in Beverly Hills, CA, Electro Dynamics Corporation was founded in 1953 by Charles “Tex” Thornton, Roy Ash, and Hugh Jamieson. After receiving a loan from Lehman Brothers, in 1954, Thornton acquired the vacuum tube producer “Litton Industries” and changed the company’s name.
Thornton wasn’t just your typical technology founder. By age 14, he is said to have acquired 40 acres of land.
During World War II he rose through the US Air Force’s ranks before leading the Office of Statistical Control. Afterwards, Thornton offered his group of 10 officers to several companies: an all-or-nothing deal. Henry Ford II was in a tight spot, so he interviewed the team and hired them. This motley crew became known as the “Whiz Kids.”
Using their statistical proficiency, this group created a new corporate structure with individual accounting systems for Ford Motor Company. Each division became a separate "profit center" (sound familiar?). The Whiz Kids became famous worldwide for their role in that transformation.
The Whiz Kids weren’t the only exceptional individuals Thornton convinced to join Litton’s mission, though:
“When Litton Industries was formed, Tex Thornton attracted Henry [Singleton] to pioneer Litton’s work on the lightweight inertial navigation system still used by military and commercial aircraft worldwide. Henry became director of the engineering of the Electronics Equipments Division in 1957 and vice-president and general manager of the division in 1958.”2
After that brief introduction to Charles Thornton and Litton Industries, let’s look at the operational statistics he used to measure his company’s annual performance. You’ll notice some differences to Singleton’s statistics.
Charles Thornton’s Highlights:
1956 Sales $14,920,050
1955 Sales $8,898,797
1956 Earnings $1,019,703
1955 Earnings $436,413
1956 Earnings per share $0.97
1955 Earning per share $0.44
1956 Net Working Capital $2,655,003
1955 Net Working Capital $1,130,111
1956 Backlog $35,000,000
1955 Backlog $19,000,000
1956 Employment 2000
1955 Employment 1100
1956 Shareholders 3000
1955 Shareholders 1700
Backlogs?
Charles focussed a lot more on the backlog than Henry did in his Teledyne annual reports. This was evident from the letter to shareholders and Thornton’s inclusion of backlog as one of the key operating statistics.
That’s not to say the backlog wasn’t important to Teledyne. Henry mentioned “backlog” in the annual report for the first time in 1965 - almost five years after founding his company.
He did so in typical Singleton fashion by reporting record-breaking statistics:
“Teledyne is entering 1966 with the brightest prospects in its history. Backlog is at record levels and business activity in our operating divisions is at an all time high.”3
In contrast to Singleton, Thornton used the term ‘backlog’ 7 times in the first 6 pages of his 1956 annual report.
Isn’t it peculiar that a scientist, who was known to be obsessed with details and quantitative financial management techniques, hardly ever cited Teledyne’s backlog whilst Henry’s mentor, the founder of Litton and the company Singleton previously worked for, felt shareholders needed to know?
“At the beginning of the year the company’s backlog of products and services amounted to $19 million. The addition of $31 million in new business during the year, less the delivery of almost $15 million in sales for the period, resulted in a backlog at year end of $35 million.”4
Delayed Gratification
“The increased earnings reflect both the greater volume of sales during the year, and more importantly, the increased profitability of our operations. A number of the research and development programs which were undertaken in earlier years to establish proprietary positions are now resulting in profitable sales.”5
Yet again in the defence contracting space in the mid-twentieth century, we witness a company marrying innovation with economic profits.
This is completely at odds with mainstream media narratives that typically teach us that these two concepts are mutually exclusive. You either reinvest or proritize profits. You either fund growth or prioritize value to shareholders. Close but no cigar.
Litton and Teledyne did both simultaneously…
Real Estate Affinity
Henry Singleton loved real estate of all types. Whether this was the case before he met Tex Thornton is hard to know from the outside looking in. One might be able to infer from his childhood experience as the son of a well-to-do Texas rancher that his preference for property was innate. What is clear, is that Charles Thornton shared Singleton’s desire to acquire property and saw it as critical to technological leadership in the electronics industry:
“to stay in the forefront of the dynamic electronics industry - the company has continued its expansion of physical facilities during the year.”
In the twenty-first century, the benefits of intangible assets, brands, and capital-light businesses are frequently celebrated by investors. Indeed, they should be. What’s interesting in studying the businesses and founders of the companies that laid the foundations for the intangible-dominated world we currently live in is their obsession with physical assets.
Let’s see how Charles Thornton described the development of Litton Industries through the lens of land, property, and manufacturing facilities:
“the first 40,000 sq. ft. section of a planned 120,000 sq. ft. supplement to our plant facilities at the Electron Tube Division in San Carlos, California. This unit now houses the production of klystrons, most of our power tube engineering activities, and the administrative offices of this division.”
“The second 40,000 sq. ft. portion of this new plant is scheduled for construction within the present fiscal year. Completion of this second unit will bring the total plant facility at San Carlos to 145,000 sq. ft.”
“The manufacturing, laboratory and office activities of the company presently occupy almost 450,000 sq. ft. at nine plant locations.”6
According to a Horatio Alger tribute, Charles Thornton started purchasing land at age 12, had accumulated around 40 acres by the time he turned 14, and operated a successful filling station and car dealership by age 19.7
It makes you feel a little lazy, doesn’t it?
The point is that land was pivotal to the creation of the building blocks of intangible technology:
“From experimental design to finished product, Litton Industries facilities are equipped to be independent and self-contained.”8
Inertial Guidance Systems
“The need is for a guidance system not dependent upon ground contact - radio, radar, or visual - but which can always retain in its own “brain” a full knowledge of where it is relative to both a starting point and a destination on the ground.”
At the risk of stating the obvious, capitalism enables those who provide solutions to problems to capture value by acquiring mediums of exchange.
One may believe that the bigger the problem is, the greater the reward for the group of people providing the solution. That happens when the company solving the problem is the sole supplier of the solution. This is rarely the case. The more competitive a marketplace, the harder it is to capture economic value, regardless of the importance or size of the problem that has been solved. Just look at the airline industry.
Here is how Charles described a potential solution to the inertial guidance system problem:
“a platform capable of retaining an original orientation relative to a spherical earth in spite of the drift or acceleration, or the pitching, rolling, or other motions of the aircraft – are the predicted answer to this need.”
As we have the benefit of hindsight bias, we can conclude that Henry Singleton’s management aptitude and technical expertise contributed to Litton’s speciality in that area even before he was promoted to director of the engineering of the Electronics Equipments Division in 1957:
“Representative of the year’s operations has been the company’s progress in inertial guidance, one of the most highly technical and advanced areas of development in the electronics industry.”
“Resultant contracts for specific application of these techniques have provided the basis for major research and development activities… Expected with the successful completion of this development is operational equipment which will have widespread application leading to quantity production.”
“The company’s recognized capabilities and position in the field indicate promising growth in this area in the future.”9
To intelligent investors at the time, in 1956, the only way to discover that Henry Singleton contributed to this area would have been to sleuth…
Computers Akimbo
This period of business history is just one small part of the transition from analog to digital. It’s interesting to note that Litton didn’t wholeheartedly back the new form of technology and ditch the old. Thornton argued that in 1956, there were three general areas of computer applications:
Mathematical computations.
Automatic control functions (commercial & military).
Business data handling.
Litton focussed on the first two sections and in 1956 released the LITTON 20 which was a digital computer designed for the solution and analysis of differential equations. To put things into perspective, in 2023, handheld calculators can solve differential and integral calculus problems in a matter of seconds. Such a phenomenon would have appeared ridiculous, in the 1950s.
“The development of a completely new set of “building blocks” for computer assemblies - a new type high density memory drum, new transistorized computer circuits, and specialized input-output devices – as well as the complete systems employing our techniques, were received with great interest.”
As we’ve alluded to in previous write-ups, breakthroughs in the fundamental building blocks of technology often serve to have the largest second-order effects as the benefits of the underlying components cascade throughout the technological system. Thornton touches on that notion in 1956:
“our unusual position in the field of digital computers and controls - our ability to serve increasingly complex problems with less complex equipment having unusually low size, weight, initial cost, and maintenance cost factors, but retaining the high accuracy characteristics of digital versus analog units - has now been generally recognized by industry and the military alike. We see a broad potential in the years to come for the production and sale of our computing equipment, of our “building block” components, and of complete automatic control systems, both for military and for industrial automation applications.”10
“we were awarded contracts for specific development of applications of these techniques to problems in every major branch of the military.”
Electron Tube Division
Litton was a pioneer in the production of high-quality microwave tubes. This was the extension of Charles Litton’s contribution to the production of microwave tubing for communications devices and radar during World War II.
High-power magnetrons and klystrons propel the pulsating microwave energy which constitutes the emanating beam of electrons in radar equipment. These microwave tube devices enable electrons to be oscillated and amplified. Klystrons can both oscillate and amplify electrons whereas magnetrons can only be used as oscillators.
With klystrons, where the electrons have been injected normally through the cathode, the beam follows a linear path. However, in the magnetron, where the electrons have been forcefully injected, the beam follows a spiral path from cathode to anode.
The most common use of a magnetron is a microwave oven that many of us have in our kitchens. The magnetron, a type of tube, provides high-power frequency (electronic waves) which is distributed to heat your meal by interacting with the food’s water molecules.
With that layman’s explanation out of the way, let’s see why klystrons and magnetrons were central to Litton’s operations in 1956:
“In February of this year we received from the Air Force what is believed to be the largest single contract ever placed for microwave power tubes. This contract was for a product we had developed over a period of four years in conjunction with the Microwave Laboratory of Stanford University.”
“we were awarded this contract on the strength of our reputation in the microwave field tube.”11
Again we see that monopoly-like economics exist for those who have pioneered cutting-edge technology:
“In almost all of the more than 100 different magnetron and klystron models we manufacture we are the principal source.”
We’ve touched on the symbiotic relationship between product and process in technology’s development before. Here is a good example of that in 1956:
“the development of our own specialized manufacturing processes for their production has enabled us to retain in volume production the high-quality characteristics which had been designed into these products originally – a feat unusual in the field of microwave tube production, where it is frequently difficult to maintain quality standards in quantity production.”12
The Devil is in the Details: Litton vs Teledyne
A similarity we see between the activities of Charles Thornton and Henry Singleton is the desire to diversify. The cynic may say that Singleton was also a concentrated contrarian. One can be both concentrated and diversified. What’s important is distinguishing the two concepts.
You can plough your entire net worth into Berkshire Hathaway. That's a highly concentrated bet on a diversified museum of corporations. On the flip side, you could invest your entire net worth equally into 100 coal miners but still not be diversified.
Here is Charles’ opinion on diversification:
“Such activity is an integral part of our plan to broaden our capabilities in this field and to continue the diversification of the use of our production facilities.”13
Litton’s acquisitions were funded by stock issuance in a way that was similar to Teledyne’s acquisitions in the 1960s. An apples-to-apples comparison can be made when you review the actions of Litton in the 1960s with Teledyne in the 1960s. Again, this is stating the obvious, but the economic and business context of the Go-Go 60s was markedly different to the post-war 1950s.
Now onto the differences between Litton and Teledyne…
In the notes to the financial statements of the 1956 annual report, Litton shared a list of all of its wholly owned subsidiaries: something Teledyne rarely did.
Litton Industries of California
US Engineering Co, Inc
The Ahrendt Instrument Company
The Automatic Seriograph Corporation
USECO Incorporated
(Triad acquired after year-end)
(Utrad acquired after year-end)
West Cost Electronics Co (Majority Owned)
Litton provides a more detailed breakdown of all its areas of research & development and product lines whereas Teledyne only cited its main areas of interest for future growth:
Radar and countermeasures
Digital computers and controls
Inertial guidance systems
Microwave power tubes
Servomechanisms and automatic controls
Electronic transformers and magnetic components
Printed and etched circuitry
Precision microwave components
It’s worth noting that Litton chose to present its statement of earnings first whereas Teledyne led with the balance sheet.
That concludes our qualitative review of Litton Industries 1956 Annual Report.
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Recent High-Quality Content
Charles Thornton, Litton Industries 1956 Annual Report, pp. 3-14.
Memorial Tributes, Vol 9, National Academy of Sciences (2001), pp. 251-252.
Henry Singleton, 1965 Teledyne Inc. Annual Report, pg. 7.
Thornton, Litton…, pg. 6.
Thornton, Litton…, pg. 7.
Thornton, Litton…, pg. 8.
Thornton, Litton…, pg. 16.
Thornton, Litton…, pg. 10.
Thornton, Litton…, pg. 13.
Thornton, Litton…, pg. 14.
Thornton, Litton…, pg. 14.
Thornton, Litton…, pg. 14.