Litton Industries, Inc. Business Information, Profile, and History

History of Litton Industries, Inc.

The U.S. conglomerate Litton Industries, Inc. has endured one of the American business world's most famous expansion odysseys. From its foundation in 1953 through the late 1960s, Litton's annual sales grew from $3 million to $1.8 billion as the company expanded from a relatively small electronics company to a far-flung aggregation of interests on the momentum of myriad acquisitions. Mounting debt, increasing bureaucracy, and other problems brought about an equally dramatic descent. By 1994, divestments whittled Litton down to two businesses: defense electronics and shipbuilding. The electronics segment included industry-leading electronic surveillance and aircraft guidance systems and missile cruisers. In the early 1990s, those high-tech electronic warfare products were in high demand around the world. Litton's Ingalls Shipbuilding subsidiary was one of America's largest and the world's most successful. It manufactured and repaired amphibious assault ships and guided missile cruisers. The U.S. Navy was one of Litton's best customers in both its business segments, and government contracts in general constituted over two-thirds of the company's revenues in the 1990s. The majority of Litton's operations were located in the United States, but the company also had plants in Germany, Canada, and Italy.

By the time he founded Litton in 1953, Charles "Tex" Thornton had compiled quite a resumé. Born to a family of modest means, Thornton made his first real estate investment at 14 and owned a filling station and car dealership at the age of 19. Thornton's reputation as an astute businessman was established during World War II when he designed a statistical control system that vastly improved the U.S. government's ability to procure and allocate military equipment.

Thornton and his associates, who included Robert S. McNamara, Arjay Miller, and Roy Ash, achieved fame during World War II as the Air Force's "Whiz Kids." After the war, the entire group was hired by Ford Motor Company. After two years at Ford, however, Thornton went to work for Howard Hughes and helped establish Hughes Aircraft Company in the semiconductor market. When Thornton tired of Hughes's eccentric business practices, he decided to form his own company.

When Thornton organized his company, he did not have any capital. However, he correctly believed that the U.S. Department of Defense would soon be seeking increasingly sophisticated weapons and that there would be room in the defense industry for another large electronics company. Due to the fact that small electronics firms tended eventually to be eliminated or absorbed by larger competitors, Thornton resolved that his company would grow and expand quickly, by making acquisitions if necessary. His company would have to be large if it was to compete with rivals like Howard Hughes.

Thornton believed that the success of his plan depended on surrounding himself with financially astute and technically proficient businessmen. Since he could not offer high salaries, he used stock options to induce people to join him. Over the years, the list of "Lidos" (Litton dropouts) read like a Who's Who of prominent American businessmen: Harry Gray built United Technologies Corporation; Dr. Henry Singleton founded Teledyne, Inc.(which later owned a significant stake in Litton); Arjay Miller became president of Ford Motor Company; and Robert McNamara became a Ford president, the U.S. Secretary of Defense, and head of the World Bank.

With the help of Roy Ash and Hugh Jamieson, Thornton formed a company called Electro Dynamics Corp., and immediately set out to find the small electronics company on which they would build their empire. Litton Industries, a vacuum tube manufacturer located near San Francisco, California, seemed the ideal choice. The only problem involved raising the $1.5 million necessary to purchase the firm from its founder, Charles Litton. After an agreement with Joseph Kennedy collapsed, Thornton and Ash approached Lehman Brothers, an investment firm. Lehman Brothers had followed Thornton's career since he was a vice-president at Hughes Aircraft and had decided to finance Thornton before he even requested assistance. Joseph Thomas from Lehman Brothers later said that their firm did not invest in Electro Dynamics as much as it invested in the ability of Thornton.

Using borrowed money, Thornton acquired Litton Industries in 1954 and purchased a few smaller electronics firms that same year. Thornton's strategy was to continue purchasing electronics companies with high growth potential and build Litton into a company that could meet almost any request for advanced technology.

Since Thornton knew Litton stock would eventually increase in value, he paid cash for companies whenever possible. Colleagues claimed that one of Thornton's techniques for arriving at a good price for a company was to continue the negotiations for as long as possible until physical exhaustion caused the other party to yield. After acquiring a company, Thornton allowed the original employees as much freedom as possible, so they could continue conducting the operations that made the company desirable in the first place.

When he purchased Litton Industries, Thornton promised Lehman Brothers that his company, with $8 million in sales, would have $100 million in sales by 1959. As it turned out, Litton Industries reached $120 million in sales by that year. In order to reach and exceed his goal, Thornton had merged with Monroe Calculating Machines. Monroe benefited from Litton's technological assets while Litton needed Monroe's sales and service outlets. Besides calculators, Litton was manufacturing inertial guidance systems for aircraft, potentometers, barratons, duplexers, klystroms, and other electronic products. During this period, almost 50 percent of Litton's business was with the U.S. government.

By 1961, Litton was the fastest growing company on the New York Stock Exchange. Litton's success during this time was attributed largely to Thornton's business acumen. Although Thornton had built Hughes Aircraft into a leader in the field of semiconductors, he kept his own company out of that market. The semiconductor market crashed in 1961, confirming Thornton's decision. Thornton also refrained from manufacturing transistors, which overcrowded the market in the early 1960s.

When Litton stock began selling at 33 times earnings (it was later to reach 75), some analysts suggested that the company would soon experience financial difficulties; Litton had acquired 23 companies in eight years. Thornton defended himself by pointing out that he purchased companies on the basis of how well they were managed and then provided the management with the money and freedom they needed to develop new products. The rate of growth for these companies, which averaged 50 percent a year, was produced internally as well as through acquisitions.

By 1963, sales reached $500 million. An article in Fortune magazine suggested that Litton's success lay in going against the current wisdom. For instance, in its defense work, Litton concentrated on procuring contracts for manned aircraft and let other contractors fight over missile contracts. The U.S. Air Force's need for aircraft turned out to be greater than anyone had previously suspected.

One of Litton's most important acquisitions was Ingalls Shipbuilding Corporation, the country's third largest private shipbuilder. The large but ailing company was purchased for $8 million in cash and the assumption of $9 million in debt. The appeal of the company was that it made submarines and oil-drilling equipment to which Litton's electronic controls could be added.

In the mid-1960s, Litton continued to sustain its high rate of growth, even after it passed the one billion dollar mark in sales. Although it continued to acquire more companies, Litton resisted defining itself as a conglomerate; instead, it referred to itself as a "technological company," or a multi-industry manufacturer of products whose common denominator was their technological complexity. Where Stouffer frozen foods and Royal typewriters fit into the picture was not clear. Yet Roy Ash spoke of the electronics empire as "a company that is meaningful as a whole" with "a coherent relationship between its different parts."

After 57 quarters of remarkable growth, Litton reported a decline in earnings of $11 million and, as a result, its stock plummeted. Investors incurred a paper loss of $2 million. The decline in profits would not have been such a catastrophe if Litton stock had not been selling at 40 times earnings, and if Litton had not conducted a certain type of publicity campaign. Critics charged that Litton's true innovations were in investor relations, rather than in high technology.

Forbes magazine described Litton's annual reports as "a feast for the eye and a famine for the mind." In fact, Litton used unusual, but not illegal, accounting techniques that exaggerated the company's growth. Litton convinced its stockholders to look at the company's "synergy" and its "meaning as a whole" rather than scrutinize figures that would have revealed some money losers among Litton's acquisitions. The company's highly publicized technological innovations and perceived advantage in the market was also exaggerated. For example, the license for Litton's microwave oven was owned by Raytheon, the company that invented it. It was revealed that Litton relied heavily on other companies' research and development of new products. Litton's success resulted from producing other companies' inventions inexpensively; when it had to depend on its own designs the company often ran into difficulties.

Part of Litton's failure to develop better products was attributed to the company's emphasis on short-term growth. Management often overlooked long-term research and development in favor of immediate financial gains. Although Litton executives envisioned themselves as part of a high technology conglomerate, according to Business Week magazine the company was "a mundane manufacturer of capital goods."

In 1972, Litton's credibility was further damaged by Roy Ash's claim that after three years of declining profits, Litton's sales would revive that year. Instead of sales reviving, however, the company recorded a $2.3 million deficit. The division most seriously affected was Ingalls Shipbuilding, which had recently built a large shipyard. Due to delays in building a number of container ships, Litton was forced to pay a total of $5 million in penalties. In addition, due to delays by the shipbuilder in meeting a $1 billion contract for landing helicopter assault ships, the U.S. Navy decided to reduce its initial order from nine to five ships.

In 1973, Fred O'Green, an engineer, was chosen by Thornton to replace the departing president Roy Ash. O'Green was instructed by Thornton to reduce Litton's holdings and improve its technological competence. O'Green was chosen because of his experience with Ingalls Shipbuilding. It was thought that O'Green could use his expertise to correct production and design problems at the shipyard.

O'Green began to analyze Litton's various businesses and separate the profitable ones from the money losers. In 1974, Litton reported $77 million in write-offs in the business systems division, which had lost money for two consecutive years. In 1979, the company sold its Triumph-Adler typewriter business, which had lagged far behind its competitors. The largest write-off, however, was the $333 million of cost overruns Ingalls Shipbuilding absorbed from the five disputed helicopter ships it had built for the U.S. Navy.

As Litton eliminated its losing businesses, the company's more successful ventures became apparent. Western Geophysical emerged as one of Litton's most profitable holdings; its seismic exploration services prospered during the 1970s oil crisis. Western Geophysical had compiled over 200,000 miles of logs charting seismic activity and these logs were a priceless source of information for oil drillers to pinpoint sources for oil. With 30 research ships collecting data around the world, Western Geophysical led the world in providing seismic information to the oil industry.

Another source of profit for Litton was its guidance and control business. Litton's most significant contribution to the high technology field was its inertial guidance system, which helped keep planes on their flight routes. As a direct result of the effectiveness of this system, Litton procured a $1.6 billion contract from the Saudi Arabian Air Force.

Problems at Ingalls Shipbuilding were eventually corrected. Profits increased from $44 million in 1979 to $78 million in 1983. Due to Litton's large capital investment in the shipyards, Ingalls' success was crucial to the financial stability of the company. The importance of Ingalls Shipbuilding to Litton was underscored when Western Geophysical's profits declined because of a decrease in oil exploration during the early 1980s.

During the 1980s, Litton finally became the high technology company it had always regarded itself. Orion Hoch, who took over as chief executive officer in late 1986, oversaw the divestment of 14 major unprofitable and non-related businesses representing over $1 billion in sales. Over the course of the decade, Litton exited business machines, publishing, medical products, office furniture, and its well-known microwaves to focus on its historical base in sophisticated electronics. Though earnings dropped in 1983, the company's earnings curve was much higher than it had been in the 1970s. In fact, Litton soon became a possible takeover candidate. The idea that Teledyne owned 26 percent of Litton's stock was not exactly reassuring to company management. Litton purposefully went deeper into debt to discourage potential buyers and to improve its cash reserves in the event of such a takeover.

In the early 1980s, Litton buttressed its electronics interests with the acquisition of Itek Corp., a defense electronics firm. The 1984 purchase of Core Laboratories Inc., a natural complement to Western Geophysical, seemed to indicate that Litton would remain dedicated to the petroleum industry. After consolidating that division's interests in the late 1980s, however, Litton spun Western Atlas Inc. off to its shareholders in 1994. This move essentially split Litton's defense interests from its commercial interests.

Litton has not escaped controversy. In the early 1980s, the National Labor Relations Board investigating allegations that the parent company held to a centralized anti-union policy that filtered down to the subsidiaries. In addition, the U.S. Department of Defense suspended the company from bidding on new defense contracts when it was reported that a Litton subsidiary defrauded the government of $300 million. To make matters worse, the company's expanded capability radar warning system for the F-16 fighter jets failed operational tests.

Litton did enjoy the positive settlement of two lawsuits in the early 1990s, however. In 1993, Litton won a $1.2 billion jury award from competitor Honeywell Inc. The suit charged that Honeywell's ring laser gyroscope, a navigational system used in both military and commercial aircraft, breached Litton's manufacturing process patent. Later in the year, the federal government settled its suit against Litton regarding billing inconsistencies.

Hoch was succeeded in fiscal 1994 by John M. Leonis, a former senior vice-president. Litton's continuing dedication to the defense industry in spite of well-publicized cutbacks flouted conventional wisdom. But in his first annual report, Leonis asserted that "Litton is in the right place at the right time because we make products the U.S. needs now to meet its world peace-keeping role." Phil Friedman, an analyst with Morgan Stanley, told Forbes that Litton's positive cash position and low debt also boded well for the company.

Principal Subsidiaries: Ingalls Shipbuilding, Inc.; Litton Technology Corporation Ltd.; Litton Industrial Automation Systems, Inc.; Litton Systems, Inc.