EXHIBIT 13
[LOGO]
Alliant
Achieving Ever Higher
Levels of Performance
[PHOTO OF TITAN IVB ROCKET LAUNCH]
1997 Annual Report
Business Groups
Conventional Munitions
[Photo of U.S. Army tank ammunition]
Business Overview
Leading designer, developer, and manufacturer of medium-caliber and
large-caliber ammunition, munitions propellants, tactical missile propulsion
systems, warheads, metal parts, composite structures for weapons systems,
infrared decoy flares, and commercial gun powder. Operations in Illinois,
Kansas, Minnesota, New Jersey, New Mexico, Tennessee, Virginia, and West
Virginia. Approximately 3,100 employees. Fiscal year 1997 sales: $499 million.
Sales as a percent of total revenues
[Pie Chart Appears Here] 44%
Competencies
. Design and production of munitions and warheads with outstanding repeatability
. Low-cost producer of rocket motors
. Safe manufacture of high-energy propellants
. Propellants and hardware for insensitive munitions
. Design and production of composite structures and metal parts for defense
applications
. Low-cost manufacturing
. Rapid development with integrated product teams
Major Programs
. 120mm training and tactical tank ammunition
. Medium-caliber training and tactical ammunition
. Rocket motors, warheads, and parts for AGM-130, AIM-9X, AMRAAM, Hellfire,
Hydra-70, Maverick, TOW II, and other tactical missiles
. Propellants for tank and medium caliber ammunition
. Gun powders for sporting reloaders and ammunition manufacturers
. Composite structures for weapons systems such as the Javelin antitank weapon
. Infrared decoy flares for aircraft protection
End Users
[Pie Chart Appears Here] U.S. Army - 63%
Commercial - 14%
U.S. Air Force - 10%
U.S. Navy - 8%
International - 5%
Space and Strategic Systems
[Photo of NASA X-33 Reusable Launch Vehicle]
Business Overview
Leading designer, developer, and manufacturer of solid rocket propulsion systems
for space and strategic applications and composite structures for military and
commercial aircraft and spacecraft. Provider of operations and technical support
services for space launches. Operations in California, Florida, and Utah.
Approximately 1,800 employees. Fiscal year 1997 sales: $339 million.
Sales as a percent of total revenues
[Pie Chart Appears Here] 30%
Competencies
. Low-cost producer of large rocket motors with repeatable performance
. Development of products through integrated product teams
. Quality and process control systems to ensure safe, consistent manufacturing
. Design and fabrication of low-cost, high-performance composite structures
using automated fiber placement and filament winding processes
Major Programs
. Titan IV SRMU strap-on boosters and launch support services
. Delta II and Delta III GEM strap-on boosters
. Pegasus(R) and Taurus(R) launch vehicle solid propulsion systems
. Trident II (D5) Fleet Ballistic Missile solid propulsion system
. Peacekeeper Intercontinental Ballistic Missile contract support
. Cryogenic hydrogen tanks for NASA X-33 Advanced Technology Demonstrator and
VentureStar(TM) Reusable Launch Vehicle
. Composite structures for F-22, Joint Strike Fighter, Boeing 767, and C-17
aircraft
. Satellite system composite piece parts, instrument benches, and dimensionally
stable assemblies
End Users
[Pie Chart Appears Here] U.S. Air Force - 43%
Commercial - 22%
U.S. Navy - 20%
NASA - 9%
Other DoD - 6%
Defense Systems
[Photo of U.S. Army's Objective Individual Combat Weapon]
Business Overview
Leading designer, developer, and manufacturer of tactical weapons systems,
air-delivered munitions, battlefield management systems, unmanned aerial
vehicles, antitank and demolition systems, fuzes, electronic warfare and test
equipment systems, shoulder-fired weapons systems, artillery fire control,
terminal sensors and seekers (MMW, UIR, LADAR, acoustic), and electronic
document software products. Operations in Florida, Minnesota, Texas, and
Wisconsin. Approximately 1,000 employees. Fiscal year 1997 sales: $253 million.
Sales as a percent of total revenues
[Pie Chart Appears Here] 22%
Competencies
. Munitions design and systems integration through integrated product teams
. Design and integration of sensors and control electronics for smart weapons
. Development and manufacture of specialty warheads
. Packaging of electronic systems to survive gun launch
. Electronic warfare and test equipment systems
. Guidance, navigation, and control subsystems for weapons
. Low-cost repeatable products
Major Programs
. Outrider(TM) Tactical Unmanned Aerial Vehicle (TUAV)
. Sense and Destroy Armor (SADARM) munition
. Tank Extended Range Munition - Kinetic Energy (TERM-KE)
. Smart Target Activated Fire and Forget (STAFF) munition
. VOLCANO and Shielder munition systems
. Brilliant Anti-Armor (BAT) P/3/I Submunition seeker
. Munitions for special operations forces
. Electronic warfare and test equipment systems
. Mortar and artillery fuzes
. Objective Individual Combat Weapon (OICW)
. DocMaestro(TM) electronic document software products
. Cased telescoped gun and ammunition system
End Users
[Pie Chart Appears Here] U.S. Army - 73%
U.S. Navy - 9%
International - 7%
U.S. Air Force - 7%
Commercial - 4%
Emerging Business
[Photo of lithium battery]
Business Overview
Provider of environmental remediation, waste disposal, ordnance reclamation, and
safety management services. Supplier of lithium reserve and rechargeable lithium
ion polymer batteries for military and aerospace applications. Provider of
information systems and acoustic processing equipment, secure data equipment,
simulation environments. Operations in Maryland, Minnesota, New Jersey,
Pennsylvania, Texas, Utah, and Virginia. Approximately 250 employees. Fiscal
year 1997 sales: $41 million.
Sales as a percent of total revenues
[Pie Chart Appears Here] 4%
Competencies
. Data acquisition, signal processing and analysis
. High-fidelity environmental simulation
. Development of leading-edge battery technology
. Automated production of low-cost, high-performance lithium batteries
. Munitions and propellant reclamation
. Uncooled infrared sensors
. Electro-magnetic emission testing and shielding
Major Programs
. Lithium and polymer batteries for aerospace and defense applications
. Analog/Digital Adaptable Recording Input/Output (ADARIO)
. Synthetic test range environments
. Reclamation of conventional ordnance
. Uncooled infrared camera subsystems
. Computer ruggedization for industrial, government, and military applications
. System for the Effective Control of Urban Environment Security (SECURES(TM))
gunshot detection system
End Users
[Pie Chart Appears Here] U.S. Army - 27%
International - 20%
Commercial - 17%
Other DoD - 17%
U.S. Air Force - 11%
U.S. Navy - 8%
The Alliant Way is our commitment to excellence in everything we do. As leaders
in our field, we want to set the standard for delivering low-cost, high-quality
solutions to our customers every time.
We will act with integrity, operate safely, and grow the value of our company to
our people, our shareholders, and our communities.
Alliant Techsystems is a prime supplier of aerospace and defense technologies to
the U.S. and its allies, specializing in propulsion systems, conventional and
smart munitions, composite structures, and unmanned vehicles. Our 6,800 people
operating in 23 states represent some of the finest talent in the country.
Financial Highlights 1
Year Ended Year Ended
(Amounts in thousands except per share data) March 31, 1997 March 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
Sales $ 1,089,397 $ 1,020,605
Change in accounting estimate-environmental liabilities(1) 17,442 -
Income from continuing operations 36,659 48,424
Income from discontinued operations, net of income tax 4,819 5,617
Gain (loss) on disposal of discontinued operations, net of income tax 17,681 (6,240)
Net income 59,159 47,801
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share-primary and fully diluted:
Continuing operations:
Continuing operations excluding environmental charge 4.03 3.61
Environmental charge(1) (1.30) -
Continuing operations 2.73 3.61
Discontinued operations(2) 1.68 (.05)
Net income 4.41 3.56
- ----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 52,721 58,623
Cash provided by operations 92,110 89,081
Capital expenditures 28,522 25,593
======================================================================================================================
Total assets 1,009,704 1,035,142
Total debt to total capitalization 55.1% 71.6%
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding 13,081,538 12,965,542
Number of employees 6,800 6,900
- ----------------------------------------------------------------------------------------------------------------------
(1) Reflects the impact of the adoption of the Statement of Position 96-1
"Environmental Remediation Liabilities." See Note 19 to the financial
statements.
(2) Reflects the results of discontinued operations and the related gain (loss)
on disposition of those operations. See Note 18 to the financial statements.
Cover
Cape Canaveral Air Station, Florida, February 23, 1997. Alliant Techsystems
Solid Rocket Motor Upgrade (SRMU) boosters successfully launch the first flight
of the Lockheed Martin Titan IVB rocket, America's largest and most powerful
expendable space launch vehicle.
Contents
Business Groups, Foldout
Financial Highlights, 1
Letter to Shareholders, 2
Review of Operations, 5
Community Investment, 17
Selected Financial Data, 18
Management's Discussion
and Analysis, 19
Consolidated Financial
Statements, 26
Notes to Consolidated
Financial Statements, 29
Board of Directors, 41
Corporate Officers, 42
Corporate Information, 43
2 Letter to Shareholders
[PHOTO]
Peter A. Bukowick
Executive Vice President
Richard Schwartz
Chairman, President,
and Chief Executive
Officer
Scott S. Meyers
Vice President
and Chief Financial
Officer
To Our Shareholders
Two years ago Alliant acquired Hercules Aerospace and made the commitment to
achieve higher levels of performance for the company. Fiscal year 1997 marks the
second year of delivering on that commitment. We have significantly increased
sales, operating profit margins, and cash flow, and reduced operating expenses.
I am proud of this performance and the people who made it happen.
These results reflect the success of our strategies to strengthen our core
businesses, pursue new growth opportunities, and use our strong cash flow to
increase shareholder value. I am confident these strategies have created the
momentum to achieve even higher levels of performance in the future.
Fiscal 1997 Performance Highlights
In fiscal year 1997 we:
. Increased sales in all businesses and grew earnings from continuing
operations (excluding a nonrecurring environmental charge) to $4.03 per share
from $3.61 last year, up 12 percent. Total reported net income rose 24 percent
to $4.41 per share versus $3.56.
. Completed our $50 million share repurchase program in May 1997.
. Generated strong cash flow from increased sales and income and improved
working capital management.
. Achieved our operating margin target range of 8 to 10 percent, excluding the
environmental charge.
. Realigned our organization to concentrate on the unique aspects of the
conventional and smart weapons markets and appointed Dr. Peter A. Bukowick to
the post of Executive Vice President overseeing all business operations.
. Strengthened the company's financial flexibility by selling our Marine
Systems Group for $141 million in cash. This transaction allowed us to reduce
debt by an additional $89 million, lowering our total debt-to-capitalization
ratio from 72 percent at the beginning of the year to 55 percent at year end. We
now are much better positioned to pursue additional strategic initiatives
including acquisitions and/or share repurchase programs.
. Secured significant new orders with large follow-on potential, including a
$39 million contract to produce the fiber-placed composite fuel tanks for the X-
33 Advanced Technology Demonstrator, a $109 million contract to produce 120mm
training ammunition for the U.S. Army's M1A1/A2 Abrams main battle tank, and a
$56 million contract to build the Outrider(TM) Tactical Unmanned Aerial Vehicle.
. Ended the year with a strong backlog of $1.4 billion or 17 months of sales,
reflecting our leading market positions and positive market trends.
3
Stock Price Performance
Despite our strong performance, the stock price declined to $42 1/8 at the end
of the year after we lost our pursuit of the Evolved Expendable Launch Vehicle
and the Wind Corrected Munitions Dispenser programs. These were upside
opportunities and do not affect the basic strength of our core plan. With the
stock price back above $50 by mid-June, we believe the investment community has
refocused on our strong fundamentals and growth potential.
Growing From a Position of Strength
Our products and capabilities support many of the nation's high-priority defense
programs. We are number one or two in our core markets of:
Propulsion Systems. We are part of the Titan IV, Delta II and III, Pegasus(R)
and Taurus(R) teams, all core U.S. space launch systems, and the Trident II
Intercontinental Ballistic Missile, the nation's key strategic weapon system.
Our propulsion systems are on many U.S. tactical weapons, including the Advanced
Medium Range Air to Air Missile (AMRAAM), Sensor Fuzed Weapon, and the Hellfire,
Maverick, and AIM-9X tactical missiles.
Munitions and Smart Weapons. We're the number-one U.S. munitions developer and
producer, supplying training and tactical tank ammunition for the U.S. Army's
main battle tank and medium-caliber ammunition for guns on armored vehicle
platforms. Our training ammunition is fundamental in helping sustain troop
readiness, and we have a growing capability in defense electronics systems for
current and future precision-guided munition systems and unmanned aerial
surveillance systems.
Composites. In our fastest growing market, we have invested in advanced
technology to become a leading supplier of aerospace composite structures. We
support current aircraft, next-generation commercial and military aircraft,
commercial and government satellites, and the X-33 Advanced Technology
Demonstrator, which will be scaled up to the Lockheed Martin VentureStar(TM),
America's next-generation reusable launch vehicle.
Growing Through Performance, New Business, and Acquisitions
We are committed to increasing shareholder value by building a portfolio of
businesses capable of generating a 15-percent average annual earnings per share
growth rate. Our growth strategy centers on 1) strengthening our core
businesses, 2) pursuing internal and external growth opportunities, and 3)
leveraging our financial strength.
To strengthen our core businesses, we have focused on improving margins through
plant consolidations, gaining greater synergy through business realignment, and
resolving performance issues with our current programs. Dedication to delivering
ESTABLISHING HIGHER LEVELS OF PERFORMANCE FOR ALLIANT TECHSYSTEMS
*Results of continuing operations exclusive of non-recurring charges for
restructuring change of control, litigation settlement, and environmental
liability reserves.
Sales
(Dollars in millions)
[CHART APPEARS HERE]
753 544 504 1020 1089
93 94 95 96 97
1,500 1,200 900 600 300
Operating Expenses*
(Percentage of sales)
[CHART APPEARS HERE]
10.8% 11.0% 11.0% 8.6% 8.6%
93 94 95 96 97
15% 12% 9% 6% 3%
Operating Profit*
(Percentage of sales)
[CHART APPEARS HERE]
5.2% 4.8% 2.0% 9.7% 8.1%
93 94 95 96 97
10% 8% 6% 4% 2%
EBITDA Cash Flow*
(Dollars in millions)
[CHART APPEARS HERE]
59 38 24 158 141
93 94 95 96 97
200 160 120 80 40
4
high-quality products at an affordable price every time is paying off in both
customer satisfaction and margin improvement. Our progress toward this goal was
affirmed when we received in June our third straight "Supplier of the Year"
award from Hughes Missile Systems Company, which is a tremendous recognition of
our workforce.
Our internal growth strategy is to capture new business in our core markets.
Some of the major opportunities we are pursuing include the Air Force's ICBM
Prime Integration Program, the Cased Telescoped Weapon System, the next-
generation kinetic energy tank ammunition round, and the U.S. Army's rifle for
the 21st century -- the Objective Individual Combat Weapon. We also are
achieving internal growth by establishing global strategic alliances with major
prime contractors, capitalizing on our unique product and technical
capabilities.
Our external growth strategy is to pursue acquisitions that strengthen and
complement our core businesses, add critical mass, or offer growth potential in
expanding markets. We will evaluate acquisition opportunities against all other
investment alternatives to select the best options for growing the long-term
value of our business.
Alliant's financial strength and strong cash flow enable us to select the best
options to create value for Alliant and our shareholders. We will invest in new
business pursuits in our core markets, further reduce debt, buy back shares, or
pursue strategic acquisitions.
Market Trends Support Our Growth Strategies
We see long-term demand for our products, which are staples in Department of
Defense initiatives for training, combat, and national strategic requirements.
Because they support our nation's most critical defense systems, our products
enjoy strong funding support in the U.S. defense budget, now stabilized after
more than a decade of decline.
Telecommunications and space launch markets are expanding rapidly, and we
offer one of the broadest lines of space propulsion systems in the industry,
covering all major commercial and military space launch payload classes. We are
accelerating production to keep pace with this growing demand.
In weapons systems development, the focus continues to be on smart or
precision-guided systems, allowing us to leverage our unique capabilities in
electronics packaging into significant growth opportunities including the
Outrider(TM) Tactical Unmanned Aerial Vehicle, the U.S. Army's Sense and Destroy
Armor (SADARM) munition, and next-generation smart tank rounds.
The increased need for high-performance, lightweight materials for aircraft,
spacecraft, and satellites has doubled our composites structures business in the
last three years. With six of only 10 fiber placement machines in the U.S., we
have invested in the technology and expertise to become a leading supplier of
composite structures for aerospace applications.
Delivering on Our Commitment to Shareholders
We have delivered on our commitment to achieve higher levels of performance. We
are confident in our ability to reach our goal of 15-percent average annual
earnings per share growth through a combination of sales growth, profit margin
improvements, and the use of our strong cash flow to further reduce debt,
repurchase stock, or make strategic acquisitions.
We have a team dedicated to making our goals a reality, achieving even higher
levels of performance for our company.
Sincerely,
/s/ Richard Schwartz
Chairman, President, and Chief Executive Officer
June 16, 1997
Conventional Munitions 5
Conventional Munitions
[Photo]
[Photo] Tom Rockne
Program Manager
120mm Training Tank Ammunition
120MM Tank Ammunition Production
State-of-the-art technology such as this control panel on a computerized
numerically controlled lathe at Ferrulmatic Operations in Totowa, New Jersey,
minimizes machining process variations in the production of metal parts,
including cores for U.S. Army 120mm tank ammunition training rounds pictured in
the foreground. The result is highly consistent and repeatable performance by
120mm tank ammunition, which played a key role during the ground offensive in
Operation Desert Storm. The Conventional Munitions Group is the largest producer
of 120mm tank ammunition for the U.S. Army, with more than 2 million training
and tactical rounds delivered since 1985.
6 Conventional Munitions
CONVENTIONAL MUNITIONS
[PHOTO]
PETER A. BUKOWICK
Group Vice President (Acting)
"Conventional Munitions is the number-one U.S. producer of low-cost, high-
quality munitions and a leader in military and commercial gunpowder, tactical
missile propulsion systems, and flares."
Market Position
Leading supplier of conventional medium-caliber and large-caliber ammunition to
the U.S. Department of Defense. U.S. Army's largest supplier of 120mm tank
ammunition. Major producer of munitions propellants and commercial gunpowder.
One of the world's leading suppliers of solid propulsion systems, warheads, and
structures for tactical missile systems, with participation on key programs such
as Maverick, Hellfire, AMRAAM, Sensor Fuzed Weapon, and AIM-9X. Leading producer
of fiber-placed composite structures for weapons systems.
Industry Trends
Department of Defense munitions budgets have stabilized at $1.8 billion to $2
billion annually. Munitions will remain a price-driven commodity, demanding that
we be the low-cost, high-quality producer. Consolidation of ammunition plants
driven by excess capacity is providing opportunities to increase production
volume at key facilities. The use of composite structures in weapons systems is
expected to grow dramatically in response to the need for enhanced performance
and lighter weight.
Strategies.
. Operate with safety as the first consideration.
. Deliver high-quality, repeatable parts at very competitive prices.
. Increase international sales and win new business in advanced tank ammunition,
medium caliber gun upgrades, and warhead systems production.
. Gain efficiencies through the consolidation of plants and facilities with
similar technologies.
. Increase participation on tactical missiles by leveraging new metal parts
manufacturing capabilities.
. Grow composite structures business by capitalizing on state-of-the-art fiber
placement production capacity.
. Increase strategic supplier agreements with major systems integrators.
OPERATING HIGHLIGHTS
June 1996 Awarded four medium caliber ammunition production contracts with
combined value of $30 million.
June 1996 Received contract from Hunting Engineering Ltd. to supply lightweight
30mm ammunition for the United Kingdom's AH-64 Apache attack helicopter.
October 1996 Resumed shipments of tactical tank ammunition rounds following
successful resolution of technical issues, resulting in sales of more than $70
million in fiscal year 1997.
November 1996 Awarded U.S. Army contract valued at $40 million for production of
propellant grains for the Hydra 70 Rocket System. Additional production could
come from direct foreign sales of the Hydra 70 system over the next several
years.
December 1996 Selected by Hughes Missile Systems Company to develop and produce
AIM-9X short-range air-to-air missile. As a team member, the Conventional
Munitions Group will design, develop, and manufacture the missile's solid
propulsion rocket motor and thrust vector control system.
January 1997 Received contract valued at $109 million to produce 120mm training
ammunition for use by the U.S. Army's M1A1/A2 Abrams main battle tank.
January 1997 Began full-scale production of commercial gunpowder at Radford Army
Ammunition Plant following consolidation of operations from Kenvil, New Jersey,
to lower costs and increase efficiency.
February 1997 Achieved certification of flare manufacturing operations at
Kilgore Operations, Toone, Tennessee, to the ISO 9001 quality management
standard and ammunition production operations at the Joliet Army Ammunition
Plant to the ISO 9002 standard.
March 1997 Achieved certification of munitions propellant manufacturing
operations at the Radford Army Ammunition Plant to the ISO 9002 quality
management standard.
7
[Photo]
[Photo] Gary Martin
Program Manager
MK90 Rocket Motor Propellant
MUNITIONS PROPELLANT MANUFACTURING
Amber Jenkins, a process engineer at the Conventional Munitions Group propellant
manufacturing facility at the Radford Army Ammunition Plant (RAAP) in Radford,
Virginia, calibrates the thickness of NOSIH-AA-2 propellant which is used in the
MK90 propellant grain for the U.S. Army's multi-purpose Hydra 70 Rocket. The
propellant is manufactured under rigid quality and process controls to ensure
the highest degree of performance repeatability and yield among the 180,000
Hydra 70 rocket motors produced annually for the U.S. Army. RAAP is the only
active facility in the U.S. manufacturing solventless double-base propellant,
which also is used in 120mm tank ammunition produced by the Conventional
Munitions Group.
[Photo of AIM-9X tactical missile]
TACTICAL MISSILE SYSTEMS
Conventional Munitions is a member of the Hughes Missile Systems Company team
selected to build the AIM-9X short-range air-to-air missile, which will provide
enhanced capabilities for U.S. Navy and Air Force fighter aircraft. The group's
Tactical Business unit will design, develop, and manufacture the missile's solid
propulsion rocket motor and thrust vector control system at the Allegany
Ballistics Laboratory in Rocket Center, West Virginia. Through our involvement
in programs such as Maverick, Hellfire, AMRAAM, Sensor Fuzed Weapon, and
Sparrow, we have become one of the world's leading suppliers of solid propulsion
systems, warheads, and structures for tactical missiles.
8 Space and Strategic Systems
Space and Strategic Systems
[PHOTO]
[PHOTO]
Jeff Foote
Program Manager
Titan SRMU and launch support
LARGE SOLID ROCKET MOTORS
Mark Chilcutt, left, and Leroy Jacquez, solid propulsion operations, perform a
mold assembly operation as the center segment of a Titan IVB Solid Rocket Motor
Upgrade (SRMU) is lowered onto a core for assembly in preparation for solid
propellant casting at Space and Strategic Systems' large solid rocket motor
production facility in Magna, Utah. Modernized in the mid-1980s with an
investment of over $300 million, the facility today is considered the safest,
most modern, automated solid propulsion manufacturing plant in the world. Strict
and uncompromising attention to process control ensures the delivery of low-
cost, high-quality repeatable motors for space launch vehicles and strategic
systems.
9
OPERATING HIGHLIGHTS
April 1996 Awarded contract valued at $98 million from Lockheed Martin
Astronautics to define launch site engineering requirements and procedures and
assist in the assembly of Alliant-produced Solid Rocket Motor Upgrade strap-on
propulsion systems and their integration into the Titan IVB space launch
vehicle.
July 1996 Received contract valued at $39 million from Lockheed Martin to build
composite fuel tanks for the NASA X-33 Advanced Technology Demonstrator, which
will be scaled up to the VentureStar(TM), America's next-generation Reusable
Launch Vehicle.
December 1996 Completed sixth planned static test firing on schedule as part of
the qualification phase of the U.S. Navy's Propulsion Consolidation Program for
the Trident II (D5) Intercontinental Ballistic Missile. An additional first
stage motor is scheduled for static test in June 1997. Completion of the
qualification phase of the program is expected in mid-June 1997.
February 1997 Held first successful static test firing of the solid rocket
motor for the new McDonnell Douglas Delta III intermediate-lift expendable space
launch vehicle, opening the way for delivery of the first production flight set
by the end of 1997.
February 1997 Launched the Lockheed Martin Titan IVB rocket powered by two
Alliant-produced Solid Rocket Motor Upgrade boosters, culminating a nine-year
development effort and marking the first flight of America's next-
generation heavy-lift space launch vehicle. (See photograph of launch on cover.)
February 1997 Supported successful installation of two new scientific
instruments by producing a high-precision composite optical platform for the
Hubble Space Telescope. Astronauts from the Space Shuttle Discovery performed
the work as part of the second servicing mission to the orbiting astronomical
observatory.
February 1997 Achieved certification of all Space and Strategic Systems
manufacturing facilities to the ISO 9001 quality management standard.
SPACE AND STRATEGIC SYSTEMS
[PHOTO]
PAUL A. ROSS
Group Vice President
"Space and Strategic Systems is an established leader in low-cost, high-
quality solid rocket motors and the rapidly growing market for composite
structures."
Market Position
World's leading producer of solid rocket motors for expendable space launch
vehicles encompassing all vehicle payload classes. Major programs include Titan
IV, Delta II, Delta III, Pegasus,(R) and Taurus(R) launch vehicles. Principal
strategic propulsion program is U.S. Navy Trident II (D5) Intercontinental
Ballistic Missile. One of the world's leading producers of composite structures,
including instrument benches, satellite assemblies, space-based antennae,
aircraft components, and space launch vehicle structures.
Industry Trends
A robust commercial and government launch market is driving demand for solid
rocket motors. Nearly 500 new communications spacecraft are expected to be
launched between now and 2010, representing a large market in commercially
funded satellite and booster development. The market for advanced composite
materials, which is expanding in response to requirements for greater
performance and lower weight in aircraft and spacecraft, will continue to be a
major growth area in coming years.
Strategies
. Continue to operate automated facilities with a focus on safety.
. Build on investments in automated facilities and expertise in energetic
materials, rocket motor design, and systems management to become the world's
leading producer of low-cost, high-quality solid rocket motors. Develop
additional strategic alliances to win new business.
. Capitalize on state-of-the-art manufacturing capabilities and strong composite
structures business base to expand production from precision components to
subassemblies and grow market position in structures for aircraft engines.
10 Space and Strategic Systems
[Photos of Delta II space launch vehicle and Trident ICBM]
SPACE AND STRATEGIC PROPULSION SYSTEMS
We are a leader in solid rocket propulsion for space and strategic systems,
supplying rocket motors for the McDonnell Douglas Delta II medium-lift space
launch vehicle (left) and the U.S. Navy's Trident II (D5) Intercontinental
Ballistic Missile. Our work on these programs has grown to encompass the solid
propulsion system for the next generation Delta III intermediate-lift vehicle
and all three stages of the Trident II under the Navy's Propulsion Consolidation
Program. During fiscal year 1997, we conducted successful static test firings of
the Delta III motor and the motors for each stage of the Trident.
[Photo]
[Photo] Mark Messick
Program Manager
X-33 Liquid Hydrogen Tanks
HIGH-PERFORMANCE COMPOSITE STRUCTURES FOR SPACE VEHICLES
Above: A fiber placement machine is building the composite liquid hydrogen fuel
tanks for Lockheed Martin's X-33 Advanced Technology Demonstrator (pictured at
right) at Space and Strategic Systems' composites manufacturing facility in
Clearfield, Utah. The group also will produce the tanks for the VentureStar(TM)
Reusable Launch Vehicle, the full-scale version of the X-33 and America's next-
generation space launch vehicle. Alliant has become the world's premier producer
of composite structures built with fiber placement, using an automated, low-cost
process patented in the early 1980s. Our composite structures business, which
has doubled over the last three years, will continue to grow as new applications
emerge for high-strength, lightweight composite materials.
ICBM Prime Integration Program 11
[Photo of F-22 fighter aircraft]
HIGH-PERFORMANCE COMPOSITE
STRUCTURES FOR MILITARY AIRCRAFT
Above: We are building the fiber-placed composite stabilizer pivot shaft for the
Lockheed Martin F-22, the U.S. Air Force's next-generation fighter aircraft. The
strength, light weight, and stability of advanced composite structures make them
ideally suited for high-performance tactical aircraft such as the F-22.
[Photo of ICBM launch]
INTERNAL GROWTH THROUGH NEW BUSINESS
[Photo] ARLEN D. JAMESON
Vice President,
ICBM Prime Integration Program
Building on our experience and leadership in systems integration and solid
propulsion, we are pursuing the prime contractor role for the U.S. Air Force's
ICBM (Intercontinental Ballistic Missile) Prime Integration Program, which will
extend the life of America's land-based ICBM systems well into the next century.
Heading our effort is Arlen D. Jameson, Lieutenant General, U.S. Air Force
(Retired), who held leadership posts within the Air Force's strategic command
throughout much of his 34-year career. General Jameson leads a team of companies
representing the expertise that has provided outstanding ICBM program
performance for over 30 years. Our team includes Boeing for guidance and
ground/vehicle integration, Logicon for software, Thiokol for propulsion, and
Textron for re-entry vehicles. The program, which has the potential for
significant revenues over the next 15 years, is well suited to the expertise of
Alliant and our teammates. We are committed to cost-effective maintenance of
America's land-based strategic missile capability.
12 Defense Systems
Defense Systems
[Photo]
[Photo] Blake Larson
Program Manager
Sense and Destroy Armor (SADARM)
SMART WEAPON SENSOR TECHNOLOGY
Technician group leader Barb Roach inspects the millimeter wave radar system for
the Sense and Destroy Armor (SADARM) smart artillery round at the SADARM
production facility in Hopkins, Minnesota. With more than 10 years of research
and development activity in sensor technology and fusion, Defense Systems
pioneered the use of millimeter wave radar that can withstand harsh gun launches
in smart weapons systems such as SADARM, the XM943 Smart Target Activated Fire
and Forget (STAFF) tank ammunition round, and the Tank Extended Range Munition-
Kinetic Energy (TERM-KE) munition. SADARM, the U.S. Army's first smart artillery
projectile, entered production in fiscal year 1997.
13
OPERATING HIGHLIGHTS
May 1996 Awarded contract to build the Outrider(TM) Tactical Unmanned Aerial
Vehicle, which flies pre-programmed reconnaissance missions to provide
battlefield surveillance information to military commanders.
June 1996 Received contract exceeding $100 million from the United Kingdom
Ministry of Defence for Shielder vehicle-launched antitank system. Contract
includes options that can be exercised through 1999. Production is anticipated
through 2000.
June 1996 Won contract to complete prototype build of Objective Individual
Combat Weapon, U.S. Army's next-generation rifle.
October 1996 Reached agreement with represented workers at Minnesota
manufacturing and test facilities regarding procedures for outsourcing
production work, resulting in lower future cost structure.
November 1996 Acquired Lundy Division of Advanced Technology Materials, Inc., a
manufacturer of next-generation chaff, dispenser systems for chaff, and avionics
spare parts, enhancing strategic position in important electronic warfare
market.
March 1997 Awarded production contract valued at $32 million for manufacture of
Sense and Destroy Armor (SADARM) smart artillery munition. Contract follows
completion of engineering and manufacturing development and $10 million
production contract earlier in the year.
March 1997 Successfully held first flight of the Outrider(TM) TUAV,
demonstrating the basic flight performance capabilities of the first fully
integrated modular air vehicle.
March 1997 Introduced DocMaestro(TM) family of software products for easy, low-
cost conversion, storage, indexing, and use of electronic documents.
March 1997 Received U.S. Army Material Command Outstanding Achievement Award in
Value Engineering for government fiscal year 1996.
DEFENSE SYSTEMS
[Photo] HUGO FRUEHAUF
Group Vice President
"Defense Systems is meeting the U.S. military's increased
demand for low-cost, high-quality smart tactical weapons
systems, defense electronic systems, and unmanned aerial
vehicle systems."
Market Position
Working in major precision guided munitions development and production programs,
including Sense and Destroy Armor, Smart Target Activated Fire and Forget, and
Tank Extended Range Munition - Kinetic Energy. Leading producer of low-cost
mortar and artillery fuzes and demolitions for special operations forces. Sole-
source provider of VOLCANO and Shielder antitank systems. Developing and
manufacturing the Outrider(TM) Tactical Unmanned Aerial Vehicle (TUAV), the
newest Department of Defense remotely piloted surveillance aircraft.
Industry Trends
Demand for systems upgrades is growing as development of new weapons platforms
declines and enhanced capability is needed for guns, ammunition, and electronic
warfare systems on existing tanks, artillery, infantry fighting vehicles, and
tactical aircraft. All U.S. military services want systems that provide
battlefield monitoring, including unmanned aerial vehicles (UAVs). Demand for
UAVs could extend to weapons systems and non-defense and commercial
applications. Budgets for precision guided munitions are expected to remain
strong.
Strategies
. Focus on safe operations and safe-to-use products.
. Develop low-cost technologies and packaging techniques for application to gun-
launched munitions to increase accuracy and lethality.
. Develop unmanned air vehicle systems that provide real-time battlefield
surveillance information to field commanders.
14 Defense Systems
[PHOTO]
Jerry Rayne
Program Manager
Outrider(TM) Tactical Unmanned Aerial Vehicle
UNMANNED AERIAL VEHICLE SYSTEMS
Technician Jack Skurdalsvold assembles the Outrider(TM) Tactical Unmanned Aerial
Vehicle (TUAV) at Defense Systems' TUAV integration facility in Hopkins,
Minnesota. Delivery of the first Outrider(TM) TUAV system is expected in mid-
1997. Defense Systems is working under a $56 million Advanced Concept Technology
Demonstration contract to develop, produce, and field the Outrider(TM) TUAV,
which will provide real-time reconnaissance, surveillance, and target
acquisition information to Army brigade, Marine air/ground task force, and
deployed Navy combat commanders. Other potential markets for the Outrider(TM)
TUAV system include international and commercial applications such as traffic
control and border patrol.
[PHOTOS OF OBJECTIVE INDIVIDUAL COMBAT WEAPON AND
CASED TELESCOPED WEAPON SYSTEM]
NEXT-GENERATION GUN SYSTEMS
Defense Systems is leading an international team in the competitive development
of the U.S. Army's Objective Individual Combat Weapon, left, which will
provide increased survivability for the 21st century soldier. Demonstrations
will be held in 1997 in preparation for final contractor selection. We also are
teamed with CTA International to market and produce the Cased Telescoped Weapon
System, right, for use in new U.S. and European land combat vehicles such as the
U.S. Army Future Scout and Cavalry System/United Kingdom Tracer, the Army's
Future Infantry Vehicle and Bradley Fighting Vehicle, and the Marine Corps'
Advanced Amphibious Assault Vehicle. If adopted by the Department of Defense,
these programs would have production extending well into the next century.
Emerging Business 15
[PHOTO]
[PHOTO]
David Roller
Program Manager
Lithium Ion Polymer Battery Technology
LITHIUM ION POLYMER BATTERIES
Laboratory technician Rebecca Morris, left, and research scientist David Swanson
place a lithium ion polymer battery into its cell package as part of a flexible
manufacturing pilot program designed to rapidly prototype high-performance
polymer batteries for military use at Power Sources Center (PSC) in Horsham,
Pennsylvania. PSC is in a strong position to benefit from anticipated growth in
rechargeable polymer batteries, which provide performance, weight, and packaging
advantages, and from the increasing use of commercial battery technologies by
the military. A major supplier of military and aerospace batteries, PSC has
produced more than 27 million lithium reserve batteries used in munitions and
fuzes.
16 Emerging Business
[PHOTO]
[PHOTO of SECURES(TM) installation on telephone pole]
Ed Page
Program Manager
System for the Effective Control of Urban Environment Security (SECURES(TM))
LAW ENFORCEMENT TECHNOLOGY
Based on sophisticated sonar technology originally developed for naval warfare
and surveillance, SECURES(TM) (System for the Effective Control of Urban
Environment Security) uses pole-mounted acoustic sensors to detect, analyze, and
relay the location of gunfire in urban environments to ensure rapid response by
police. During fiscal year 1997, the National Institute of Justice and the
Dallas Police Department conducted a successful eight-week field test of
SECURES.(TM) Results of the test are being incorporated into the SECURES(TM)
product prior to commercial market introduction. The U.S. Army also is
considering deployment of SECURES(TM) to Bosnia as a sniper detection system.
SECURES(TM) is one of several products under development by Advanced Technology
Applications to meet the information needs of federal, state, and local law
enforcement officials.
EMERGING BUSINESS
[PHOTO]
DONALD E. WILLIS
Group Vice President
"The Emerging Business Group is capturing unrealized value in non-core and
commercial markets to grow shareholder value."
Market Position
Leading supplier of ordnance reclamation services, military and aerospace
batteries, information systems and acoustic processing equipment, secure data
equipment, and simulation training environments.
Industry Trends
U.S. demand for ordnance reclamation and remediation services is expected to
remain stable. The battery market is being driven by increasing use of
rechargeable polymer batteries and adoption of commercial technologies by the
military. Advanced technology markets will show greater use of technology for
law enforcement and rapid growth in mobile computing.
Strategy
. Grow U.S. ordnance reclamation market share and expand offering
of remediation and management services, emphasizing safety.
. Become the leading supplier of reserve batteries and components
for rechargeable batteries.
. Increase share of law enforcement markets through SECURES(TM)
and the RoughWriter(TM) rugged laptop computer.
. Continue to find applications for military technologies in the
commercial marketplace.
OPERATING HIGHLIGHTS
July 1996 Awarded contract valued at $8 million for Power Sources Center to
operate a fully automated production line for the manufacture of miniature
lithium batteries.
October 1996 Formed joint venture between Power Sources Center and Valence
Technology Inc. to develop and manufacture rechargeable solid polymer batteries
for military markets.
November 1996 Received contract valued at $5 million for Global Environmental
Solutions to dismantle obsolete Navy projectiles.
January 1997 Awarded contract valued at $1 million for Power Sources Center to
develop and implement flexible manufacturing processes for lithium ion polymer
batteries.
February 1997 Completed successful field test of SECURES(TM) gunshot
detection system by the Dallas Police Department.
Community Investment 17
[PHOTO]
THE ALLIANT ACADEMY
Above: Kevin Erickson, a development engineer with our Defense Systems Group in
Hopkins, Minnesota, and an Alliant Academy volunteer, with fourth-grade students
at Alice Smith Elementary School in Hopkins. The Alliant Academy links
elementary teachers from the school districts in Hopkins, Minneapolis, and
Mounds View, Minnesota, with Alliant volunteers for an entire school year.
Working in partnership, the teachers and volunteers develop ways to bring math,
science, and technology concepts to life for fourth-, fifth-, and sixth-grade
students. Short-term and long-term projects, facility tours, field trips,
inventors' fairs, and other activities are used to augment the curriculum. The
year-long experience provides teachers with an ongoing resource, students with
role models, and volunteers with a rewarding way to share their talents.
[PHOTO]
SUPPLIER PARTNERSHIPS
Left, Kay Kuba, President of GCI Systems, a minority- and woman-owned small
business in New Brighton, Minnesota, and Vicki Zarada, Alliant computer buyer.
GCI Systems supplies computer equipment to Alliant.
Commitment to Community
We are committed to making Alliant Techsystems a positive force in the
communities where we live and work by investing our human and financial
resources, operating in an environmentally responsible manner, and working in
partnership with our suppliers.
Community Investment
Investing in our communities means committing time, expertise, and dollars to
critical community needs we are equipped to address. As a company, we invest in
initiatives that help teachers better understand and adopt the national math and
science standards, including the Alliant Academy, the First program, and the
SciMathMN Teachers Academy. Our giving is aimed at improving student
achievement, providing role models, and removing social barriers to academic
success. As individuals, we invest in our communities through our Community
Matching Gifts program and Volunteerism Council grants.
Environmental Management
We are committed to producing products and services for our customers in an
environmentally responsible manner. We believe that forward-looking, proper, and
cost-effective management of air, land, and water resources is key to our long-
term success. We will provide a safe and healthful workplace for our employees
and for the communities where we operate. To ensure that we deliver on this
commitment, we have established quantifiable goals for environmental
performance. We also periodically assess our operating facilities and strive for
continuous improvement in pollution prevention and waste minimization.
Supplier Partnerships
We seek out high-quality business partners who share our commitment to operating
according to the highest standards of business ethics and conduct. These include
small, minority- and women-owned businesses who deserve the right to compete for
our business. Supplier diversity is important to us and to our customer, the
U.S. Department of Defense. During the government's fiscal year 1996, we placed
nearly 7 percent of our purchases with minority- and women-owned small
businesses. Finding these partners is a key accountability, and one we also urge
our suppliers to adopt.
Reduction of Reported Emissions
[CHART APPEARS HERE]
Percent from baseline
0 11% 54% 87% 90% 94%
91 92 93 94 95 96
Baseline equals 1991 levels
Alliant facilities have reduced emissions to the environment. This chart
summarizes emissions we reported to the U.S. Environmental Protection Agency as
part of the Emergency Planning and Community Right-to-Know Act of the Superfund
Amendments and Reauthorization Act (SARA), Title III, Section 313.
18 Selected Financial Data
Years Ended
-----------------------------------------------------------------------
March 31, March 31, March 31, March 31, March 31,
(Amounts in thousands except per share data) 1997 1996 1995(1) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Results of Operations
Sales $1,089,397 $1,020,605 $ 504,190 $544,236 $ 752,612
Cost of sales 907,695 834,298 438,558 458,602 631,910
Change in accounting estimate-environmental liabilities(2) 17,442 - - - -
Research and development 16,207 14,126 11,763 12,132 13,377
Selling 35,778 33,143 24,820 23,672 37,469
General and administrative 41,881 40,186 19,066 23,893 30,622
Restructuring charges - - 35,600 - 103,281
Change of control charges - - 23,039 - -
Litigation settlement charges - - 15,000 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 70,394 98,852 (63,656) 25,937 (64,047)
Interest expense, net (34,386) (37,427) (7,076) (2,800) (6,678)
Other income (expense), net 651 657 (2,332) (3,081) 1,872
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 36,659 62,082 (73,064) 20,056 (68,853)
Income tax provision (benefit) - 13,658 - - (24,552)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 36,659 48,424 (73,064) 20,056 (44,301)
Income (loss) from discontinued operations, net of income taxes 4,819 5,617 456 12,418 (38,715)
Gain (loss) on disposal of discontinued operations,
net of income taxes 17,681 (6,240) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 59,159 47,801 (72,608) 32,474 (83,016)
Cumulative effect of accounting change, net of income taxes - - (1,500) - (31,181)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 59,159 $ 47,801 $ (74,108) $ 32,474 $(114,197)
===================================================================================================================================
Earnings (loss) per common and common equivalent share:
Continuing operations $2.73 $3.61 $ (7.27) $ 1.98 $ (4.58)
Discontinued operations 1.68 (.05) .05 1.23 (4.01)
Cumulative effect of accounting change - - (.15) - (3.23)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $4.41 $3.56 $ (7.37) $ 3.21 $ (11.82)
===================================================================================================================================
Financial Position
Working capital $ 94,045 $ 42,978 $ 70,007 $(16,489) $ 37,970
Property, plant, and equipment, net 360,560 382,513 484,985 85,094 53,919
Total assets 1,009,704 1,035,142 1,022,235 419,437 435,229
Long-term debt 237,071 350,000 395,000 - 65,485
Total equity 218,792 157,477 140,370 91,980 65,595
Other Data
Depreciation and amortization $ 52,721 $ 58,623 $ 16,283 $ 15,323 $ 17,530
Capital expenditures 28,522 25,593 12,635 13,499 7,319
Gross margin as a percentage of sales 15.1%(2) 18.3% 13.0% 15.7% 16.0%
===================================================================================================================================
(1) Hercules Aerospace Company was acquired from Hercules Incorporated on March
15, 1995. For the fiscal year ended March 31, 1995, results of operations
include Hercules Aerospace Company (Aerospace) from March 15, 1995, through
March 31, 1995. For the fiscal year ended March 31, 1997, and 1996, results
of operations include Aerospace for the entire year. See Note 21 to the
financial statements.
(2) Includes the impact of the fiscal 1997 adoption of Statement of Position 96-
1 "Environmental Remediation Liabilities," which resulted in a $17.4 million
or $1.30 per share charge to earnings. See Note 19 to the financial
statements.
Management's Discussion and Analysis 19
The following discussion should be read in conjunction with the financial
statements and notes beginning on page 26.
Results of Operations
Sales--Sales from continuing operations in fiscal 1997 were $1,089.4 million, an
increase of $68.8 million or 6.7 percent from sales of $1,020.6 million in
fiscal 1996.
Aerospace Systems Group sales in fiscal 1997 were $593.3 million, an
increase of $24.7 million or 4.3 percent from $568.6 million in fiscal 1996. The
increase was driven primarily by increased sales on the Delta III propulsion
program and composite structures programs.
Defense Systems Group sales in fiscal 1997 were $497.7 million, an increase
of $43.0 million or 9.5 percent from $454.7 million in fiscal 1996. The increase
was driven principally by increases in Tank Ammunition sales of approximately
$89 million, primarily due to the resolution of technical issues which had
delayed fiscal 1996 shipments. Additionally, sales were increased approximately
$27 million due to a fiscal 1997 contract award to produce the Outrider/TM/
Tactical Unmanned Aerial Vehicle (TUAV). These sales increases were partially
offset by decreases due to program completions in fiscal 1996 of approximately
$40 million on the Combined Effects Munition program (CEM) and $19 million on
the Shoulder Launched Multipurpose Assault Weapon (SMAW) program.
Emerging Business Group sales in fiscal 1997 were $41.4 million, an
increase of $10.4 million from $31.0 million in fiscal 1996, primarily
attributable to higher volume in the battery manufacturing operations.
Sales from continuing operations of $1,020.6 million in fiscal 1996
represented a $516.4 million increase over fiscal 1995 sales of $504.2 million.
Fiscal 1996 sales included $568.6 million generated by the Aerospace Systems
Group (Aerospace operations), which the Company acquired from Hercules Inc. on
March 15, 1995 (Aerospace acquisition), compared to fiscal 1995 Aerospace sales
of $20.3 million.
Company sales for fiscal 1998 are expected to be approximately $1 billion.
Gross Margin--The Company's gross margin as a percentage of sales was 15.1
percent, 18.3 percent, and 13.0 percent in fiscal 1997, 1996, and 1995,
respectively. The decreased gross margin in fiscal 1997 was largely attributable
to the Company's adoption of Statement of Position No. 96-1 (SOP 96-1),
"Environmental Remediation Liabilities" (see further discussion of SOP 96-1
below), which resulted in a one-time, non-cash charge of $17.4 million. Fiscal
1997 gross margin as a percentage of sales before adoption of SOP 96-1 was 16.7
percent, a decrease of 1.6 percent compared to the fiscal 1996 gross margin rate
of 18.3 percent. The decrease was primarily attributable to cost growth of
approximately $28 million on certain tactical propulsion, fuzing, ammunition,
and ordnance reclamation contracts. These decreases in gross margin were
partially offset by improvements on various ordnance programs, as well as by
negotiated settlements reached with the U.S. Government totaling approximately
$12 million for reimbursement of previously incurred costs on a rocket motor
propulsion contract and another contract that had been terminated by the U.S.
Government due to an arms-limitation treaty into which it had entered.
Fiscal 1996 gross margin as a percentage of sales was 18.3 percent,
compared to 13.0 percent in fiscal 1995. The significant increase in fiscal 1996
was primarily attributable to the acquisition of the Aerospace operations on
March 15, 1995. Additionally, fiscal 1995 gross margin included gross margin
write-offs (i.e., estimated costs of completing a contract in excess of contract
revenues) of approximately 1 percent, representing cost growth on the SMAW and
lightweight 30mm medium caliber ammunition programs, and another 1 percent on
other programs due to identification of financial and technical issues.
Fiscal 1998 gross margin is expected to be in the 17.5 percent to 18.5
percent range.
Research and Development--The Company's research and development expenditures
were $16.2 million or 1.5 percent of sales in fiscal 1997, compared with $14.1
million or 1.4 percent of sales in fiscal 1996 and $11.8 million or 2.3 percent
of sales in fiscal 1995. The slight increase in research and development
expenditures as a percent of sales in fiscal 1997 compared to fiscal 1996 was
driven primarily by costs incurred on the Evolved Expendable Launch Vehicle
(EELV) program. Fiscal 1996 expenditures of 1.4 percent of sales represented a
decrease compared to fiscal 1995 expenditures of 2.3 percent of sales due to a
change in executive management which resulted in a more focused approach to
program pursuits. The Company also spent $231.3 million on government-customer
funded research and development contracts in fiscal 1997, a decrease of $50.5
million compared to expenditures of $281.8 million in fiscal 1996 and $117.7
million in fiscal 1995. The decrease in fiscal 1997 compared to fiscal 1996
primarily represents the completion of a rocket motor development program. The
significant increase in fiscal 1996 government-funded research compared to
fiscal 1995 was due primarily to the Aerospace acquisition.
Fiscal 1998 spending for research and development as a percent of sales is
expected to approximate fiscal 1997 levels.
Selling--The Company's selling expenses totaled $35.8 million or 3.3 percent of
sales in fiscal 1997, compared with $33.1 million or 3.2 percent of sales in
fiscal 1996. Fiscal 1997 selling costs include approximately $4 million of
expenditures for the Company's pursuit of the U.S. Government's Intercontinental
Ballistic Missile (ICBM) Prime Integration Program, expected to be awarded in
early calendar year 1998. Fiscal 1996 selling costs as a percentage of sales of
3.2 percent decreased significantly compared to fiscal 1995 levels of 4.9
percent. The fiscal 1996 decline is attributed primarily to the elimination of
duplicative selling expenses, subsequent to the acquisition of the Aerospace
operations on March 15, 1995, as well a more focused approach to program
pursuits. Fiscal 1998 selling expenses, as a percent of sales, are expected to
increase to approximately 4 percent, due in large part to continued spending on
the ICBM Prime Integration Program.
General and Administrative--General and administrative costs for fiscal 1997
totaled $41.9 million or 3.8 percent of sales, compared with $40.2 million or
3.9 percent of sales in fiscal 1996, and $19.1 million or 3.8 percent of sales
in fiscal 1995. Fiscal 1997 general and administrative costs as a percent of
sales decreased slightly from fiscal 1996 levels, reflecting ongoing cost
control efforts. Fiscal 1998 general and administrative costs as a percent of
sales are expected to approximate fiscal 1997 levels.
Restructuring Charges--The Company initiated a restructuring program in the
quarter ending March 31, 1995, which resulted in a fiscal 1995 fourth-quarter
pre-tax charge of $35.6 million. The program was designed to achieve greater
efficiency and competitiveness and improve margins. Approximately $12.2 million
of the non-cash portion of the charge consists of accruals for certain pension-
related liabilities in accordance with Statement of Financial Accounting
Standards (SFAS) No. 88 "Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits."
In mid-fiscal 1996, various executive management changes were made within
the Defense Systems Group. The new management re-evaluated business strategies
for the group, including its restructure plans. While the significant components
of the restructure plan did not change, the anticipated timing of certain
severance and facility closure costs pushed into fiscal 1997. Cash expenditures
under this restructuring program, primarily for employee-related costs, totaled
approximately $9 million and $12 million in fiscal 1997 and fiscal 1996,
respectively. The balance of the reserve at March 31, 1997, represents
specifically identified incremental employee severance and facility closure
costs expected to be incurred in fiscal 1998. Amounts charged for restructuring
reserves include estimates of costs related to facility closure and employee
severance costs. These costs are subject to change near term, although not
currently anticipated, due to changes in assumptions and the period over which
such costs are expected to be incurred.
Change of Control--In August 1994, six new directors nominated by Capstay
Partners, L.P. were elected to the Company's Board of Directors, resulting in a
"change of control" as defined in the Company's compensation and benefit plans
and in agreements with certain employees. These change of control agreements
resulted in the Company incurring an "unusual" charge of $23.0 million in fiscal
1995.
Litigation Settlement--The Company had been a defendant in a "qui tam" lawsuit
under the False Claims Act (Accudyne "qui tam"). On June 23, 1995, the Company
and claimants reached agreement to settle the lawsuit. Accordingly, the Company
recorded an unusual charge of $15.0 million as of the fourth quarter of fiscal
1995.
Interest Expense--Interest expense was $35.1 million in fiscal 1997, a decrease
of $4.2 million, compared to $39.3 million in fiscal 1996. Fiscal 1996 interest
expense increased by $31.4 million from $7.9 million in fiscal 1995. The
decrease in fiscal 1997 interest expense compared to fiscal 1996 reflects
reduced average borrowings outstanding due to regularly scheduled paydowns, as
well as an $88.6 million prepayment of long-term debt with a portion of the sale
proceeds generated by the February 28, 1997, sale of the Marine Systems Group.
The significant increase in interest expense in fiscal 1996 compared to fiscal
1995 reflects increased borrowings to fund the Aerospace acquisition, completed
on March 15, 1995.
The Company has entered into hedging transactions to protect against
increases in market interest rates on its long-term debt. At March 31, 1997, the
notional amount of interest rate swap agreements was approximately $83 million.
Under the swap agreements, the Company currently pays an average fixed rate of
6.7 percent and receives interest at a rate equal to three-month LIBOR (5.6
percent at March 31, 1997). These agreements have remaining terms of one to two
years, with certain cancellation options. The interest rate cap agreements limit
the Company's LIBOR exposure to 7.0 percent, and expire on October 1, 1997. The
notional amount of amortizing interest rate cap agreements at March 31, 1997 was
$22.5 million.
Income Taxes--Fiscal 1997 taxes on income from continuing operations reflect a
zero-percent tax rate, compared to a 22-percent tax rate in fiscal 1996. These
rates vary from statutory tax rates principally due to partial utilization of
available tax loss carryforwards. The fiscal 1997 income tax provision includes
a $12.1 million tax expense on income from discontinued operations. The fiscal
1996 income tax provision includes a tax benefit of $7.8 million for
discontinued operations. Fiscal 1995 taxes reflect a zero-percent tax rate. This
varies from statutory tax rates principally because SFAS No. 109 does not permit
current recognition of deferred tax benefits in excess of the amount more likely
than not to be realized.
Discontinued Operations
Marine Systems Group--On December 22, 1996, the Company entered into an
agreement to sell its Marine Systems Group, including substantially all of the
assets of that business, to Hughes Aircraft Company for $141.0 million in cash.
The sale was completed on February 28, 1997, resulting in a pre-tax gain to the
Company of approximately $27.2 million ($17.7 million, after tax), which the
Company recognized in the fourth quarter. The Company has accounted for the
operations of the Marine Systems Group as discontinued operations in these
financial statements.
Demilitarization Operations--During fiscal 1994, the Company entered into two
joint ventures in Belarus and Ukraine, for the purpose of establishing
demilitarization operations in those countries. In March 1996, Company
management, after evaluating its strategic plans for the future, elected to
discontinue its ownership of foreign demilitarization businesses
("Demilitarization operations"). Accordingly, the Company began actions to
transfer ownership of the joint ventures to host country governments or their
agents and in the fourth quarter of fiscal 1996, the Company estimated and
recorded a $6.2 million loss on disposal of discontinued operations (net of tax
benefit of $4.2 million).
During fiscal 1997, the Company stopped production efforts and completed
its withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997,
the Company reached agreement with the Ukrainian government to transfer the
Company's interests in the operation to the Ukrainian government after payment
of a $19.8 million non-interest bearing long-term note receivable. Management's
best estimate of the value received for the net assets transferred under the
contractual obligation, after discounting for interest, is currently estimated
to be approximately $8.7 million and is recorded on the balance sheet as "Net
assets of discontinued operations" at March 31, 1997. The Company has also
provided a letter of credit to support approximately $2.5 million of bank
borrowings of the demilitarization operations.
Net Income/(Loss)--The Company recorded net income of $59.2 million in fiscal
1997, an increase of $11.4 million or 23.8 percent over net income of $47.8
million in fiscal 1996. Fiscal 1997 net income includes $22.5 million of income
from discontinued operations, compared to a $.6 million loss in fiscal 1996. The
fiscal 1997 increase in income from discontinued operations is reflective of the
Company's sale of the Marine Systems Group on February 28, 1997, which resulted
in an after-tax gain of $17.7 million. This increase in fiscal 1997 net income
was partially offset by the Company's adoption of SOP 96-1 "Environmental
Remediation Liabilities," which resulted in a $17.4 million reduction in net
income. Fiscal 1997 net income also benefited from the Company's ability to more
fully utilize previous tax loss carryforwards to reduce tax expense on
continuing operations in fiscal 1997 to zero percent, compared to 22 percent in
fiscal 1996. Net income of $47.8 million in fiscal 1996 compares to a net loss
of $74.1 million in fiscal 1995. Fiscal 1996 results include a full year of
operations of the Aerospace Systems Group, a significant contributor to the
improved results. The Aerospace operations were acquired from Hercules on March
15, 1995. Additionally, fiscal 1996 results were affected positively by improved
gross margins in the Defense Systems Group and reduced operating expenses as a
percent of sales due to a more focused approach to program pursuits and the
synergistic benefits of eliminating duplicative selling expenses as a result of
the Aerospace acquisition. Fiscal 1995 results included $73.6 million in unusual
charges associated with litigation settlement, change of control, and
restructuring charges.
Cumulative Effect of Change in Accounting for Post-Employment
Benefits--Effective April 1, 1994, the Company changed its method of accounting
for post-employment benefit obligations to comply with SFAS No. 112, "Employers
Accounting for Post-Employment Benefits." This new rule requires such
obligations to be accounted for on an accrual basis rather than the "pay-as-you-
go" basis. An accrued liability was established for such obligations as of April
1, 1994, resulting in a reduction of after-tax earnings for fiscal 1995 of $1.5
million or $.15 per share. Other than this cumulative effect charge, earnings
were not materially affected by this accounting change.
22 Management's Discussion and Analysis
Liquidity, Capital Resources, and Financial Condition
Cash provided by operations during fiscal 1997 totaled $92.1 million, compared
with cash provided by operations of $89.1 million for fiscal 1996 and cash used
by operations of $58.1 million for fiscal 1995. Cash provided by operations for
fiscal 1997 reflects increased net income and improved working capital
management, partially offset by the decrease in net operating cash flow from the
Company's discontinued operations. Approximately $9 million was expended under
the Company's Defense Systems Group restructure plan, primarily for employee-
related costs. Additional restructure expenditures of approximately $12 million
were made in fiscal 1997, primarily for closure costs in connection with the
Company's closure plan of certain facilities acquired in the Aerospace
acquisition. Cash provided by operations for fiscal 1996 compared to cash used
by operations for fiscal 1995 primarily reflects increased fiscal 1996
profitability, as well as the fiscal 1995 impact of the restructuring programs,
change of control-related payments, and increased working capital.
As a result of the Accudyne "qui tam" litigation settlement recorded as of
the fourth quarter of fiscal 1995, the Company spent approximately $3.0 and $3.5
million in fiscal 1997 and 1996, respectively. The remaining $8.5 million, plus
interest, is expected to be expended through the fiscal year ending March 31,
1999, with $4.0 million payable in fiscal 1998.
As a result of operating losses incurred in prior years, primarily
resulting from restructuring charges, as well as one-time charges incurred in
fiscal 1995 for change of control and the litigation settlement, the Company has
tax loss carryforwards of approximately $24 million, which are available to
reduce future tax payments. Realization of the net deferred tax asset (net of
recorded valuation allowance) is dependent upon profitable operations and future
reversals of existing taxable temporary differences. Although realization is not
assured, the Company believes that it is more likely than not that such net
recorded benefits will be realized through the reduction of future taxable
income.
On February 28, 1997, the Company completed the sale of its Marine Systems
Group to Hughes Aircraft Company for $141.0 million in cash. In accordance with
the terms of its debt agreements, the Company used $88.6 million of the sale
proceeds to prepay a portion of its long-term debt.
The Company's future cash flow from operations is not expected to be
significantly affected in future periods as a result of these discontinued
operations.
Net outlays for capital expenditures during fiscal 1997 were $28.5 million
or 2.6 percent of sales, compared with fiscal 1996 outlays of $25.6 million or
2.5 percent of sales, and $12.6 million or 2.5 percent of sales in fiscal 1995.
Management expects total capital expenditures for fiscal 1998 to decrease to
approximately 2 percent of sales, due primarily to the completion in fiscal 1997
of tooling expenditures for the Delta III rocket launch program.
In fiscal 1995, the Company acquired the Aerospace operations from Hercules
for $306.0 million in cash and 3.86 million shares of stock valued at $112.0
million. During fiscal 1996, the Company received a net amount of $29.1 million
from Hercules as an adjustment to the purchase price. The adjustment was
primarily the result of receivable collections just prior to the closing of the
acquisition, which reduced assets and lowered the final purchase price.
Principal payments made on the Company's long-term debt during fiscal 1997
totaled $128.9 million, including the $88.6 million prepayment resulting from
the sale of the Marine Systems Group.
As of March 31, 1997, no borrowings were outstanding against the Company's
$275.0 million revolving line of credit. Letters of credit totaling $51.4
million at that date reduced the borrowings available under this credit line to
$223.6 million.
The Company's total debt (current portion of long-term debt, notes payable
and long-term debt) as a percentage of total capitalization decreased
significantly to 55.1 percent at March 31, 1997, compared with 71.6 percent at
March 31, 1996, which primarily reflects continued profitable operations and
strong cash flow from operations, as well as proceeds from the sale of the
Marine Systems Group, which was used largely for debt repayment.
The Company initiated a $50.0 million share repurchase program in fiscal
1996. In connection with that program, the Company has repurchased 1,122,580
shares of its stock in the open market as of March 31, 1997, at an average price
of $38.69 per share, for an aggregate amount of $43.4 million, of which $6.6
million was repurchased in fiscal 1997. The Company completed the $50.0 million
repurchase plan in the first quarter of fiscal 1998.
The Company satisfied all its needs for cash in fiscal 1997, primarily for
operating capital, capital expenditures, scheduled debt repayments, and share
repurchases, entirely from operating cash flows. Based on the financial
condition of the Company at March 31, 1997, management believes the internal
cash flows of the Company combined with the availability of funding under its
line of credit if needed, will be adequate to fund the future growth of the
Company as well as to service its long-term debt obligations. Management is
currently evaluating a number of options relative to the Company's cash balances
at March 31, 1997, among which include but are not limited to, further debt
repayment, share repurchases, or acquisitions of businesses that fit the
Company's long-term growth strategies.
23
Environmental Matters
The Company is subject to various local and national laws relating to protection
of the environment and is in various stages of investigation or remediation of
potential, alleged, or acknowledged contamination. In October 1996, the American
Institute of Certified Public Accountants (AICPA) issued SOP 96-1 "Environmental
Remediation Liabilities," which required a change in, and provided clarification
to, the manner in which companies measure and recognize costs associated with
environmental remediation liabilities. Under the provisions of the SOP, the most
significant change in accounting for the Company is that all future anticipated
ongoing monitoring and maintenance costs associated with known remediation sites
is required to be accrued. Such costs were previously expensed as incurred. The
Company elected to adopt the provisions of the new rule early, as is permitted
under the SOP, which resulted in a non-cash charge of $17.4 million in the
fourth quarter of fiscal 1997. The charge is classified in cost of sales
expenses in the Company's consolidated income statement for the fourth quarter
ending March 31, 1997. At March 31, 1997, the accrued liability for
environmental remediation of $34.8 million represents management's best estimate
of the probable and reasonably estimable costs related to the Company's known
remediation obligations. It is expected that a significant portion of the
Company's environmental costs will be reimbursed to the Company. As collection
of those reimbursements is estimated to be probable, the Company has recorded
amounts receivable of approximately $10.6 million at March 31, 1997. Such
receivable primarily represents the reimbursement of costs associated with the
Aerospace operations. As part of the Aerospace acquisition, the Company
generally assumed responsibility for environmental compliance at Aerospace
operations facilities. It is expected that much of the compliance and
remediation costs associated with these facilities will be reimbursable under
U.S. Government contracts, and that those environmental remediation costs not
covered through such contracts will be covered by Hercules under various
agreements. The Company's accrual for environmental remediation liabilities and
the associated receivable for reimbursement thereof have been discounted, and
are recorded net of $10 million and $3 million, respectively, to reflect the
present value of the expected future cash flows, using a discount rate net of
estimated inflation of 5 percent. It is expected that fiscal 1998 environmental
expenditures, net of expected recoveries, will approximate $5.2 million. Amounts
payable/receivable in periods beyond fiscal 1998 have been classified as non-
current on the Company's March 31, 1997, balance sheet. At March 31, 1997, the
estimated aggregate undiscounted amounts payable for environmental remediation
costs, net of expected reimbursements, are approximately $5.2, $5.0, $3.3, $1.7,
and $1.4 million for the fiscal years ending March 31, 1998, 1999, 2000, 2001,
and 2002, respectively. Estimated amounts payable thereafter total $14.6
million. At March 31, 1997, the estimated discounted range of reasonably
possible costs of study and remediation is between $34 million and $70 million.
The Company does not anticipate that resolution of the environmental
contingencies in excess of amounts accrued, net of recoveries, will materially
affect future operating results.
There were no material insurance recoveries related to environmental
remediations during fiscal 1997, 1996, or 1995.
In future periods, new laws or regulations, advances in technologies, and
additional information about the ultimate remedy selected at new and existing
sites, and the Company's share of the cost of such remedies, could significantly
change the Company's estimates. It is reasonably possible that management's
current estimates of liabilities for the above contingencies could change in the
near term as more definitive information becomes available.
Litigation
The Company is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. Such matters arise out of the normal
course of business and relate to product liability, government regulations,
including environmental issues, and other issues. Certain of the lawsuits and
claims seek damages in very large amounts. In these legal proceedings, no
director, officer, or affiliate is a party or named a defendant.
The Company is involved in three "qui tam" lawsuits brought by former
employees of the Aerospace operations acquired from Hercules. One involves
allegations relating to submission of false claims and records, delivery of
defective products, and a deficient quality control program. The second involves
allegations of mischarging of work performed under Government contracts, misuse
of Government equipment, other acts of financial mismanagement, and wrongful
termination claims. The Government did not join in either of these lawsuits.
Under the terms of the agreements relating to the Aerospace acquisition, all
litigation and legal disputes arising in the ordinary course of operations will
be assumed by the Company except for a few specific lawsuits and disputes
including the two qui tam lawsuits referred to above. The Company has agreed to
indemnify and reimburse Hercules for a portion of litigation costs incurred and
a portion of damages, if any, awarded in these lawsuits. Under terms of the
purchase agreement with Hercules, the Company's maximum settlement liability is
approximately $4 million, for which the Company has fully reserved at March 31,
1997. In the third qui tam lawsuit, the Company received a partially unsealed
complaint in March 1997 alleging labor mischarging on a government contract.
Damages are not specified. The government is currently investigating the
claim and has not determined whether it will join the lawsuit. In late fiscal
1997, the Company was also served with two complaints in civil actions alleging
violations of the False Claims Act and the Truth in Negotiations Act. The
complaints allege defective pricing on two separate government contracts.
Damages in either case were not specified.
While the results of litigation cannot be predicted with certainty, management
believes, based upon the advice of counsel, that the actions seeking to recover
damages against the Company either are without merit, are covered by insurance
and reserves, do not support any grounds for cancellation of any contract, or
are not likely to materially affect the financial condition or results of
operations of the Company, although the resolution of any of such matters during
a specific period could have a material effect on the quarterly or annual
operating results for that period.
It is reasonably possible that management's current estimates of liabilities
for the above contingencies could change in the near term as more definitive
information becomes available.
New Accounting Rules
In October 1996, the AICPA issued SOP 96-1 "Environmental Remediation
Liabilities," which required change in, and provided clarification to, the
manner in which companies measure and recognize costs associated with
environmental remediation liabilities. Under the provisions of the SOP, the most
significant change in accounting for the Company is that all future anticipated
ongoing monitoring and maintenance costs associated with known remediation sites
is required to be accrued. Such costs were previously expensed as incurred. The
Company elected to adopt the provisions of the new rule early, as is permitted
under the SOP, which resulted in a non-cash charge of $17.4 million in the
fourth quarter of fiscal 1997. The charge is classified in cost of sales
expenses in the Company's consolidated income statement for the period ending
March 31, 1997.
Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected
to continue following the guidance of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," for measurement and recognition
of stock-based transactions with employees. The adoption of SFAS No. 123 did not
have an impact on the Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share," which will require companies to present basic earnings per
share (EPS) and diluted earnings per share, instead of the primary and fully
diluted EPS that is currently required. The new standard requires additional
informational disclosures and also makes certain modifications to the currently
applicable EPS calculations defined in Accounting Principles Board No. 15. The
new standard is required to be adopted by all public companies for reporting
periods ending after December 15, 1997 (the Company's third quarter of fiscal
1998), and will require restatement of EPS for all prior periods reported. Under
the requirements of SFAS No. 128, the Company EPS would be as follows:
Years Ended March 31
---------------------
1997 1996 1995
- ---------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations $2.82 $3.72 $(7.27)
Discontinued operations 1.73 (.05) .05
Cumulative effect of
accounting change -- -- (.15)
- ---------------------------------------------------------
Net income (loss) $4.55 $3.67 $(7.37)
=========================================================
Diluted earnings per share:
Continuing operations $2.73 $3.61 $(7.27)
Discontinued operations 1.68 (.05) .05
Cumulative effect of
accounting change -- -- (.15)
- ---------------------------------------------------------
Net income (loss) $4.41 $3.56 $(7.37)
=========================================================
Inflation
In the opinion of management, inflation has not had a significant impact on the
results of the Company's operations. The selling prices under contracts, the
majority of which are long term, generally include estimated costs to be
incurred in future periods. These cost projections can generally be negotiated
into new buys under fixed-price government contracts, while actual cost
increases are recoverable in cost-type contracts.
Risk Factors
Except for the historical information contained herein, certain of the matters
discussed in this report are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties, including, but not limited to, changes in governmental spending
and budgetary policies, governmental laws and other rules and regulations
surrounding various matters such as environmental remediation, contract pricing,
changing economic and political conditions in the United States and in other
countries, international trading restrictions, outcome of union negotiations,
customer product acceptance, the Company's success in program pursuits,
continued access to capital markets, and merger and acquisition activity within
the industry. All forecasts and projections in this report are "forward-looking
statements," and are based on management's current expectations of the Company's
near-term results, based on current information available pertaining to the
Company, including the aforementioned risk factors. Actual results could differ
materially.
To the Stockholders of Alliant Techsystems:
We have audited the accompanying consolidated balance sheets of Alliant
Techsystems Inc. and subsidiaries as of March 31, 1997, and 1996, and the
related consolidated statements of income and of cash flows for each of the
years ended March 31, 1997, 1996, and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Alliant Techsystems Inc. and
subsidiaries at March 31, 1997, and 1996, and the consolidated results of its
operations and its cash flows for each of the years ended March 31, 1997, 1996,
and 1995, in conformity with generally accepted accounting principles.
As discussed in Note 10 to the financial statements, effective April 1, 1994,
the Company changed its method of accounting for post-employment benefit costs
to conform with Statement of Financial Accounting Standards No. 112.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
May 14, 1997
The management of Alliant Techsystems Inc. is responsible for the integrity,
objectivity, and consistency of the financial information presented in this
report. The financial statements have been prepared in accordance with generally
accepted accounting principles, and necessarily include some amounts based on
management's judgments and best estimates.
To meet its responsibilities, management relies on a comprehensive system of
internal controls designed to provide reasonable assurance that assets are
safeguarded and that transactions are appropriately recorded and reported. The
system is supported by the employment of qualified personnel and by an effective
internal audit function.
Our independent auditors provide an objective, independent review of
management's discharge of its responsibilities as they relate to the financial
statements. Their report is presented separately.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, recommends the independent auditors for appointment by the Board
subject to ratification by shareholders. The Committee also meets periodically
with the independent auditors, internal auditors, and representatives of
management to discuss audit results, the adequacy of internal controls, and the
quality of our financial accounting and reporting. The independent auditors and
the internal auditors have access to the Committee without the presence of
management.
/s/ Richard Schwartz
Richard Schwartz
Chairman, President, and Chief Executive Officer
/s/ Scott S. Meyers
Scott S. Meyers
Vice President and Chief Financial Officer
26 Consolidated Income Statements
Years Ended
------------------------------------------------
(Amounts in thousands except per share data) March 31, 1997 March 31, 1996 March 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $1,089,397 $1,020,605 $ 504,190
Cost of sales 907,695 834,298 438,558
Change in accounting estimate- environmental liabilities 17,442 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Gross margin 164,260 186,307 65,632
Operating expenses:
Research and development 16,207 14,126 11,763
Selling 35,778 33,143 24,820
General and administrative 41,881 40,186 19,066
Restructuring charges - - 35,600
Change of control charges - - 23,039
Litigation settlement charges - - 15,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 93,866 87,455 129,288
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 70,394 98,852 (63,656)
- ----------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (35,102) (39,279) (7,919)
Interest income 716 1,852 843
Other, net 651 657 (2,332)
- ----------------------------------------------------------------------------------------------------------------------------------
Total other expense (33,735) (36,770) (9,408)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 36,659 62,082 (73,064)
Income tax provision - 13,658 -
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 36,659 48,424 (73,064)
Discontinued operations:
Income from discontinued operations, net of income taxes 4,819 5,617 456
Gain (loss) on disposal of discontinued operations, net of income taxes 17,681 (6,240) -
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 59,159 47,801 (72,608)
Cumulative effect of accounting change net of income taxes - - (1,500)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 59,159 $ 47,801 $ (74,108)
==================================================================================================================================
Primary and fully diluted earnings (loss) per
common and common equivalent share:
Continuing operations $2.73 $3.61 $(7.27)
Discontinued operations 1.68 (.05) .05
Cumulative effect of accounting change - - (.15)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $4.41 $3.56 $(7.37)
==================================================================================================================================
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets 27
(Amounts in thousands except share data) March 31, 1997 March 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 122,491 $ 45,532
Marketable securities 378 348
Receivables 191,675 178,475
Net inventory 68,125 87,602
Deferred income tax asset 37,244 40,393
Other current assets 5,329 3,819
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 425,242 356,169
Net property, plant, and equipment 360,560 382,513
Goodwill 123,618 125,033
Deferred charges 10,925 12,316
Prepaid and intangible pension assets 80,569 85,142
Other assets 116 855
Net assets of discontinued operations 8,674 73,114
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,009,704 $1,035,142
==================================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 29,024 $ 45,000
Notes payable 2,302 2,756
Accounts payable 85,451 77,453
Contract advances and allowances 64,500 40,636
Accrued compensation 28,392 28,672
Accrued income taxes 9,156 9,310
Restructuring liability 5,876 26,782
Other accrued liabilities 106,496 82,582
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 331,197 313,191
Long-term debt 237,071 350,000
Post-retirement and post-employment benefits liability 143,373 143,930
Pension liability 37,079 42,184
Other long-term liabilities 42,192 28,360
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 790,912 877,665
Contingencies (see Notes 15 and 19)
Stockholders' equity:
Common stock-$.01 par value
Authorized-20,000,000 shares
Issued and outstanding 13,081,538 and 12,965,542 shares at
March 31, 1997, and 1996, respectively 131 130
Additional paid-in-capital 248,612 249,814
Retained earnings (deficit) 4,361 (54,798)
Unearned compensation (1,324) (2,552)
Pension liability adjustment (2,304) (1,189)
Common stock in treasury, at cost (782,075 and 898,071 shares held
at March 31, 1997, and 1996, respectively) (30,684) (33,928)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 218,792 157,477
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,009,704 $1,035,142
==================================================================================================================================
See Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------------------
28 Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
Years Ended
------------------------------------------------
(Amounts in thousands) March 31, 1997 March 31, 1996 March 31, 1995
- --------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 59,159 $ 47,801 $ (74,108)
Adjustments to net income (loss) to arrive at cash
provided by (used for) operations:
Restructuring charges--non-cash portion -- -- 18,433
Change of control charges--non-cash portion -- -- 7,991
Litigation settlement charges--non-cash portion -- -- 15,000
Cumulative effect of accounting change--net of
income taxes -- -- 1,500
Depreciation 45,114 49,855 13,824
Amortization of intangible assets and earned
compensation 7,607 8,768 2,459
(Gain) loss on disposition of discontinued
operations, net of taxes (17,681) 6,240 --
Loss on sale of marketable securities -- -- 1,562
(Gain) loss on disposition of property (72) (135) 1,005
Changes in assets and liabilities:
Receivables (13,201) (409) (32,870)
Inventories 19,349 11,947 2,751
Accounts payable 7,726 29,564 (5,412)
Contract advances and allowances 23,863 (21,409) 7,862
Accrued compensation (280) 3,382 (7,716)
Accrued income taxes (154) (115) 1,127
Accrued restructure liability (22,946) (35,471) (4,800)
Accrued environmental liability 13,180 (178) 3,279
Other assets and liabilities (24,914) (29,167) (8,944)
Operating activities of discontinued operations (4,640) 18,408 (1,046)
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operations 92,110 89,081 (58,103)
==============================================================================================================
Investing Activities
Capital expenditures (28,522) (25,593) (12,635)
Acquisition of businesses -- -- (305,891)
Purchase price finalization -- 29,115 --
Accrued transaction fees paid -- (6,000) --
Proceeds from sale of discontinued operations 141,000 -- --
Proceeds from the disposition of property 2,835 929 149
Investing activities of discontinued operations (2,483) (2,306) (6,700)
Proceeds from sale of marketable securities -- -- 3,759
Other investing activities, net -- 414 (988)
- --------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities 112,830 (3,441) (322,306)
- --------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of long-term debt -- -- 425,000
Payments made on long-term debt and notes payable (128,905) (30,000) (53,465)
Payments made for debt issue costs -- -- (12,997)
Net purchase of treasury shares (2,616) (36,859) --
Proceeds from exercised stock options 3,995 1,773 1,793
Other financing activities, net (455) (686) (11)
- ----------------------------------------------------------------------------------------------------------------
Cash (used for) provided by financing activities (127,981) (65,772) 360,320
================================================================================================================
Increase (decrease) in cash and cash equivalents 76,959 19,868 (20,089)
Cash and cash equivalents at beginning of period 45,532 25,664 45,753
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 122,491 $ 45,532 $ 25,664
================================================================================================================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements 29
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - The consolidated financial statements of the Company
include all wholly owned subsidiaries. Intercompany balances and transactions
between entities included in these financial statements have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may differ from those estimates.
Long-Term Contracts - Sales under long-term contracts are accounted for under
the percentage of completion method and include cost reimbursement and fixed-
price contracts. Sales under cost reimbursement contracts are recognized as
costs are incurred. Sales under fixed-price contracts are either recognized as
the actual cost of work performed relates to the estimate at completion (cost-
to-cost) or based on results achieved, which usually coincides with customer
acceptance (units of delivery).
Profits expected to be realized on contracts are based on the Company's
estimates of total contract sales value and costs at completion. Estimated
amounts for contract changes and claims are included in contract sales only when
realization is estimated to be probable. Assumptions used for recording sales
and earnings are adjusted in the period of change to reflect revisions in
contract value and estimated costs. In the period in which it is determined that
a loss will be incurred on a contract, the entire amount of the estimated loss
is charged to income.
Research and development, selling, and general and administrative costs are
expensed in the year incurred.
Environmental Remediation and Compliance - Costs associated with environmental
compliance and preventing future contamination that are estimable and probable
are accrued and expensed, or capitalized as appropriate. Expected remediation
and monitoring costs relating to the remediation of an existing condition caused
by past operations, and which do not contribute to current or future revenue
generation, are accrued and expensed in the period that such costs become
estimable. Liabilities are recognized for remedial activities when they are
probable and the remediation cost can be reasonably estimated.
The cost of each environmental liability is estimated by engineering,
financial, and legal specialists within the Company based on current law and
existing technologies. Such estimates are based primarily upon the estimated
cost of investigation and remediation required and the likelihood that other
potentially responsible parties (PRPs) will be able to fulfill their commitments
at the sites where the Company may be jointly and severally liable. The
Company's estimates for environmental obligations are dependent on and affected
by changes in environmental laws and regulations, the nature and extent of
historical information and physical data relating to a contaminated site, the
complexity of the site, methods of remediation available, the technology that
will be required, the outcome of discussions with regulatory agencies and other
PRPs at multi-party sites, the number and financial viability of other PRPs,
future technological developments, and the timing of expenditures. Accordingly,
such estimates could change materially as the Company periodically evaluates and
revises such estimates based on expenditures against established reserves and
the availability of additional information.
Cash Equivalents - Cash equivalents are all highly liquid temporary cash
investments purchased with original maturities of three months or less. The fair
market value of such investments at March 31, 1997, approximates cost.
Marketable Securities - Marketable securities sold during fiscal 1995 represent
available-for-sale investments in a diversified mutual fund whose portfolio
consists of U.S. Treasury bills, bonds, and other government-backed obligations
and are recorded at estimated market value. There were no gross realized gains
recorded in fiscal 1997, 1996, and 1995. Gross realized losses for the same
periods were $0, $0, and $1,562, respectively, calculated using the specific
identified cost basis. Unrealized gains and losses were negligible at March 31,
1997, and 1996, respectively.
Inventories - Inventoried costs relating to long-term contracts and programs are
stated at actual production costs, including factory overhead, initial tooling,
and other related nonrecurring costs incurred to date, reduced by amounts
identified with sales recognized on units delivered or progress completed.
Inventoried costs relating to long-term contracts and programs are reduced by
charging any amounts in excess of estimated realizable value to cost of sales.
Progress payments received from customers relating to the uncompleted portions
of contracts are offset first against unbilled receivable balances, then against
applicable inventories. Any remaining progress payment balances are classified
as advance payments.
Property and Depreciation - Property, plant, and equipment is stated at cost and
depreciated over estimated useful lives. Machinery and test equipment is
depreciated using the double declining balance method, converting to straight-
line depreciation for the last third of the asset's life. All other depreciable
property is depreciated using the straight-line method.
Goodwill - Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition and is being
amortized on a straight-line basis over periods up to 40 years. The
recoverability of the carrying value of goodwill is periodically evaluated by
comparison with the estimated future undiscounted cash flows from related
operations.
Income Taxes - Deferred income taxes result from temporary differences between
the basis of assets and liabilities recognized for differences between the
financial statement and tax basis thereon, and for the expected future tax
benefits to be derived from tax losses and tax credit carryforwards. A valuation
allowance is recorded to reflect the likelihood of realization of deferred tax
assets.
- -------------------------------------------------------------------------------
30 Notes to the Consolidated Financial Statements
- -------------------------------------------------------------------------------
Financial Instruments and Hedging - The Company uses interest rate swap and cap
agreements to manage interest costs and the risk associated with changing
interest rates. As interest rates change, the differential paid or received is
recognized in interest expense of the period.
Earnings Per Share Data - For the fiscal years ended March 31, 1997, 1996, and
1995, primary and fully diluted earnings (loss) per share is computed based on
weighted average common and common equivalent shares outstanding of 13,402,000,
13,431,000, and 10,052,000, respectively. Common stock equivalents are excluded
from the earnings (loss) per share calculation for fiscal 1995 because the
effect would be antidilutive. Common stock equivalents used in computing
earnings per share relate to stock options which, if exercised, would have a
dilutive effect on earnings per share for fiscal 1997 and 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which will
require companies to present basic earnings per share (EPS) and diluted earnings
per share, instead of the primary and fully diluted EPS that is currently
required. The new standard requires additional informational disclosures, and
also makes certain modifications to the currently applicable EPS calculations
defined in Accounting Principles Board No. 15. The new standard is required to
be adopted by all public companies for reporting periods ending after December
15, 1997, (the Company's third quarter of fiscal 1998), and will require
restatement of EPS for all prior periods reported. Under the requirements of
SFAS No. 128, the Company's EPS would be as follows:
Years Ended March 31
--------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Continuing operations $2.82 $3.72 $(7.27)
Discontinued operations 1.73 (.05) .05
Cumulative effect of
accounting change - - (.15)
- ------------------------------------------------------------------------------------
Net income (loss) $4.55 $3.67 $(7.37)
====================================================================================
Diluted earnings per share:
Continuing operations $2.73 $3.61 $(7.27)
Discontinued operations 1.68 (.05) .05
Cumulative effect of
accounting change - - (.15)
- ------------------------------------------------------------------------------------
Net income (loss) $4.41 $3.56 $(7.37)
====================================================================================
Reclassifications - Certain reclassifications have been made to the 1996 and
1995 financial statements to conform to the 1997 classification.
2. Receivables
Receivables, including amounts due under long-term contracts (contract
receivables), are summarized as follows:
Years Ended
----------------------------
Mar. 31, 1997 Mar. 31, 1996
- -----------------------------------------------------
Contract receivables
Billed receivables $ 74,063 $ 67,003
Unbilled receivables 114,801 110,511
Other receivables 2,811 961
- -----------------------------------------------------
$191,675 $178,475
=====================================================
Receivable balances are shown net of reductions of $301,385 and $307,090 as of
March 31, 1997, and 1996, respectively, for progress payments received from
customers relating to completed portions of contracts.
Unbilled receivables represent the balance of recoverable costs and accrued
profit comprised principally of revenue recognized on contracts for which
billings have not been presented to the customer because the amounts were earned
but not billable as of the balance sheet date under the contractual terms. These
amounts include expected additional billable general overhead costs and fees on
flexibly priced contracts awaiting final rate negotiations, and are generally
billable and collectible within one year.
3. Inventories
Inventory balances are shown net of reductions of $18,933 and $84,233 as of
March 31, 1997, and 1996, respectively, for progress payments received from
customers relating to uncompleted portions of contracts.
4. Property, Plant, and Equipment
The major categories of property consist of the following:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
Land $ 23,624 $ 24,165
Buildings and improvements 164,225 160,717
Machinery and equipment 324,625 319,610
Property not yet in service 10,701 5,985
- ------------------------------------------------------------------------------------------------------------------------
523,175 510,477
Less accumulated depreciation (162,615) (127,964)
- ------------------------------------------------------------------------------------------------------------------------
$ 360,560 $ 382,513
========================================================================================================================
- --------------------------------------------------------------------------------
31
- --------------------------------------------------------------------------------
5. Goodwill and Deferred Charges
Goodwill and deferred charges consist of the following:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill, net of accumulated amortization:
1997 - $7,255, 1996 - $3,940 $123,618 $125,033
===========================================================================================================================
Debt issuance costs, net of
accumulated amortization:
1997 - $7,099, 1996 - $2,433 $ 7,721 $ 11,098
Other 3,204 1,218
- ---------------------------------------------------------------------------------------------------------------------------
$ 10,925 $ 12,316
===========================================================================================================================
6. Other Accrued Liabilities
The major categories of other current and long-term accrued liabilities are as follows:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Employee benefits and insurance $ 46,950 $ 38,201
Legal accruals 25,041 27,657
Other accruals 34,505 16,724
- ---------------------------------------------------------------------------------------------------------------------------
Other accrued liabilities - current $ 106,496 $ 82,582
===========================================================================================================================
Litigation settlement - long-term $ 4,500 $ 8,500
Environmental remediation liability 19,169 7,289
Deferred tax liability 18,462 9,496
Other long-term 61 3,075
- ---------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities $ 42,192 $ 28,360
===========================================================================================================================
The increase in other current accrued liabilities is driven in large part
by severance and closure costs to be incurred in connection with the Company's
sale of the Marine Systems Group (see Note 18). The increase in other long-term
liabilities is primarily reflective of the Company's adoption of SOP 96-1
"Environmental Remediation Liabilities" (see Note 19).
7. Long-Term Debt
The components of the Company's long-term debt are as follows:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Bank term loan with quarterly principal
and interest payments through March 2001 $116,095 $245,000
11.75% Senior Subordinated Notes with semi-
annual interest payments, maturing 2003 150,000 150,000
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt 266,095 395,000
Less current portion (29,024) (45,000)
- ---------------------------------------------------------------------------------------------------------------------------
Long-term portion $237,071 $350,000
===========================================================================================================================
In connection with the Aerospace acquisition (see Note 21), the Company
entered into a six-year, $500,000 bank credit facility which was comprised of a
$275,000 term loan and a $225,000 revolving working capital (revolver) and
letter of credit facility. In November 1996, this facility was amended to
increase the revolver and letter of credit facility from $225,000 to $275,000,
and to reduce the Company's borrowing interest rate margins. Outstanding letters
of credit totaling $51,448 reduced the available line of credit to $223,552 at
March 31, 1997. The Company is required to pay a commitment fee (0.275 percent
at March 31, 1997) on the $275,000 revolver, and is also charged for outstanding
letters of credit, in addition to an issuance fee, which varies and is
negotiated with each bank. The revolver and letter of credit fees are subject to
adjustment based on the Company's long-term debt rating. The interest rate
charged for borrowings under the bank credit facility is at the option of the
Company, either a floating rate based on a defined prime rate or a fixed rate
related to the London Interbank Offered Rate (LIBOR) plus a margin based on the
Company's debt rating. As of March 31, 1997, the unhedged interest rate on
outstanding borrowings under this facility was approximately 6.5 percent.
Borrowings are secured by substantially all of the assets of the Company.
Amounts outstanding under this agreement at March 31, 1997, based on current
rates for similar instruments with the same maturities, approximate fair market
value. There were no outstanding borrowings against the revolving line of credit
at March 31, 1997.
In addition to the bank credit facility, the Company has $150,000 of 11.75
percent senior subordinated notes outstanding. The senior subordinated notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after March 1, 1999, at certain defined redemption prices. The estimated fair
value of the Company's senior subordinated notes, based on bank quotes, is
approximately $162.8 million.
The Company's bank credit facility and senior subordinated notes limit the
payment of dividends and contain certain covenants with respect to the Company's
consolidated net worth, leverage, and debt and interest coverage. Additionally,
the Company's debt agreements impose certain restrictions on the incurrence of
additional indebtedness, sale of assets, mergers and consolidations,
transactions with affiliates, creation of liens, and certain other matters. In
connection with the sale of its Marine Systems Group in February 1997 (see Note
18), the Company prepaid $88.6 million of its long-term debt in accordance with
the terms of the bank credit facility. At March 31, 1997, the Company was in
compliance with all covenants and restrictions specified in its debt agreements.
At March 31, 1997, the aggregate maturities due over the next five fiscal
years under the bank term loan and the senior subordinated notes are $29,024 in
1998, $31,926 in 1999, $31,926 in 2000, $23,219 in 2001, and $0 in 2002. Amounts
due thereafter total $150,000.
The company's weighted average interest rate on short-term borrowings
during fiscal 1997 and 1996 was 7.2 percent and 7.3 percent, respectively.
The Company has entered into hedging transactions to protect against increases
in market interest rates on its long-term debt. At March 31, 1997, the notional
amount of interest rate swap agreements was $83,000. Under the swap agreements,
the Company currently pays an average fixed rate of 6.7 percent, and receives
interest at a rate equal to three-month LIBOR (5.6 percent at March 31, 1997).
These agreements have remaining terms of one to two years, with certain
cancellation options. Fair value of the interest rate swap agreements at March
31, 1997, is $(.7) million. The interest rate cap agreements limit the Company's
LIBOR exposure to 7.0 percent, and expire on October 1, 1997. The notional
amount of amortizing interest rate cap agreements at March 31, 1997, was
$22,500. The recorded value of the interest rate cap agreements approximates
fair value at March 31, 1997. Counter parties to the interest rate swap and cap
agreements are major financial institutions who also participate in the
Company's bank credit facilities. Credit loss from counterparty non-performance
is not anticipated. The estimated fair market value amounts have been determined
using available market information or other appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Therefore, the estimates are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange. The effect of using different market assumptions and/or
estimation methodologies may be material to the estimated fair value amounts.
8. Employee Benefit Plans
The Company's noncontributory defined benefit pension plans cover substantially
all employees. Plans provide either pension benefits of stated amounts for each
year of credited service, or pension benefits based on employee yearly pay
levels and years of credited service. The Company funds the plans in accordance
with Federal requirements calculated using appropriate actuarial methods.
Plan assets for the Company are held in a trust and are invested in a
diversified portfolio of equity securities and fixed income investments.
The sale of the Marine Systems Group resulted in curtailments as defined by
SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits." The net impact of the
curtailments was a credit to fiscal 1997 gain on disposal of discontinued
operations of $304, and a decrease in the accumulated benefit obligation as of
March 31, 1997, of $24,079. The workforce reduction associated with the fiscal
1995 restructuring program also resulted in curtailments as defined by SFAS No.
88. The impact of the fiscal 1995 curtailments was a charge to income of
$12,243, and an increase in the accumulated benefit obligation as of March 31,
1995, of $7,665.
The components of the Company's net periodic pension cost are
as follows:
Years Ended
----------------------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- -----------------------------------------------------------------------------------------------------------------
Service cost of benefits
earned during the period $ 14,337 $ 13,662 $ 9,766
Interest cost of projected
benefit obligation 44,563 45,871 22,388
Return on assets (73,506) (110,907) 15,590
Net amortization and deferral 25,250 64,612 (32,307)
- -----------------------------------------------------------------------------------------------------------------
Net pension cost $ 10,644 $ 13,238 $ 15,437
=================================================================================================================
The plans' funded status and amounts recognized in the Company's balance
sheets for its pension plans are summarized below:
Plans Whose Accumulated
Benefits Exceed Assets
----------------------------------
Mar. 31, 1997 Mar. 31, 1996
- -----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(294,386) $(296,277)
- -----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (302,285) (300,779)
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation (318,356) (324,480)
Plan assets at fair value 272,111 272,649
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation (in excess of)
plan assets (46,245) (51,831)
Remaining unrecognized net
transition obligation (asset) (2,624) (3,472)
Unrecognized prior service cost 12,125 15,067
Unrecognized net loss 4,846 2,336
Accrued contribution to plans 2,861 3,496
Adjustment to recognize minimum liability (8,042) (7,780)
- -----------------------------------------------------------------------------------------------------------------
Unfunded pension liability
recognized in balance sheet $ 37,079 $ 42,184
=================================================================================================================
Plans Whose Assets
Exceed Accumulated Benefits
-------------------------------------------
Mar. 31, 1997 Mar. 31, 1996
- -----------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $(448,931) $(416,094)
- -----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation (462,835) (429,466)
- -----------------------------------------------------------------------------------------------------------------
Projected benefit obligation (519,750) (512,722)
Plan assets at fair value 643,463 628,656
- -----------------------------------------------------------------------------------------------------------------
Funded status 123,713 115,934
Remaining unrecognized net
transition obligation (asset) -- --
Unrecognized prior service cost -- --
Unrecognized net gain (48,085) (38,739)
Accrued contribution to plans -- --
Adjustment to recognize minimum liability -- --
- -----------------------------------------------------------------------------------------------------------------
Prepaid premium expense
recognized in balance sheet $ 75,628 $ 77,195
=================================================================================================================
33
Assumptions used in the accounting for defined benefit plans were:
Years Ended
------------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- -------------------------------------------------------------------------------
Discount rate used in
determining present
values 7.50% 7.50% 8.25%
Annual increase in future
compensation levels 4.25% 4.25% 4.75%
Expected long-term rate
of return on assets 8.75% 8.75% 8.25%
===============================================================================
The Company also sponsors a number of defined contribution plans.
Participation in one of these plans is available to substantially all employees.
The two principal defined contribution plans are Company-sponsored 401(K) plans
to which employees may contribute up to 18 percent of their pay. The Company
contributes in Company stock or cash amounts equal to 50 percent of employee
contributions up to 4 or 6 percent of the employee's pay. The amount expensed
for the Company match provision of the plans was $5,881, $5,780, and $3,606 in
fiscal 1997, 1996, and 1995, respectively. The significant increase in fiscal
1996 over amounts expensed in fiscal 1995 reflects the addition of the Aerospace
employees on March 15, 1995. The Company employs approximately 1,975 employees
(29 percent of its total employees) covered by collective bargaining agreements,
220 of whom are covered under agreements expected to be renegotiated during
fiscal 1998 due to current agreement expirations.
9. Post-Retirement Benefits
Generally, employees retiring from the Company after attaining age 55 who have
had at least five years of service are entitled to post-retirement health care
benefits and life insurance coverage until the retiree reaches age 65. The
portion of the premium cost born by the Company for such benefits is dependent
on the employee's years of service. Further contributions from retirees are also
required based on plan deductibles and co-payment provisions.
Post-retirement benefit costs, other than those related to pensions, in the
fiscal years ended March 31, 1997, 1996, and 1995, included the following
components:
Years Ended
----------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- -------------------------------------------------------------------------------
Service cost of benefits
earned during the year $ 899 $ 842 $ 366
Interest cost on accumulated
post-retirement
benefit obligation 7,341 7,603 2,112
Net amortization and deferral 378 (25) --
Curtailment gain (45) (1,120) (25)
- -------------------------------------------------------------------------------
Net post-retirement
benefit cost $8,573 $ 7,300 $2,453
===============================================================================
Curtailment gains recognized in fiscal 1996 were the result of the reduction
in employment in connection with restructuring programs.
The Company's post-retirement benefit obligations other than pensions
generally are not prefunded. The following table sets forth the status of the
retiree benefit obligations at March 31, 1997, and 1996:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- --------------------------------------------------------------------------------
Actuarial present value of benefits attributed to:
Retirees $112,449 $120,638
Fully eligible active employees 11,676 11,973
Other active employees 18,550 17,197
- -------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation $142,675 $149,808
Plan assets at fair value (4,797) (1,394)
- -------------------------------------------------------------------------------
Projected post-retirement benefit obligation $137,878 $148,414
Unrecognized net actuarial gain (loss) 2,979 (6,644)
Unrecognized prior service cost 180 245
- -------------------------------------------------------------------------------
Post-retirement benefit liability recognized
in the balance sheet $141,037 $142,015
===============================================================================
An assumed discount rate of 7.5 percent was used to determine post-retirement
benefit costs other than pensions for fiscal 1997. The 1997 weighted average
annual assumed rate of increase in the per capita cost of covered benefits
(health care cost trend rates) is 5.0 percent. Increasing this rate by one
percentage point in each year would have increased the accumulated post-
retirement benefit obligation as of March 31, 1997, by $9,739 and increased the
aggregate of the service and interest cost components of post-retirement benefit
costs for fiscal 1997 by $586.
10. Post-Employment Benefits
The Company provides certain disability and workers' compensation benefits to
former or inactive employees. Effective April 1, 1994, the Company adopted SFAS
No. 112, "Employers' Accounting for Post-Employment Benefits." This statement
requires recognition of these benefits on an accrual basis. Prior to April 1,
1994, certain disability benefits were expensed as claims were reported. The
effect of adopting SFAS No. 112 was recognized immediately in fiscal 1995 as the
effect of a change in accounting principle and resulted in a charge of $1,500
net of taxes, or $0.15 per share against fiscal 1995 income.
11. Income Taxes
The components of the Company's income tax provision consist of:
Years Ended
---------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- ------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Deferred 12,115 16,801 --
- ------------------------------------------------------------------------------
Income tax provision $ 12,115 $ 16,801 $ 0
==============================================================================
34 Notes to the Consolidated Financial Statements
The items responsible for the differences between the federal statutory
rate and the Company's effective rate are shown as follows:
Years Ended
---------------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- -----------------------------------------------------------------------------------------------
Income taxes computed
at statutory federal rate $ 24,946 $ 26,729 $(25,938)
State income taxes-net of
federal impact 3,564 2,838 (3,705)
Permanent non-deductible costs 1,462 4,450 2,019
Unrecorded (recorded)
tax benefits (17,857) (17,216) 27,624
- -----------------------------------------------------------------------------------------------
Income tax provision $ 12,115 $ 16,801 $ 0
===============================================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and operating loss and
tax credit carryforwards. Significant items comprising the net deferred tax
asset shown on the statement of financial position are:
Years Ended
-----------------------------
Mar. 31, 1997 Mar. 31, 1996
- ---------------------------------------------------------------------------
Deferred sales $(17,442) $(18,363)
Accelerated depreciation (39,217) (29,994)
- ---------------------------------------------------------------------------
Deferred income tax liabilities (56,659) (48,357)
- ---------------------------------------------------------------------------
Reserves for employee benefits 49,954 53,285
Restructuring and environmental reserves 21,033 15,124
Research tax credits 22,400 -
Net operating loss carryforwards 23,973 33,683
Other reserves 32,427 45,957
- ---------------------------------------------------------------------------
Deferred income tax assets 149,787 148,049
Valuation allowance (74,346) (68,795)
- ---------------------------------------------------------------------------
Net deferred income tax asset $ 18,782 $ 30,897
- ---------------------------------------------------------------------------
Current deferred income tax asset 37,244 40,393
Noncurrent deferred income tax (liability) (18,462) (9,496)
- ---------------------------------------------------------------------------
Net deferred income tax asset $ 18,782 $ 30,897
===========================================================================
During fiscal 1997, the deferred tax asset valuation allowance increased by
$5,551. This increase is primarily the result of the Company's analysis of the
likelihood of realizing the future tax benefit of tax loss carryforwards and
additional temporary differences. Realization of the net deferred tax asset (net
of recorded valuation allowance) is dependent on profitable operations and
future reversals of existing taxable temporary differences. Although realization
is not assured, the Company believes it is more likely than not that the net
recorded benefits will be realized through the reduction of future taxable
income. The amount of the net deferred tax assets considered realizable,
however, could be reduced in the near term if actual future taxable income is
lower than estimated, or if there are differences in the timing or amount of
future reversals of existing taxable temporary differences.
Federal and state operating loss carryforwards for tax purposes available
to offset future taxable income are $59,933 at March 31, 1997. These
carryforwards begin to expire in 2008. Research tax credits available to offset
future payments are $22,400, and begin to expire in 2006.
12. Leases
The Company leases land, buildings, and equipment under various operating leases
which generally have renewal options of one to five years. Rental expense for
the years ended March 31, 1997, 1996, and 1995, was $11,264, $11,417, and
$12,244, respectively.
Minimum rental commitments payable under noncancellable lease commitments
outstanding at March 31, 1997, are $10,874, $6,926, $4,890, $3,073, and $924,
respectively, for the fiscal years ending March 31, 1998, 1999, 2000, 2001, and
2002. Approximately $2,000 of these lease commitments remain accrued at March
31, 1997, as part of the restructuring charges referred to in Note 13.
13. Restructuring Charges
The Company initiated a restructuring program in the quarter ending March 31,
1995, which resulted in a fiscal 1995 fourth-quarter pre-tax charge of $35,600.
The program was designed to achieve greater efficiency and competitiveness, and
to improve margins. Approximately $12,200 of the non-cash portion of the charge
consists of accruals for certain pension-related liabilities in accordance with
SFAS No. 88 "Employers Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."
In mid-fiscal 1996, various executive management changes were made in the
Defense Systems Group. As a result of these changes, new management re-evaluated
business strategies for the Group, including its restructure plans and, while
the significant components of the restructure plan did not change, the
anticipated timing of certain severance and facility closure costs pushed into
fiscal 1997. Cash expenditures under this restructuring program totaled
approximately $9,000 and $12,000 in fiscal 1997 and fiscal 1996, respectively,
primarily for employee-related costs. The Company experienced lower than
expected severance costs under the restructure plan due to higher than expected
employee attrition. As a result, the Company recorded credits of $1,900 and
$3,200 in the fourth quarters of fiscal 1997 and 1996, respectively, to reduce
the restructure accrual. The balance of the reserve at March 31, 1997,
represents specifically identified incremental employee severance and facility
closure costs expected to be incurred in fiscal 1998. Amounts charged for
restructuring reserves include estimates of costs related to facility closure
and employee severance costs which are subject to change in the near term
(although not currently anticipated) due to changes in assumptions and the
period over which such costs are expected to be incurred.
35
14. Stockholders' Equity
Changes in stockholders' equity are summarized below:
Common Stock Additional Retained Pension Unearned Cost
(Amounts in thousands $.01 Par Paid-In Earnings Liability Compen- Treasury
except share data) Shares Amount Capital (Deficit) Adjustment sation Shares Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1994 9,818,416 $ 98 $128,014 $ (28,491) $ (7,085) $ (556) $ - $ 91,980
Net loss (74,108) (74,108)
Treasury shares received (61,784) (519) 52 (1,351) (1,818)
Pension liability adjustment 4,519 4,519
Exercise of stock options 136,060 1 946 1,275 2,222
Restricted stock grants 67,600 1 2,209 (2,235) 25
Amortization of restricted stock 1,188 1,188
Issuance to Hercules, Inc. 3,862,069 39 111,961 112,000
Stock value guarantees 3,606 3,606
Stock options Issued 3,241 (3,241)
Other net issuances 27,091 730 51 781
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 13,849,452 139 250,188 (102,599) (2,566) (4,792) - 140,370
Net income 47,801 47,801
Treasury shares received (983,333) (10) 43 (37,080) (37,047)
Pension liability adjustment 1,377 1,377
Exercise of stock options 80,223 1 (759) 2,701 1,943
Restricted stock grants 19,200 385 (836) 451
Amortization of restricted stock 3,033 3,033
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 12,965,542 130 249,814 (54,798) (1,189) (2,552) (33,928) 157,477
Net income 59,159 59,159
Treasury shares received (158,387) (2) (7,195) (7,197)
Pension liability adjustment (1,115) (1,115)
Exercise of stock options 157,023 2 (1,985) 5,978 3,995
Restricted stock grants 27,000 247 (1,246) 999
Amortization of restricted stock 1,894 1,894
Other net issuances 90,360 1 536 580 3,462 4,579
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 13,081,538 $ 131 $248,612 $ 4,361 $ (2,304) $ (1,324) $(30,684) $218,792
===================================================================================================================================
The Company has authorized 5,000,000 shares of preferred stock, par value
$1.00, none of which has been issued.
The Company has authorized up to 2,620,679 shares to be granted under the
1990 Equity Incentive Plan of which 281,302 were available at March 31, 1997,
for future grants. Stock options are granted periodically at the fair market
value of the Company's common stock on the date of grant, and are generally
exercisable from one to three years from the date of grant. Stock options
covering an aggregate of 387,000 shares were issued on March 15, 1995, at $30.00
per share, pursuant to agreements entered into on October 27, 1994. This plan
also provides for the issuance of 250,000 stock appreciation rights which may be
issued in tandem with stock options. Restricted stock issued to non-employee
directors and certain key employees totaled 27,000, 19,200, and 67,600 for the
fiscal years ended March 31, 1997, 1996, and 1995, respectively. All restricted
stock granted before August 10, 1994, became fully vested as of that date due to
the change of control (see Note 16). Shares issued subsequent to that date total
101,700 and vest over periods of one to four years from the date of award. In
fiscal 1997 net restricted shares of up to 16,800 shares were reserved for
certain key officers which will vest on achievement of certain financial
performance goals through fiscal 1999.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation." As permitted by SFAS No. 123, the Company has elected to
continue following the guidance of APB 25 for measurement and recognition of
stock-based transactions with employees. Accordingly, compensation cost has not
been recognized for the awards made in the form of stock options. If
compensation cost for the Company's stock-based compensation plan had been
determined based on the fair value at the grant dates for awards under the plan
(consistent with the method provided in SFAS No. 123), the Company's net income
and earnings per share would have been reduced to the proforma amounts indicated
below:
Years Ended
---------------------------------
Mar. 31, 1997 Mar. 31, 1996
- ---------------------------------------------------------------------------
Net income As reported $59,159 $47,801
Proforma $57,032 $47,057
Earnings per share As reported $ 4.41 $ 3.56
Proforma $ 4.26 $ 3.50
- ---------------------------------------------------------------------------
A summary of the Company's stock option
activity is as follows:
Years Ended
------------------------------------------------------------------------------------------
March 31, 1997 March 31, 1996 March 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 991,210 $ 30.23 852,433 $27.36 729,360 $ 14.43
Granted 150,650 46.28 232,340 39.08 701,271 30.36
Exercised (157,023) 25.43 (80,223) 24.21 (136,060) 16.34
Canceled (88,504) 32.77 (13,340) 37.38 (442,138) 14.14
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 896,333 $ 33.49 991,210 $30.23 852,433 $ 27.36
Options exercisable at year end 532,815 29.64 482,210 25.80 275,062 18.06
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $ 21.88 $18.29
==================================================================================================================================
The weighted average fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and represents the
difference between fair market value on the date of grant and the estimated
market value on the expected exercise date. The following weighted average
assumptions were used for grants in fiscal 1997 and 1996, respectively: risk-
free interest rates of 6.5 and 6.1 percent, expected volatility of 31.5 percent
in both years, and expected lives of seven years in both years.
A summary of stock options outstanding at March 31, 1997, is as follows:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- -----------------------------------------------------------------------------------
$10-$24 156,179 7.4 yrs $18.63 156,179 $18.63
$25-$30 273,000 13.0 yrs 30.00 145,000 30.00
$31-$40 279,504 7.9 yrs 36.47 221,636 36.37
$41-$52 187,650 9.1 yrs 46.49 10,000 47.25
===================================================================================
In fiscal 1995, limited stock appreciation rights (LSARs) were attached to
623,253 stock options, which became exercisable at the time of change of control
(see Note 16). The Company offered to certain executive officers a note
receivable and one stock option in exchange for deferring the LSAR payment
through November 8, 1997. This offer was accepted for 152,371 LSARs and 282,767
LSARs were exercised. Non-executive officers were offered a Stock Value
Guarantee (SVG) in exchange for their LSARs, in which the Company agreed to pay
any holder the excess, if any, of the guaranteed minimum price of $34.75 over
the amount that the holder receives upon the exercise of the stock option, and
the simultaneous market transaction sale of the stock received upon such
exercise, prior to the expiration date of June 30, 1997. SVGs were accepted on
188,115 shares of stock and 50,899 LSARs were exercised by non-executive
officers.
The Company initiated a $50,000 share repurchase plan in fiscal 1996. In
connection with that plan, the Company has repurchased 1,122,580 shares of the
Company's stock in the open market as of March 31, 1997, at an average price of
$38.69 per share, for an aggregate amount of $43,400.
In accordance with SFAS No. 87, "Employer's Accounting for Pensions," the
Company has recognized the minimum liability for underfunded pension plans equal
to the excess of the accumulated benefit obligation over plan assets. A
corresponding amount is recognized as an intangible asset to the extent of any
unrecognized prior service cost, with the remaining balance recorded as
reduction to equity. As of March 31, 1997, the minimum pension liability in
excess of the unrecognized prior service cost was $2,304.
15. Contingencies
As a U.S. Government contractor, the Company is subject to defective pricing and
cost accounting standards noncompliance claims by the Government. Additionally,
the Company has substantial Government contracts and subcontracts, the prices of
which are subject to adjustment. The Company believes that resolution of such
claims and price adjustments made or to be made by the Government for open
fiscal years (1987 through 1997) will not materially exceed the amount provided
in the accompanying balance sheets.
The Company is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. Such matters arise out of the normal
course of business and relate to product liability, government regulations,
including environmental issues, and other issues. Certain of the lawsuits and
claims seek damages in very large amounts. In these legal proceedings, no
director, officer, or affiliate is a party or a named defendant.
The Company is involved in three "qui tam" lawsuits brought by former
employees of the Aerospace operations acquired from Hercules. One involves
allegations relating to submission of false claims and records, delivery of
defective products, and a deficient quality control program. The second involves
allegations of mischarging of work performed under Government contracts, misuse
of Government equipment, other acts of financial mismanagement and wrongful
termination claims. The Government did not join in either of these lawsuits.
Under the terms of the agreements relating to the Aerospace acquisition, all
litigation and legal disputes arising in the ordinary course of operations will
be assumed by the Company except for a few specific lawsuits and disputes
including the two qui tam lawsuits referred to above. The Company has agreed to
indemnify and reimburse Hercules for a portion of litigation costs incurred, and
a portion of damages, if any, awarded in these lawsuits. Under terms of the
purchase agreement with Hercules, the Company's maximum settlement liability is
approximately $4,000, for which the Company has fully reserved at March 31,
1997. In the third qui tam lawsuit, the Company received a partially unsealed
complaint in March 1997 alleging labor mischarging on a government contract.
Damages are not specified. The Government is currently investigating the claim
and has not determined whether it will join the lawsuit. In late fiscal 1997,
the Company was also served with two complaints in civil actions alleging
violations of the False Claims Act and the Truth in Negotiations Act. The
complaints allege defective pricing on two separate Government contracts.
Damages in either case were not specified.
While the results of litigation and other proceedings cannot be predicted with
certainty, in the opinion of management, the actions seeking to recover damages
against the Company either are without merit, are covered by insurance and
reserves, do not support any grounds for cancellation of any contract, or are
not likely to materially affect the financial condition or results of operations
of the Company, although the resolution of any of such matters during a specific
period could have a material effect on the quarterly or annual operating results
for that period.
It is reasonably possible that management's current estimates of liabilities
for the above contingencies could change in the near term, as more definitive
information becomes available.
16. Change of Control
In August 1994, six new directors nominated by Capstay Partners, L.P. were
elected to the Company's Board of Directors, resulting in a "change of control"
as defined in the Company's compensation and benefit plans and in agreements
with certain employees. These change of control agreements resulted in the
Company incurring an "unusual charge" totaling $23,039 in fiscal 1995.
17. Litigation Settlement
The Company had been a defendant in a "qui tam" lawsuit by claimants, including
present and former employees of Accudyne Corporation, alleging violations of the
False Claims Act. The alleged violations occurred prior to the acquisition of
Accudyne by the Company in October 1993.
To avoid the expense and disruption of protracted litigation, on June 23,
1995, the Company and claimants reached agreement to settle the lawsuit. Terms
of the agreement include payment by the Company of $12,000, consisting of
payments of $500 and $3,000 in 1995 and 1996, respectively, and payments to be
made of $4,000 in April 1997 and $4,500 in June 1998, plus interest at the
three-year Treasury Bill rate. Accordingly, the Company recorded an unusual
charge of $15,000 as of the fourth quarter of fiscal 1995, which includes legal
costs of approximately $3,000 which were agreed to be paid for by the Company.
18. Discontinued Operations
Marine Systems Group -- On December 22, 1996, the Company entered into an
agreement to sell its Marine Systems Group, including substantially all assets
of that business, to Hughes Aircraft Company for $141,000 in cash. The sale was
completed on February 28, 1997, resulting in a pre-tax gain to the Company of
approximately $27,200 ($17,681, after tax), which the Company recognized in the
fourth quarter. The Company has accounted for the operations of the Marine
Systems Group as discontinued operations in these financial statements.
Demilitarization Operations -- During fiscal 1994, the Company entered into two
joint ventures in Belarus and Ukraine for the purpose of establishing
demilitarization operations in those countries. In March 1996, Company
management, after evaluating its strategic plans for the future, elected to
discontinue its ownership of foreign demilitarization businesses
("Demilitarization operations"). Accordingly, the Company began actions to
transfer ownership of the joint ventures to host country governments or their
agents and in the fourth quarter of fiscal 1996, the Company estimated and
recorded a $6,240 loss on disposal of discontinued operations (net of tax
benefit of $4,160).
During fiscal 1997, the Company stopped production efforts, and completed its
withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997, the
Company reached agreement with the Ukrainian government to transfer the
Company's interests in the operation to the Ukrainian government after payment
of a $19.8 million non-interest bearing long-term note receivable. Management's
best estimate of the value received for the net assets transferred under the
contractual obligation, after discounting for interest, is currently estimated
to be approximately $8.7 million, and is recorded on the balance sheet as "Net
assets of
- --------------------------------------------------------------------------------
38 Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
discontinued operations" at March 31, 1997. The Company has also provided a
letter of credit to support approximately $2,500 of bank borrowings of the
demilitarization operations. Amounts estimated and recorded as net assets of
discontinued operations include significant assumptions made with regard to the
ultimate proceeds expected to be received and the timing that such proceeds are
expected to be received. These estimates are subject to changes in the near term
(although are not currently expected to) due to changes in assumptions. Those
changes could have a material impact on the Company's results in that period.
The consolidated income statements of the Company reflect the operating
results and the gain (loss) on disposal of discontinued operations separately
from continuing operations. The components of the loss from discontinued
operations are summarized as follows:
Years Ended
-----------------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- --------------------------------------------------------------------------------------------------
Sales $107,746 $186,677 $284,872
Income from discontinued
operations 7,415 5,071 456
Gain (loss) on disposal of assets 27,200 (10,400) --
Income tax (expense) benefit (12,115) 4,706 --
- --------------------------------------------------------------------------------------------------
Gain (loss) from discontinued
operations $ 22,500 $ (623) $ 456
==================================================================================================
19. Environmental Remediation Liabilities
The Company is subject to various local and national laws relating to protection
of the environment and is in various stages of investigation or remediation of
potential, alleged, or acknowledged contamination. In October 1996, the AICPA
issued SOP 96-1 "Environmental Remediation Liabilities," which required a change
in, and provided clarification to, the manner in which companies measure and
recognize costs associated with environmental remediation liabilities. Under the
provisions of the SOP, the most significant change in accounting for the Company
is that all future anticipated ongoing monitoring and maintenance costs
associated with known remediation sites is required to be accrued. Such costs
were previously expensed as incurred. The Company elected to adopt the
provisions of the new rule early, as is permitted under the SOP, which resulted
in a non-cash charge of $17.4 million in the fourth quarter of fiscal 1997. The
charge is classified in cost of sales expenses in the Company's consolidated
income statement for the quarter ending March 31, 1997. At March 31, 1997, the
accrued liability for environmental remediation of $34.8 million represents
management's best estimate of the probable and reasonably estimable costs
related to the Company's known remediation obligations. It is expected that a
significant portion of the Company's environmental costs will be reimbursed to
the Company. As collection of those reimbursements is estimated to be probable,
the Company has recorded amounts receivable of approximately $10.6 million at
March 31, 1997. Such receivable primarily represents the reimbursement of costs
associated with the Aerospace operations. As part of the Aerospace acquisition,
the Company generally assumed responsibility for environmental compliance at
Aerospace operations facilities. It is expected that much of the compliance and
remediation costs associated with these facilities will be reimbursable under
U.S. Government contracts, and that those environmental remediation costs not
covered through such contracts will be covered by Hercules under various
agreements. The Company's accrual for environmental remediation liabilities and
the associated receivable for reimbursement have been discounted, and are
recorded net of $10 million and $3 million, respectively, to reflect the present
value of the expected future cash flows, using a discount rate net of estimated
inflation of 5 percent. It is expected the fiscal 1998 environmental
expenditures, net of expected recoveries, will approximate $5.2 million. Amounts
payable/receivable in periods beyond fiscal 1998 have been classified as non-
current on the Company's March 31, 1997, balance sheet. At March 31, 1997, the
estimated aggregate undiscounted amounts payable for environmental remediation
costs, net of expected reimbursements, are approximately $5.2, $5.0, $3.3, $1.7,
and $1.4 million for the fiscal years ending March 31, 1998, 1999, 2000, 2001,
and 2002, respectively. Estimated amounts payable thereafter total $14.6
million. At March 31, 1997, the estimated discounted range of reasonably
possible costs of study and remediation is between $34 million and $70 million.
The Company does not anticipate that resolution of the environmental
contingencies in excess of amounts accrued, net of recoveries, will materially
affect future operating results.
20. Supplemental Cash Flow Information
Net income taxes paid (refunded) in the fiscal years ended March 31, 1997, 1996,
and 1995, totaled $107, $100, and $(1,100), respectively.
Amounts paid for interest were $39,015, $40,736, and $8,715 for fiscal 1997,
1996, and 1995, respectively. Amounts received for interest in those same
periods were $689, $1,789, and $564, respectively. The significant change in
interest paid during fiscal 1996, compared to fiscal 1995, reflects payments of
interest on debt issued in connection with the March 15, 1995, acquisition of
the Aerospace operations.
39
21. Acquisition
On March 15, 1995, the Company acquired the Aerospace operations (Aerospace
acquisition) of Hercules for $276,776 in cash (net of a $29,115 purchase price
reimbursement received by the Company in fiscal 1996 from Hercules, reflecting
finalization of the purchase price), and 3.86 million shares of Common Stock
valued at $112,000, for an aggregate purchase price of approximately $388,776.
Unaudited pro forma results of operations of the Company for the year ended
March 31, 1995, as if the acquisition had been completed at the beginning of the
period are:
Year Ended
Mar. 31, 1995
- --------------------------------------------------------------------------------
Sales $1,120,822
Income (loss) before cumulative effect of accounting change $ (7,306)
Income (loss) per share from continuing operations $ (.78)
================================================================================
The unaudited pro forma results of operations are not necessarily indicative
of the results of operations that would have occurred had the businesses
actually been combined during the period presented nor is this information
indicative of expected future results of operations.
The Company used the purchase method of accounting to account for the
Aerospace acquisition. Accordingly, the purchase price was allocated to the
assets acquired and liabilities assumed based on fair value. The excess of
purchase price over the estimated fair value of the assets acquired,
approximately $118,000, has been recorded as goodwill, and is being amortized
over 40 years.
22. Business Segment Information
The Company operates one business segment which is involved in the production of
various types of defense systems. The Aerospace Systems Group designs, develops,
and manufactures launch vehicle systems, solid propulsion systems, munitions
propellants, composite structures, and decoy flares. The Defense Systems Group
designs, develops, and manufactures ammunition, fuzes, shoulder-fired weapons,
smart weapons/munitions, antitank mines, warheads, air-delivered munition,
artillery fire control, battlefield monitoring systems, unmanned aerial
vehicles, and defense electronics systems. The Emerging Business Group consists
of three primary business units: Global Environmental Solutions, Power Sources
Center, and Advanced Technology Applications.
The Company's sales are predominantly derived from contracts with agencies of,
and prime contractors to, the U.S. Government. The various U.S. Government
customers exercise independent purchasing decisions, and sales to the U.S.
Government generally are not regarded as constituting sales to one customer, but
instead, each contracting entity is considered to be a separate customer. During
fiscal 1997, approximately 85 percent of the Company's sales were derived from
contracts with the U.S. Government or U.S. Government prime contractors. Export
sales to customers were $75,014, $71,929, and $51,975 in fiscal years 1997,
1996, and 1995, respectively.
The following summarizes the Company's sales to the U.S. Government and total
sales by business group.
Years Ended
---------------------------------------------------
Mar. 31, 1997 Mar. 31, 1996 Mar. 31, 1995
- --------------------------------------------------------------------------------------
U.S. Government
contract sales $ 927,068 $ 887,502 $441,166
- --------------------------------------------------------------------------------------
Sales by business group:
Aerospace Systems $ 593,269 $ 568,568 $ 20,269(1)
Defense Systems 497,715 454,694 472,931
Emerging Business 41,448 30,985 10,990
Intercompany sales
eliminations (43,035) (33,642) --
- --------------------------------------------------------------------------------------
Total $1,089,397 $1,020,605 $504,190
======================================================================================
(1) Represents operations from March 15, 1995, through March 31, 1995, from the
Aerospace acquisition.
40 Notes to the Consolidated Financial Statements
23. Quarterly Financial Data (Unaudited)
Quarterly financial data is summarized for the years ended March 31, 1997, and
1996 as follows:
Fiscal Year 1997 Quarter Ended
---------------------------------------------------
June 30 Sep. 29 Dec. 29 Mar. 31
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $ 230,173 $ 247,648 $300,785 $310,791
Gross margin 36,159 42,323 50,700 35,078
Income from continuing operations 7,614 11,323 16,200 1,522
Per share .57 .85 1.20 .11
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 9,904 12,827 17,225 19,203
Per share .74 .96 1.28 1.43
====================================================================================================================================
Fiscal Year 1996 Quarter Ended
---------------------------------------------------
July 2 Oct. 1 Dec. 31 Mar. 31
- ------------------------------------------------------------------------------------------------------------------------------------
Sales $ 242,786 $ 232,721 $257,097 $288,001
Gross margin 41,049 42,845 43,660 58,753
Income from continuing operations 6,595 9,574 11,624 20,631
Per share .48 .72 .87 1.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 10,065 11,186 12,494 14,056
Per share .74 .84 .93 1.05
====================================================================================================================================
The adoption of SOP 96-1, which relates to accounting for environmental
remediation liabilities, resulted in a charge to income from continuing
operations of $17,442 in the fourth quarter of fiscal 1997 (see Note 19).
The Company completed the sale of its Marine Systems Group to Hughes
Aircraft Company on February 28, 1997. As a result, the Company recorded a gain
on the sale of discontinued operations, net of income taxes, of $17,681 during
the fourth quarter of fiscal 1997 (see Note 18).
Income from the results of discontinued operations, net of income taxes,
was $2,290, $1,504, and $1,025 for the first, second, and third quarters of
fiscal 1997, respectively. Fourth-quarter fiscal 1997 net operating results of
the Marine Systems Group are reflected as a component of the gain on the sale of
the discontinued operations.
Income (loss) from discontinued operations, net of income taxes was $3,470,
$1,612, $870, and $(335) for the first, second, third, and fourth quarters of
fiscal 1996, respectively. The fourth-quarter results for fiscal 1996 were
additionally affected by an after-tax charge of $6,240 for the estimated loss on
disposal of discontinued operations.
Following is a summary of the Company's stock price for the past three years.
Common Stock Price
----------------------
Quarter Ended High Low
- --------------------------------------------------------------------------------------
March 31, 1997 $54.75 $42.00
December 29, 1996 57.38 47.63
September 29, 1996 53.50 46.25
June 30, 1996 49.13 43.75
March 31, 1996 50.50 46.25
December 31, 1995 53.00 44.63
October 1, 1995 47.50 41.50
July 2, 1995 41.75 35.63
March 31, 1995 40.38 34.88
January 1, 1995 40.63 27.25
October 2, 1994 33.63 28.50
July 3, 1994 29.75 21.75
March 31, 1994 29.75 23.75
- --------------------------------------------------------------------------------------
The Company does not currently pay dividends on its common stock.
Board of Directors 41
Richard Schwartz
Chairman of the Board of Directors, President, and Chief Executive Officer,
Alliant Techsystems. More than 35 years' experience in the aerospace industry.
Joined Alliant Techsystems in 1995. Previously President of Hercules Aerospace
Company and Executive Vice President of Hercules Incorporated. Also served as
President, Rocketdyne Division, Rockwell International Corporation. Bachelor's
degree, Cooper Union University. MBA, Pepperdine University.
R. Keith Elliott
Chairman of the Board and Chief Executive Officer, Hercules, Incorporated, a
manufacturer of chemical specialty products.
Thomas L. Gossage
Retired Chairman of the Board and Chief Executive Officer, Hercules,
Incorporated.
Joel M. Greenblatt
Managing and General Partner, Gotham III, an investment partnership. Responsible
for portfolio management. Former Chairman of the Board of Directors, Alliant
Techsystems. Chairman, St. Lawrence Seaway Corporation. Bachelor's degree and
MBA, Wharton School of the University of Pennsylvania.
Jonathan G. Guss
Principal and President, Active Management Group, Inc., a turnaround management
services company. Principal and Chief Executive Officer, EK Management Corp.
Formerly a consultant with Booz, Allen & Hamilton, Inc. Bachelor's degree, Reed
College. MBA, Harvard Business School.
David E. Jeremiah
Admiral, U.S. Navy (Retired). Partner and President, Technology Strategies &
Alliances Corporation, a strategic advisory and investment banking firm. Held a
variety of command and staff positions during 39-year Navy career, including
Vice Chairman, Joint Chiefs of Staff. Bachelor's degree, University of Oregon.
Master's degree in financial management, George Washington University.
Gaynor N. Kelley
Retired Chairman and Chief Executive Officer, The Perkin-Elmer Corporation,
a manufacturer of analytical instrumentation and materials coating systems.
Joined The Perkin-Elmer Corporation in 1950. Held numerous management
positions before being elected Chairman and CEO in 1990. Elected to the Board of
Directors, Hercules, Incorporated in 1989. Bachelor's degree, Delchanty
Institute.
Joseph F. Mazzella
Partner, Lane Altman & Owens, a law firm in Boston, Massachusetts. Joined Lane
Altman & Owens as an associate in 1980. Previously served as an attorney with
the Securities and Exchange Commission in Washington, D.C. Bachelor's degree,
College of the City of New York. Juris Doctor, Rutgers University.
Daniel L. Nir
Managing and General Partner, Gotham III, an investment partnership. Responsible
for portfolio management. Director, St. Lawrence Seaway Corporation. Bachelor's
degrees, University of Pennsylvania College of Arts and Sciences, Wharton School
of the University of Pennsylvania.
42 Corporate Officers
Corporate officers who serve as directors are listed under the Board of
Directors.
Peter A. Bukowick
Executive Vice President. Joined Alliant in 1995 as Group Vice President,
Aerospace Systems. Nearly 30 years' experience in technical, research and
development, and business management. Joined Hercules, Incorporated in 1968.
Held various management positions, including Vice President, Technology,
Hercules Aerospace Company. Bachelor's degree, Lafayette College. Ph.D., organic
chemistry, University of Virginia.
Hugo Fruehauf
Group Vice President, Defense Systems. Joined Alliant in 1995. More than 35
years' experience in space launch systems and field operations, and the design
and development of satellite systems and precision frequency products. Formerly
President of DATUM-EFRATOM Time and Frequency Products, Inc. Also worked for
Rockwell International, Martin Marietta, and General Dynamics. Electronic
engineering degree, DeVry Institute of Technology.
Charles H. Gauck
Secretary and Associate General Counsel. Extensive corporate legal and corporate
secretary experience. Joined Honeywell in 1990. Previously served as Secretary
of The Pillsbury Company. Also held legal positions and secretary post with a
national retailer. Bachelor's degree and Juris Doctor, University of Minnesota.
Robert E. Gustafson
Vice President, Human Resources. More than 20 years' experience in human
resources management. Joined Honeywell in 1980. Held various human
resources management positions with military and commercial divisions. Corporate
staff assignments included Director of Executive Compensation
and Director of Compensation and Benefits. Also held posts with Litton
Industries, The Pillsbury Company, and Hormel. Bachelor's degree, St. Cloud
State University.
Roger P. Heinisch
Vice President, Engineering. Nearly 30 years' experience in advanced technology
and engineering. Joined Honeywell in 1968. Served in research and engineering
posts at Honeywell, including Corporate Vice President of Advanced Technology.
Bachelor's degree and master's degree in nuclear engineering, Marquette
University. Ph.D., engineering science, Purdue University.
Arlen D. Jameson
Vice President, ICBM Prime Integration Program. Joined Alliant in 1997. Served
with U.S. Air Force for 34 years before retiring with the rank of Lieutenant
General in 1996. Major assignments included Deputy Commander in Chief,
United States Strategic Command, Commander, Twentieth Air Force, and Chief
of Staff, Strategic Air Command. Bachelor's degree, University of Puget Sound.
MBA, Ohio State University.
Galen K. Johnson
Vice President and Treasurer. Extensive experience in corporate finance and
public accounting. Joined finance staff of Honeywell's Avionics Division in
1980. Held a variety of treasury, accounting, and tax positions. Chartered
Financial Analyst and Certified Public Accountant. Bachelor's degree, St. Cloud
State University. MBA, University of St. Thomas.
William R. Martin
Vice President, Washington, D.C. Operations. More than 30 years' experience in
design, manufacturing, and business planning in the aerospace and defense
industry. Previously Vice President of Business Development for Aerospace
Systems. Joined Hercules Aerospace Company in 1979 and held various management
positions, including Vice President, Business Development and Washington
Operations.
Scott S. Meyers
Vice President and Chief Financial Officer. Joined Alliant in 1996. Formerly
Executive Vice President and Chief Financial Officer for Magnavox Electronic
Systems Company. Extensive experience in financial and administrative
management. Background also includes 14 years' experience in public accounting
as a partner with KPMG Peat Marwick. Certified Public Accountant. Bachelor's
degree, Elmhurst College.
Paula J. Patineau
Vice President and Controller. Background includes 20 years of experience in
accounting and finance management, including process and systems improvement,
acquisition integration, labor negotiations, and cost management. Joined
Honeywell in 1977. Also held accounting position with Sperry Univac Corporation.
Bachelor's degree, College of St. Catherine.
Kristi Rollag Wangstad
Vice President, Public Affairs. Background includes a variety of public
relations and corporate communications management positions. Joined Honeywell in
1990. Previously Vice President of Corporate Communications for First Bank
System. Bachelor's degree, Luther College. Master's degree in public relations,
Boston University.
Paul A. Ross
Group Vice President, Space and Strategic Systems. Previously Vice President and
General Manager, Space and Strategic Propulsion Division, Aerospace Systems
Group. More than 30 years' experience in program management, engineering,
quality assurance, finance, and operations with Rockwell International, Thiokol
Corporation, and Hercules Aerospace Company. Bachelor's degree, University of
Redlands.
Donald E. Willis
Group Vice President, Emerging Business. Vice President, Strategic Planning.
Background in strategic planning, program and R&D management. Joined Honeywell
in 1979. Held posts in Defense Systems, Aerospace and Defense, Armament Systems,
Military Avionics, Systems and Research Center. Bachelor's degree, Miami
University. Master's degree in computer information science, Georgia Institute
of Technology.
Daryl L. Zimmer
Vice President and General Counsel. Background includes legal and management
positions in government and defense contracting. Experienced in programs dealing
with business ethics and conduct. Joined Honeywell in 1967. Served as program
director for defense industry ethics at Honeywell. Bachelor's degree, St. John's
University. Juris Doctor, William Mitchell College of Law.
Corporate Information 43
Corporate Headquarters
600 Second Street N.E., Hopkins, Minnesota 55343
Telephone: 612-931-6000
E-mail address: Alliant_Corporate@ATK.com
Internet address: www.ATK.com
Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held at 2:00 p.m. on
August 5, 1997, at the Holiday Inn West, 9970 Wayzata Boulevard,
St. Louis Park, Minnesota.
Stock Exchange Listing
The common stock of Alliant Techsystems is listed on the New York Stock Exchange
under the symbol ATK. It is listed in newspaper stock tables under AlliantTech.
Nearly 6 million shares were traded in fiscal year 1997. The stock price ranged
from a low of $42 to a high of $57-3/8.
Transfer Agent and Registrar
Shareholder inquiries concerning the transfer of shares, lost certificates, or
address changes should be directed to Transfer Agent/Registrar, ChaseMellon
Shareholder Services, 450 West 33rd Street, New York, New York 10001. Telephone:
800-851-9677 (toll free). Internet address: www.cmssonline.com.
Investor Relations
Inquiries from shareholders, securities analysts, and others in the professional
investment community should be directed to Richard N. Jowett, Director of
Investor Relations, Alliant Techsystems, 600 Second Street N.E., MN11-2015,
Hopkins, Minnesota 55343. Telephone: 612-931-6080. E-mail:
Richard-Jowett@ATK.com.
Media Relations
Inquiries from the media should be directed to Rod Bitz, Director of Corporate
Communications, Alliant Techsystems, 600 Second Street N.E., MN11-2043, Hopkins,
Minnesota 55343. Telephone: 612-931-5413. E-mail: Rod_Bitz@ATK.com. Alliant news
releases are posted on the company's Internet site at www.ATK.com.
Form 10-K Annual Report
Shareholders who wish to obtain a copy of the Form 10-K Annual Report filed with
the Securities and Exchange Commission for Alliant Techsystems' fiscal year
ended March 31, 1997, may do so by writing to the Director of Investor
Relations.
Community Investment Report
In keeping with our commitment to be a positive force in the communities where
we operate, Alliant Techsystems invests both financial and human resources in
our communities. For a complete report on the company's giving and volunteerism
programs in fiscal year 1997, write to Wayne E. Gilbert, Director of State and
Community Affairs, Alliant Techsystems, 600 Second Street N.E., MN11-2043,
Hopkins, Minnesota 55343. Telephone: 612-931-5422. E-mail:
Wayne_Gilbert@ATK.com.
Independent Auditors
Deloitte & Touche LLP
400 One Financial Plaza
120 South Sixth Street
Minneapolis, Minnesota 55402
Facilities and Offices
Conventional Munitions Emerging Business
Wilmington, Illinois Annapolis, Maryland
DeSoto, Kansas Hopkins, Minnesota
Elk River, Minnesota Wanamassa, New Jersey
Hopkins, Minnesota Horsham, Pennsylvania
New Brighton, Minnesota San Antonio, Texas
Totowa, New Jersey Magna, Utah
Socorro, New Mexico Arlington, Virginia
Toone, Tennessee
Radford, Virginia ICBM Prime Integration Program
Rocket Center, West Virginia Magna, Utah
Space and Strategic Systems Marketing and Sales
Vandenberg Air Force Base, California Huntsville, Alabama
Cape Canaveral, Florida Tucson, Arizona
Clearfield, Utah Los Angeles, California
Magna, Utah Ridgecrest, California
Tekoi, Utah Shalimar, Florida
Fort Benning, Georgia
Defense Systems Bettendorf, Iowa
Fort Knox, Kentucky
Clearwater, Florida Annapolis, Maryland
Hopkins, Minnesota Sterling Heights, Michigan
New Brighton, Minnesota Peterborough, New Hampshire
Hondo, Texas Mt. Arlington, New Jersey
Janesville, Wisconsin Fort Sill, Oklahoma
Arlington, Virginia
[RECYCLE LOGO] This annual report was printed on recycled paper containing 10%
post-consumer fiber. Design and typesetting: The Nancekivell
Group, Minneapolis. Photography: Niedorf Photography. Printing:
Diversified Graphics, Inc.
[LOGO]
600 Second Street N.E.
Hopkins, Minnesota USA 55343