[LOGO OF ALLIANT
TECHSYSTEMS APPEARS HERE]
BUILDING VALUE
. Best value for our customers
. Opportunities for our employees
. Superior returns for our owners
1998 Annual Report
Our building block approach to growing earnings per share
at an average annual rate of 15 percent combines revenue growth,
margin improvement, and strategic cash deployment.
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Our Building Blocks Our Strategies
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Cash Flow Reinvestment Reinvest cash in strategic mergers and acquisitions, share repurchases,
and internal investments to increase shareholder value.
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Debt Repayment Reduce interest expense and improve financial and strategic flexibility.
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Margin Improvement Increase margins to over 10 percent through overhead reductions,
facilities consolidation, process control, and strong operations teams.
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Composite Structures Capitalize on world-class fiber placement production capabilities to take
advantage of strong demand for lightweight, high-performance materials for
aircraft, satellites, space launch vehicles, and weapons systems.
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Upside Program Opportunities Capture key upside program opportunities that will add significantly
to revenues in the future.
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Core Business Leverage safe operations, repeatable products, customer relationships,
world-class facilities, and talented employees to strengthen and broaden
our core business base.
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Financial Highlights
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Amounts in thousands except per share data (Years Ended March 31) 1998 1997
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Sales $1,075,506 $1,089,397
Change in accounting estimate - Environmental liabilities/1/ - 17,442
Income from continuing operations 67,958 36,659
Income from discontinued operations, net of income tax/2/ - 4,819
Gain on disposal of discontinued operations, net of income tax/2/ 225 17,681
Net income 68,183 59,159
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Basic earnings per common share:
Continuing operations excluding environmental charge 5.21 4.12
Environmental charge/1/ - (1.30)
Continuing operations 5.21 2.82
Discontinued operations .02 1.73
Basic earnings per common share 5.23 4.55
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Diluted earnings per common share:
Continuing operations excluding environmental charge 5.08 4.03
Environmental charge/1/ - (1.30)
Continuing operations 5.08 2.73
Discontinued operations .02 1.68
Diluted earnings per common share 5.10 4.41
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Depreciation and amortization 47,517 52,721
Cash provided by operations 62,969 92,110
Capital expenditures 20,406 28,522
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Total assets 932,180 1,000,588
Total debt to total capitalization 43% 55%
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Common shares outstanding 12,855,511 13,081,538
Number of employees 6,550 6,800
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/1/Reflects the impact of the adoption in fiscal 1997 of the Statement of
Position 96-1 "Environmental Remediation Liabilities." See Note 16 to the
financial statements.
/2/Reflects the results of discontinued operations and the related gain (loss)
on disposition of those operations. See Note 15 to the financial statements.
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Alliant Techsystems 1
[PHOTO APPEARS HERE]
Peter A. Bukowick Scott S. Meyers Richard Schwartz
President and Vice President and Chairman and
Chief Operating Officer Chief Financial Officer Chief Executive Officer
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To Our Shareholders
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Three years ago, your new board of directors and management team made a
commitment to improve the performance of your company. Our immediate goal
was to increase operating margins to the 8-10 percent range. We have
reached our goal in each of the last three years.
This has been accomplished by an Alliant/customer team committed to
high-quality products that deliver consistent performance at an affordable
price. The Alliant Way demands sound designs that produce the most
repeatable products in the industry. There can be no compromise. Soldiers'
lives depend on our munitions. Communications satellites count on our
space boosters. And national strategic deterrence relies on our rocket
motors.
This passion for process control provides a direct benefit to our
shareholders. High product yields and improved program performance add up
to increased margins and new contract awards.
At the start of fiscal year 1998, we raised our performance bar for the
next five years by setting a goal to grow earnings per share at an average
annual rate of 15 percent. We established a building block approach to
earnings growth that combines revenue growth, margin improvement, and
strategic cash deployment to achieve our goal. Fiscal year 1998 was also a
year of fine tuning our strategies. In the future, we will seek to
minimize direct competition with the three major Department of Defense
prime contractors, and will instead, expand our role with them in those
areas where we have core competencies.
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Fiscal Year 1998 Performance
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I am pleased to report outstanding success in our first year of
performance against these challenging goals. Our performance could only
have been accomplished with Alliant people that I believe make up the best
team in the aerospace and defense industry. They are committed to
delivering excellent technical performance, proactive program management,
the most repeatable products in the industry, and superior financial
results.
Earnings per share from continuing operations in fiscal year 1998 rose
26 percent to $5.08 from $4.03 a year ago, which excludes a one-time
charge to adopt revised environmental accounting rules. Net earnings
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2 Alliant Techsystems
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were up 16 percent to $5.10 per share from $4.41 per share, which
included income from discontinued operations of $1.68. Our growth in
earnings per share was accomplished by improving operating margins,
reducing interest through debt repayment, and by repurchasing our common
stock.
We positioned Alliant for the future with a backlog of $1.7 billion at
the end of fiscal year 1998. Early in fiscal year 1999, we were awarded
additional contracts from Boeing valued at approximately $750 million for
propulsion on the Delta family of vehicles. Additional production options
could ultimately add another $1 billion to the total value of the award.
As a result, our firm backlog as of the mailing of this report is
approximately $2.4 billion or 26 months of sales -- the highest in the
company's history. We enter fiscal year 1999 with enthusiasm and
confidence.
Expanding Backlog
Months of sales [BAR GRAPH APPEARS HERE]
New contracts to produce solid
rocket boosters for the Boeing
family of Delta space launch
vehicles have brought our back-
log to record levels.
*First quarter estimate
1993 14
1994 17
1997 17
1998 19
First Quarter 1999 Est. 26
Positive reaction to our performance and our plans for the future were
reflected in our stock price during fiscal year 1998, which rose from
$42 1/8 at the beginning of the year to $62 3/4 at year end.
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Six Building Blocks for Growth
------------------------------
Vital to our success is a company-wide focus on our six building blocks
for 15-percent earnings per share growth. Superior performance within each
block is key to achieving our goal -- and to building best value for our
customers, opportunities for our employees, and superior returns for our
owners.
Core Business Base
We will measure our progress toward our 15-percent earnings growth goal
from the $4.03 per share we earned in fiscal year 1997. The core business
base that provided those earnings is expected to remain stable over the
next five years. The overall Department of Defense budget has stabilized
and we are now seeing projected increases in the defense procurement
budget. We also see solid budget support for our core products of
munitions, fuzes, and rocket motors -- all of which are fundamental to the
defense of our nation.
The recently awarded contracts for production of Delta solid rocket
boosters strengthened our core business base significantly. They also
illustrate our strategy of leveraging state-of-the-art facilities,
rigorous process control, excellent customer relationships, and strong
program management teams to win new business.
Upside Program Opportunities
In March 1998, we were selected to develop the Objective Individual Combat
Weapon (OICW), a next-generation rifle that will provide 21st century
soldiers with an unprecedented capability and revolutionize warfare much
as the introduction of the machine gun did early in this century. During
the upcoming months, we will be building OICW systems and ammunition for
evaluation by the joint military services in preparation for the program's
engineering and manufacturing development phase, which is set to begin in
calendar year 2000.
We also made excellent technical progress on the Outrider(TM) Tactical
Unmanned Aerial Vehicle program, successfully demonstrating a number of
key tactical operations, including fully automatic takeoff, flight, and
landing. The system is currently undergoing evaluation by the U.S. Army to
determine its effectiveness in tactical situations. When fielded, the
Outrider will deliver real-time battlefield reconnaissance, surveillance,
and target acquisition information without risking the lives of air crew
members.
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Alliant Techsystems 3
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Composite Structures
Composite structures has been our fastest growing business, with sales
rising at a rate of more than 40 percent annually over the past five
years. Our growth will be fueled by strong demand for high-performance,
lightweight materials for aircraft, satellites, space launch vehicles, and
weapons systems - market segments in which we are well positioned.
During fiscal year 1998, we completed development and sub-assembly of
the composite fuel tanks for Lockheed Martin's X-33 Advanced Technology
Demonstrator, a sub-scale prototype of the VentureStar(TM) Reusable Launch
Vehicle. Other highlights included contracts to produce components for
America's next-generation tactical aircraft, the Joint Strike Fighter and
the F-22 Raptor.
[GRAPH APPEARS HERE]
Composite Structures
Sales
Year ($ Millions)
---- ------------
1994 18
1995 27
1996 36
1997 50
1998 75
Sales from our composite structures
business have grown at an annual rate
of more than 40 percent over the past
five years.
Margin Improvement
Our EBIT (earnings before interest and taxes) margin rate for fiscal year
1998 was 8.6 percent, up from 8.1 percent a year ago. Our goal is to raise
our margin rate to over 10 percent during the next several years by
reducing overhead and by improving operating efficiencies. Overhead
reductions will occur through a more efficient corporate structure and by
reducing the number of operating locations. Operating efficiencies will be
achieved through added concentration on process control and reduction of
cycle times.
Facility consolidation activities begun during the past year included
the move of our medium caliber ammunition integration operations from the
Joliet Army Ammunition Plant in Illinois to the Radford Army Ammunition
Plant in Virginia, which will consolidate our load, assemble, and pack
operations and propellant production into one facility. We also began the
consolidation of medium caliber production operations at the Twin Cities
Army Ammunition Plant in Minnesota into a smaller number of buildings.
[GRAPH APPEARS HERE]
Margin Improvement
Operating Profit*
Year (as a percentage of Sales)
1996 9.7%
1997 8.1%
1998 8.6%
We have achieved our goal to increase operating margins to the 8-10 percent
range in each of the last three years.
*Exclusive of non-recurring charges
Debt Repayment
Lower interest expense through debt repayment is an important factor in
our profit formula. We have made tremendous strides in this area over the
past three years, with our debt-to-total-capitalization ratio declining to
43 percent at the end of fiscal year 1998 - down from 55 percent at the
end of the previous year and 72 percent two years ago.
During fiscal year 1998, we repaid more than $67 million of our debt,
which was the principal factor in a $9.9 million reduction in net interest
expense compared to the previous year.
These improvements in our balance sheet provide financial flexibility
for the company and resulted in an upgrade to our debt rating during the
year by Standard & Poor's Corporation.
[GRAPH APPEARS HERE]
Debt Repayment
Debt to Book
Date Capitalization
1996 72%
1997 55%
1998 43%
Our debt has declined steadily over the past three years, reducing interest
expense and giving us greater strategic flexibility.
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4 Alliant Techsystems
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Cash Flow Reinvestment
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The strategic use of our cash for acquisitions, stock repurchases, or
internal investments is fundamental to earnings growth. During the past
year, we completed the acquisition of part of Motorola's military fuze
business, strengthening our core competency in electronic fuzes and
increasing our share of this important market.
We also have reduced ownership of our stock by Hercules, Inc. from 3.86
million shares - a 30-percent holding - to 542,000 shares through a
combination of a secondary offering and stock repurchases. The stock was
acquired by Hercules in connection with the 1995 acquisition of Hercules
Aerospace Company by Alliant. We expect to purchase the remaining shares
in calendar year 1998. In addition, we bought back approximately 165,000
shares on the open market under an authorization by the Board of Directors
to repurchase up to one million shares of the company's stock.
The Right People in the Right Places
Having the right people in the right places is fundamental to our ability
to achieve our earnings growth objective. Over the past year, we have
focused on strengthening our operations management team, promoting Peter
Bukowick to President and Chief Operating Officer and appointing Nick
Vlahakis and Don Sticinski to head our Conventional Munitions and Defense
Systems groups. Each is an outstanding executive with a long track record
of successfully managing programs, processes, and profitability - and
delivering customer satisfaction and superior financial results.
Our performance accountability system is in place across the entire
company. Under this system, employees develop annual goals that support
overall corporate goals. Performance evaluation and compensation are
directly tied to the accomplishment of these goals.
Our Board of Directors has been strengthened by the election of three
new directors: Peter Bukowick; Gilbert F. Decker, former Assistant
Secretary of the Army, Research, Development, and Acquisition; and Michael
T. Smith, Chairman of the Board and Chief Executive Officer of Hughes
Electronics Corporation. Your company will benefit significantly from their
guidance and counsel.
Confidence in the Future
I am proud of our accomplishments during the past three years. We have
significantly improved your company's profitability, built an outstanding
management team, and increased the value of your investment.
I recognize that your ownership of Alliant Techsystems reflects not
only an appreciation of what we have accomplished - but more importantly,
an expectation and confidence that we will do even better in the future.
We have set a goal to grow earnings per share at an average of 15 percent
per year. I am confident we can achieve our goal by increasing earnings at
a strong pre-tax rate to offset the return to a full income tax rate over
the next several years. We see added opportunities for revenue growth as
we go forward and positive trends in each of our businesses to improve
margins and generate strong cash flows.
I would like to close by thanking our customers for their confidence in
our products, our shareholders for their continued support, our board of
directors for their guidance, and - most of all - our company team for
their dedication to excellence and commitment to process control. Their
talent and dedication are the reasons why I look to the future with such
confidence.
Sincerely,
/s/ Richard Schwartz
Richard Schwartz
Chairman and Chief Executive Officer
June 19, 1998
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Alliant Techsystems 5
[PHOTO APPEARS HERE]
Nick Vlahakis
Group Vice President
"Our employees demand that our products perform consistently because we know
the lives of our soldiers and the security of our nation are at stake."
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Conventional Munitions
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Each of the 3,100 employees who work in the Conventional Munitions Group is
focused on one objective: providing the men and women in our armed forces
high-quality, repeatable products at an affordable price that ensure the safety
and success of their mission. Whether it's ammunition, tactical missile motors
and warheads, infrared flares, or composite structures, we demand that our
products perform consistently because we know the lives of our soldiers and the
security of our nation are at stake.
Two important management disciplines are key to achieving this objective:
strong employee/customer partnerships and rigorous process control.
STRONG PARTNERSHIPS We are fortunate to count among our employees people with
critical technical skills that are in many cases a national asset. The best way
to leverage these skills is to work closely on integrated product teams with our
customers in industry and government and with the military users of our systems.
Integrated product teams represent what's best about defense acquisition
reform because they create an attitude among the team members that says we're in
this together, it's our program, and if we work together, we can make it a
win-win for everyone.
RIGOROUS PROCESS CONTROL To continue to succeed in our business, we must instill
a passion among all our employees that our products work the same way each time
they are used. There can be no substitute. It is fundamental to everything for
which we strive: mission success and safety, customer satisfaction, and superior
returns for our shareholders.
The only way to ensure the reliability and repeatability of our products is
strict adherence to rigorous process control standards. Process control is the
principal management tool that drives our business. We employ it to ensure that
our product designs meet program requirements and can be manufactured without
variation.
STRATEGIES FOR SUCCESS Our strategies for serving our customers and our
shareholders are clearly defined. We are focused on partnerships, process
control, margin improvement, safety, leveraging our core business, and capturing
new opportunities. The talent and dedication of our employees give me great
confidence that we can carry out these strategies for success.
/s/ Nick Vlahakis
Nick Vlahakis
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6 Alliant Techsystems
[PHOTO APPEARS HERE]
Medium Caliber Ammunition
Our medium caliber ammunition team continues to maintain its market
leadership position thanks to the efforts of team members like Rich Walin and
Barbara Miller (seated L-R) and Jim Stubbs, Barbara Anderson, and Martha
Callander (standing L-R). During fiscal year 1998, we were awarded contracts
with a combined value of $64 million to produce tactical and training rounds for
use in infantry fighting vehicles, tactical aircraft, and shipboard defense
systems. Our success in this market is due to talented employees and rigorous
process control and safety standards, which assure the delivery of competitively
priced, high-quality ammunition with consistent and repeatable performance for
U.S. combat troops.
[PHOTO APPEARS HERE]
Tactical Missile Rocket Motors, Warheads, and Structures
Operator Ronnie Beal performs automated electron beam welding of rocket motor
cases for the Advanced Medium Range Air-to-Air Missile (AMRAAM) at the
Allegany Ballistics Laboratory (ABL) in Rocket Center, West Virginia,
headquarters for our tactical business unit. Our highly disciplined approach
to manufacturing processes and safety has made us one of the world's leading
suppliers of solid propulsion systems, warheads, and structures for tactical
missile systems. In addition to AMRAAM, pictured below on an F-18 fighter
aircraft, we supply the AIM-9X, Evolved Sea Sparrow, Maverick, Tomahawk, and
TOW II missile programs to prime contractor Raytheon Missile Systems Company.
The quality of our products is reflected in our selection by Raytheon as its
supplier of the year in each of the past three years. We are a supplier to
Lockheed Martin on the Predator and ATACMS missile programs, Boeing on the
AGM-130 missile program, the Lockheed Martin/Boeing joint venture company on
the Hellfire program, and the Lockheed Martin/Raytheon joint venture company
on the Javelin program. ABL, a U.S. Navy-owned/Alliant-operated facility, is
nearing completion of a major renovation program that has made it the world's
most modern small rocket motor production facility and a center for state-of-
the-art production of composite structures for weapons systems.
[PHOTO OF KAREN WEAKLEY APPEARS HERE]
Karen Weakley
Program Manager,
AMRAAM Missile
[PHOTO OF F-18 AIRCRAFT WITH AMRAAM MISSILE APPEARS HERE]
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Alliant Techsystems
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Training and Tactical Tank Ammunition
------------------------------------------
We use the combined capability of Alliant to produce repeatable training and
tactical tank ammunition. Design and program management is located at
Conventional Munitions headquarters in Hopkins, Minnesota. Primers are
manufactured at Kilgore Operations in Toone, Tennessee, and metal parts are
fabricated at Ferrulmatic Operations in Totowa, New Jersey. Propellant is
produced at the Radford Army Ammunition Plant in Radford, Virginia. Pictured is
analytical chemist Shelley Porter using state-of-the-art video equipment to
track the consistency of MK-14 propellant grains produced at Radford. The use of
these capabilities together with rigorous process control enable us to produce
high-quality, low-cost products. With more than two million training and
tactical rounds delivered since 1985, our tank ammunition has gained a
reputation for reliability and consistent performance. Our tactical ammunition
performed so effectively in Operation Desert Storm that U.S. tank crews called
the round "the silver bullet." Orders in fiscal year 1998 included a $91 million
contract for training rounds, bringing the total value of a four-year
procurement to $333 million.
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
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Infrared Decoy Flares
------------------------------------------
Kilgore Operations is the country's largest producer of infrared decoy flares
used to protect aircraft such as these U.S. Marine Corps Harrier jets from heat-
seeking missiles. Kilgore-produced flares also are dispensed from the F-4, F-5,
F-15, and F-16 tactical fighters, the AH-64 Apache attack helicopter, and cargo
and troop aircraft such as the C-130 Hercules. A major supplier of military
pyrotechnics since World War II, Kilgore operates the largest infrared decoy
flare production facility in the U.S. in Toone, Tennessee. Orders for infrared
decoy flares totaled $36 million in fiscal year 1998.
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Alliant Techsystems 9
[PHOTO OF PAUL A. ROSS APPEARS HERE] Paul A. Ross
Group Vice President
"Our growth reflects three factors
that put us head and shoulders above
our competition: process control,
world-class facilities, and a
workforce that is second to none."
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Space and Strategic Systems
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Space and Strategic Systems experienced significant growth over the past year --
the result of three factors that put us head and shoulders above our
competition: disciplined process control, world-class facilities, and a
workforce that is second to none. These strengths allow us to deliver products
to our customers that are highly repeatable, new program development that is the
quickest in the industry, and unequaled quality at an extremely competitive
price.
MARKET LEADERSHIP IN SOLID PROPULSION We have become the largest supplier of
solid propulsion for the commercial space launch industry - a market leadership
position that is reflected in our growing backlog. With recent contracts from
Boeing for additional solid boosters for the Delta family of launch vehicles,
our backlog now is the highest in our history.
In October 1997, we had the opportunity to be involved in the historic
mission to Saturn, when our Solid Rocket Motor Upgrade (SRMU) boosters provided
the first stage lift for the Lockheed Martin Titan IV B rocket that carried the
Cassini/Huygens spacecraft into outer space.
All in all, 176 of our motors were used in 37 flights of various space launch
vehicles and strategic missiles over the past year. Every one of these motors
performed flawlessly for a 100-percent mission success rate.
TREMENDOUS GROWTH IN COMPOSITE STRUCTURES
Our composite structures business experienced tremendous growth in fiscal year
1998 as we pioneered new applications for our lightweight, high-strength
structures. Space structures include the liquid hydrogen fuel tanks for Lockheed
Martin's X-33 Advanced Technology Demonstrator, a sub-scale prototype for what
eventually will become the VentureStar(TM) Reusable Launch Vehicle. During the
past year, we completed development and sub-assembly of the tanks. We also are
producing components for two next-generation combat aircraft, the Joint Strike
Fighter and the F-22 Raptor.
OUR PEOPLE MAKE IT HAPPEN Our successes would not be possible without the
contributions and support of our 1,800 talented and dedicated employees. Their
relentless pursuit of process control and quality in all they do and their
strong focus on serving our customers ensure that we will continue to deliver
premier performance and ultimately greater value for our shareholders.
/s/ Paul A. Ross
Paul A. Ross
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10 Alliant Techsystems
[PHOTO APPEARS HERE]
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Boosters for the Delta Family of Launch Vehicles
----------------------------------------------------
Members of our Delta booster team are pictured with solid rocket motors for the
new Boeing Delta III space launch vehicle at our facility in Magna, Utah. Front
row, L-R: Jeff Vosburgh, Lisa Gold, Jill Bohney, Bob Seirup. Middle row, L-R:
Rob Richeson, Dale Giles, Steve Breivik. Back row, L-R: Travis Campbell, Delta
team leader and Vice President, Commercial Launch Vehicles, Andy Jackson, Tony
Kelley. Not pictured: Cindy Hikada and Marlo Stradley. Our relationship with
Boeing began 12 years ago when we were selected to develop an improved booster
for the Delta II. The quality and repeatability of our motors is a major reason
why the Delta II is today the world's most reliable expendable launch vehicle --
and why we have been selected by Boeing to continue production of boosters for
the Delta family of vehicles under long-term contracts valued at approximately
$750 million.
[PHOTO OF X-33 VEHICLE APPEARS HERE]
[PHOTO OF MARK MESSICK APPEARS HERE] Mark Messick
Program Manager,
X-33 Liquid Hydrogen Tanks
In fiscal year 1998, we completed the development and sub-assembly of the liquid
hydrogen fuel tanks for Lockheed Martin's X-33 Advanced Technology Demonstrator.
The fiber-placed composite components for the two 28-foot-long, 4,000 pound
tanks, which are visible at the rear of the engineering drawing above, were
fabricated at our composite structures production facilities in Clearfield and
Magna, Utah. The tanks will be delivered to Lockheed Martin for final tank
assembly, which is expected to be completed in the summer of 1998. We also will
produce the composite fuel tanks for the Lockheed Martin VentureStar(TM)
Reusable Launch Vehicle, the full-scale version of the X-33 and America's next-
generation space shuttle. Graphite epoxy composite material was selected for the
fuel tanks to reduce the weight of the vehicle. In addition to spacecraft, we
are producing composite components for commercial and military airplanes,
including next-generation combat aircraft. With sales rising at an average
annual rate of 40 percent over the past five years, composite structures has
been our fastest growing business.
----------------------------------------------------
Composite Structures for Space Applications
----------------------------------------------------
[PHOTO OF X-33 VEHICLE APPEARS HERE]
[PHOTO OF TRIDENT MISSILE APPEARS HERE]
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Solid Propulsion for Strategic Deterrence
-----------------------------------------------
Under a joint venture with Cordant Technologies (formerly Thiokol), we produce
boosters for the Trident II (D-5) Fleet Ballistic Missile. In fiscal year 1998,
we completed qualification of boosters under the U.S. Navy's Propulsion
Consolidation Program and received an $83 million contract from Lockheed Martin
to produce 18 Trident propulsion systems. The contract is a follow-on to a $155
million award received in 1995, when the joint venture was selected to be the
single supplier for all three stages of the Trident II. We have been a member of
the Navy's strategic missile team for 25 years.
-----------------------------------------
Titan IV B Solid Rocket Motor Upgrade
-----------------------------------------
In October 1997, a U.S. Air Force Titan IV B rocket powered by two Alliant Solid
Rocket Motor Upgrade (SRMU) boosters successfully launched the Cassini/Huygens
mission to Saturn. The mission was the second for our SRMU boosters. The SRMU,
the largest of several boosters developed by Space and Strategic Systems, was
funded by Lockheed Martin Astronautics, the prime contractor on the Titan IV B
program. To provide the needed Titan IV B performance and reliability, we
designed a total booster with electronics, thrust vector control, and composite
case technology to achieve all requirements. State-of-the-art lightweight
composite case technology coupled with effective use of high-performance
propellants and an emphasis on process control, quality, and safety have made
the SRMU the highest performance and safest large booster system ever developed.
[PHOTO OF TITAN IVB ROCKET APPEARS HERE]
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Alliant Techsystems
[PHOTO OF DON L STICINSKI APPEARS HERE] Don L. Sticinski
Group Vice President
"The right people in the right
positions is the single most
important factor in our ability
to provide best value to our
customers and superior returns to
our shareholders."
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Defense Systems
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As a result of key development programs won over the past several years, Defense
Systems is helping shape the battlefield of the 21st century. Our challenge is
to ensure the highest standards of reliability and quality as we transition
these programs from development to production.
CAPABILITIES FOR TOMORROW'S BATTLEFIELD The unprecedented capabilities of our
Objective Individual Combat Weapon and Outrider(TM) Tactical Unmanned
Aerial Vehicle will increase the lethality and survivability
of 21st century combat troops and revolutionize the way wars are fought. Our
Sense and Destroy Armor (SADARM) smart submunition will provide similar
capabilities to our artillery forces.
The unique properties of our lithium ion polymer batteries have the potential
to serve the power needs of 21st century soldiers as well as the satellites from
which they will obtain positioning and target information. Our electronic
warfare systems are vital to air combat. The acquisition of Motorola's military
fuze business makes us a leading manufacturer of electro-mechanical and
electronic fuzes necessary for all weapon systems.
All these programs have one thing in common: their success is due to
effective integrated product team partnerships between our employees, government
program managers, suppliers, and military users.
FOCUSED ON SUCCESS The adage "success breeds success" is particularly
appropriate as we move development programs into production. The transition is
dependent upon a series of successes at each step along the way, from initial
design to manufacturing startup to product delivery. A proactive approach to
statistical process control is the key to ensuring these successes.
ACCOUNTABILITY FOR RESULTS Having the right people in the right positions is the
single most important factor in our ability to provide best value to our
customers and superior returns to our shareholders. Fundamental to this is
giving the individual and the team accountability for results. My commitment is
to give those individuals and teams the necessary authority to ensure they can
deliver on their accountabilities.
Each of our 1,100 employees is focused on making our goals a reality. With
their help, I am confident that Defense Systems will continue to be an important
partner to the U.S. military.
/s/ Don L. Sticinski
Don L. Sticinski
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14 Alliant Techsystems
[PHOTO APPEARS HERE]
Objective Individual Combat Weapon
Seated at left is Mike Moore, program manager, Objective Individual Combat
Weapon (OICW) with members of his engineering team. Standing (L-R) are Dave
Erdmann and Steve Savitt. Seated (L-R) are John Overland and Pete Gilles. Not
pictured are two key members of the OICW management team: Dave Broden, technical
director, and Tom Bierman, business development manager. In March 1998, our team
was selected to continue development of the OICW, the U.S. military's next-
generation individual weapon, which will provide American soldiers and Marines
with an unprecedented capability that will increase their lethality and
survivability on the 21st century battlefield. We worked closely with government
technical experts and military users on integrated product teams to define
weapon system requirements during the prototype development stage, which
culminated in competitive firing demonstrations in January 1998. During fiscal
year 1999, we will be building and delivering OICW weapon systems and ammunition
for testing and evaluation by the joint services.
[PHOTO APPEARS HERE]
-------------------------------------------------
Outrider(TM) Tactical Unmanned Aerial Vehicle
-------------------------------------------------
Soldiers from the 15th Military Intelligence Battalion at Ft. Hood, Texas,
prepare the Outrider(TM) Tactical Unmanned Aerial Vehicle (TUAV) for ground and
flight maneuvers as part of the program's military utility assessment phase,
which involves a number of tactical scenarios such as observation of opposing
forces, location and identification of targets, and battle damage assessment.
The Outrider TUAV program has made significant technical progress over the past
year, demonstrating nearly all key tactical operations, including automatic
takeoff and landing, mission planning and downloading, and payload data
transmission. Critical to the success of the program has been the integrated
product teams made up of representatives from the Department of Defense,
Alliant, supplier companies, and the military that have been empowered to make
quick decisions to resolve technical and program issues in a timely manner. When
fielded by the U.S. military, the Outrider TUAV will provide combat commanders
with a dedicated unmanned aerial vehicle system that delivers real-time
reconnaissance, surveillance, and target acquisition information without risking
the lives of pilots or other air crew members. Defense Systems was selected in
May 1996 to develop the Outrider TUAV under an Advanced Concept Technology
Demonstration program.
Don Cattell [PHOTO OF DON CATTELL APPEARS HERE]
Vice President,
Unmanned Vehicle
Systems
[PHOTO OF OUTRIDER AIR VEHICLE APPEARS HERE]
------------------------------
High-Performance Batteries
------------------------------
From right to left are Dr. Pat Narendra, managing director, Power Sources Center
(PSC), production coordinator Lisa Robinson, and production engineer Nick
Motolese at our automated, high-volume battery production facility in Horsham,
Pennsylvania. PSC is a major supplier of lithium reserve batteries for munitions
and is developing advanced rechargeable lithium ion polymer batteries. PSC is
positioned to benefit from the growing demand for high-performance rechargeable
batteries for both military applications such as communications equipment and
undersea vehicles, and for use on commercial satellites.
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
-------------------------------
Electronic Military Fuzes
-------------------------------
Fuze production specialist Sharon Ryner inspects electronic artillery fuzes at a
statistical process control station at our manufacturing facility in Janesville,
Wisconsin. Since 1951, we have produced more than 260 million fuzes and fielded
over 60 different fuze and munition types for the U.S. armed services. Today,
our fuzes are used in artillery, mortar, rocket, cannon, air-delivered, and
special operations systems. In fiscal year 1998, we strengthened our position in
this important market with the acquisition of part of Motorola's military fuze
business, which develops and manufactures high-quality electronic fuzes for
projectiles, air-delivered weapons, penetrating weapons, and safe and arm
devices. We are consolidating the Motorola operations into our Janesville
operations, bringing together two manufacturing organizations with superior
quality, strict process control standards, and premier technical capabilities to
create a fuze manufacturing center of excellence. The consolidation, which will
be completed during fiscal year 1999, will lead to economies of scale and
ultimately better value for our customers and greater returns for our
shareholders
- --------------------------------------------------------------------------------
17
---------------------------
Selected Financial Data
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Amounts in thousands except per share data
(Years Ended March 31) 1998 1997 1996 1995/1/ 1994
- ---------------------------------------------------------------------------------------------------------------------------
Results of Operations
Sales $1,075,506 $1,089,397 $1,020,605 $504,190 $544,236
Cost of sales 881,237 907,695 834,298 438,558 458,602
Change in accounting estimate -
Environmental liabilities/2/ - 17,442 - - -
Research and development 12,447 16,207 14,126 11,763 12,132
Selling 37,757 35,778 33,143 24,820 23,672
General and administrative 52,011 41,881 40,186 19,066 23,893
Restructuring charges - - - 35,600 -
Change of control charges - - - 23,039 -
Litigation settlement charges - - - 15,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 92,054 70,394 98,852 (63,656) 25,937
Interest expense, net (24,531) (34,386) (37,427) (7,076) (2,800)
Other income (expense), net 435 651 657 (2,332) (3,081)
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 67,958 36,659 62,082 (73,064) 20,056
Income tax provision - - 13,658 - -
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 67,958 36,659 48,424 (73,064) 20,056
Income from discontinued operations, net
of income taxes - 4,819 5,617 456 12,418
Gain (loss) on disposal of discontinued
operations, net of income taxes 225 17,681 (6,240) - -
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change 68,183 59,159 47,801 (72,608) 32,474
Cumulative effect of accounting change,
net of income taxes - - - (1,500) -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 68,183 $ 59,159 $ 47,801 $(74,108) $ 32,474
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Continuing operations $ 5.21 $ 2.82 $ 3.72 $ (7.27) $ 2.06
Discontinued operations .02 1.73 (.05) .05 1.27
Cumulative effect of accounting change - - - (.15) -
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ 5.23 $ 4.55 $ 3.67 $ (7.37) $ 3.33
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share:
Continuing operations $ 5.08 $ 2.73 $ 3.61 $ (7.27) $ 1.98
Discontinued operations .02 1.68 (.05) .05 1.23
Cumulative effect of accounting change - - - (.15) -
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ 5.10 $ 4.41 $ 3.56 $ (7.37) $ 3.21
- ---------------------------------------------------------------------------------------------------------------------------
Financial Position
Net current assets (liabilities) $ 95,628 $ 108,191 $ 42,978 $ 70,007 $(16,489)
Property, plant, and equipment, net 333,181 358,103 382,513 484,985 85,094
Total assets 932,180 1,000,588 1,035,142 1,022,235 419,437
Long-term debt 180,810 237,071 350,000 395,000 -
Total equity and redeemable common shares/3/ 265,754 218,792 157,477 140,370 91,980
Other Data
Depreciation and amortization $ 47,517 $ 52,721 $ 58,623 $ 16,283 $15,323
Capital expenditures 20,406 28,522 25,593 12,635 13,499
Gross margin as a percentage of sales 18.1% 15.1%/2/ 18.3% 13.0% 15.7%
===========================================================================================================================
/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) only from March 15, 1995,
through March 31, 1995.
/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
charge to earnings, or $1.30 per share on a diluted basis. See Note 16 to
the financial statements.
/3/ Redeemable common shares represent 813,000 shares, redeemable at prescribed
prices totaling $44,979. Shares are redeemable in three equal lots of
271,000 shares each during each of the last three calendar quarters of 1998.
See Note 13.
- --------------------------------------------------------------------------------
18 Alliant Techsystems
------------------------------------------
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the financial
statements and notes, thereto, beginning on page 28.
Results of Operations
Sales - Sales from continuing operations in fiscal 1998 were $1,075.5 million, a
decrease of $13.9 million or 1.3 percent from sales of $1,089.4 million in
fiscal 1997.
Conventional Munitions Group sales in fiscal 1998 were $460.3 million, a
decrease of $22.7 million or 4.7 percent, from sales of $483.0 million in fiscal
1997. The decrease was primarily the result of lower tank ammunition sales in
fiscal 1998.
Space and Strategic Systems Group sales in fiscal 1998 were $370.0 million,
an increase of $30.5 million or 9.0 percent, from sales of $339.5 million in
fiscal 1997. The increase was driven primarily by increased space propulsion and
composite structures sales in fiscal 1998, up $44 million and $19 million
respectively, compared to fiscal 1997 sales. These increases were offset
partially by the absence in the current year of $21 million in fiscal 1997 sales
generated on the Evolved Expendable Launch Vehicle program (EELV), on which the
Company completed its role in the prior year.
Defense Systems Group sales in fiscal 1998 were $227.5 million, a decrease of
$15.9 million or 6.5 percent, from sales of $243.4 in fiscal 1997. The net
decrease in fiscal 1998 sales was the result of decreased revenues on programs
at or nearing completion, offset partially by increased revenues on the
Outrider(TM) unmanned aerial vehicle contract, where sales in fiscal 1998
increased $28 million over fiscal 1997.
Emerging Business Group sales in fiscal 1998 were $27.2 million, a decrease
of $14.2 million from sales of $41.4 million in fiscal 1997. In late fiscal
1998, management began to implement a plan that it believes will enhance the
Company's focus on core business. As a result, effective April 1, 1998, certain
of the Emerging Business Group business pursuits were consolidated into other
Company business groups. Certain other non-core operations were phased out. This
reorganization is not expected to have a material impact on the Company's
financial results.
Sales from continuing operations of $1,089.4 million in fiscal 1997
represented an increase of $68.8 million, or 6.7 percent, over sales of $1,020.6
million in fiscal 1996. The increase was primarily driven by increased tank
ammunition sales, due to the resolution of technical issues in fiscal 1997 which
had delayed fiscal 1996 shipments.
Company sales for fiscal 1999 are expected to be approximately $1.1 billion.
Gross Margin -- The Company's gross margin as a percentage of sales was 18.1
percent, 15.1 percent, and 18.3 percent in fiscal 1998, 1997, and 1996,
respectively. Gross margin in fiscal 1998 was $194.3 million, an increase of
$30.0 million, compared to $164.3 million for fiscal 1997. The increased margin
in fiscal 1998 was driven in large part by the fiscal 1997 one-time $17.4
million charge for the Company's adoption of AICPA Statement of Position No.
96-1 (SOP 96-1), "Environmental Remediation Liabilities." Additional margin
improvement was attributable to cost underruns on space propulsion and composite
structures programs. Fiscal 1998 gross margin was adversely impacted by cost
growth in the company's Emerging Business Group, driven primarily by the
Explosive "D" fixed price contract for ordnance reclamation. Production delays
on the Explosive "D" contract have resulted in additional costs to the Company,
a portion of which the Company believes will ultimately be reimbursed by the
customer. Potential technical and safety issues have been identified that,
depending on the outcome of the continuing evaluation of these risks and the
potentially mitigating solutions, could add cost growth to the program. These
potential technical and safety issues would similarly result in cost growth on
another fixed price Explosive "D" contract (for 6 and 8-inch gun projectiles)
for which contract performance efforts are yet to begin. As a result of the
above and other cost growth during fiscal 1998, the Company wrote off $6
million, which represents the Company's best estimate of unrecoverable contract
costs. Based on information known at this time, management's estimated range of
possible additional cost growth as a result of the potential technical and
safety issues on Explosive "D" is currently $0-$8 million, on which ultimate
outcome is dependent on the extent to which the Company is able to mitigate
these potential risks, and obtain additional contract funding from the customer
for work performed. Additionally, the customer has the ability to exercise a
fixed price option for additional reclaimed quantities of the 6 and 8-inch
projectiles. The Company believes that it is unlikely that these options will be
exercised. The Company is currently working closely with the customer to resolve
these matters on a mutually agreeable basis.
Gross margin in fiscal 1997 was $164.3 million, a decrease of $22.0 million,
compared to $186.3 million for fiscal 1996. The decreased margin in fiscal 1997
was primarily attributable to the $17.4 million charge associated with the
Company's adoption of SOP 96-1. Additionally, the decrease was also attributable
to cost growth on certain tactical propulsion, fuzing, ammunition, and ordnance
reclamation contracts, offset by $12 million of non-recurring income due to
negotiated settlements on two propulsion contracts that the U.S. Government
customer had terminated in prior years.
Fiscal 1999 gross margin is expected to be in the 17.5 to 18.5 percent range.
- --------------------------------------------------------------------------------
Alliant Techsystems 19
- --------------------------------------------------------------------------------
Research and Development -- The Company's research and development expenditures
were $12.4 million or 1.2 percent of sales in fiscal 1998, compared with $16.2
million or 1.5 percent of sales in fiscal 1997 and $14.1 million or 1.4 percent
of sales in fiscal 1996. The decrease in research and development expenditures
in fiscal 1998 compared to fiscal 1997 was driven primarily by the absence in
fiscal 1998 of costs incurred in the prior year of $3.0 million on the EELV
program. Fiscal 1997 expenditures, 1.5 percent of sales, represented a slight
increase compared to fiscal 1996 expenditures, 1.4 percent of sales, due
primarily to EELV expenditures in fiscal 1997. The Company also spent $241.6
million on U.S. Government-customer funded research and development contracts in
fiscal 1998, an increase of $10.3 million when compared to expenditures of
$231.3 million in fiscal 1997 and $281.8 million in fiscal 1996. The decrease in
fiscal 1997 compared to fiscal 1996 primarily represents the completion of a
rocket motor development program.
Selling -- The Company's selling expenses totaled $37.8 million or 3.5 percent
of sales in fiscal 1998, compared with $35.8 million or 3.3 percent of sales in
fiscal 1997. Fiscal 1998 selling costs include approximately $7 million of
expenditures, compared to $3.4 million in fiscal 1997, on the Company's pursuit
of the U.S. Government's Inter-Continental Ballistic Missile (ICBM) prime
integration program which was ultimately awarded to a competitor in fiscal 1998.
Fiscal 1997 selling costs, 3.3 percent as a percentage of sales, increased
slightly compared to fiscal 1996 levels of 3.2 percent. The fiscal 1997 increase
is attributed to early spending on ICBM in fiscal 1997.
General and Administrative -- General and administrative costs for fiscal 1998
totaled $52.0 million or 4.8 percent of sales, compared with $41.9 million or
3.8 percent of sales in fiscal 1997, and $40.2 million or 3.9 percent of sales
in fiscal 1996. Fiscal 1998 general and administrative costs, as a percent of
sales, increased from fiscal 1997 levels. This increase primarily reflected
increased legal costs compared to the prior year, and the absence in fiscal 1998
of a $2 million restructure reserve reversal in fiscal 1997, due to cost
underruns identified relative to the originally reserved amounts.
Operating expenses for fiscal 1999, stated as a percentage of sales, are
expected to be approximately one percent lower than fiscal 1998 expenses, which
were 9.5 percent of sales. This expected decrease is primarily due to the
absence of fiscal 1998 spending on ICBM.
Restructuring and Facility Closure Charges -- The Company initiated a
restructuring program in fiscal 1995 which resulted in a fiscal 1995 fourth-
quarter pre-tax charge of $35.6 million of which approximately $12 million was a
non-cash charge associated with 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. As a result of these changes, new management re-evaluated
business strategies for the Group, including its restructure plans and as a
result, the anticipated timing of certain severance and facility closure costs
pushed into fiscal 1997. Cash expenditures under this completed restructuring
program, primarily for employee-related costs, totaled approximately $3 million,
$8 million, and $11 million in fiscal 1998, 1997, and 1996, respectively. In the
fourth quarter of fiscal 1997, the Company reversed approximately $2 million of
this reserve against general and administrative costs, due to cost underruns
relative to the originally reserved amounts. See also Discontinued Operations
discussion, below, regarding Marine Systems Group facility closure costs
incurred in fiscal 1998.
Interest Expense -- Interest expense was $27.6 million in fiscal 1998, a
decrease of $7.5 million, when compared to $35.1 million in fiscal 1997. Fiscal
1997 interest expense decreased $4.2 million from $39.3 million in fiscal 1996.
The decrease in fiscal 1998 interest expense, as compared to fiscal 1997,
reflects reduced average borrowings outstanding, due to regularly scheduled
paydowns, as well as long-term debt prepayments of $88.6 million in March 1997,
and $40 million in December 1997, with portions of the sale proceeds generated
by the February 1997 sale of the Marine Systems Group. The decrease in interest
expense in fiscal 1997 as compared to fiscal 1996 reflects decreased borrowings
due to regularly scheduled paydowns.
During fiscal 1998, the Company entered into treasury rate-lock agreements to
hedge against increases in market interest rates on the anticipated refinancing
of its senior subordinated notes, which are callable on March 1, 1999. These
agreements provide rate locks between 6.04 and 6.25 percent on the most recently
issued U.S. 10-year treasury note through March 1, 1999, on a notional amount
totaling $100 million. The Company's actual refinancing rate will depend on its
credit rating and respective borrowing margin over the treasury rate at that
time.
In January 1998, the Company entered into a swap agreement relating to $50
million face amount (approximately $48.7 million of accreted value) of its 11.75
percent senior subordinated notes. The agreement locks in the price at which the
Company can pre-pay $50 million of its senior subordinated notes, which the
Company currently anticipates doing in March 1999. The agreement provides for
the Company to receive 11.75 percent interest on a notional amount of $50
million and to pay interest at one month London Interbank Offering Rate (LIBOR),
plus 1 percent (approximately 6.7 percent at March 31, 1998), on a notional
amount of $55 million. Additionally, the agreement provides that during the term
of the swap, which expires in February 1999, any increases (decreases) in the
market value of the notes will be received (paid), respectively, by the Company.
The Company has provided a cash deposit of $2.4 million to the financial
intermediary to collateralize the swap agreement. The
- --------------------------------------------------------------------------------
20 Alliant Techsystems
- --------------------------------------------------------------------------------
Company simultaneously entered into an additional swap agreement to hedge
against increases in the one-month LIBOR interest rate relating to the above
swap. Under the agreement, the Company pays a fixed rate of 5.54 percent, and
receives interest at a rate of one-month LIBOR (approximately 5.7 percent at
March 31, 1998) on a notional amount of $55 million. Both swap agreements expire
February 1, 1999, and have certain cancellation options.
Income Taxes -- Taxes on income from continuing operations in fiscal years 1998
and 1997 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 $4.7
million for discontinued operations.
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 Co. (Hughes) for $141.0 million in
cash. The sale was completed on February 28, 1997, resulting in a pretax gain to
the Company of approximately $27.2 million ($17.7 million, after tax), which the
Company recognized in the fourth quarter of fiscal 1997.
In connection with the sale, the Company began actions during fiscal 1998 to
close certain facilities (not sold to Hughes) that had previously been utilized
for Marine Systems Group contracts as well as for Defense Systems Group
activities. The sale of the Marine business and the resultant loss of production
volume within these facilities made continued use of these facilities
inefficient and cost prohibitive. Accordingly, as a direct result of the sale,
the Company booked reserves of approximately $21 million in March 1997 (by a
charge to the gain on disposal of discontinued operations) primarily for the
estimated costs of facility closure, severance costs, and anticipated litigation
costs associated with these activities. The Company has spent approximately $11
million to date on these facility closure and severance costs. As these facility
closure activities are now substantially complete, the Company reversed $10.1
million of these liabilities during the fourth quarter of fiscal 1998, resulting
in an additional gain on the disposal of the Marine business.
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 its foreign demilitarization businesses
(Demilitarization operations). Accordingly, the Company began actions to
transfer ownership of the joint ventures to the 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. In March
1998, as a result of the Company's continued consideration and evaluation of the
status of the underlying operations, as well as newly imposed export
restrictions in the Ukraine and the apparently increasing political instability
in the region, Company management wrote off approximately $9.9 million,
representing the remaining recorded value of the Company's investment in that
operation. The Company maintains a letter of credit to support approximately
$2.5 million of bank borrowings of the Demilitarization operations.
Net Income -- The Company recorded net income of $68.2 million in fiscal 1998,
an increase of $9.0 million, or 15.3 percent, over net income of $59.2 million
in fiscal 1997. The fiscal 1998 increase in net income was driven by reduced
interest expense due to debt paydowns, and improvements in operating margins,
driven by cost underruns on space propulsion and composite structures programs,
as well as the absence of the fiscal 1997 $17.4 million charge for the Company's
adoption of SOP 96-1. Fiscal 1997 net income also included $22.5 million of
income from discontinued operations, which is reflective of the Company's sale
of the Marine Systems Group on February 28, 1997. The Company's fiscal 1997 net
income of $59.2 million represented an increase of $11.4 million, or 23.8
percent, over fiscal 1996 net income of $47.8 million. Fiscal 1997 net income
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. Fiscal 1996 included a $.6
million loss from discontinued operations.
- --------------------------------------------------------------------------------
Alliant Techsystems 21
- --------------------------------------------------------------------------------
Liquidity, Capital Resources, and Financial Condition
Cash provided by operations during fiscal 1998 totaled $63.0 million, compared
with $92.1 million for fiscal 1997. Cash provided by operations for fiscal 1998
reflects increased net income offset by increased use of cash for working
capital purposes during fiscal 1998, primarily due to the receipt of $24 million
more in customer advances in fiscal 1997. Fiscal 1998 cash flow from operations
was also decreased by an increased use of cash for accounts payable. These
decreases in cash flow were partially offset by the fiscal 1998 decrease in cash
used in the Company's discontinued operations. During fiscal 1998, approximately
$13 million was expended under the Company's restructure and facility
consolidation activities, primarily for move and employee related costs
associated with the February 1997 sale of the Marine Systems Group. Cash
provided by operations during fiscal 1997 totaled $92.1 million, compared with
cash provided by operations of $89.1 million for fiscal 1996. 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 $8 million was
expended during fiscal 1997 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, in
connection with the Company's closure plan for certain facilities acquired in
the March 15, 1995, acquisition of the Hercules Aerospace Company (Aerospace
operations) from Hercules, Incorporated (Hercules).
As a result of the Accudyne "qui tam" litigation settlement recorded as of
the fourth quarter of fiscal 1995, the Company spent approximately $4.0, $3.0,
and $3.5 million in fiscal 1998, 1997, and 1996, respectively. The final
payment, $4.5 million, plus interest, will be paid during fiscal 1999.
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,
the Company has tax loss carryforwards of approximately $37.6 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. It is currently expected that required payments for
taxes in fiscal 1999 will continue to be reduced due to the aforementioned tax
loss carryforwards. However, the Company may be subject to the provisions of the
Alternative Minimum Tax (AMT), in which case tax payments could be required. To
the extent that AMT is required to be paid currently, the resulting deferred tax
asset can be carried forward indefinitely, and can be recovered through
reductions in tax payments on future taxable income. During fiscal 1998, the
Company paid net AMT of approximately $1 million.
In December 1997, the Company completed its acquisition of certain assets
from a division of Motorola, Inc., including patent and technology rights
related to military fuze production, for approximately $8.5 million. Up to $9.0
million in additional consideration may be required to be paid to the seller in
the future, based on the magnitude of certain future program wins. Results from
the proposed acquisition did not have a material impact on the Company's fiscal
year 1998 results.
On February 28, 1997, the Company completed the sale of its Marine Systems
Group to Hughes 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 pre-pay
a portion of its long-term debt in March, 1997.
In fiscal 1995, the Company acquired the Aerospace operations from Hercules
for $306.0 million in cash and 3.86 million shares of Company common 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.
On October 24, 1997, the Company entered into an agreement with Hercules
providing for the disposition of the 3.86 million shares of Company common stock
held by Hercules. The shares represent the stock issued by the Company in
connection with the March 15, 1995, acquisition of the Hercules Aerospace
Company operations from Hercules.
Under the agreement with Hercules, during the quarter ended December 28,
1997, the Company registered for public offering approximately 2.78 million of
the shares (previously unregistered) held by Hercules. The offering was
completed on November 21, 1997. No new shares were issued in the offering nor
did the Company receive any proceeds from the offering. The remaining 1.1
million shares then held by Hercules became subject to a put/call arrangement
under which Hercules can require the Company to purchase the shares in four
equal installments of 271,000 shares during each of the four calendar quarters
of 1998. The Company can likewise require Hercules to sell the shares to the
Company in four equal installments during each of the four calendar quarters of
1998. The price for shares purchased under the put/call arrangement is equal to
the per share net proceeds realized by Hercules in the secondary public
offering, $55.32. During February 1998, the Company did repurchase the first
installment of 271,000 shares, for approximately $15 million, which is reflected
accordingly in these financial statements. In May 1998, the company repurchased
the second installment of 271,000 shares, for approximately $15 million. The
Company's present intention is to purchase the remaining shares covered by the
put/call arrangement, although no definitive decision has been made to do so.
- --------------------------------------------------------------------------------
22 Alliant Techsystems
- --------------------------------------------------------------------------------
During early fiscal 1998, the Company completed a $50 million stock
repurchase program started in fiscal 1996. In connection with that program, the
Company made repurchases in fiscal 1998 of approximately 140,000 shares, for
approximately $6.0 million. Since 1996, repurchases of 1.3 million shares were
made under this buyback program, at an average cost per share of $39.12. On
October 22, 1997, the Company's Board of Directors authorized the Company to
repurchase up to an additional 1.0 million shares of its common stock. It is
currently expected that any purchases made under this buy-back plan would be
subject to market conditions and the Company's compliance with its debt
covenants. Effective November 10, 1997, the Company entered into an agreement to
amend its Credit Agreement that provides the Company expanded flexibility with
respect to certain restricted payments, including payments for stock
repurchases. As of March 31, 1998, the Company's revised debt covenants permit
it to expend up to an additional $66.5 million in total, in connection with all
share repurchases. In connection with this new repurchase program, the Company
has repurchased 165,300 shares through March 31, 1998, at a cumulative cost of
$10.0 million, or an average cost per share of $60.34. While it is currently the
Company's intention to continue stock repurchases under the program, there can
be no assurance that the Company will repurchase all or any portion of the
remaining shares or as to the timing or terms thereof.
Net outlays for capital expenditures during fiscal 1998 were $20.4 million,
or 1.9 percent of sales, compared with fiscal 1997 outlays of $28.5 million, or
2.6 percent of sales, and fiscal 1996 outlays of $25.6 million, or 2.5 percent
of sales. Management expects total capital expenditures for fiscal 1999 to
increase significantly, due in large part to capital investments the Company
will make to facilitate expected growth in the Company's space propulsion
business. This increase is primarily associated with orders the Company received
from Boeing in May 1998, aggregating $750 million for the production of solid
rocket boosters for Delta space launch vehicles. While these orders are not
expected to have a material impact on fiscal 1999 sales, outlays for capital
expenditures are expected to increase significantly, as the Company prepares its
facilities for this contract.
Principal payments made on the Company's long-term debt during fiscal 1998
totaled $67.4 million, which include prepayments made of approximately $41.5
million.
As of March 31, 1998, no borrowings were outstanding against the Company's
$275.0 million revolving line of credit. Letters of credit totaling $39.9
million at that date reduced the borrowings available under this credit line to
$235.1 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 to 43
percent at March 31, 1998, compared with 55 percent at March 31, 1997, 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
were used largely for debt repayment.
The Company satisfied all of its needs for cash in fiscal 1998, primarily
used for operating capital, capital expenditures, scheduled debt repayments, and
share repurchases, entirely from cash balances on hand, including current year
operating cash flows. Based on the financial condition of the Company at March
31, 1998, management believes the internal cash flows of the Company, combined
with the availability of funding, if needed, under its line of credit, will be
adequate to fund the future growth of the Company as well as to service its
long-term debt obligations.
Contingencies -- 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 March 1997, the Company
adopted the provisions of SOP 96-1, 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, all future anticipated ongoing monitoring and maintenance costs
associated with known remediation sites are required to be accrued. Such costs
were previously expensed as incurred. The Company's adoption of the provisions
of the SOP resulted in a non-cash charge of $17.4 million in the fourth quarter
of fiscal 1997. The charge was classified in cost of sales expenses in the
Company's consolidated income statement for the quarter ending March 31, 1997.
At March 31, 1998, the accrued liability for environmental remediation of
$31.9 million represents management's best estimate of the present value 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 a
receivable of $9.6 million, representing the present value of those
reimbursements at March 31, 1998. Such receivable primarily represents the
expected reimbursement of costs associated with the Aerospace operations,
acquired from Hercules in March, 1995 (Aerospace acquisition), whereby the
Company generally assumed responsibility for environmental compliance at
Aerospace 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 indemnification
agreements. At March 31, 1998, the Company's accrual for environmental
remediation liabilities and the associated receivable for reimbursement thereof,
have been discounted to reflect
- --------------------------------------------------------------------------------
Alliant Techsystems 23
the present value of the expected future cash flows, using a discount rate, net
of estimated inflation, of 4.5 percent. The following is a summary of the
Company's amounts recorded for environmental remediation at March 31, 1998:
- --------------------------------------------------------------------------------
Accrued Environmental Costs -
Environmental Liability Reimbursement Receivable
- --------------------------------------------------------------------------------
Amounts (Payable)/Receivable $(40,929) $12,482
Unamortized Discount 9,043 (2,860)
- --------------------------------------------------------------------------------
Present Value Amounts
(Payable)/Receivable $(31,886) $ 9,622
- --------------------------------------------------------------------------------
At March 31, 1998, the aggregate undiscounted amounts payable for
environmental remediation costs, net of expected reimbursements, are estimated
to be $3.4, $5.9, $1.5, $1.4, and $1.6 million for the fiscal years ending March
31, 1999, 2000, 2001, 2002, and 2003, respectively; estimated amounts payable
thereafter total $14.5 million. Amounts payable/receivable in periods beyond
fiscal 1999 have been classified as non-current on the Company's March 31, 1998,
balance sheet. At March 31, 1998, the estimated discounted range of reasonably
possible costs of environmental remediation is between $31.9 and $56.2 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 1998, 1997, or 1996.
In future periods, new laws or regulations, advances in technologies,
outcomes of negotiations/litigations with regulatory authorities and other
parties, additional information about the ultimate remedy selected at new and
existing sites, the Company's share of the cost of such remedies, changes in the
extent and type of site utilization, the number of parties found liable at each
site, and their ability to pay are all factors that 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.
Contingencies - Litigation
As a U.S. Government contractor, the Company is subjected to defective pricing
and cost accounting standards non-compliance 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 1998) 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, intellectual property,
government regulations, including environmental issues, and other issues.
Certain of the lawsuits and claims seek damages in 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 in March 1995. The
first 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
the acquired operations will be assumed by the Company except for a few specific
lawsuits and disputes including the two qui tam lawsuits referred to above. On
May 15, 1998, Hercules announced that it had agreed to a settlement in the first
qui tam lawsuit, subject to approval by the court. Under terms of the purchase
agreement with Hercules, the Company's maximum combined settlement liability for
both of these qui tam matters is approximately $4 million, for which the Company
has fully reserved. The Company also agreed to reimburse Hercules for 40 percent
of all legal costs incurred after March 15, 1995, relating to these two actions.
In the third qui tam lawsuit, the Company received a partially unsealed
complaint in March, 1997 alleging labor mischarging to the Intermediate Nuclear
Force (INF) contract, and other contracts. Damages are not specified in this
civil suit. The Company and Hercules have agreed to share equally the external
attorney's fees and investigative fees and related costs and expenses of this
action until such time as a determination is made as to the applicability of the
indemnification provisions of the purchase agreement. In March 1998, the Company
and Hercules settled with the Department of Justice on the portion of the
complaint alleging labor mischarging to the INF contract and agreed to pay $2.25
million each, together with relator's attorney's fees of $150 thousand each,
which was paid in April 1998. As a result of this settlement, the Department of
Justice will not intervene in the remaining portion of the complaint. The
Company has accrued for such settlement costs in these financial statements.
The Company has also been served with a complaint in a civil action alleging
violation of the False Claims Act and the Truth in Negotiations Act. The
complaint alleges defective pricing on a government contract. Based upon
documents provided to the Company in connection with the action, the Company
believes that the U.S. Government may seek damages and penalties of
approximately $5 million.
- --------------------------------------------------------------------------------
24 Alliant Techsystems
The Company is a defendant in a patent infringement case brought by Cordant
Technologies (formerly Thiokol Corporation), which the Company believes is
without merit. The complaint does not quantify the amount of damages sought.
Through its analysis of an October 27, 1997, court filing, the Company now
believes that, based on an economist's expert testimony, Cordant Technologies
may seek lost profits, interest and costs of approximately $240 million. Even if
the Company is found liable, it believes that damages should be based upon a
reasonable royalty of less than $5 million. The court has bifurcated the trial,
with the liability issue being tried first and, if liability is found, the
damages issue being tried second. The liability issue was tried in January 1998,
after which the court requested, and the parties submitted, post-trial briefs. A
decision on the liability issue is not expected until several months after
submission of the parties' post-trial briefs. In the judgment of management, the
case will not have a material adverse effect upon the Company's future financial
condition or results of operations. However, there can be no assurance that the
outcome of the case will not have a material adverse effect on the Company.
During fiscal 1998, the Company has substantially completed the requirements
of the M117 Bomb reclamation contract. The contract contained a priced option,
having approximate contract value less than $5 million, whereby the customer
could require the reclamation of additional quantities, given that such option
be exercised within the terms and conditions of the contract. On August 4, 1997,
the customer informed the Company that it was exercising the option. The
Company, based on advice from its counsel, maintains that the option exercise
was invalid and has therefore not performed on the option. The Company is
currently appealing the validity of the option to the United States Court of
Appeals, based on the Company's continued belief that such exercise was invalid.
In late December 1997, the Company was informed by the customer that the Company
was being terminated for default on the contract. The Company expects the
appeals process to conclude in calendar 1998. Depending on the outcome of the
appeal, which will drive the outcome of the termination for default, management
currently estimates that the range of possible adverse impact to the Company's
operating earnings is from $0-$4 million.
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 such
matters during a specific period could have a material adverse effect on the
quarterly or annual operating results for that period.
Year 2000
The Company utilizes a significant amount of computer hardware and software
programs and operating systems across the entire organization, including
applications used in manufacturing, product development, financial business
systems, and various administrative functions. To the extent that this hardware
and software contains source code that is unable to appropriately interpret the
upcoming calendar year 2000, some level of modification, or even replacements of
such applications will be necessary.
The Company's process for becoming "Year 2000" compliant includes activities
to increase awareness of the issue across the Company, assess where the Company
has issues, determine proposed resolutions, validate those proposed resolutions,
and finally, implement the agreed-upon resolutions. The Company has
substantially completed its assessment of applications within the Company that
are not Year 2000 compliant and is in varying stages of determining appropriate
resolutions to the issues identified. The Company currently expects to complete
all relevant internal hardware and software modification and testing by early
calendar 1999. In addition, the Company has initiated formal communications with
all of its significant suppliers and customers to determine their Year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be converted
to Year 2000 compliant systems in a timely manner, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
Given information known at this time about the Company's systems having such
issues, coupled with the Company's ongoing, normal course-of-business efforts to
upgrade or replace business critical systems and software applications as
necessary, it is currently expected that Year 2000 costs, the majority of which
are expected to be incurred in fiscal 1999, will not have an impact exceeding a
range of $5-$10 million on the Company's liquidity or its results of operations.
These costs include incremental personnel costs, consulting costs, and costs for
the modification of existing hardware and software. These costs will be funded
through cash flows from operations and are expensed as incurred. Purchased
hardware and software will be capitalized in accordance with normal policy. The
costs of the project and the timing in which the Company believes it will
complete the necessary Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the success of the Company in identifying
systems
- --------------------------------------------------------------------------------
Alliant Techsystems 25
- --------------------------------------------------------------------------------
and programs having Year 2000 issues, the nature and amount of programming
required to upgrade or replace the affected programs, the availability and cost
of personnel trained in this area, and the extent to which the Company might be
adversely impacted by third party (suppliers, customers, etc.) failure to
remediate their own Year 2000 issues. Failure by the Company and/or its
suppliers and customers (in particular, the U.S. Government, on which the
Company is materially dependent) to complete Year 2000 compliance work in a
timely manner could have a material adverse effect on the Company's operations.
New Accounting Rules
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which requires companies to present basic earnings per share (EPS) and
diluted EPS, instead of the primary and fully diluted EPS that were previously
required. The Company adopted the provisions of SFAS 128 during fiscal 1998, as
required under the Statement. Accordingly, the financial statements for the
period ended March 31, 1998, and all periods prior, have been reported
consistent with the requirements of SFAS 128.
In January 1998, the FASB issued SFAS No. 132 "Employers Disclosures About
Pensions and Other Post-retirement Benefits." The Statement requires certain
changes in disclosure requirements for pension and post-retirement benefits. The
Company adopted SFAS 132 in March 1998.
In October 1996, the AICPA issued SOP 96-1, 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
was 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.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which requires businesses to disclose comprehensive income and its components in
the Company's general-purpose financial statements. Additionally, the FASB also
issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information." Both Statements require additional disclosure only, and as such,
are expected to have no financial impacts to the Company. The Statements are
effective for the Company's fiscal year ended March 31, 1999.
In March, 1998, the AICPA issued SOP 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The SOP
provides guidance on when costs incurred for internal use computer software are
to be capitalized. The SOP is currently not expected to have a material impact
to the Company's results of operations or its financial position. The SOP is
effective for the Company's fiscal year beginning April 1, 1999.
Inflation
In the opinion of management, inflation has not had a significant impact upon
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
Certain of the statements made and information contained in this report,
excluding historical information, are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include those relating to fiscal 1999 sales, gross margin, operating
expenses, facility closure costs, senior subordinated debt prepayment, tax
payments and capital expenditures. Also included are statements relating to cost
growth and reimbursement prospects for the Explosive "D" contract and the
likelihood that the contract's option will be exercised; the realization of net
deferred tax benefits; the repurchase of Company common stock generally, and
from Hercules in particular; the funding of future growth and long-term debt
repayment; environmental remediation costs and reimbursement prospects; the
financial and operating impact of the resolution of environmental and litigation
contingencies in general, resolution of the Cordant Technologies matter and M117
contract termination for default in particular; the ultimate cost and impact of
the Company's Year 2000 compliance effort; and the financial and operating
impact of FASB Statements and AICPA SOPs. Such forward-looking statements
involve risks and uncertainties that could cause actual results or outcomes to
differ materially. Some of these risks and uncertainties are set forth in
connection with the applicable statements. Additional risks and uncertainties
include, but are 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, program
performance, continued access to technical and capital resources, supply and
availability of raw materials and components, timely compliance with the
technical requirements of the Year 2000 issue, including timely compliance by
the Company's vendors and customers, 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.
- --------------------------------------------------------------------------------
26 Alliant Techsystems
------------------------------
Report of Independent Auditors
------------------------------
To the Stockholders of Alliant Techsystems:
We have audited the accompanying consolidated balance sheets of Alliant
Techsystems Inc. and subsidiaries as of March 31, 1998, and 1997, and the
related consolidated statements of income and of cash flows for each of the
years ended March 31, 1998, 1997, and 1996. 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, 1998, and 1997, and the consolidated results of its
operations and its cash flows for each of the years ended March 31, 1998, 1997,
and 1996, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
May 11, 1998
--------------------
Report of Management
--------------------
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 and Chief Executive Officer
/s/ Scott S. Meyers
Scott S. Meyers
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
Alliant Techsystems 27
------------------------------
Consolidated Income Statements
------------------------------
Amounts in thousands except per share data (Years Ended March 31) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Sales $1,075,506 $1,089,397 $1,020,605
Cost of sales 881,237 907,695 834,298
Change in accounting estimate - environmental liabilities - 17,442 -
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 194,269 164,260 186,307
Operating expenses:
Research and development 12,447 16,207 14,126
Selling 37,757 35,778 33,143
General and administrative 52,011 41,881 40,186
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 102,215 93,866 87,455
- ---------------------------------------------------------------------------------------------------------------------------
Income from operations 92,054 70,394 98,852
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (27,621) (35,102) (39,279)
Interest income 3,090 716 1,852
Other, net 435 651 657
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense (24,096) (33,735) (36,770)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 67,958 36,659 62,082
Income tax provision - - 13,658
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 67,958 36,659 48,424
Discontinued operations:
Income from discontinued operations, net of income taxes - 4,819 5,617
Gain (loss) on disposal of discontinued operations,
net of income taxes 225 17,681 (6,240)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 68,183 $ 59,159 $ 47,801
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share:
Continuing operations $ 5.21 $ 2.82 $ 3.72
Discontinued operations .02 1.73 (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 5.23 $ 4.55 $ 3.67
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share:
Continuing operations $ 5.08 $ 2.73 $ 3.61
Discontinued operations .02 1.68 (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 5.10 $ 4.41 $ 3.56
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
28 Alliant Techsystems
---------------------------
Consolidated Balance Sheets
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Amounts in thousands except share data (Years Ended March 31) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 68,960 $ 122,491
Receivables 209,915 190,675
Net inventory 49,072 68,125
Deferred income tax asset 38,280 40,259
Other current assets 6,803 5,707
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 373,030 427,257
- ---------------------------------------------------------------------------------------------------------------------------
Net property, plant, and equipment 333,181 358,103
Goodwill 131,600 123,618
Prepaid and intangible pension assets 85,539 80,569
Deferred charges and other 8,830 11,041
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $932,180 $1,000,588
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 17,838 $ 29,024
Notes payable - 2,302
Accounts payable 80,071 85,451
Contract advances and allowances 64,318 64,500
Accrued compensation 32,275 28,392
Accrued income taxes 8,049 9,156
Accrued restructuring and facility consolidation 2,637 15,856
Other accrued liabilities 72,214 84,385
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 277,402 319,066
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt 180,810 237,071
Post-retirement and post-employment benefits liability 136,889 143,373
Pension liability 33,991 37,079
Other long-term liabilities 37,334 45,207
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities $666,426 $ 781,796
- ---------------------------------------------------------------------------------------------------------------------------
Contingencies (see Notes 14 and 16)
Redeemable common shares (813,000 shares, par value $8, redeemable at prescribed
prices totaling $44,979. Shares are redeemable in three equal lots of 271,000
shares each during each of the
last three calendar quarters of 1998.) $ 44,979 $ -
Stockholders' equity:
Common stock - $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding 12,855,511 and 13,081,538 shares at
March 31, 1998 and 1997, respectively 121 131
Additional paid-in-capital 201,728 248,612
Retained earnings 72,544 4,361
Unearned compensation (1,251) (1,324)
Pension liability adjustment (4,743) (2,304)
Common stock in treasury, at cost (1,008,102 and 782,075 shares held
at March 31, 1998 and 1997, respectively) (47,624) (30,684)
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $932,180 $1,000,588
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Alliant Techsystems 29
-------------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Amounts in thousands (Years Ended March 31) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 68,183 $ 59,159 $ 47,801
Adjustments to net income to arrive at cash provided by operations:
Depreciation 41,416 45,114 49,855
Amortization of intangible assets and unearned compensation 6,101 7,607 8,768
(Gain) loss on disposition of discontinued operations, net of taxes (225) (17,681) 6,240
Loss (gain) on disposition of property 330 (72) (135)
Changes in assets and liabilities:
Receivables (19,240) (13,201) (409)
Inventories 19,053 19,349 11,947
Accounts payable (5,380) 7,726 29,564
Contract advances and allowances (182) 23,863 (21,409)
Accrued compensation 3,883 (280) 3,382
Accrued income taxes (1,107) (154) (115)
Accrued restructuring and facility consolidation (13,219) (22,946) (35,471)
Accrued environmental liability (1,905) 13,180 (178)
Pension and post-retirement benefits (11,397) (7,293) (4,205)
Other assets and liabilities (23,342) (17,621) (24,962)
Operating activities of discontinued operations - (4,640) 18,408
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 62,969 92,110 89,081
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (20,406) (28,522) (25,593)
Acquisition of business (8,466) - -
Business acquisition 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 2,021 2,835 929
Investing activities of discontinued operations - (2,483) (2,306)
Other investing activities, net - - 414
- ---------------------------------------------------------------------------------------------------------------------------
Cash (used for) provided by investing activities (26,851) 112,830 (3,441)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Payments made on long-term debt and notes payable (67,447) (128,905) (30,000)
Net purchase of treasury shares (28,952) (2,616) (36,859)
Proceeds from exercised stock options 9,052 3,995 1,773
Other financing activities, net (2,302) (455) (686)
- ---------------------------------------------------------------------------------------------------------------------------
Cash used for financing activities (89,649) (127,981) (65,772)
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (53,531) 76,959 19,868
Cash and cash equivalents at beginning of period 122,491 45,532 25,664
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 68,960 $ 122,491 $45,532
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
30 Alliant Techsystems
----------------------------------------------
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Amounts in thousands except share and per share data and unless otherwise
indicated)
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, 1998 approximates cost.
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 contract advances.
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 of 25 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.
- --------------------------------------------------------------------------------
Alliant Techsystems 31
- --------------------------------------------------------------------------------
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.
Financial Instruments and Hedging - The Company uses interest rate swap and
forward rate lock 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 - In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, "Earnings Per Share," which requires companies
to present basic earnings per share (EPS) and diluted EPS, instead of the
primary and fully diluted EPS that were previously required. The Company adopted
the provisions of SFAS 128 during fiscal 1998, as required under the Statement.
Accordingly, the financial statements for the year ended March 31, 1998, and all
periods prior, have been reported consistent with the requirements of SFAS 128.
Basic EPS is computed based upon the weighted average number of common shares
outstanding for each period presented. Diluted EPS is computed based on the
weighted average number of common shares and common equivalent shares. Common
equivalent shares represent the effect of redeemable common stock (see Note 13)
and stock options outstanding during each period presented, which, if exercised,
would have a dilutive effect on earnings per share for fiscal 1998, 1997, and
1996. The diluted EPS calculation results in the same EPS that the Company has
historically reported as fully diluted.
In computing EPS from continuing operations for the years ended March 31,
1998, 1997, and 1996, income from continuing operations, as reported for each
respective period, is divided by (in thousands):
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- --------------------------------------------------------------------------------
Basic EPS:
Average shares outstanding 13,048 13,015 13,034
- --------------------------------------------------------------------------------
Diluted EPS:
Average shares outstanding 13,048 13,015 13,034
Dilutive effect of options and
redeemable common shares 323 387 397
- --------------------------------------------------------------------------------
Diluted EPS shares outstanding 13,371 13,402 13,431
- --------------------------------------------------------------------------------
For the year ended March 31, 1998, the 813,000 common shares redeemable under
the put/call agreement with Hercules (see Note 13) were not included in the
calculation of diluted EPS, as inclusion of those redeemable shares would have
been anti-dilutive. There were no other significant issuable securities (i.e.,
options to purchase common shares) outstanding during the above periods
indicated, not included in the computation of diluted EPS, due to the option
price being greater than the average market price of the common shares.
Reclassifications - Certain reclassifications have been made to the fiscal 1997
and 1996 financial statements to conform to the fiscal 1998 classification.
2 Receivables
Receivables, including amounts due under long-term contracts (contract
receivables), are summarized as follows:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Contract receivables
Billed receivables $ 80,408 $ 74,062
Unbilled receivables 127,231 113,802
Other receivables 2,276 2,811
- --------------------------------------------------------------------------------
$209,915 $190,675
- --------------------------------------------------------------------------------
Receivable balances are shown net of reductions of $207,200 and $301,385 as
of March 31, 1998 and 1997, respectively, for customer progress payments
received on 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 contractually billable as of the balance sheet date. These amounts also
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 $13,254 and $18,933 as of
March 31, 1998 and 1997, respectively, for customer progress payments received
on uncompleted portions of contracts.
4 Property, Plant, and Equipment
The major categories of property consist of the following:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Land $ 22,901 $ 23,624
Buildings and improvements 163,821 164,225
Machinery and equipment 327,453 322,168
Property not yet in service 6,173 10,701
- --------------------------------------------------------------------------------
520,348 520,718
- --------------------------------------------------------------------------------
Less accumulated depreciation (187,167) (162,615)
- --------------------------------------------------------------------------------
$333,181 $358,103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32 Alliant Techsystems
- --------------------------------------------------------------------------------
5 Goodwill and Deferred Charges
Goodwill and deferred charges consist of the following:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Goodwill, net of accumulated amortization:
1998 - $10,769, 1997 - $7,255 $ 131,600 $ 123,618
================================================================================
Debt issuance costs, net of accumulated amortization:
1998 - $8,569, 1997 - $7,100 $ 6,280 $ 7,721
Other 2,550 3,320
- --------------------------------------------------------------------------------
$ 8,830 $ 11,041
- --------------------------------------------------------------------------------
The increase in goodwill in fiscal 1998 reflects goodwill associated with the
December 1997 $8.5 million acquisition of the assets of the Motorola fuze
business.
6 Other Accrued Liabilities
The major categories of other current and long-term accrued liabilities are as
follows:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Employee benefits and insurance $29,313 $34,927
Legal accruals 21,495 26,138
Other accruals 21,406 23,320
- --------------------------------------------------------------------------------
Other accrued liabilities - current $72,214 $84,385
================================================================================
Litigation settlement - long-term $ - $ 4,500
Environmental remediation liability 17,264 19,169
Deferred tax liability 19,498 21,477
Other long-term 572 61
- --------------------------------------------------------------------------------
Other long-term liabilities $37,334 $45,207
================================================================================
7 Long-Term Debt
The components of the Company's long-term debt are as follows:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- --------------------------------------------------------------------------------
Bank Term Loan with quarterly principal and
interest payments through March 2001 $ 48,648 $116,095
11.75% Senior Subordinated Notes with
semi-annual interest payments, maturing 2003 150,000 150,000
- --------------------------------------------------------------------------------
Total long-term debt 198,648 266,095
Less current portion (17,838) (29,024)
================================================================================
Long-term portion $180,810 $237,071
================================================================================
In fiscal 1995, the Company entered into a six-year bank credit facility
which is comprised of a $275,000 term loan and a $275,000 revolving working
capital (revolver) and letter of credit facility. Outstanding letters of credit
totaling $39,889 reduced the available line of credit to $235,111 at March 31,
1998. The Company is required to pay a commitment fee (0.275 percent at March
31, 1998) on the $275,000 revolver. The revolver 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 Offering Rate (LIBOR) plus a margin based on the Company's
debt rating. As of March 31, 1998, the unhedged interest rate on outstanding
borrowings under this facility was approximately 6.6 percent. Borrowings are
secured by substantially all of the assets of the Company. Amounts outstanding
under this agreement at March 31, 1998, 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,
1998.
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 $163.9 million at March 31, 1998.
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, payments
for stock repurchases, transactions with affiliates, creation of liens, and
certain other matters. Effective November 10, 1997, the Company entered into an
agreement to amend its Credit Agreement that provides the Company expanded
flexibility with respect to certain restricted payments, including payments for
stock repurchases. In connection with the sale of its Marine Systems Group in
February 1997 (see Note 15), the Company prepaid $88.6 million of its long-term
debt, in accordance with the terms of the bank credit facility. During fiscal
1998, the Company made additional long-term debt prepayments of $41.5 million.
At March 31, 1998, the Company was in compliance with all covenants and
restrictions specified in its debt agreements.
At March 31, 1998, the aggregate maturities due over the next five fiscal
years under the bank term loan and the senior subordinated notes are $17,838 in
1999, $17,838 in 2000, $12,972 in 2001, $0 in 2002, and $150,000 in 2003. No
amounts are due thereafter.
- --------------------------------------------------------------------------------
Alliant Techsystems 33
- --------------------------------------------------------------------------------
The company's weighted average interest rate on short-term borrowings during
fiscal 1998 and 1997 was 7.4 percent and 7.2 percent, respectively.
During fiscal 1998, the Company entered into treasury rate-lock agreements to
hedge against increases in market interest rates on the anticipated refinancing
of its senior subordinated notes, which are callable on March 1, 1999. These
agreements provide rate locks between 6.04 and 6.25 percent on the most recently
issued U.S. 10-year treasury note through March 1, 1999, on a notional amount
totaling $100 million. The Company's actual refinancing rate will depend on its
credit rating and respective borrowing margin over the treasury rate at that
time. The fair market value of the treasury rate-lock agreements at March 31,
1998, is $(3.1) million.
In January, 1998, the Company entered into a swap agreement relating to $50
million face amount (approximately $48.7 million of accreted value) of its 11.75
percent senior subordinated notes. The agreement locks in the price at which the
Company can pre-pay $50 million of its senior subordinated notes, which the
Company currently anticipates doing in March 1999. The agreement provides for
the Company to receive 11.75 percent interest on a notional amount of $50
million and to pay interest at one month LIBOR plus 1 percent (approximately 6.7
percent at March 31, 1998) on a notional amount of $55 million. Additionally,
the agreement provides that during the term of the swap, which expires in
February 1999, any increases (decreases) in the market value of the notes will
be received (paid), respectively, by the Company. The Company has provided a
cash deposit of $2.4 million to the financial intermediary to collateralize the
swap agreement. The fair market value of the swap agreement at March 31, 1998,
is $1.3 million. The Company simultaneously entered into an additional swap
agreement to hedge against increases in the one-month LIBOR interest rate
relating to the above swap. Under the agreement, the Company pays a fixed rate
of 5.54 percent, and receives interest at a rate of one-month LIBOR
(approximately 5.7 percent at March 31, 1998) on a notional amount of $55
million. The fair market value of the additional swap agreement at March 31,
1998, is $.1 million. Both swap agreements expire February 1, 1999, and have
certain cancellation options.
Counter parties to the interest rate swap and rate lock 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 a curtailment 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
curtailment was a credit to the fiscal 1997 gain on disposal of discontinued
operations of $304 thousand.
The following illustrates the change in the Company's projected pension
benefit obligation for fiscal years 1998 and 1997:
- ------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- ------------------------------------------------------------------------------------
Projected benefit obligation at beginning of year $ 838,107 $ 837,202
Service cost of benefits earned during the period 15,008 16,636
Interest cost of projected benefit obligation 60,354 61,563
Plan amendments 2,593 4,214
Sale of Marine Systems Group/1/ -- (30,475)
Actuarial loss 39,779 33,439
Benefits paid (75,719) (84,472)
- ------------------------------------------------------------------------------------
Projected benefit obligation at end of year $ 880,122 $ 838,107
====================================================================================
/1/Refer to footnote 15
Changes in the Company's pension plan assets are summarized as follows for
fiscal years 1998 and 1997:
- ------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- ------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 915,574 $ 901,305
Actual return on plan assets 163,528 107,965
Company contributions 12,604 14,776
Benefits paid (75,089) (84,472)
Sale of Marine Systems Group/1/ -- (24,000)
- ------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 1,016,617 $ 915,574
====================================================================================
/1/Refer to footnote 15
- --------------------------------------------------------------------------------
34 Alliant Techsystems
- --------------------------------------------------------------------------------
The components of prepaid pension cost and the amounts recognized in the
Company's balance sheet for its pension plans are as follows for fiscal years
1998 and 1997:
- -----------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- -----------------------------------------------------------------------------------------
Funded status $ 136,495 $ 77,467
Accrued contribution 2,990 2,861
Unrecognized net actuarial gain (94,452) (43,239)
Unrecognized prior service cost 13,267 12,125
Unrecognized net asset (2,009) (2,624)
- -----------------------------------------------------------------------------------------
Prepaid pension cost $ 56,291 $ 46,590
=========================================================================================
Prepaid benefit cost $ 80,427 $ 75,627
Accrued benefit liability (33,991) (37,079)
Intangible asset 5,112 5,738
Accumulated other comprehensive income 4,743 2,304
- -----------------------------------------------------------------------------------------
Total prepaid pension cost recognized in balance sheet $ 56,291 $ 46,590
=========================================================================================
The change in the additional minimum pension liability recognized (see Note
13) was as follows for fiscal years 1998 and 1997:
- -----------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- -----------------------------------------------------------------------------------------
Change in:
Intangible assets $ (626) $(1,202)
Accrued pension benefit costs (1,813) 87
- -----------------------------------------------------------------------------------------
Total change in additional minimum pension liability $(2,439) $(1,115)
=========================================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with accumulated benefits in excess of
plan assets were $72,188, $70,512, and $42,907, respectively as of March 31,
1998, and $318,356, $302,285, and $272,111, respectively, as of March 31, 1997.
The components of the Company's net periodic pension costs are as follows for
fiscal years 1998, 1997, and 1996:
- -----------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -----------------------------------------------------------------------------------------
Service cost of benefits earned
during the period $ 15,008 $ 16,636 $ 15,662
Interest costs of projected benefit
obligation 60,354 61,563 60,871
Expected return on plan assets (73,098) (68,834) (63,857)
Amortization of unrecognized net
loss (gain) 132 121 (585)
Amortization of unrecognized prior
service cost 1,452 1,753 1,693
Amortization of unrecognized net asset (615) (596) (546)
- -----------------------------------------------------------------------------------------
Net periodic pension cost $ 3,233 $ 10,643 $ 13,238
=========================================================================================
The weighted-average assumptions used in the accounting for defined benefit
plans were:
- -----------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -----------------------------------------------------------------------------------------
Discount rate used in determining
present values 7.25% 7.50% 7.50%
- -----------------------------------------------------------------------------------------
Annual increase in future compensation levels:
Union 3.25% 3.25% 3.25%
Salaried 4.25% 4.25% 4.25%
- -----------------------------------------------------------------------------------------
Expected long-term rate of return on
plan assets 8.75% 8.75% 8.75%
=========================================================================================
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 common 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 $5,538, $5,881, and
$5,780 in fiscal 1998, 1997, and 1996, respectively. The Company employs
approximately 2,150 employees (33 percent of its total employees) covered by
collective bargaining agreements, 1,274 of whom are covered under agreements
expected to be renegotiated during fiscal 1999, 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 or later,
depending on plan provisions. The portion of the premium cost borne 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.
The following illustrates the change in the Company's accumulated nonpension
post-retirement benefit obligation for fiscal years 1998 and 1997:
- -----------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- -----------------------------------------------------------------------------------------
Accumulated benefit obligation at beginning of year $ 142,675 $ 149,808
Service cost of benefits earned during the period 1,203 899
Interest cost on accumulated obligation 9,649 7,341
Plan amendments (5,885) --
Actuarial loss 13,524 656
Net benefits paid (15,947) (16,029)
- -----------------------------------------------------------------------------------------
Accumulated benefit obligation at end of year $ 145,219 $ 142,675
=========================================================================================
- --------------------------------------------------------------------------------
Alliant Techsystems 35
- --------------------------------------------------------------------------------
Changes in the Company's post-retirement plan assets are summarized as
follows for fiscal year 1998 and 1997:
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- -------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 4,797 $ 1,394
Actual return on plan assets (260) 181
Retiree contributions 4,279 4,500
Company contributions 16,875 19,251
Gross benefits paid (17,073) (20,529)
- -------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 8,618 $ 4,797
===========================================================================================
The Company's nonpension post-retirement benefit obligations are generally
not prefunded. The following table illustrates the status of retiree benefit
obligations as of March 31, 1998 and 1997.
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997
- -------------------------------------------------------------------------------------------
Funded status $(136,601) $(137,878)
Accrued contribution 1,504 --
Unrecognized net actuarial loss (gain) 7,966 (2,980)
Unrecognized prior service cost (5,747) (180)
- -------------------------------------------------------------------------------------------
Post-retirement benefit liability recognized in balance sheet $(132,878) $(141,038)
===========================================================================================
The components of the Company's net periodic post-retirement benefit costs
are as follows for fiscal years 1998, 1997, and 1996:
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Service cost of benefits earned during
the period $ 1,204 $ 899 $ 842
Interest costs of accumulated
post-retirement benefit obligation 9,649 7,506 7,603
Expected return on plan assets (315) (165) --
Amortization of unrecognized net loss -- 399 --
Amortization of unrecognized prior
service cost (318) (21) (25)
Curtailment gain -- -- (1,120)
- -------------------------------------------------------------------------------------------
Net post-retirement periodic benefit cost $ 10,220 $ 8,618 $ 7,300
===========================================================================================
The curtailment gain recognized in fiscal 1996 was the result of a reduction
in employment associated with restructuring programs.
The weighted-average assumptions used in the accounting for nonpension
post-retirement benefits were as follows:
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Discount rate used in determining
present values 7.25% 7.50% 7.50%
- -------------------------------------------------------------------------------------------
Expected long-term rate of return on
plan assets 6.00% 6.00% 6.00%
- -------------------------------------------------------------------------------------------
Medical trend rate 5.00% 5.00% 5.00%
===========================================================================================
For measurement purposes, a weighted average annual rate of increase of
approximately 5 percent in the per capital cost of covered health care benefits
was assumed for fiscal year 1999. The rate was assumed to remain at that level
thereafter.
The following illustrates the effect of a one-percentage point increase or
decrease in the assumed health care cost trend rate, as of March 31, 1998:
- -------------------------------------------------------------------------------------------
One Percentage One Percentage
Point Increase Point Decrease
- -------------------------------------------------------------------------------------------
Effect on service and interest
cost components $ 882 $ (815)
Effect on accumulated post-retirement
benefit obligation $ 8,019 $ (7,596)
===========================================================================================
10 Income Taxes
The components of the Company's income tax provision consist of:
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State - - -
Deferred - 12,115 16,801
- -------------------------------------------------------------------------------------------
Income tax provision $ - $12,115 $16,801
===========================================================================================
The items responsible for the differences between the federal statutory rate
and the Company's effective rate are shown as follows:
- -------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------------------
Income taxes computed at statutory
federal rate $23,864 $24,946 $26,729
State income taxes-net of federal impact 3,409 3,564 2,838
Permanent non-deductible costs 1,361 1,462 4,450
Unrecorded tax benefits (28,634) (17,857) (17,216)
- -------------------------------------------------------------------------------------------
Income tax provision $ - $12,115 $16,801
===========================================================================================
- --------------------------------------------------------------------------------
36 Alliant Techsystems
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 March 31 1998 1997
- -------------------------------------------------------------------------------
Deferred sales $ (29,243) $ (33,843)
Accelerated depreciation (60,417) (55,817)
- -------------------------------------------------------------------------------
Deferred income tax liabilities (89,660) (89,660)
- -------------------------------------------------------------------------------
Reserves for employee benefits 50,594 49,967
Restructuring and environmental reserves 9,960 21,108
Research tax credits 25,228 22,400
Net operating loss carryforwards 37,634 50,891
Other reserves 16,943 37,994
- -------------------------------------------------------------------------------
Deferred income tax assets 140,359 182,360
Valuation allowance (31,917) (73,918)
- -------------------------------------------------------------------------------
Net deferred income tax asset $ 18,782 $ 18,782
- -------------------------------------------------------------------------------
Current deferred income tax asset 38,280 40,259
Noncurrent deferred income tax liability (19,498) (21,477)
- -------------------------------------------------------------------------------
Net deferred income tax asset $ 18,782 $ 18,782
===============================================================================
During fiscal 1998, the deferred tax asset valuation allowance decreased by
$42,001. This decrease 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 upon 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 $94,085 at March 31, 1998. These carryforwards
begin to expire in 2008. Research tax credits available to offset future tax
payments are $25,228, and begin to expire in 2006.
11 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, 1998, 1997, and 1996 was $10,538, $11,830, and
$11,580, respectively.
Minimum rental commitments payable under noncancellable lease commitments
outstanding at March 31, 1998 are $9,120, $6,852, $5,365, $3,201, and $2,393,
respectively, for the fiscal years ending March 31, 1999, 2000, 2001, 2002, and
2003.
12 Restructuring Charges
The Company initiated a restructuring program in fiscal 1995 which resulted in a
fiscal 1995 fourth-quarter pre-tax charge of $35.6 million of which
approximately $12 million was a non-cash charge associated with 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. As a result of these changes, new management re-evaluated
business strategies for the Group, including its restructure plans and as a
result, the anticipated timing of certain severance and facility closure costs
pushed into fiscal 1997. Cash expenditures under this completed restructuring
program, primarily for employee-related costs, totaled approximately $3 million,
$8 million, and $11 million in fiscal 1998, 1997, and 1996, respectively. In the
fourth quarter of fiscal 1997, the Company reversed approximately $2 million of
this reserve against general and administrative costs, due to cost underruns
relative to the originally reserved amounts. See Note 15 for discussion of
Marine Systems Group facility closure costs incurred in fiscal 1998.
Additional restructure expenditures of approximately $12 million were made in
fiscal 1997, in connection with the Company's closure plan for certain
facilities acquired in the March 15, 1995, acquisition of the Aerospace
operations.
- --------------------------------------------------------------------------------
Alliant Techsystems 37
- --------------------------------------------------------------------------------
13 Stockholders' Equity and Redeemable Common Shares
Changes in stockholders' equity and redeemable common shares are summarized
below:
- --------------------------------------------------------------------------------
Redeemable Common Stock Additional Retained Pension Unearned Cost
(Amounts in thousands Common $.01 Par Paid-In Earnings Liability Compen- Treasury
except share data) Shares Shares Amount Capital (Deficit) Adjustment sation Shares Total
- ------------------------------------------------------------------------------------------------------------------------------------
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
Net income 68,183 68,183
Treasury shares received (589,363) (6) (195) (31,687) (31,888)
Pension liability adjustment (2,439) (2,439)
Exercise of stock options 281,455 3 (2,316) 11,368 9,055
Restricted stock grants 25,675 294 (1,332) 1,038
Amortization of restricted
stock 1,118 1,118
Redeemable common shares 44,979 (8) (44,971)
Other net issuances 56,206 1 304 287 2,341 2,933
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 44,979 12,855,511 $121 $201,728 $72,544 $(4,743) $(1,251) $(47,624) $265,754
- ------------------------------------------------------------------------------------------------------------------------------------
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 156,302 were available at March 31, 1998,
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. Restricted stock
issued to non-employee directors and certain key employees totaled 25,675,
27,000, and 19,200 for the fiscal years ended March 31, 1998, 1997, and 1996,
respectively. Restricted shares vest over periods of one to four years from the
date of award. As of March 31, 1998, net restricted shares of up to 15,700
shares were reserved for certain key officers which will vest upon achievement
of certain financial performance goals through fiscal 2000.
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS 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 to employees 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 123), the Company's net income and
earnings per share would have been reduced to the proforma amounts indicated
below:
- --------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- --------------------------------------------------------------
Net income As reported $68,183 $59,159 $47,801
Proforma $65,434 $57,032 $47,057
Basic EPS As reported $ 5.23 $ 4.55 $ 3.67
Proforma $ 5.01 $ 4.38 $ 3.61
Diluted EPS As reported $ 5.10 $ 4.41 $ 3.56
Proforma $ 4.89 $ 4.26 $ 3.50
================================================================================
- --------------------------------------------------------------------------------
38 Alliant Techsystems
- --------------------------------------------------------------------------------
A summary of the company's stock option activity is as follows:
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 896,333 $33.49 991,210 $30.23 852,433 $27.36
Granted 150,850 44.61 150,650 46.28 232,340 39.08
Exercised (281,455) 32.16 (157,023) 25.43 (80,223) 24.21
Canceled (33,946) 44.70 (88,504) 32.77 (13,340) 37.38
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 731,782 $35.74 896,333 $33.49 991,210 $30.23
Options exercisable at year end 440,964 30.34 532,815 29.64 482,210 25.80
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $20.18 $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 1998, 1997, and 1996 respectively:
- --------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- --------------------------------------------------------------------------------
Risk-free rate 6.1% 6.5% 6.1%
Expected volatility 30.4 31.5 31.5
Expected option life 7 years 7 years 7 years
================================================================================
A summary of stock options outstanding at March 31, 1998 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-$24 102,043 4.8 yrs $18.44 102,043 $18.44
$25-$30 215,000 12.0 yrs 30.00 215,000 30.00
$31-$40 131,534 6.8 yrs 37.47 79,680 37.49
$41-$52 279,205 8.5 yrs 45.54 44,241 46.55
$53-$63 4,000 10.0 yrs 61.17 -- --
================================================================================
On October 24, 1997, the Company entered into an agreement with Hercules
Incorporated (Hercules) providing for the disposition of the 3.86 million shares
of Company common stock held by Hercules. The shares represent the stock issued
by the Company in connection with the March 15, 1995, acquisition of the
Hercules Aerospace Company operations (Aerospace operations) from Hercules.
Under the agreement with Hercules, during the quarter ended December 28,
1997, the Company registered for public offering approximately 2.78 million of
the shares (previously unregistered) held by Hercules. The offering was
completed on November 21, 1997. No new shares were issued in the offering nor
did the Company receive any proceeds from the offering. The remaining 1.1
million shares then held by Hercules became subject to a put/call arrangement
under which Hercules can require the Company to purchase the shares in four
equal installments of 271,000 shares during each of the four calendar quarters
of 1998. The Company can likewise require Hercules to sell the shares to the
Company in four equal installments during each of the four calendar quarters of
1998. The prices for shares purchased under the put/call arrangement is equal to
the per share net proceeds realized by Hercules in the secondary public
offering, $55.32. During February 1998, the Company did repurchase the first
installment of 271,000 shares, for approximately $15 million, which is reflected
accordingly in these financial statements. In May, 1998, the Company repurchased
the second installment of 271,000 shares, for approximately $15 million. The
Company's present intention is to purchase the remaining shares covered by the
put/call arrangement although no definitive decision has been made to do so.
During early fiscal 1998, the Company completed a $50 million stock
repurchase program started in fiscal 1996. In connection with that program, the
Company made repurchases in fiscal 1998 of approximately 140,000 shares, for
approximately $6.0 million. Since 1996, repurchases of 1.3 million shares were
made under this buyback program, at an average cost per share of $39.12. On
October 22, 1997, the Company's Board of Directors authorized the Company to
repurchase up to an additional 1.0 million shares of its common stock. It is
currently expected that any purchases made under this buy-back plan would be
subject to market conditions and the Company's compliance with its debt
covenants. Effective November 10, 1997, the Company entered into an agreement to
amend
- --------------------------------------------------------------------------------
Alliant Techsystems 39
- --------------------------------------------------------------------------------
its Credit Agreement that provides the Company expanded flexibility with respect
to certain restricted payments, including payments for stock repurchases. As of
March 31, 1998, the Company's revised debt covenants permit it to expend up to
an additional $66.5 million in total, in connection with all share repurchases.
In connection with this new repurchase program, the Company has repurchased
165,300 shares through March 31, 1998, at a cumulative cost of $10.0 million, or
an average cost per share of $60.34. While it is currently the Company's
intention to continue stock repurchases under the program, there can be no
assurance that the Company will repurchase all or any portion of the remaining
shares or as to the timing or terms thereof.
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, 1998, the minimum pension liability in
excess of the unrecognized prior service cost was $4,743.
14 Contingencies
As a U.S. Government contractor, the Company is subjected to defective pricing
and cost accounting standards non-compliance claims by the U.S. 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 1998) 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, intellectual property,
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 (Aerospace
acquisition) in March 1995. The first 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 the acquired operations will be
assumed by the Company except for a few specific lawsuits and disputes including
the two qui tam lawsuits referred to above. On May 15, 1998 Hercules announced
that it had agreed to a settlement in the first qui tam lawsuit, subject to
approval by the court. Under terms of the purchase agreement with Hercules, the
Company's maximum combined settlement liability for both qui tam matters is
approximately $4 million, for which the Company has fully reserved. The Company
also agreed to reimburse Hercules for 40 percent of all legal costs incurred
after March 15, 1995, relating to these two actions. In the third qui tam
lawsuit, the Company received a partially unsealed complaint in March, 1997
alleging labor mischarging to the Intermediate Nuclear Force (INF) contract, and
other contracts. Damages are not specified in this civil suit. The Company and
Hercules have agreed to share equally the external attorney's fees and
investigative fees and related costs and expenses of this action until such time
as a determination is made as to the applicability of the indemnification
provisions of the purchase agreement. In March 1998, the Company and Hercules
settled with the Department of Justice on the portion of the complaint alleging
labor mischarging to the INF contract and agreed to pay $2.25 million each,
together with realtor's attorney's fees of $150 thousand, which was paid in
April 1998. As a result of this settlement, the Department of Justice will not
intervene in the remaining portion of the complaint. The Company has accrued for
such settlement costs in these financial statements.
The Company has also been served with a complaint in a civil action alleging
violation of the False Claims Act and the Truth in Negotiations Act. The
complaint alleges defective pricing on a government contract. Based upon
documents provided to the Company in connection with the action, the Company
believes that the U.S. Government may seek damages and penalties of
approximately $5 million.
- --------------------------------------------------------------------------------
40 Alliant Techsystems
- --------------------------------------------------------------------------------
The Company is a defendant in a patent infringement case brought by Cordant
Technologies (formerly Thiokol Corporation), which the Company believes is
without merit. The complaint does not quantify the amount of damages sought.
Through its analysis of an October 27, 1997, court filing, the Company now
believes that, based on an economist's expert testimony, Cordant Technologies
may seek lost profits, interest and costs of approximately $240 million. Even if
the Company is found liable, it believes that damages should be based upon a
reasonable royalty of less than $5 million. The court has bifurcated the trial,
with the liability issue being tried first and, if liability is found, the
damages issue being tried second. The liability issue was tried in January 1998,
after which the court requested, and the parties submitted, post-trial briefs. A
decision on the liability issue is not expected until several months after
submission of the parties' post-trial briefs. In the judgment of management, the
case will not have a material adverse effect upon the Company's future financial
condition or results of operations. However, there can be no assurance that the
outcome of the case will not have a material adverse effect on the Company.
During fiscal 1998, the Company has substantially completed the requirements
of the M117 Bomb reclamation contract. The contract contained a priced option,
having approximate contract value less than $5 million, whereby the customer
could require the reclamation of additional quantities, given that such option
be exercised within the terms and conditions of the contract. On August 4, 1997,
the customer informed the Company that it was exercising the option. The
Company, based on advise from its counsel, maintains that the option exercise
was invalid and has therefore not performed on the option. The Company is
currently appealing the validity of the option to the United States Court of
Appeals, based on the Company's continued belief that such exercise was invalid.
In late December 1997, the Company was informed by the customer that the Company
was being terminated for default on the contract. The Company expects the
appeals process to conclude in calendar 1998. Depending on the outcome of the
appeal, which will drive the outcome of the termination for default, management
currently estimates that the range of possible adverse impact to the Company's
operating earnings is from $0-$4 million.
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 such
matters during a specific period could have a material adverse effect on the
quarterly or annual operating results for that period.
15 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 Co. (Hughes) for $141.0 million in
cash. The sale was completed on February 28, 1997, resulting in a pretax gain to
the Company of approximately $27.2 million ($17.7 million, after tax), which the
Company recognized in the fourth quarter of fiscal 1997.
In connection with the sale, the Company began actions during fiscal 1998 to
close certain facilities (not sold to Hughes) that had previously been utilized
for Marine Systems Group contracts as well as for Defense Systems Group
activities. The sale of the Marine business and the resultant loss of production
volume within these facilities made continued use of these facilities
inefficient and cost prohibitive. Accordingly, as a direct result of the sale,
the Company booked reserves of approximately $21 million in March 1997 (by a
charge to the gain on disposal of discontinued operations) primarily for the
estimated costs of facility closure, severance costs, and anticipated litigation
costs associated with these activities. The Company has spent approximately $11
million to date on these facility closure and severance costs. As these facility
closure activities are now substantially complete, the Company reversed $10.1
million of these liabilities during the fourth quarter of fiscal 1998, resulting
in an additional gain on the disposal of the Marine business.
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 its foreign demilitarization businesses
(Demilitarization operations). Accordingly, the Company began actions to
transfer ownership of the joint ventures to the 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. In March
1998, as a result of the Company's continued consideration and evaluation of the
status of the underlying operations, as well as newly imposed export
restrictions in the Ukraine and the apparently increasing political instability
in the region,
- --------------------------------------------------------------------------------
Alliant Techsystems 41
- --------------------------------------------------------------------------------
Company management wrote off approximately $9.9 million, representing the
remaining recorded value of the Company's investment in that operation. The
Company maintains a letter of credit to support approximately $2.5 million of
bank borrowings of the Demilitarization operations.
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 gain (loss) from discontinued
operations are summarized as follows:
- -------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------
Sales $ -- $ 107,746 $ 186,677
Income from discontinued operations -- 7,415 5,071
Gain (loss) on disposal of assets 225 27,200 (10,400)
Income tax (expense) benefit -- (12,115) 4,706
- -------------------------------------------------------------------------------
Gain (loss) from discontinued operations $ 225 $ 22,500 $ (623)
- -------------------------------------------------------------------------------
16 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 March 1997, the Company
adopted the provisions of 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, all future anticipated ongoing
monitoring and maintenance costs associated with known remediation sites are
required to be accrued. Such costs were previously expensed as incurred. The
Company's adoption of the provisions of the SOP resulted in a non-cash charge of
$17.4 million in the fourth quarter of fiscal 1997. The charge was classified in
cost of sales expenses in the Company's consolidated income statement for the
fourth quarter ending March 31, 1997.
At March 31, 1998, the accrued liability for environmental remediation of
$31.9 million represents management's best estimate of the present value 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 a
receivable of $9.6 million, representing the present value of those
reimbursements at March 31, 1998. Such receivable primarily represents the
expected reimbursement of costs associated with the Aerospace operations,
acquired from Hercules in March 1995 (Aerospace acquisition), whereby the
Company generally assumed responsibility for environmental compliance at
Aerospace 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 indemnification
agreements. At March 31, 1998, the Company's accrual for environmental
remediation liabilities and the associated receivable for reimbursement thereof,
have been discounted to reflect the present value of the expected future cash
flows, using a discount rate, net of estimated inflation, of 4.5 percent. The
following is a summary of the Company's amounts recorded for environmental
remediation at March 31, 1998:
- --------------------------------------------------------------------------------
Accrued Environmental Costs -
Environmental Liability Reimbursement Receivable
- --------------------------------------------------------------------------------
Amounts (Payable)/Receivable $(40,929) $ 12,482
Unamortized Discount 9,043 (2,860)
Present Value of Amounts
(Payable)/Receivable $(31,886) $ 9,622
- --------------------------------------------------------------------------------
At March 31, 1998, the aggregate undiscounted amounts payable for
environmental remediation costs, net of expected reimbursements, are estimated
to be $3.4, $5.9, $1.5, $1.4, and $1.6 million for the fiscal years ending March
31, 1999, 2000, 2001, 2002, and 2003, respectively; estimated amounts payable
thereafter total $14.5 million. Amounts payable/receivable in periods beyond
fiscal 1999 have been classified as non-current on the Company's March 31, 1998
balance sheet. At March 31, 1998, the estimated discounted range of reasonably
possible environmental remediation costs is between $31.9 and $56.2 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.
- --------------------------------------------------------------------------------
42 Alliant Techsystems
- --------------------------------------------------------------------------------
17 Supplemental Cash Flow Information
Net income taxes paid in the fiscal years ended March 31, 1998, 1997, and 1996,
totaled $1,107, $107, and $56, respectively.
Amounts paid for interest were $27,400, $39,015, and $40,736 for
fiscal 1998, 1997, and 1996, respectively. Amounts received for interest in
those same periods were $3,090, $716, and $1,852, respectively. The significant
decrease in interest paid during fiscal 1998 compared to fiscal 1997, reflects a
reduction in long-term debt due to the $88.6 million loan prepayment made in
March 1997 with proceeds received from the sale of the Marine Systems Group. The
increase in interest received in fiscal 1998 compared to fiscal 1997 reflects
increased average cash balances also due to the proceeds received from the sale
of the Marine Systems Group.
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 receivables collected just prior to the closing of the
acquisition, which reduced assets and lowered the final purchase price.
18 Business Segment Information
The Company operates one business segment which is involved in the production of
various types of defense systems. The Conventional Munitions Group designs,
develops, and manufactures medium-caliber and tank ammunition, munitions
propellants, solid rocket propulsion systems, warheads, composite structures for
weapons systems, infrared decoy flares, and commercial gun powder. The Space and
Strategic Systems Group designs, develops, and manufactures solid rocket
propulsion systems for space launch vehicles, strategic missile systems, and
provides reinforced composite structures and components for military and
commercial aircraft and spacecraft. The Space and Strategic Systems Group also
provides operations and technical support for space launches. The Defense
Systems Group designs, develops, and manufactures smart munitions, fuzes,
electronic systems, and unmanned aerial vehicles. The Emerging Business Group
consisted of three primary business units during fiscal year 1998: Global
Environmental Solutions, Power Sources Center, and Advanced Technology
Applications. Effective April 1, 1998, certain of the Emerging Business Group
business pursuits were consolidated into other Company business groups. Certain
other non-core operations were phased out.
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 1998, approximately 82 percent of the Company's sales were derived from
contracts with the U.S. Government or U.S. Government prime contractors. The
Company's sales to U.S. Government prime contractors include sales to two
contractors, Lockheed Martin and Boeing, which comprise greater than 10 percent
of the Company's total revenues. During fiscal 1998, sales to Lockheed Martin
and Boeing, respectively, represented approximately 20 percent and 11 percent of
the Company's total revenues. Export sales to customers were $33.2 million,
$58.0 million, and $58.5 million in fiscal years 1998, 1997, and 1996,
respectively. The decrease in export sales in fiscal year 1998 compared to
fiscal 1997 primarily reflects reduced sales of medium caliber ammunition.
The following summarizes the Company's sales to the U.S. Government and
total sales by business group.
- -------------------------------------------------------------------------------
Years Ended March 31 1998 1997 1996
- -------------------------------------------------------------------------------
U.S. Government contract sales $ 879,056 $ 884,707 $ 887,502
- -------------------------------------------------------------------------------
Sales by business group:
Conventional Munitions $ 460,321 $ 483,044 $ 438,227
Space and Strategic Systems 369,996 339,510 316,629
Defense Systems 227,452 243,410 250,959
Emerging Business 27,206 41,448 30,985
Intercompany sales eliminations (9,469) (18,015) (16,195)
Total $1,075,506 $1,089,397 1,020,605
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Alliant Techsystems 43
- --------------------------------------------------------------------------------
19 Quarterly Financial Data (Unaudited)
Quarterly financial data is summarized for the years ended March 31, 1998 and
1997 as follows:
- --------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998 Quarter Ended June 29 Sep. 28 Dec. 28 Mar. 31
- --------------------------------------------------------------------------------------------------------------------
Sales $251,639 $266,954 $269,217 $287,696
Gross margin 43,720 45,829 48,065 56,655
Income from continuing operations 14,657 15,920 18,027 19,354
Basic earnings per share from continuing operations 1.13 1.22 1.37 1.49
Diluted earnings per share from continuing operations 1.10 1.18 1.33 1.45
- --------------------------------------------------------------------------------------------------------------------
Net income 14,657 15,920 18,027 19,579
Basic earnings per share 1.13 1.22 1.37 1.51
Diluted earnings per share 1.10 1.18 1.33 1.47
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
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
Basic earnings per share from continuing operations .58 .87 1.24 .12
Diluted earnings per share from continuing operations .57 .85 1.20 .11
- --------------------------------------------------------------------------------------------------------------------
Net income 9,904 12,827 17,225 19,203
Basic earnings per share .76 .99 1.32 1.47
Diluted earnings per share .74 .96 1.28 1.43
- ---------------------------------------------------------------------------------------------------------------------------
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 16).
The Company completed the sale of its Marine Systems Group to Hughes 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 15).
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.
Following is a summary of the Company's stock price for the past three years.
- -------------------------------------------------------------------------------
Common Stock Price
- -------------------------------------------------------------------------------
Quarter Ended High Low
- -------------------------------------------------------------------------------
March 31, 1998 $65.00 $55.00
December 28, 1997 65.69 53.75
September 28, 1997 69.00 51.44
June 29, 1997 52.81 40.50
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
- -------------------------------------------------------------------------------
The Company does not currently pay dividends on its common stock.
- -------------------------------------------------------------------------------
44 Alliant Techsystems
----------------------
Board of Directors
- --------------------------------------------------------------------------------
Richard Schwartz
Chairman of the Board of Directors 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.
Peter A. Bukowick
President and Chief Operating Officer, Alliant Techsystems. Joined Alliant in
1995 as Group Vice President, Aerospace Systems. Background includes 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.
Gilbert F. Decker
Consultant to high technology electronics and aerospace industries. Served as
Assistant Secretary of the Army, Research, Development, and Acquisition from
1994 to 1997. Also held Chief Executive Officer positions with Xeruca Holding,
Incorporated, and Penn Central Federal Systems Company. Bachelor's degree, The
Johns Hopkins University. Master's degree in industrial engineering, Stanford
University.
Thomas L. Gossage
Retired Chairman of the Board and Chief Executive Officer, Hercules,
Incorporated. Joined Hercules in 1988 as President, Hercules Specialty Chemicals
Co. Named Chairman and Chief Executive Officer of Hercules Incorporated in 1991.
Served with Monsanto Co. for 26 years prior to joining Hercules. Bachelor's
degree and master's degree in chemical engineering, Georgia Institute of
Technology.
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
Director and Chief Executive Officer, Bogen Communications International, Inc.,
a producer of sound processing equipment and telecommunications peripherals.
Also Principal and Chief Executive Officer, EK Management Corp. Previously
Principal and President, Active Management Group, and 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 military career, including
Vice Chairman, Joint Chiefs of Staff. Also has chaired and served on
intelligence and defense advisory panels, including National Defense Panel and
Defense Policy Board. 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 Partner, Sargeant Capital Ventures, L.L.C, an investment partnership.
Responsible for portfolio management. Formerly Managing and General Partner,
Gotham III. Director, St. Lawrence Seaway Corporation. Bachelor's degrees,
University of Pennsylvania College of Arts and Sciences, Wharton School of the
University of Pennsylvania.
Michael T. Smith
Chairman of the Board and Chief Executive Officer, Hughes Electronics
Corporation, a satellite and wireless communications company. Joined Hughes
Electronics in 1985 after the company was formed following the acquisition of
Hughes Aircraft Company by General Motors. Also served in a variety of financial
management positions with General Motors. Bachelor's degree, Providence College.
MBA, Babson College.
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Alliant Techsystems 45
----------------------
Corporate Officers
- --------------------------------------------------------------------------------
Corporate officers who serve as directors are listed under the Board of
Directors.
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.
Galen K. Johnson
Vice President and Treasurer. Joined Alliant in 1990 as Director of Treasury
Operations. Prior experience includes ten years in treasury, accounting, and tax
positions with Honeywell, and five years in public accounting with Arthur
Andersen. Chartered Financial Analyst and Certified Public Accountant.
Bachelor's degree, St. Cloud State University. MBA, University of St. Thomas.
Richard N. Jowett
Vice President, Investor Relations and Public Affairs. More than 25 years'
experience in finance and strategic planning. Joined Honeywell in 1971 and held
management positions with several business divisions. Also served as Director of
Cash Management for Honeywell. Named Director of Investor Relations for Alliant
in 1990. Bachelor's degree, Georgia Institute of Technology. MBA, Georgia State
University.
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 Group. Joined Hercules Aerospace Company in 1979 and held various
management positions, including Vice President, Business Development and
Washington Operations.
Mark L. Mele
Vice President, Strategic Planning. Extensive background in finance, marketing,
business development, and strategic planning. Joined Hercules Incorporated in
1979 and held posts with Aerospace Systems Group and Hercules Aerospace Company
before being named Director, Business Development, for Alliant in 1995.
Bachelor's degree, Tulane University. MBA, Georgia Institute of Technology.
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 more than 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.
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, Cordant
Technologies (formerly Thiokol Corporation), and Hercules Aerospace Company.
Bachelor's degree, University of Redlands.
Don L. Sticinski
Group Vice President, Defense Systems. Formerly Vice President, Operations,
Space and Strategic Systems Group. Joined Hercules Aerospace Company in 1980.
Held key program and operations management positions on all major space and
strategic propulsion programs. Bachelor's degree, U.S. Naval Academy. Master's
degree in systems engineering, University of Southern California. MBA,
University of Colorado.
Nick Vlahakis
Group Vice President, Conventional Munitions. Previously Vice President and
General Manager, Ordnance Division, Conventional Munitions Group. Background
includes engineering and management positions in composite structures and space
and tactical propulsion programs. Joined Hercules Aerospace Company in 1982.
Bachelor's degree, Northwestern University. Master's degree in mechanical
engineering, Carnegie-Mellon University. MBA, University of Utah.
William G. Wilson
Vice President, Technology. Thirty years' experience in engineering, research
and development, program management, and business development. Joined Hercules
Aerospace Company in 1968. Held key management positions in tactical propulsion,
space propulsion, and composite structures businesses. Bachelor's degree and
master's degree in mechanical engineering, Clemson University. Ph.D., mechanical
engineering, Virginia Polytechnic Institute.
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.
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46 Alliant Techsystems
-------------------------
Corporate Information
- --------------------------------------------------------------------------------
Corporate Headquarters
600 Second Street N.E., Hopkins, Minnesota 55343.
Telephone: 612-931-6000.
E-mail: 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 4, 1998,
at Alliant Techsystems Corporate Headquarters, 600 Second Street N.E., Hopkins,
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.
More than 10 million shares were traded in fiscal year 1998. The stock price
ranged from a low of $40 1/2 to a high of $69.
Transfer Agent and Registrar
Shareholder inquiries concerning the transfer of shares, lost certificates, or
address changes should be directed to Transfer Agent/Registrar, Chemical Mellon
Shareholder Services, 450 West 33rd Street, New York, New York 10001. Telephone:
800-851-9677 (toll free). Internet address: www.chasemellon.com
Investor Relations
Inquiries from shareholders, securities analysts, and others in the professional
investment community should be directed to Richard N. Jowett, Vice President,
Investor Relations and Public Affairs, 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., MN11-2015, 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, 1998, may do so by writing to the Vice President of Investor
Relations and Public Affairs.
Community Investment
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 information on the company's giving and volunteerism
programs in fiscal year 1998, write to Wayne E. Gilbert, Director of State and
Community Affairs, Alliant Techsystems, 600 Second Street N.E., MN11-2015,
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 Group
Wilmington, Illinois
DeSoto, Kansas
Elk River, Minnesota
Hopkins, Minnesota
New Brighton, Minnesota
Totowa, New Jersey
Socorro, New Mexico
Toone, Tennessee
Radford, Virginia
Rocket Center, West Virginia
Space and Strategic Systems Group
Vandenberg Air Force Base, California
Cape Canaveral, Florida
Clearfield, Utah
Magna, Utah
Tekoi, Utah
Defense Systems Group
Clearwater, Florida
Hopkins, Minnesota
New Brighton, Minnesota
Horsham, Pennsylvania
Hondo, Texas
Janesville, Wisconsin
Marketing and Sales
Huntsville, Alabama
Tucson, Arizona
Los Angeles, California
Ridgecrest, California
Colorado Springs, Colorado
Shalimar, Florida
Fort Benning, Georgia
Bettendorf, Iowa
Fort Knox, Kentucky
Sterling Heights, Michigan
Mt. Arlington, New Jersey
Dayton, Ohio
Fort Sill, Oklahoma
Arlington, Virginia
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Alliant Techsystems 47
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Conventional Munitions Group Sales as a Percent of Total
Company Revenues
- --------------------------------------------------------------------------------
Business Overview
Designer, developer, and manufacturer [PIE CHART APPEARS HERE]
of medium-caliber and large-caliber
ammunition, munitions propellants, 43%
tactical missile propulsion systems,
warheads, metal parts, composite Fiscal year 1998 sales:
structures for weapons systems, $465 million
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.
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Space and Strategic Systems Group Sales as a Percent of Total
Company Revenues
- --------------------------------------------------------------------------------
Business Overview
Designer, developer, and manufacturer [PIE CHART APPEARS HERE]
of solid rocket propulsion systems
for space and strategic applications 34%
and composite structures for military
and commercial aircraft and spacecraft.
Provider of operations and technical Fiscal year 1998 sales:
support services for space launches. $370 million
Operations in California, Florida,
and Utah. Approximately 1,800 employees.
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Defense Systems Group Sales as a Percent of Total
Company Revenues
- --------------------------------------------------------------------------------
Business Overview
Designer, developer, and manufacturer [PIE CHART APPEARS HERE]
of unmanned aerial vehicles, antitank
and demolition systems, precision-guided 23%
munitions, electro-mechanical and
electronic fuzes, shoulder-fired weapons Fiscal year 1998 sales:
systems, and batteries for military and $242 million
aerospace applications. Operations in
Florida, Minnesota, Pennsylvania, Texas,
and Wisconsin. Approximately 1,100 employees.
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Our Customers Our Competitive Strengths Our Major Programs and Products
[PIE CHART APPEARS HERE] [_] Design and production of conventional [_] 120mm training and tactical tank ammunition
ammunition, ordnance, composite [_] Medium-caliber training and tactical ammunition
[_] U.S. Army -- 69% structures, and metal parts [_] Rocket motors, warheads, and metal parts for AGM-
[_] Commercial -- 11% [_] Producer of high-quality ammunition, 130, AIM-9X, AMRAAM, Hellfire, Hydra-70,
[_] U.S. Air Force -- 11% rocket motors, flares, and pyrotechnics Maverick, TOW II, and other tactical missiles
[_] U.S. Navy -- 5% [_] Safe manufacture of high-energy [_] Propellants for tank and medium caliber
[_] International -- 4% propellants ammunition
[_] Rigorous process control standards [_] Gun powders for sporting
[_] Repeatable products reloaders and ammunition manufacturers
[_] Talented and dedicated workforce of [_] Composite structures for tactical aircraft and
3,100 employees weapons systems
[_] Infrared decoy flares for aircraft protection
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Our Customers Our Competitive Strengths Our Major Programs and Products
- ------------------------------------------------------------------------------------------------------------------------------------
[PIE CHART APPEARS HERE] [_] Automated, low-cost production of large [_] SRMU strap-on space boosters and launch
rocket motors with repeatable performance support services for Lockheed Martin Titan IV B
[_] U.S. Air Force -- 37% [_] Rigorous quality and process control systems rocket
[_] Commercial -- 27% to ensure safe, consistent manufacturing [_] GEM strap-on space boosters for the Boeing Delta
[_] U.S. Navy -- 18% [_] Full-service composite structures capability, family of launch vehicles
[_] NASD -- 15% including automated fiber-placed and filament- [_] Solid propulsion systems for Pegasus(R) and
[_] Other DoD -- 3% wound structures and Taurus(R) space launch vehicles
[_] Repeatable products [_] Solid propulsions system for Trident II (D5)
[_] Talented and dedicated workforce of 1,800 Fleet Ballistic Missile
employees [_] Cryogenic hydrogen tanks for Lockheed Martin X-33
Advanced Technology Demonstrator and Venture
Star(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
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Our Customers Our Competitive Strengths Our Major Programs and Products
- ------------------------------------------------------------------------------------------------------------------------------------
[PIE CHART APPEARS HERE] [_] Electro-mechanical and electronic fuze design [_] Objective Individual Combat Weapon (OICW)
and manufacture [_] Outrider(TM) Tactical Unmanned Aerial Vehicle
[_] U.S. Army -- 63% [_] Munitions design and systems integration (TUAV)
[_] U.S. Navy -- 11% [_] Design and integration of sensors and control [_] Sense and Destroy Armor (SADARM) munition
[_] Commercial -- 8% electronics for smart weapons [_] Electro-mechanical and electronic fuzes
[_] U.S. Marine Corps -- 8% [_] Battery development and manufacture [_] Tank Extended Range Munition -- Kinetic Energy
[_] U.S. Air Force -- 7% [_] Rigorous process control standards (TERM-KE)
[_] International -- 2% [_] Repeatable products [_] VOLCANO and Shielder munition systems
[_] Other DoD -- 1% [_] Talented and dedicated workforce of 1,100 [_] Lithium and polymer batteries for aerospace and
employees defense applications
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[LOGO OF ALLIANT TECH SYSTEMS APPEARS HERE]
600 Second Street N.E.
Hopkins, Minnesota USA 55343