SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 28, 1997 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-10582 ALLIANT TECHSYSTEMS INC. (Exact name of registrant as specified in its charter) DELAWARE 41-16726904 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 SECOND STREET N.E. HOPKINS, MINNESOTA 55343-8384 (Address of principal executive office) (Zip Code) (612) 931-6000 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of October 17, 1997, the number of shares of the registrant's common stock, par value $.01 per share, outstanding was 13,122,535 (excluding 741,078 treasury shares). PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Income Statements (Unaudited) (In thousands except QUARTERS ENDED SIX MONTHS ENDED per share data) ------------ ------------ ------------ ------------- September 28 September 29 September 28 September 29 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Sales $ 266,954 $ 247,648 $ 518,593 $ 477,821 Cost of sales 221,125 205,325 429,044 399,338 ---------- ---------- ---------- ---------- Gross margin 45,829 42,323 89,549 78,483 Operating expenses Research and development 2,636 4,344 4,674 7,144 Selling 8,801 8,040 19,049 15,218 General and administrative 12,127 9,475 22,271 19,263 ---------- ---------- ---------- ---------- Total operating expenses 23,564 21,859 45,994 41,625 ---------- ---------- ---------- ---------- Income from operations 22,265 20,464 43,555 36,858 Miscellaneous income (expense) (36) (96) 64 150 ---------- ---------- ---------- ---------- Earnings before interest and taxes 22,229 20,368 43,619 37,008 Interest expense (7,380) (9,106) (14,937) (18,386) Interest income 1,071 61 1,896 316 ---------- ---------- ---------- ---------- Income from continuing operations 15,920 11,323 30,578 18,938 Income from discontinued operations, net of income taxes 1,504 3,793 ---------- ---------- ---------- ---------- Net income $ 15,920 $ 12,827 $ 30,578 $ 22,731 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings per common and common equivalent share: Continuing operations $ 1.18 $ .85 $ 2.28 $ 1.42 Discontinued operations .11 .28 ---------- ---------- ---------- ---------- Net income $ 1.18 $ .96 $ 2.28 $ 1.70 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average number of common and common equivalent shares (thousands) 13,496 13,421 13,407 13,383 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- See Notes to Financial Statements Balance Sheets (Unaudited) ------------------ -------------- (In thousands except share data) September 28, 1997 March 31, 1997 ------------------ -------------- ASSETS Current assets: Cash and cash equivalents $ 86,608 $ 122,491 Marketable securities 378 378 Receivables 190,294 191,675 Net inventory 59,233 68,125 Deferred income tax asset 37,244 37,244 Other current assets 7,437 5,329 ----------- ----------- Total current assets 381,194 425,242 Net property, plant, and equipment 338,817 355,560 Goodwill 121,917 123,618 Deferred charges 10,107 10,925 Prepaid and intangible pension assets 82,896 80,569 Other assets 2,021 116 Net assets of discontinued operations 9,654 8,674 ----------- ----------- Total assets $ 946,606 $ 1,004,704 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 30,475 $ 29,024 Notes payable 931 2,302 Accounts payable 67,704 85,451 Contract advances and allowances 46,336 64,500 Accrued compensation 23,366 28,392 Accrued income taxes 7,049 9,156 Accrued restructuring and facility consolidation 11,776 23,414 Other accrued liabilities 77,298 83,958 ----------- ----------- Total current liabilities 264,935 326,197 Long-term debt 221,108 237,071 Post-retirement and post-employment benefits liability 139,868 143,373 Pension liability 33,408 37,079 Other long-term liabilities 37,902 42,192 ----------- ----------- Total liabilities 697,221 785,912 Stockholders' Equity: Common stock - $.01 par value Authorized - 20,000,000 shares Issued and outstanding 13,122,351 shares at September 28, 1997 and 13,081,538 at March 31, 1997 131 131 Additional paid-in-capital 247,698 248,612 Retained earnings 34,939 4,361 Unearned compensation (1,570) (1,324) Pension liability adjustment (2,304) (2,304) Common stock in treasury, at cost (741,262 shares held at September 28, 1997 and 782,075 at March 31, 1997) (29,509) (30,684) ----------- ----------- Total stockholders' equity 249,385 218,792 ----------- ----------- Total liabilities and stockholders' equity $ 946,606 $ 1,004,704 ----------- ----------- ----------- ----------- See Notes to Financial Statements Statements of Cash Flows (Unaudited) (In thousands) SIX MONTHS ENDED ------------------ ------------------ September 28, 1997 September 29, 1996 ------------------ ------------------ OPERATING ACTIVITIES Net income $ 30,578 $ 22,731 Adjustments to net income to arrive at cash used for operations: Depreciation 20,839 22,876 Amortization of intangible assets and unearned compensation 3,111 3,982 Loss (gain) on disposal of property 76 (90) Changes in assets and liabilities: Receivables 1,381 (3,776) Inventory 8,892 (989) Accounts payable (17,747) (24,780) Contract advances and allowances (18,164) 2,124 Accrued compensation (5,026) (3,632) Accrued income taxes (2,107) (206) Accrued restructuring and facility consolidation (11,638) (12,238) Accrued environmental liability (324) (1,335) Other assets and liabilities (20,487) (13,136) Operating activities of discontinued operations (980) (12,020) ---------- ---------- Cash used for operations (11,596) (20,489) ---------- ---------- INVESTING ACTIVITIES Capital expenditures (6,015) (11,655) Acquisition of business (2,000) Proceeds from disposition of property, plant, and equipment 158 2,380 Investing activities of discontinued operations (960) ---------- ---------- Cash used for investing activities (7,857) (10,235) ---------- ---------- FINANCING ACTIVITIES Net borrowings on line of credit 12,000 Payments made on long-term debt (14,512) (22,500) Net purchase of treasury shares (5,054) (2,341) Proceeds from exercised stock options 4,508 1,715 Other financing activities, net (1,372) (431) ---------- ---------- Cash used for financing activities (16,430) (11,557) ---------- ---------- Decrease in cash and cash equivalents (35,883) (42,281) Cash and cash equivalents - beginning of period 122,491 45,532 ---------- ---------- Cash and cash equivalents - end of period $ 86,608 $ 3,251 ---------- ---------- ---------- ---------- See Notes to Financial Statements Notes to Financial Statements (Unaudited) 1. In interim accounting periods, the Company absorbs operating expenses based upon sales volume using the anticipated relationship of such costs to sales for the year. Accordingly, the Company had $2.2 million and $4.8 million of underabsorbed operating expenses recorded in other current assets at September 28, 1997, and September 29, 1996, respectively. Unabsorbed expenses at September 28, 1997, will be absorbed over the remainder of fiscal 1998. 2. During the six months ended September 28, 1997, the Company made principal payments on its Bank Term Loan of $14.5 million. No borrowings were outstanding against its revolving line of credit at September 28, 1997. Letters of credit totaling $36.9 million reduced the available line of credit to $238.1 million. The remaining scheduled minimum loan payments on outstanding long-term debt are as follows: fiscal 1998, $14.6 million; fiscal 1999, $31.9 million; fiscal 2000, $31.9 million; fiscal 2001, $23.2 million; fiscal 2002 and thereafter, $150.0 million. 3. The major categories of other current and long-term accrued liabilities are as follows: PERIOD ENDING ---------------------------------------- SEPTEMBER 28, 1997 MARCH 31, 1997 --------------------------------------------------------------------------- Employee benefits and insurance 32,199 35,546 Legal accruals 21,266 25,041 Other accruals 23,833 23,371 --------------------------------------------------------------------------- Other accrued liabilities-current 77,298 83,958 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Litigation settlement--long-term -- 4,500 Environmental remediation liability 18,844 19,169 Deferred tax liability 18,462 18,462 Other long-term 596 61 --------------------------------------------------------------------------- Other long-term liabilities 37,902 42,192 --------------------------------------------------------------------------- --------------------------------------------------------------------------- The decrease in other accrued liabilities since March 31, 1997 primarily represents payments made for legal settlement and litigation matters, including the $4.0 million installment paid in April 1997 in connection with the Accudyne "qui tam" settlement, reached in June 1995. 4. Alternative minimum taxes of $2.1 million were paid during the six-month period ended September 28, 1997. No taxes were paid for the comparable period of the prior year. The effective income tax rate of 0 percent on continuing operations in the current six-month period reflects recognition and utilization of $30.6 million of available federal and state loss carryforwards (gross) for tax purposes. 5. During fiscal 1996, the Company began a program to repurchase up to $50.0 million of its common stock. During the six-months ended September 28, 1997, the Company repurchased an additional 139,600 shares for approximately $6.0 million. The Company has substantially completed its stock repurchase program, having repurchased approximately 1.26 million shares of common stock over the life of the program, at an average price of $39.09 per share, for an aggregate cost of $49.4 million. On October 24, 1997, the Company entered into an agreement with Hercules Incorporated providing for the disposition of the 3.86 million shares of Alliant 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, the Company will register for public offering approximately 2.82 million shares held by Hercules. No new shares will be issued in the offering, and the Company will not receive any of the proceeds of the offering. The remaining shares held by Hercules will be subject to a put/call arrangement under which Hercules can require the Company to purchase the shares in four equal installments during 1998, and the Company can require Hercules to sell the shares to the Company in four equal installments during 1998. The price for shares purchased under the put/call arrangement will be equal to the per share net proceeds realized by Hercules in the secondary public offering, plus simple interest at a rate of 6.25% per annum. The Company's present intention is to purchase the shares covered by the put/call arrangement, although no definitive decision has been made to do so. 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 on the open market. 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. The Company's debt covenants currently permit it to expend up to approximately $60 million in total, in connection with share repurchases. The Company intends to seek to amend its bank credit agreement covenants to permit the additional share repurchases. There can be no assurance that the Company will repurchase all or any portion of the shares or as to the timing or terms thereof. 6. Contingencies: As a U.S. Government contractor, the Company is subject 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 (1994 through 1997) will not materially exceed the amount provided in the accompanying balance sheets. 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. The Company records environmental remediation and the related ongoing monitoring and maintenance liabilities when the event obligating the Company has occurred and the cost is both probable and reasonably estimable. At September 28, 1997, the accrued liability for environmental remediation of $34.5 million represents management's best estimate of the probable and reasonably estimable costs related to the Company's known remediation obligations. It is expected that a portion of the Company's environmental costs will be reimbursed to the Company. As collection of those reimbursements is estimated to be probable, the Company has recorded amounts receivable of approximately $10.6 million at September 28, 1997. Such receivable primarily represents the expected reimbursement of costs associated with the operations acquired from Hercules Incorporated in March 1995 (Aerospace acquisition). As part of the Aerospace acquisition, the Company generally assumed responsibility for environmental compliance at the acquired facilities. It is expected that much of the compliance and remediation costs with respect to these facilities will be reimbursable through pricing adjustments in U.S. Government contracts, and that those environmental remediation costs not covered through such contracts will be covered by Hercules under various agreements. The Company's accrual for environmental remediation liabilities and the associated receivable for reimbursement have been discounted, and are recorded net of $10 million and $3 million, respectively, to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 5 percent. At September 28, 1997, the estimated discounted range of reasonably possible costs of study and remediation is between $34 million and $70 million. The Company does not anticipate that resolution of the environmental contingencies in excess of amounts accrued, net of recoveries, will materially affect future operating results. In future periods, new laws, rules and 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, changes in the extent and type of site utilization, the number of parties found liable at each site, and their ability to pay could significantly change the Company's estimates. 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 operations acquired from Hercules in March 1995. One involves allegations relating to submission of false claims and records, delivery of defective products, and a deficient quality control program. The second involves allegations of mischarging of work performed under government contracts, misuse of government equipment, other acts of financial mismanagement and wrongful termination claims. The government did not join in either of these lawsuits. Under the terms of the agreements relating to the Aerospace acquisition, all litigation and legal disputes arising in the ordinary course of 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. The Company has agreed to indemnify and reimburse Hercules for a portion of litigation costs incurred, and a portion of damages, if any, awarded in these lawsuits. Under terms of the purchase agreement with Hercules, the Company's maximum settlement liability is approximately $4 million, for which the Company has fully reserved at September 28, 1997. In the third QUI TAM lawsuit, the Company received a partially unsealed complaint in March 1997 alleging labor mischarging on a government contract. Damages are not specified. The government is currently investigating the claim and has not determined whether it will join the lawsuit. In late fiscal 1997, the Company was also served with two complaints in civil actions alleging violations of the False Claims Act and the Truth in Negotiations Act of which one has subsequently been settled during the quarter, without material impact to the Company. The remaining complaint alleges defective pricing on a government contract. Damages were not specified. While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of counsel, that the actions seeking to recover damages against the Company either are without merit, are covered by insurance and reserves, do not support any grounds for cancellation of any contract, or are not likely to materially affect the financial condition or results of operations of the Company, although the resolution of any of such matters during a specific period could have a material effect on the quarterly or annual operating results for that period. It is reasonably possible that management's current estimates of liabilities for the above contingencies could change in the near term, as more definitive information becomes available. 7. Interest paid during the three and six-month periods ended September 28, 1997 totaled $11.4 and $14.4 million, respectively. Interest paid during the three and six-month periods ended September 29, 1996 totaled $14.3 and $20.1 million, respectively. The Company has entered into interest rate swap agreements as hedging transactions to protect against increases in market interest rates on its floating rate bank financing. At September 28, 1997, the notional amount of interest rate swap agreements was $50.0 million. Under the swap agreements, the Company currently pays an average fixed rate of 6.3 percent and receives interest at a rate equal to three-month LIBOR (5.7 percent at September 28, 1997). These agreements have a remaining term of 9 months. During the quarter, 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 for a rate lock of 6.15% on the then most recently issued U.S. 10-year treasury note between now and March 1, 1999, on a notional amount of $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. 8. Effective April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected to continue following the guidance of Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" for measurement and recognition of stock-based transactions with employees, and therefore the adoption of SFAS No. 123 did not have a significant impact on the Company's financial position or results of operations. 9. Earnings per common share are computed based upon the weighted average number of common shares and common equivalent shares, consisting of the dilutive effect of stock options outstanding during each year. Earnings per common share assuming full dilution are substantially the same. In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share," which will require companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS that is currently required. The new standard requires additional informational disclosures and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997 (the Company's third quarter of fiscal 1998), and will require restatement of EPS for all prior periods reported. Under the requirements of SFAS No. 128, the Company's EPS would be as follows: QUARTERS ENDED --------------------------------------- SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 --------------------------------------------------------------------------- Basic earnings per share: Continuing operations 1.22 .87 Discontinued operations -- .12 --------------------------------------------------------------------------- Total Basic Earnings Per Share $1.22 $.99 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Diluted earnings per share: Continuing operations 1.18 .85 Discontinued operations -- .11 --------------------------------------------------------------------------- Total Diluted Earnings Per Share $1.18 $.96 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 10. Certain reclassifications have been made to the fiscal 1997 financial statements, as previously reported, to conform to the current classification. These reclassifications did not affect the net income from operations, as previously reported. 11. The figures set forth in this quarterly report are unaudited but, in the opinion of the Company, include all adjustments necessary for a fair presentation of the results of operations for the three and six month periods ended September 28, 1997, and September 29, 1996. The Company's accounting policies are described in the notes to financial statements in its fiscal 1997 Annual Report on Form 10-K. 12. On October 10, 1996, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 96-1 (SOP 96-1) entitled "Environmental Remediation Liabilities." The SOP provides authoritative guidance on specific accounting issues relative to recognition, measurement, display, and disclosure of environmental remediation liabilities. The Company adopted SOP 96-1 in the fourth quarter of fiscal 1997. 13. 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES Sales from continuing operations for the quarter ended September 28, 1997 totaled $267.0 million, an increase of $19.4 million, or 7.8 percent, from $247.6 million for the comparable quarter in the prior year. Conventional Munitions Group sales were $113.3 million for the quarter ended September 28, 1997, an increase of $8.4 million, or 8.0 percent, compared to $104.9 million in the comparable quarter of the prior year. The sales increase was primarily driven by a $12 million increase in tank ammunition sales due in large part to the resolution of technical issues on the M830A1 tactical tank round, which had delayed production and shipments through early fiscal 1997. These tank ammunition increases were partially offset by decreases in other programs. Space and Strategic Group sales were $95.9 million for the quarter ended September 28, 1997, an increase of $19.1 million, or 24.9 percent, compared to $76.8 million in the comparable quarter of the prior year. The current year quarter included a sales increase of $6 million from the composite structures business, due in large part to work performed on the X-33 contract, where the Company is building the liquid hydrogen fuel tanks for what could become the next-generation space launch vehicle. The period also included a $10 million sales increase in solid rocket propulsion systems, as the next generation medium-lift rocket program (Delta III) is ramped up for production, as well as increased Titan sales. Defense Systems Group sales were $51.7 million for the quarter ended September 28, 1997, a decrease of $11.3 million, or 17.9 percent, compared to $63.0 million for the comparable quarter of the prior year. The decrease was largely attributable to decreased revenues on antitank mines and artillery fire control systems, partially offset by increased revenues attributable to the Outrider-TM- program, awarded to the Company in the first quarter of fiscal 1997. Emerging Business Group sales were $8.5 million for the quarter ended September 28, 1997, compared to $9.0 million for the comparable quarter of the prior year. Sales from continuing operations for the six month period ended September 28, 1997 totaled $518.6 million, an increase of $40.8 million, or 8.5 percent, from $477.8 million for the comparable period of the prior year. Conventional Munitions Group sales for the six month period ended September 28, 1997 were $230.0 million, an increase of $34.0 million, or 17.3 percent, compared to $196.0 million in the comparable period of the prior year. The sales increase was attributable to increased tank ammunition sales, up approximately $44 million compared to the six month period of the prior year, due in large part to the resolution of technical issues on the M830A1 tactical tank round, which had delayed production and shipments through early fiscal 1997. Sales of the tactical round were approximately $29 million higher for the six month period ended September 28, 1997, when compared to the same period of the prior year. The tank ammunition sales increase was also partially driven by production increases of tank ammunition training rounds, up $15 million for the six month period ended September 28, 1997, compared to the comparable period of the prior year. These tank ammunition increases were partially offset by decreases in other programs. Space and Strategic Systems Group sales were $174.0 million for the six month period ended September 28, 1997, an increase of $18.9 million, or 12.2 percent, compared to $155.1 million in the comparable period of the prior year. The sales increase was primarily driven by increases in solid rocket propulsion systems and in the composite structures business, up approximately $19 million and $17 million, respectively, compared to the comparable period of the prior year. The sales increases in composite structures and solid rocket propulsion completely offset the absence in fiscal 1998 of $11 million of revenue recognized in the fiscal 1997 period on the Evolved Expendable Launch Vehicle (EELV) program, which the Company completed in fiscal 1997, as well as decreased Trident (D5) volume, down $9 million compared to the comparable six month period of the prior year. Defense Systems Group sales were $102.3 million for the six month period ended September 28, 1997, a decrease of $18.3 million, or 15.2 percent, compared to $120.6 million in the comparable period of the prior year. The decrease is largely attributable to decreased revenues on antitank mines and artillery fire control systems, partially offset by a $20 million increase in revenues attributable to the Outrider-TM- program. Emerging Business Group sales were $17.2 million for the six month period ended September 28, 1997, an increase of $.6 million or 3.6 percent, compared to $16.6 million for the comparable period of the prior year. Alliant Techsystems sales for fiscal 1998 are expected to be approximately $1 billion. GROSS MARGIN The Company's gross margin in the quarter ended September 28, 1997, was $45.8 million, or 17.2 percent of sales, compared to $42.3 million, or 17.1 percent of sales for the comparable quarter of the prior year. The slight improvement in margin, as a percent of sales, for the quarter ended September 28, 1997, is due to a combination of factors, the most significant being improved margins in core programs, including propulsion systems, composite structures, and ammunition programs, offset by increased costs in U.S. demilitarization activities and other Emerging Business pursuits. Gross margin for the six month period ended September 28, 1997, totaled $89.5 million, or 17.3 percent of sales, compared to $78.5 million, or 16.4 percent of sales for the comparable period of the prior year. The increase in gross margin for the six month period ended September 28, 1997 is reflective of increased sales volume, as well as sales mix. Gross margin improved, as a percent of sales, due to a combination of factors, the most significant being improved margins in core programs due to improved performance relative to the prior year, including rocket propulsion systems, composite structures, and ammunition programs, as well as the fact that gross margin results for the prior year six month period ended September 29, 1996 were impacted by cost growth due to technical issues on various tactical propulsion and fuzing programs. Fiscal 1998 gross margin, as a percentage of sales, is expected to be in the 17.5 - 18.5 percent range. OPERATING EXPENSES The Company's operating expenses for the quarter ended September 28, 1997 totaled $23.6 million, 8.8 percent of sales, compared to $21.9 million, or 8.8 percent of sales for the comparable quarter in the prior year. Reduced research and development costs, due to the completion in fiscal 1997 of spending associated with the Company's pursuit of EELV, were offset by increases in selling, general, and administrative costs due in part to the Company's costs incurred in fiscal 1998 in pursuit of the U.S. Government's Intercontinental Ballistic Missile (ICBM) Prime Integration program. Operating expenses for the six month period ended September 28, 1997, totaled $46.0 million, 8.9 percent of sales, compared to $41.6 million, or 8.7 percent of sales for the comparable period of the prior year. Reduced research and development costs, due to the completion in fiscal 1997 of $1.8 million spending associated with EELV, were offset by increases in selling, general, and administrative costs, due in large part to the Company's costs of approximately $5.6 million incurred in fiscal 1998, in pursuit of ICBM. Operating expenses for fiscal 1998, as a percentage of sales, are expected to be approximately 9.5 percent. INTEREST EXPENSE The Company's interest expense for the quarter ended September 28, 1997 was $7.4 million, a decrease of $1.7 million compared to $9.1 million for the comparable quarter in the prior year. Interest expense for the six month period ended September 28, 1997 was $14.9 million, a decrease of $3.5 million compared to $18.4 million for the comparable six month period of the prior year. The large decreases in the current year periods were driven by significantly reduced borrowings outstanding in the current year, as compared to the comparable periods of the prior year. Total borrowings outstanding (including notes payable, and the current and long-term portions of long-term debt) at September 28, 1997, were $134.0 million less than total borrowings outstanding at September 29, 1996, due to scheduled debt repayments, as well as an $88.6 million pre-payment of debt in late fiscal 1997, as a result of the sale of the Company's former Marine Systems Group. INTEREST INCOME Interest income for the quarter ended September 28, 1997 was $1.1 million, compared to $.1 million for the comparable quarter of the prior year, an increase of $1.0 million. Interest income for the six month period ended September 29, 1997 was $1.9 million, compared to $.3 million for the comparable period of the prior year. The increase is driven by interest income earned on increased average cash balances in the three and six-month periods ended September 28, 1997. INCOME TAXES The three and six month periods ended September 28, 1997, and the comparable periods ended September 29, 1996, reflect an effective income tax rate of 0 percent. This tax rate differs from statutory tax rates due to the utilization of available tax loss carry fowards. Recognition of such carryforwards is expected to continue to reduce future tax expense. It is currently expected that required payments for taxes in fiscal 1998 will continue to be reduced due to the aforementioned tax loss carryfowards. 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 via reductions in tax payments on future taxable income. NET INCOME Net income reported for the three and six month periods ended September 28, 1997, was $15.9 million and $30.6 million, respectively, compared to $12.8 million and $22.7 million for the comparable periods of the prior year. The increase was primarily due to a combination of increased sales volume, improved gross margins, and reduced interest costs in the current year periods ended September 28, 1997, as compared to the comparable periods of the prior year. LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION Cash used for operations totaled $11.6 million for the six month period ended September 28, 1997, a decrease in cash usage of $8.9 million, when compared with cash used for operations of $20.5 million in the comparable period of the prior year. The lower level of cash usage in the period ended September 28, 1997 was primarily the result of lower interest expense. During the six months ended September 28, 1997, the Company has spent approximately $11.7 million on its restructuring and facility consolidation programs. Approximately $8 million of this spending represented severance and facility consolidation costs associated with the Company's March, 1997 sale of its Marine Systems Group. At September 28, 1997, the remaining accrued restructure and facility consolidation liability primarily represents specifically identified reserves for employee severance, related benefits, and facility closure costs expected to be incurred in the upcoming year. Cash used for investing activities for the six month period ended September 28, 1997 was $7.9 million, a $2.4 million decrease from cash used for investing activities of $10.2 million in the comparable six month period of the prior year. This difference was primarily the result of higher capital expenditures in the prior year period, due to required tooling expenditures in connection with a rocket propulsion contract. Additionally, in connection with the Company's announced intention to acquire certain assets from a division of Motorola, Inc., including patent and technology rights related to military fuze production, the Company issued a $2.0 million deposit to the seller. While negotiations have not been finalized, the asset purchase is expected to be completed in the third quarter of fiscal 1998, for a purchase price currently expected to be less than $15 million. Additional consideration to the sellers may be required in the future, based on the financial results of the business acquired. Results from the proposed acquisition are not expected to have a material impact to the Company's fiscal year 1998 results. Net outlays for capital expenditures for the six month period ended September 28, 1997, totaled $6.0 million, or 1.2 percent of sales, a decrease as a percentage of sales, compared to capital expenditures of $11.7 million, or 2.4 percent of sales, in the comparable period of the prior year. The increased expenditures for the prior year period were primarily the result of increased tooling expenditures for a rocket propulsion contract. The Company expects expenditures, as a percentage of sales, to be approximately 2.0 percent of sales for fiscal 1998. At September 28, 1997, the Company had no borrowings outstanding against its bank revolving credit facility. Outstanding letters of credit of $36.9 million reduced amounts available on this facility to $238.1 million at September 28, 1997. During fiscal 1996, the Company began a program to repurchase up to $50.0 million of its common stock. During the six month period ended September 28, 1997, the Company repurchased an additional 139,600 shares for approximately $6.0 million. As of September 28, 1997, the Company has substantially completed its stock repurchase program, having repurchased approximately 1.26 million shares of common stock over the life of the program, at an average price of $39.09 per share, for an aggregate cost of $49.4 million. On October 24, 1997, the Company entered into an agreement with Hercules Incorporated providing for the disposition of the 3.86 million shares of Alliant common stock held by Hercules. The shares represent the stock issued by the Company in connection with the March 15, 1995 acquisition of the Aerospace Company operations from Hercules. Under the agreement with Hercules, the Company will register for public offering approximately 2.82 million shares held by Hercules. No new shares will be issued in the offering, and the Company will not receive any of the proceeds of the offering. The remaining shares held by Hercules will be subject to a put/call arrangement under which Hercules can require the Company to purchase the shares in four equal installments during 1998, and the Company can require Hercules to sell the shares to the Company in four equal installments during 1998. The price for shares purchased under the put/call arrangement will be equal to the per share net proceeds realized by Hercules in the secondary public offering, plus simple interest at a rate of 6.25% per annum. The Company's present intention is to purchase the shares covered by the put/call arrangement, although no definitive decision has been made to do so. 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 on the open market. 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. The Company's debt covenants currently permit it to expend up to approximately $60 million in total, in connection with share repurchases. The Company intends to seek to amend its bank credit agreement covenants to permit the additional share repurchases. There can be no assurance that the Company will repurchase all or any portion of the shares or as to the timing or terms thereof. The company's total debt (notes payable, current portion of long-term debt, and long-term debt) as a percentage of total book capitalization decreased to 50 percent on September 28, 1997, compared to 55 percent on March 31, 1997. This decrease reflects scheduled principal repayments made during fiscal 1998, as well as increased equity, due primarily to fiscal 1998 net earnings to date. In June 1995, the Company and claimants reached an agreement to settle the Accudyne "qui tam" lawsuit. Terms of the agreement include payments by the Company of $12.0 million, consisting of payments of $.5 million, $3.0 million and $4.0 million, made in June 1995, April 1996, and April 1997, respectively, and payment to be made of $4.5 million, plus interest at the three year Treasury Bill rate, in June 1998. In addition, legal costs of approximately $3.0 million have been paid. Accordingly, the Company recorded an unusual charge of $15.0 million as of the fourth quarter of the fiscal year ended March 31, 1995. The Company utilizes a significant number of computer software programs and operating systems across the entire organization, among these include applications used in manufacturing, product development, financial business systems, and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year "2000," some level of modification, or even possibly replacement of such applications will be necessary. The Company is currently in process of completing its identification of applications that are not "Year 2000" compliant. Given information known at this time about Company systems having such issues, coupled with the Company's on-going, normal course-of-business efforts to upgrade or replace business critical systems, as necessary, it is currently not expected that these "Year 2000" costs will have any material adverse impacts on the Company's liquidity or its results of operations. Based on the financial condition of the Company at September 28, 1997, the Company believes that future operating cash flows, combined with existing cash balances, and the availability of funding 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. 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 on cost-type contracts. RISK FACTORS Except for the historical information contained herein, certain of the matters discussed in this report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involves risks and uncertainties, including, but not limited to, changes in governmental spending and budgetary policies, governmental laws and other rules and regulations surrounding various matters such as environmental remediation, contract pricing, changing economic and political conditions in the United States and in other countries, international trading restrictions, outcome of union negotiations, customer product acceptance, continued access to technical and capital resources, 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. PART II -- OTHER INFORMATION ITEM 2. LEGAL PROCEEDINGS Prior to the acquisition of the Company's Kenvil, New Jersey facility from Hercules Incorporated ("Hercules") in March 1995 as part of the acquisition of the Hercules Aerospace Company division of Hercules (the "Acquisition"), the New Jersey Department of Environmental Protection ("NJDEP") informed Hercules that it was considering enforcement actions in connection with the Kenvil facility's alleged failure to comply with prior administrative consent orders and other alleged violations previously identified by the NJDEP. In October 1997 the registrant paid a penalty in the amount of $431,543 in connection with these alleged violations. The registrant believes that Hercules is responsible for substantially all of this penalty under agreements entered into in connection with the Acquisition, and the registrant has made a claim against Hercules for reimbursement of the amount paid. In September 1997 the registrant settled a civil action captioned UNITED STATES V. ALLIANT TECHSYSTEMS INC., which was filed in the U.S. District Court for the District of Minnesota on February 21, 1997, related to a contract for 120mm tank ammunition, and alleged violations of the False Claims Act, the Truth in Negotiations Act, and common law and equitable theories of recovery. The registrant, without admitting liability with respect to the charges, paid $228,750 in connection with the settlement. Incorporated herein by reference is note 6 of Notes to Financial Statements included in Item 1 of Part I of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On August 5, 1997, the registrant held its annual meeting of stockholders. (b) At the above annual meeting, the following persons were elected directors to serve until the next annual meeting of stockholders: Vincent J. Corbo; R. Keith Elliott, Thomas L. Gossage; Joel M. Greenblatt; Jonathan G. Guss; David E. Jeremiah; Gaynor N. Kelley; Joseph F. Mazzella; Daniel L. Nir; and Richard Schwartz. (c) At the above annual meeting, the stockholders voted upon the following proposals (1) election of directors; (2) ratification of the selection of Deloitte & Touche as independent accountants for the fiscal year ending March 31, 1998; (3) approval of the Alliant Techsystems Inc. 1997 Employee Stock Purchase Plan; and (4) a stockholder proposal. The votes cast on each of the above proposals were as follows: PROPOSAL NUMBER 1: FOR WITHHELD Vincent J. Corbo . . . . . . . 11,121,955 549,448 R. Keith Elliott . . . . . . . 11,125,035 546,368 Thomas L. Gossage. . . . . . . 11,118,924 552,479 Joel M. Greenblatt . . . . . . 11,120,136 551,267 Jonathan G. Guss . . . . . . . 11,128,843 542,560 David E. Jeremiah. . . . . . . 11,020,302 651,101 Gaynor N. Kelley . . . . . . . 11,135,779 535,624 Joseph F. Mazzella . . . . . . 11,014,943 656,460 Daniel L. Nir. . . . . . . . . 11,122,739 548,664 Richard Schwartz . . . . . . . 11,128,098 543,305 Broker non-votes: None PROPOSAL NUMBER 2: For. . . . . . . . . . . . . . 11,602,858 Against. . . . . . . . . . . . 36,242 Abstain. . . . . . . . . . . . 32,303 Broker non-votes . . . . . . . None PROPOSAL NUMBER 3: For. . . . . . . . . . . . . . 11,355,141 Against. . . . . . . . . . . . 292,531 Abstain. . . . . . . . . . . . 23,731 Broker non-votes . . . . . . . None PROPOSAL NUMBER 4: For. . . . . . . . . . . . . . 529,642 Against. . . . . . . . . . . . 9,678,244 Abstain. . . . . . . . . . . . 226,384 Broker non-votes . . . . . . . 1,237,133 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. EXHIBIT NO. DESCRIPTION OF EXHIBIT 11 Computation of Earnings Per Common and Common Equivalent Share 27 Financial Data Schedule (b) Reports on Form 8-K. During the quarterly period ended September 28, 1997, the registrant filed no reports on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIANT TECHSYSTEMS INC. Date: October 24, 1997 By: /s/ Charles H. Gauck Name: Charles H. Gauck Title: Secretary (On behalf of the registrant) Date: October 24, 1997 By: /s/ Scott S. Meyers Name: Scott S. Meyers Title: Vice President and Chief Financial Officer (Principal Financial Officer) ALLIANT TECHSYSTEMS INC. FORM 10-Q EXHIBIT INDEX The following exhibits are filed herewith electronically or incorporated herein by reference. The applicable Securities and Exchange Commission File Number is 1-10582. Exhibit Number Description of Exhibit Method of Filing - ------ ---------------------- ---------------- 11 Computation of Earnings Per Common and Common Equivalent Share. . . . . . . . . . . . . . . . Filed herewith electronically 27 Financial Data Schedule . . . . . . . . . . . . Filed herewith electronically