<PAGE>
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 December 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 January 31, 1998, the number of shares of the registrant's common
stock, par value $.01 per share, outstanding was 13,182,100 (excluding 681,513
treasury shares).
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Income Statements (Unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
(In thousands except December 28 December 29 December 28 December 29
per share data) 1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales $269,217 $300,785 $787,811 $778,606
Cost of sales 221,152 250,085 650,196 649,424
------------- ------------- ------------- -------------
Gross margin 48,065 50,700 137,615 129,182
Operating expenses
Research and development 2,890 4,625 7,564 11,769
Selling 10,085 8,978 29,134 24,196
General and administrative 11,033 12,026 33,304 31,289
------------- ------------- ------------- -------------
Total operating expenses 24,008 25,629 70,002 67,254
------------- ------------- ------------- -------------
Income from operations 24,057 25,071 67,613 61,928
Miscellaneous income 84 69 147 219
------------- ------------- ------------- -------------
Earnings before interest and taxes 24,141 25,140 67,760 62,147
Interest expense (6,943) (8,948) (21,880) (27,334)
Interest income 829 8 2,725 324
------------- ------------- ------------- -------------
Income from continuing operations 18,027 16,200 48,605 35,137
Income from discontinued operations, net of
income taxes 1,025 4,819
------------- ------------- ------------- -------------
Net income $ 18,027 $ 17,225 $ 48,605 $ 39,956
============= ============= ============= =============
Earnings per common share
Continuing operations $ 1.37 $ 1.24 $ 3.72 $ 2.70
Discontinued operations .08 .37
------------- ------------- ------------- -------------
Net income $ 1.37 $ 1.32 $ 3.72 $ 3.07
============= ============= ============= =============
Earnings per common share - assuming dilution
Continuing operations $ 1.33 $ 1.20 $ 3.62 $ 2.62
Discontinued operations .08 .36
------------- ------------- ------------- -------------
Net income $ 1.33 $ 1.28 $ 3.62 $ 2.98
============= ============= ============= =============
Average number of common shares (thousands) 13,155 13,029 13,067 12,994
============= ============= ============= =============
Average number of common and
dilutive shares (thousands) 13,539 13,472 13,443 13,411
============= ============= ============= =============
</TABLE>
See Notes to Financial Statements
<PAGE>
Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
(In thousands except share data) December 28, 1997 March 31, 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,340 $ 122,491
Marketable securities 378 378
Receivables 180,990 191,675
Net inventory 52,389 68,125
Deferred income tax assets 37,244 37,244
Other current assets 7,339 5,329
------------------ ------------------
Total current assets 324,680 425,242
Net property, plant, and equipment 333,785 355,560
Goodwill 132,564 123,618
Deferred charges 9,427 10,925
Prepaid and intangible pension assets 84,185 80,569
Other assets 21 116
Net assets of discontinued operations 9,402 8,674
------------------ ------------------
Total assets $894,064 $1,004,704
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 17,970 $ 29,024
Notes payable 2,302
Accounts payable 60,494 85,451
Contract advances and allowances 32,072 64,500
Accrued compensation 22,487 28,392
Accrued income taxes 7,032 9,156
Accrued restructuring and facility consolidation 8,623 23,414
Other accrued liabilities 85,414 83,958
------------------ ------------------
Total current liabilities 234,092 326,197
Long-term debt 186,357 237,071
Post-retirement and post-employment benefits liability 137,340 143,373
Pension liability 32,523 37,079
Other long-term liabilities 36,808 42,192
------------------ ------------------
Total liabilities 627,120 785,912
Contingencies
Redeemable common shares (1,084,000 shares, redeemable at
prescribed prices totaling $59,972.
Shares are redeemable in four equal
lots of 271,000 shares each during each
of the four calendar quarters of 1998). 59,972
Common stock - $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding 13,162,807 shares
at December 28, 1997 and 13,081,538
at March 31, 1997 121 131
Additional paid-in-capital 186,865 248,612
Retained earnings 52,966 4,361
Unearned compensation (1,285) (1,324)
Pension liability adjustment (2,304) (2,304)
Common stock in treasury, at cost (700,806 shares held at
December 28, 1997 and 782,075 at March 31, 1997) (29,391) (30,684)
------------------ ------------------
Total liabilities and stockholders' equity $894,064 $1,004,704
================== ==================
</TABLE>
See Notes to Financial Statements
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
(In thousands) NINE MONTHS ENDED
------------------------------------------
December 28, 1997 December 29, 1996
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 48,605 $ 39,956
Adjustments to net income to arrive at cash
provided by operations:
Depreciation 31,259 34,322
Amortization of intangible assets
and unearned compensation 4,530 6,029
Loss (gain) on disposal
of property 199 (380)
Changes in assets and liabilities:
Receivables 10,685 (10,181)
Inventory 15,736 11,073
Accounts payable (24,957) (6,233)
Contract advances and allowances (32,428) 964
Accrued compensation (5,905) (4,136)
Accrued income taxes (2,124) (147)
Accrued restructuring and facility consolidation (14,791) (17,184)
Accrued environmental liability (1,419) (3,755)
Other assets and liabilities (23,226) (16,947)
Operating activities of discontinued operations (728) (845)
------------------- -------------------
Cash provided by operations 5,436 32,536
------------------- -------------------
INVESTING ACTIVITIES
Capital expenditures (11,166) (18,044)
Acquisition of business (6,194)
Proceeds from disposition of property, plant, and equipment 1,197 2,682
Investing activities of discontinued operations (1,277)
------------------- -------------------
Cash used for investing activities (16,163) (16,639)
------------------- -------------------
FINANCING ACTIVITIES
Net borrowings on line of credit 10,000
Payments made on long-term debt (61,768) (33,750)
Net purchase of treasury shares (9,632) (918)
Proceeds from exercised stock options 8,278 2,058
Other financing activities, net (2,302) (444)
------------------- -------------------
Cash used for financing activities (65,424) (23,054)
------------------- -------------------
Decrease in cash and cash equivalents (76,151) (7,157)
Cash and cash equivalents - beginning of period 122,491 45,532
------------------- -------------------
Cash and cash equivalents - end of period $ 46,340 $ 38,375
=================== ===================
</TABLE>
See Notes to Financial Statements
<PAGE>
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 $1.3 million and $6.3 million of
underabsorbed operating expenses recorded in other current assets at
December 28, 1997, and December 29, 1996, respectively. Unabsorbed expenses
at December 28, 1997, will be absorbed over the remainder of fiscal 1998.
2. During the nine months ended December 28, 1997, the Company made principal
payments on its Bank Term Loan of $61.8 million. No borrowings were
outstanding against its revolving line of credit at December 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, $4.2 million; fiscal 1999, $18.3 million;
fiscal 2000, $18.3 million; fiscal 2001, $13.5 million; fiscal 2002 and
thereafter, $150.0 million.
3. The major categories of other current and long-term accrued liabilities are
as follows:
<TABLE>
<CAPTION>
PERIOD ENDING
-----------------------------------------------------
DECEMBER 28, 1997 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Employee benefits and insurance 32,054 34,765
Legal accruals 20,497 25,041
Other accruals 32,863 24,152
- ------------------------------------------------------------------------------------------------
Other accrued liabilities-current 85,414 83,958
================================================================================================
Litigation settlement--long-term -- 4,500
Environmental remediation liability 17,750 19,169
Deferred tax liability 18,462 18,462
Other long-term 596 61
- ------------------------------------------------------------------------------------------------
Other long-term liabilities 36,808 42,192
================================================================================================
</TABLE>
The slight increase in other accrued liabilities - current since March 31,
1997 is reflective of increased interest accruals due to the timing of
interest payments on the Company's long term debt. This increase in accrued
liabilities was partially offset by 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 nine-month
period ended December 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 nine-month period reflects recognition and
utilization of $48.6 million of available federal and state loss
carryforwards (gross) for tax purposes.
5. 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, during the quarter ended December 28,
1997 the Company registered for public offering approximately 2.82 million
shares (previously unregistered) held by Hercules. The offering was
completed on November 21, 1997. No new shares were issued in the
<PAGE>
offering nor did the Company receive any proceeds from the offering. The
remaining 1.1 million shares held by Hercules are 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 the first calendar quarter of
1998, the Company did repurchase the first 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. In total, repurchases of 1.3 million shares
were made, 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
December 28, 1997, the Company's revised debt covenants permit it to expend
up to an additional $77 million in total, in connection with all share
repurchases. In connection with this new repurchase program, the Company has
repurchased 75,400 shares through December 28, 1997, at a cumulative cost of
$4.4 million, or $57.99 per share. 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.
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 (1987 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 December 28, 1997,
the accrued liability for environmental remediation of $32.9 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
$10.1 million at December 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 approximately $10
million and $3 million, respectively, to reflect
<PAGE>
the present value of the expected future cash flows, using a discount rate,
net of estimated inflation, of 5 percent. At December 28, 1997, the estimated
discounted range of reasonably possible costs of study and remediation is
between $32 million and $67 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. 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 in this civil suit. 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.
The Company is a defendant in a patent infringement case brought by 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, Thiokol may seek lost profits, interest and costs of
approximately $260 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 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.
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 adverse effect on the quarterly or annual operating results for that
period.
<PAGE>
During fiscal 1998, the Company has substantially completed the contract
requirements of the M117 Bomb reclamation. The M117 Bomb 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 with 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 it was being terminated for default
on the contract. The Company continues to believe that its position is valid
and expects to conclude the appeals process 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.
In March of 1996, Company management elected to discontinue its ownership of
foreign demilitarization businesses ("demilitarization operations"). 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 that operation to the Ukrainian government, after
payment of a $19.8 million non-interest bearing long-term note receivable.
Management's best estimate of the value to be received for the net assets
transferred under the contractual obligation, after discounting for interest,
is recorded on the balance sheet as "Net assets of discontinued operations"
at December 28, 1997. The Company has also provided a letter of credit to
support approximately $2.5 million of bank borrowings of the demilitarization
operations. Amounts estimated and recorded as net assets of discontinued
operations include significant assumptions made with regard to the ultimate
proceeds expected to be received and the timing that such proceeds are
expected to be received. These estimates are subject to changes due to change
in circumstances and assumptions. Those changes could have a material impact
on the company's results in the period of any such change.
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 nine-month periods ended December 28, 1997
totaled $1.9 and $16.3 million, respectively. Interest paid during the three
and nine-month periods ended December 29, 1996 totaled $4.8 and $24.9
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 December 28, 1997, the notional amount of
interest rate swap agreements was $50.0 million. Under the swap agreements,
the Company pays an average fixed rate of 6.3 percent and receives interest
at a rate equal to three-month LIBOR (5.9 percent at December 28, 1997).
These agreements were terminated in January, 1998 with diminutive impact to
the Company.
During the second quarter of 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 for a rate lock of 6.15%
on the most recently issued U.S. 10-year treasury note through 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. 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 has adopted the
provisions of SFAS 128, as required under the Statement, in the quarter
ended December 28, 1997. Accordingly, the financial statements for the
periods ended December 28, 1997, 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, consisting of the dilutive effect of redeemable common stock and
<PAGE>
stock options outstanding during each period presented. The diluted EPS
calculation results in the same EPS that the Company has historically
reported.
In computing EPS from continuing operations for the three and nine month
periods ended December 28, 1997 and December 29, 1996, income from continuing
operations, as reported for each respective period, is divided by:
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
-------------------------------------------------------------------
12/28/97 12/29/96 12/28/97 12/29/96
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS:
- - Average Shares Outstanding 13,155 13,029 13,067 12,994
========================================================================================================
Diluted EPS:
- - Average Shares Outstanding 13,155 13,029 13,067 12,994
- - Dilutive effect of options and 384 443 376 417
redeemable common shares
- --------------------------------------------------------------------------------------------------------
Diluted EPS Shares Outstanding 13,539 13,472 13,443 13,411
========================================================================================================
</TABLE>
For the quarter ended December 28, 1997, the 1,084,000 common shares subject
to the put/call agreement with Hercules 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 (options
to purchase common shares) outstanding during the above periods indicated,
that were not included in the computation of diluted EPS due to the option
price being greater than the average market price of the common shares.
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 nine month
periods ended December 28, 1997, and December 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.
<PAGE>
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 December 28, 1997,
totaled $269.2 million, a decrease of $31.6 million, or 10.5 percent, from
$300.8 million for the comparable quarter of the prior year. Conventional
Munitions Group sales were $112.4 million for the quarter ended December 28,
1997, a decrease of $24.2 million, or 17.7 percent, compared to $136.6 million
in the comparable quarter of the prior year. The sales decrease was primarily
driven by higher tank ammunition sales in the prior year period. Space and
Strategic Group sales were $92.9 million for the quarter ended December 28,
1997, compared to $93.0 million for the comparable quarter of the prior year.
Sales from the Delta and Titan space propulsion programs increased approximately
$14 million. This increase was offset by the absence in the current year of
revenue recognized in fiscal 1997 on the completed Evolved Expendable Launch
Vehicle (EELV) program, decreased Trident (D5) volume and the absence of the
one-time $6 million fiscal 1997 sales increase reflecting a settlement with the
U.S. Government for reimbursement of costs incurred on the SICBM contract.
Defense Systems Group sales were $62.9 million for the quarter ended December
28, 1997, a decrease of $4.2 million, or 6.3 percent, compared to $67.1 million
for the comparable quarter of the prior year. The decrease was largely
attributable to a $4 million decrease in revenues on antitank mines programs, as
well as the absence in the current quarter of approximately $6 million in
revenues recognized in the comparable period of the prior year on several
completed programs. These decreases in revenues were partially offset by a $5
million increase in revenue on the Outrider(TM) unmanned vehicle program, as
well as increased revenue from the Sense and Destroy Armor (SADARM) munition, a
development program now in low-rate initial production. Emerging Business Group
sales for the quarter ended December 28, 1997, were $3.2 million, a decrease of
$7.5 million compared to $10.7 million for the comparable quarter of the prior
year. The decrease is primarily due to decreased revenues in the Global
Environmental Solutions (GES) business unit, driven by reduced ordnance
reclamation revenues, primarily on contracts to reclaim eight-inch gun
projectiles (Explosive "D") as well as reclamation of the M117 Bomb. The
Explosive "D" decrease is driven by schedule delays that have pushed out
production on the $4.1 million contract. Decreased revenues attributed to the
M117 Bomb reclamation contract is due to substantial completion of the basic
contract. During the quarter ended December 28, 1997, 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 will be consolidated into other Company business groups.
Certain other non-core operations will be phased out. This reorganization is not
expected to have a material impact on the Company's financial results.
Sales from continuing operations for the nine-month period ended December 28,
1997, totaled $787.8 million, an increase of $9.2 million, or 1.2 percent,
compared to $778.6 million in the comparable period in the prior year.
Conventional Munitions Group sales for the nine-month period ended December 28,
1997, were $342.4 million, an increase of $9.8 million, or 2.9 percent, compared
to $332.6 million in the comparable period of the prior year. The increase in
the fiscal 1998 period was primarily driven by M830A1 tactical tank ammunition
sales, up $11 million compared to the comparable period of the prior year, as
technical issues had delayed shipments until early in the third quarter of
fiscal 1997. Space and Strategic Systems Group sales for the
<PAGE>
nine-month period ended December 28, 1997, were $266.9 million, an increase of
$18.8 million, or 7.6 percent, compared to $248.1 million in the comparable
period of the prior year. The increase was primarily driven by increases in
solid rocket propulsion systems and in the composite structures business, up
approximately $27 million and $19 million respectively, compared to the
comparable period of the prior year. These sales increases completely offset the
absence in fiscal 1998 of $16 million of revenue recognized in the fiscal 1997
period on the EELV program, which the Company completed in fiscal 1997, as well
as decreased Trident volume, down $8 million compared to the comparable nine-
month period of the prior year. The results for the nine-month period ended
December 29, 1996 also included a one-time sales adjustment of approximately $6
million for the SICBM claim settlement. Defense Systems Group sales for the
nine-month period ended December 28, 1997 were $165.2 million, a decrease of
$22.5 million, or 12.0 percent, compared to $187.7 million in the comparable
period of the prior year. The sales decrease was largely attributable to
decreased revenues on antitank mines and mine systems, artillery fire control
systems, and fuzing programs, partially offset by a $25 million increase in
revenues attributable to the Outrider(TM) program. Emerging Business Group sales
for the nine-month period ended December 28, 1997 were $20.4 million, a decrease
of $6.9 million, compared to $27.3 million for the comparable period of the
prior year. The decrease is primarily driven by reduced ordnance reclamation
revenues on Explosive "D" due to schedule delays in fiscal 1998, as well as
decreases on the M117 Bomb reclamation contract, which was substantially
completed in the nine-month period ended December 28, 1997. Alliant Techsystems
sales for fiscal 1998 are expected to be approximately $1 billion.
GROSS MARGIN
The Company's gross margin in the quarter ended December 28, 1997 was $48.1
million, or 17.9 percent of sales, compared to $50.7 million or 16.9 percent of
sales for the comparable quarter of the prior year. The improvement in margin,
as a percent of sales, for the quarter ended December 28, 1997 was due to a
combination of factors, including improvement on propulsion systems and
composite structure programs, which were partially offset by cost growth in the
Company's Emerging Business ordnance reclamation contracts. Propulsion systems
margins improved approximately $6 million during the quarter driven primarily by
performance incentive fees earned during the quarter, as well as due to higher
sales volume compared to the comparable period in the prior year. Margin on
composite structures programs also improved during the quarter ended December
28, 1997, due to improved cost performance. These improvements were partially
offset by the absence in the fiscal 1998 quarter of a $6 million SICBM
terminated contract settlement in the fiscal 1997 period, and also 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. Additionally, during management's technical review of the program in
mid-December 1997, potential technical and safety issues were 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 the quarter ended December 28, 1997, the
Company wrote off $4 million, which represents the Company's best estimate of
unrecoverable contract costs. Based on information known at this time,
management's estimated range of
<PAGE>
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.
Gross margin for the nine-month period ended December 28, 1997 totaled $137.6
million, or 17.5 percent of sales, compared to $129.2 million or 16.6 percent of
sales for the comparable period of the prior year. The increase in gross margin
for the nine-month period ended December 28, 1997 is reflective of increased
sales volume as well as improved contract cost performance. Gross margin
improved, as a percent of sales, due to a combination of factors, the most
significant being improved margins on core programs. These improvements were
primarily driven by improved contract cost performance relative to the prior
year. Rocket propulsion systems margin improved approximately $12 million
during the nine-month period ended December 28, 1997, driven by increased volume
as well as by improved cost performance, partially due to performance incentive
fees earned during the period. Margin on composite structures programs also
improved during the nine month period ended December 28, 1997, primarily driven
by increased volumes, but also due to improved cost performance. Tank
ammunition margin also improved, as the resolution of technical issues in fiscal
1997 resulted in improved margins in the fiscal 1998 nine-month period. These
margin improvements were partially offset by the absence in the nine-month
period ended December 28, 1998 of a $6 million SICBM terminated contract
settlement fee received in the fiscal 1997 period, as well as by cost growth in
the Company's Emerging Business Group, driven primarily by deterioration on the
Explosive "D" contract of $6 million compared to the comparable period of the
previous year. Fiscal 1998 gross margin, as a percent 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 December 28, 1997 totaled
$24.0 million, 8.9 percent of sales, compared to $25.6 million, or 8.5 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, as a percent of
sales, 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
<PAGE>
(ICBM) Prime Integration program. The Company was notified in December that they
did not win this procurement.
Operating expenses for the nine-month period ended December 28, 1997 totaled
$70.0 million, 8.9 percent of sales, compared to $67.3 million, or 8.6 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
$6.9 million incurred in fiscal 1998 in pursuit of ICBM. Operating expenses for
fiscal 1998, as a percentage of sales, are expected to be approximately 9.0
percent.
INTEREST EXPENSE
The Company's interest expense for the quarter ended December 28, 1997 was $6.9
million, a decrease of $2.0 million compared to $8.9 million for the comparable
quarter in the prior year. Interest expense for the nine-month period ended
December 28, 1997 was $21.9 million, a decrease of $5.4 million compared to
$27.3 million for the comparable nine 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 December
28, 1997, were $169.2 million less than total borrowings outstanding at December
29, 1996, due to scheduled debt repayments, as well as pre-payments of $88.6
million in late fiscal 1997, as a result of the sale of the Company's former
Marine Systems Group, and a $40 million pre-payment in December, 1997.
INTEREST INCOME
Interest income for the quarter ended December 28, 1997 was $.8 million,
compared to no interest income for the comparable quarter of the prior year, an
increase of $.8 million. Interest income for the nine-month period ended
December 28, 1997 was $2.7 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 nine-month periods ended
December 28, 1997.
INCOME TAXES
The three and nine-month periods ended December 28, 1997, and the comparable
periods ended December 29, 1996, reflect an effective income tax rate of 0
percent. This tax rate differs from statutory tax rates due to the partial
recognition 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 and fiscal
1999 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.
<PAGE>
NET INCOME
Net income reported for the three and nine-month periods ended December 28,
1997, was $18.0 million and $48.6 million, respectively, compared to $17.2
million and $40.0 million for the comparable periods of the prior year. The
increase was primarily due to a combination of improved gross margins and
reduced interest costs in the current year periods ended December 28, 1997, as
compared to the comparable periods of the prior year.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
- -----------------------------------------------------
Cash provided by operations totaled $5.4 million for the nine-month period ended
December 28, 1997, a decrease in cash provided by operations of $27.1 million,
compared to cash provided by operations of $32.5 million in the comparable
period of the prior year. The reduced level of cash provided in the current
year period was driven by reduced contract advances, due primarily to the timing
of performance payments received in the Company's tank ammunition business area.
These payments, made in the third quarter of fiscal 1997, are currently expected
to be received in the Company's fourth quarter of fiscal 1998. During the nine
months ended December 28, 1997, the Company has spent approximately $14.8
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. Cash used for investing activities for the nine-month period ended
December 28, 1997 was $16.2 million, a $.5 million decrease from cash used for
investing activities of $16.6 million in the comparable nine-month period of the
prior year. 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 $6.0 million. Up to $9.0 million in
additional consideration may be required to be paid to the sellers in the
future, based on the magnitude of certain future program wins. 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 nine month period ended December
28, 1997, totaled $11.2 million, or 1.4 percent of sales, a decrease as a
percentage of sales, compared to capital expenditures of $18.0 million, or 2.3
percent of sales, in the comparable period of the prior year. The higher
expenditures in the prior year period were primarily the result of tooling
expenditures for the Delta III rocket propulsion contract. The Company expects
expenditures, as a percentage of sales, to be approximately 1.6 percent of sales
for fiscal 1998. Company management is currently evaluating anticipated capital
expenditures for fiscal 1999, and believes such costs will be over 3 percent of
sales. The increase over expected fiscal 1998 expenditures is primarily driven
by new business opportunities.
At December 28, 1997, the Company had no borrowings outstanding against its
$275.0 million bank revolving credit facility. Outstanding letters of credit of
$36.9 million reduced amounts available on this facility to $238.1 million at
December 28, 1997.
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.
<PAGE>
Under the agreement with Hercules, during the quarter ended December 28, 1997
the Company registered for public offering approximately 2.82 million 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 held by Hercules are 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 the first calendar quarter of 1998, the Company did
repurchase the first 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. In total, repurchases of 1.3 million shares were
made, 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 December
28, 1997, the Company's revised debt covenants permit it to expend up to an
additional $77 million in total, in connection with all share repurchases. In
connection with this new repurchase program, the Company has repurchased 75,400
shares through December 28, 1997, at a cumulative cost of $4.4 million, or
$57.99 per share. 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.
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 43
percent on December 28, 1997, compared to 55 percent on March 31, 1997. This
decrease reflects principal repayments made during fiscal 1998, including a $40
million prepayment in December, 1997, 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 amount of computer hardware and software
programs/ 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
computer hardware or software contains source
<PAGE>
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 and software
applications, as necessary, it is currently expected that these "Year 2000"
costs, the majority of which will occur in fiscal year 1999, will not have an
impact exceeding a range of $5-$10 million on the Company's liquidity or its
results of operations. These currently expected impacts have been incorporated
into the Company's operating plans for fiscal 1999.
Based on the financial condition of the Company at December 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.
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 (1987 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 December 28, 1997, the accrued
liability for environmental remediation of $32.9 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 $10.1 million at December 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 approximately $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 December 28, 1997, the estimated
discounted range of reasonably possible costs of study and remediation is
between $32 million and $67 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
<PAGE>
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. 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 in this civil suit. 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.
The Company is a defendant in a patent infringement case brought by 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, Thiokol may seek lost profits, interest and costs of
approximately $260 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 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.
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 adverse effect on the quarterly or
annual operating results for that period.
During fiscal 1998, the Company has substantially completed the contract
requirements of the M117 Bomb reclamation. The M117 Bomb 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 with 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
it was being terminated for default on the contract. The Company continues to
believe that its position is valid and expects to conclude the appeals process
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.
In March of 1996, Company management elected to discontinue its ownership of
foreign demilitarization businesses ("demilitarization operations"). 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
<PAGE>
transfer the Company's interests in that operation to the Ukrainian government,
after payment of a $19.8 million non-interest bearing long-term note receivable.
Management's best estimate of the value to be received for the net assets
transferred under the contractual obligation, after discounting for interest, is
recorded on the balance sheet as "Net assets of discontinued operations" at
December 28, 1997. The Company has also provided a letter of credit to support
approximately $2.5 million of bank borrowings of the demilitarization
operations. Amounts estimated and recorded as net assets of discontinued
operations include significant assumptions made with regard to the ultimate
proceeds expected to be received and the timing that such proceeds are expected
to be received. These estimates are subject to changes due to change in
circumstances and assumptions. Those changes could have a material impact on the
company's results in the period of any such change.
It is reasonably possible that management's current estimates of liabilities for
the above contingencies could change in the near term, as more definitive
information becomes available.
NEW ACCOUNTING RULES
- --------------------
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.
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 has adopted the
provisions of SFAS 128, as required under the Statement, in the quarter ended
December 28, 1997. Accordingly, the financial statements for the periods ended
December 28, 1997, and all periods prior, have been reported consistent with the
requirements of SFAS 128.
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
<PAGE>
restrictions, outcome of union negotiations, customer product acceptance,
continued access to technical and capital resources, timely compliance with Year
2000 technical requirements by the Company, as well as by its 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.
<PAGE>
PART II -- OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
(a) As previously reported, the registrant is a defendant in a patent
infringement case captioned "Thiokol Corporation vs. Alliant Techsystems Inc.
and Hercules Incorporated," which was filed in the United States District Court
for the District of Delaware on November 15, 1995, and which the registrant
believes is without merit. Registrant's motion for summary judgment in the case
has been denied by the court, which 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 post-trial briefs. A decision on the liability issue is not
expected until several months after submission of the parties' post-trial
briefs.
(b) As previously reported, in October 1997 the registrant paid a penalty
of $431,543 to the New Jersey Department of Environmental Protection in
connection with matters occurring at the registrant's Kenvil, New Jersey
facility prior to the registrant's acquisition of the facility (the
"Acquisition") from Hercules Incorporated ("Hercules") in March 1995. In
November 1997, Hercules reimbursed the registrant for $381,543 in response to
the registrant's claim for reimbursement under agreements entered into in
connection with the Acquisition.
(c) Incorporated herein by reference is note 6 of Notes to Financial
Statements included in Item 1 of Part I of this report.
ITEM 5. OTHER INFORMATION
(a) During the quarter ended December 28, 1997, the registrant's Board of
Directors approved the Alliant Techsystems Inc. LSAR Option Loan Program, a copy
of which is attached to this report as Exhibit 10.1, pursuant to which two
executive officers of the registrant, Charles H. Gauck and Daryl L. Zimmer, were
granted loans on November 5, 1997, in connection with which they executed
Promissory Notes and Stock Pledge Agreements in the forms attached to this
report as Exhibit 10.2. The amounts of the loans, which were to finance the
exercise of employee stock options, were $149,436.03 in the case of Mr. Gauck,
and $439,273.57 in the case of Mr. Zimmer, which amounts were repaid, with
interest, on December 10, 1997. No other loans have been, or may be, granted
under the Program.
(b) Attached to this report as Exhibit 99 is a list of the registrant's
directors and executive officers, as of the date of this report, which reflects
the following changes since the beginning of the quarter ended December 28,
1997: Deletions: Vincent J. Corbo, director; R. Keith Elliott, director; Hugo
Fruehauf, Group Vice President - Defense Systems; Roger P. Heinisch, Vice
President - Engineering; and Arlen D. Jameson, Vice President - ICBM Prime
Integration Program. Additions: Gilbert F. Decker, director; Michael T. Smith,
director; and Nicholas G. Vlahakis, Group Vice President - Conventional
Munitions.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description of Exhibit
- -------------- -----------------------------------------------------------
10.1 Alliant Techsystems Inc. LSAR Option Loan Program
10.2 Forms of Promissory Note and Stock Pledge Agreement
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
99 Alliant Techsystems Inc. Directors and Executive Officers
(b) Reports on Form 8-K.
During the quarterly period ended December 28, 1997, the registrant
filed the following report on Form 8-K:
Date of Report Items Reported
--------------------- -----------------------
October 27, 1997 Item 5. Other Events
Item 7(c). Exhibits
<PAGE>
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: February 6, 1998 By: /s/ Charles H. Gauck
Name: Charles H. Gauck
Title: Secretary
(On behalf of the registrant)
Date: February 6, 1998 By: /s/ Scott S. Meyers
Name: Scott S. Meyers
Title: Vice President and Chief
Financial Officer
(Principal Financial Officer)
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Method of Filing
- --------- ----------------------------------------------------------- ------------------------------
<S> <C> <C>
10.1 Alliant Techsystems Inc. LSAR Option Loan Program.......... Filed herewith electronically
10.2 Forms of Promissory Note and Stock Pledge Agreement........ Filed herewith electronically
11 Computation of Earnings Per Common Share................... Filed herewith electronically
27 Financial Data Schedule.................................... Filed herewith electronically
99 Alliant Techsystems Inc. Directors and Executive Officers . Filed herewith electronically
</TABLE>
<PAGE>
Exhibit 10.1
ALLIANT TECHSYSTEMS INC.
LSAR OPTION LOAN PROGRAM
1. PURPOSE. The purpose of the Alliant Techsystems Inc. LSAR Option Loan
Program (the "Program") is to provide financial assistance in connection with
the exercise by individuals (the "Participants") of stock options (the "LSAR
Options") awarded in connection with each holder's agreement to defer receipt of
payment (the "Deferred Amount") for his limited stock appreciation rights at the
time of the August 10, 1994 "change of control" of Alliant Techsystems Inc. (the
"Company").
2. LOAN PROVISIONS.
2.1 General. The Company shall extend a loan ("Loan") to a Participant
upon the exercise of an LSAR Option, subject to the terms and conditions set
forth in this Section 2, if the Participant so requests at the time the
Participant's LSAR Option is exercised. Notwithstanding anything to the
contrary herein, the Company shall not be required to make any Loan to a
Participant if the making of such Loan would (a) cause the Company to violate
any covenant or similar provision in any indenture, loan agreement or other
agreement, or (b) violate any applicable federal, state or local law.
2.2 Principal Amount. The maximum principal amount of any Loan shall be
the sum of (a) the exercise price of the LSAR Option and (b) the withholding
taxes payable upon exercise of the LSAR Option (including withholding taxes
payable with respect to the Deferred Amount), less (c) the Deferred Amount.
2.3 Term. The term (the "Term") of each Loan shall begin on the date of
the exercise of the LSAR Option (the "Exercise Date") and have a final maturity
date of March 31, 1998, at which time the unpaid principal amount of the Loan,
plus unpaid accrued interest thereon, as provided in Section 2.4, shall be due
and payable in full. A Participant may prepay any portion of a Loan at any
time. All prepayments shall first be applied to pay accrued interest through
the date of the prepayment and then to reduce the principal balance due on the
Loan.
2.4 Interest. Interest on the unpaid principal balance of each Loan
shall accrue from the Exercise Date until the Loan is paid in full at an
interest rate, compounded annually, equal to the higher of (a) six percent or
(b) the "applicable federal rate" in effect on the Exercise Date for loans of
such maturity, as determined by Section 1274(d) of the Internal Revenue Code.
Accrued interest shall not be payable during the Term, except in connection with
prepayments of any portion of a Loan, but shall be paid at the time any portion
of the unpaid principal amount of a Loan is repaid.
2.5 Full Recourse Promissory Note. Each Loan shall be evidenced by a
full recourse promissory note ("Note") in such form and containing such
provisions of the Program as the Company's legal counsel deems appropriate. The
obligations of each Participant under a Note shall be unconditional and absolute
and, without limiting the generality of the foregoing, shall not
<PAGE>
be released, discharged or otherwise affected by any change in the existence,
structure or ownership of the Company, or any insolvency, bankruptcy,
reorganization or other similar proceeding affecting the Company or its assets
or the market value of its common stock ("Common Stock") or any resulting
release or discharge of any obligation of the Company or the existence of any
claim, set-off or other rights which any Participant may have at any time
against the Company or any other person, whether in connection with the Program
or with any unrelated transactions, provided that nothing herein shall prevent
the assertion of any such claim by separate suit or counterclaim.
2.6 Security. Payment of the Note shall be secured by a pledge of all of
the shares of Common Stock (the "Shares") acquired by the Participant upon
exercise of the LSAR Option. The Participant shall effect such pledge by
delivering to the Company (a) the certificate(s) for the Shares, accompanied by
a duly exercised stock power in blank, (b) a properly executed stock pledge
agreement, and (iii) such other documents as may be required by the Company's
legal counsel. A Participant shall always have the right to sell Shares,
provided that (i) such sales are made in open market transactions, (ii) the
Company shall have a security interest in the proceeds of such sale to the
extent of the unpaid balance of the Loan, plus accrued interest thereon, and
(iii) the proceeds of such sale are used, to the extent necessary, to repay the
Loan, plus accrued interest thereon to the date of such repayment.
3. MISCELLANEOUS.
3.1 Administration. The Program shall be administered by the Personnel
and Compensation Committee (the "Committee") of the Company's Board of Directors
(the "Board"). Subject to the provisions of the Program, the Committee shall
interpret the Program and make such rules as it deems necessary for the proper
administration of the Program, shall make all other determinations necessary or
advisable for the administration of the Program and shall correct any defect or
supply any omission or reconcile any inconsistency in the Program in the manner
and to the extent that the Committee deems desirable to carry the Program into
effect. Any action taken or determination made by the Committee hereunder shall
be final and conclusive on all parties. The act or determination of a majority
of the Committee shall be deemed to be the act or determination of the entire
Committee. The Committee may consult with legal counsel, who may be legal
counsel to, or employed by, the Company, and such other advisors as the
Committee may deem necessary and/or desirable, and the members of the Committee
shall not incur any liability for any action taken in good faith in reliance
upon the advice of legal counsel or any other advisor.
3.2 Amendment and Termination of the Program. The Board may amend,
suspend or terminate the Program at any time; provided that no amendment,
suspension or termination of the Program may, without the consent of a
Participant, adversely affect such Participant's rights under the Program in any
material respect. The Program shall automatically terminate, without action by
the Board, if no Participant requests a Loan on or prior to the date of the
expiration of the LSAR Options.
<PAGE>
3.3 Employment Not Guaranteed. Nothing contained in the Program nor any
related document nor any action taken in the administration of the Program shall
be construed as a contract of employment or as giving a Participant any right to
be retained in the employment of the Company or any of its subsidiaries.
3.4 Applicable Law. The Program and any related documents shall be
governed in accordance with the laws of the State of Minnesota without regard to
the application of the conflicts of law provisions thereof.
3.5 Inurement of Rights and Obligations. The rights and obligations under
the Program and any related documents shall inure to the benefit of, and shall
be binding upon, the Company, its successors and assigns, and the Participants
and their beneficiaries.
3.6 Notices. All notices and other communications required or permitted to
be given under the Program shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed first class, postage prepaid, as
follows: (i) if to the Company, at its principal business address to the
attention of the Corporate Secretary, and (ii) if to a Participant, at the last
address of the Participant known to the sender at the time the notice or other
communication is sent.
<PAGE>
Exhibit 10.2
PROMISSORY NOTE
Date: November ___, 1997
On March 31, 1998, I promise to pay to the order of Alliant Techsystems
Inc. (the "Corporation") the sum of ____________________________________Dollars
($__________________) with interest at a rate per annum equal to the greater of
(a) 6% or (b) the "applicable federal rate" in effect on the date hereof for
loans of such maturity, as determined by Section 1274(d) of the Internal Revenue
Code.
There has been given as collateral for the payment of this Promissory
Note the number of shares of the Common Stock of the Corporation described in
the Stock Pledge Agreement between the Corporation and the undersigned dated as
of the date hereof.
This Promissory Note is evidence of an indebtedness incurred by the
undersigned in connection with a loan to the undersigned by the Corporation
pursuant to the terms of the Alliant Techsystems Inc. LSAR Option Loan Program
(the "Program"). This Promissory Note is subject to the terms and provisions
of, and is entitled to the benefits of, the Program.
Signature: _______________________________
Print Name: _______________________________
<PAGE>
STOCK PLEDGE AGREEMENT
(SECURITY AGREEMENT)
This Agreement, dated as of November ___, 1997, is governed by the
Uniform Commercial Code of the State of Minnesota.
Borrower's Name:
-------------------------------------------------
Address:
-------------------------------------------------
-------------------------------------------------
Secured Party: Alliant Techsystems Inc.
600 Second Street N.E.
Hopkins, MN 55343
1. In this Agreement, the words "I," "me," and "my" mean the Borrower,
and the words "you" and "your" mean the Secured Party.
2. I agree to give you a security interest in my property described
below, which is called "Collateral." The Collateral covered by your security
interest is the following number of shares of Alliant Techsystems Inc. common
stock, which are being issued in connection with my exercise of an employee
stock option, and the stock certificates for which you may direct your transfer
agent to deliver to you to hold: ______________. Any proceeds from the sale of
Collateral are also part of the Collateral.
3. By granting you a security interest in the Collateral, I intend to
provide you with security for payment of any amounts I may owe you under the
Promissory Note (the "Promissory Note") dated the same date as this Agreement,
which is evidence of my indebtedness to you in connection with a loan to me by
you under the Alliant Techsystems Inc. LSAR Option Loan Program (the "Program").
4. If I don't repay any amounts I may owe you under the Promissory Note
you can take the Collateral and sell it as described below. The rights and
obligations you and I have under this Agreement also include the rights and
obligations you and I have under the Promissory Note and the Program.
5. I agree to help you do all that is necessary to protect your security
interest in the Collateral.
6. I am using the money you are lending me to buy the Collateral. You
have what is called a "purchase money security interest" in the Collateral.
This may give you more protection against others who might claim the Collateral
is theirs.
<PAGE>
7. I own the Collateral and no one else has any interest in it or claim
against it. I agree not to give it as security to anyone else until I have paid
you all amounts I owe you under the Promissory Note.
8. I agree that without giving me any advance notice, you can require me
to pay all amounts I owe you under the Promissory Note at once if I break any
promise made under this Agreement or the Promissory Note.
9. I will be in default if:
- I don't pay any amount I owe you under the Promissory Note when it
is due.
- I break any promise I have made to you in this Agreement or the
Promissory Note.
- I become insolvent or file a petition in bankruptcy or a petition in
bankruptcy is filed against me.
- I grant a security interest in the Collateral to someone else.
- I die or become incompetent.
10. If I am in default, you can:
- sell as much of the Collateral as is necessary to provide you with
proceeds that will at least equal the amounts I own you under the
Promissory Note, or
- transfer to your ownership as much of the Collateral as has a fair
market value equal to the amounts I owe you under the Promissory
Note.
If the sale proceeds or fair market value of the Collateral transferred to your
ownership are not enough to pay all of the amounts I owe you under the
Promissory Note, I still will have to pay the difference, plus interest at the
rate described in the Promissory Note. If you sell or transfer to your
ownership less than all of the Collateral as described above, you will return to
me the remaining Collateral and any left over proceeds.
11. Because you excuse one default by me does not mean that later
defaults will be excused.
12. You also have the rights and remedies regarding possession, retention
and sale of the Collateral and use of the proceeds as are permitted by the
Uniform Commercial Code.
13. You are authorized to file a Financing Statement.
<PAGE>
14. I've read this Agreement and received a copy. I understand it
contains all my rights and responsibilities. No oral statements will be
binding. All changes must be approved by you in writing. My heirs and legal
representatives will also be responsible under this Agreement.
Date: November ___, 1997
ALLIANT TECHSYSTEMS INC.
- -------------------------------- By:
--------------------------------
Name: Name:
--------------------------- ------------------------------
Borrower Title:
-----------------------------
Secured Party
<PAGE>
Exhibit 11
Computation of Earnings per Common Share
(In thousands except per share amounts)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
December 28 December 29
1997 1996
------------------------------------------------- ------------------------------------------------
Income from Income from
Continuing Per Continuing Per
Operations Shares Share Operations Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------- ------------------ ---------- ----------------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income from continuing
operations available to
common stockholders $18,027 13,155 $1.37 $16,200 13,029 $1.24
========== ==========
EFFECT OF DILUTIVE
SECURITIES
Options and redeemable
common shares 384 443
------------------- ------------------ ----------------- ------------------
DILUTED EPS
Income from continuing
operations available to
common stockholders, plus
assumed conversions $18,027 13,539 $1.33 $16,200 13,472 $1.20
=================== ================== ========== ================= ================== ==========
NINE MONTHS ENDED
---------------------------------------------------------------------------------------------------
December 28 December 29
1997 1996
------------------------------------------------- ------------------------------------------------
Income from Income from
Continuing Per Continuing Per
Operations Shares Share Operations Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------- ------------------ ---------- ----------------- ------------------ ----------
BASIC EPS
Income from continuing
operations available to
common stockholders $48,605 13,067 $3.72 $35,137 12,994 $2.70
========== ==========
EFFECT OF DILUTIVE
SECURITIES
Options and redeemable
common shares 376 417
------------------- ------------------ ----------------- ------------------
DILUTED EPS
Income from continuing
operations available to
common stockholders, plus
assumed conversions $48,605 13,443 $3.62 $35,137 13,411 $2.62
=================== ================== ========== ================= ================== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q FILING
FOR NINE MONTHS ENDED 12/28/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> APR-01-1997 APR-01-1996
<PERIOD-END> DEC-28-1997 DEC-29-1996
<CASH> 46,340 122,491
<SECURITIES> 378 378
<RECEIVABLES> 180,990 191,675
<ALLOWANCES> 142 107
<INVENTORY> 52,389 68,125
<CURRENT-ASSETS> 324,680 425,242
<PP&E> 523,255 518,175
<DEPRECIATION> 189,470 162,615
<TOTAL-ASSETS> 894,064 1,004,704
<CURRENT-LIABILITIES> 234,092 326,197
<BONDS> 186,357 237,071
59,972 0
0 0
<COMMON> 121 131
<OTHER-SE> 206,851 218,661
<TOTAL-LIABILITY-AND-EQUITY> 894,064 1,004,704
<SALES> 787,811 778,606
<TOTAL-REVENUES> 787,811 778,606
<CGS> 650,196 649,424
<TOTAL-COSTS> 650,196 649,424
<OTHER-EXPENSES> 7,564 11,769
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,880 27,334
<INCOME-PRETAX> 48,605 35,137
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 48,605 35,137
<DISCONTINUED> 0 4,819
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 48,605 39,956
<EPS-PRIMARY> 3.72<F1> 3.07<F1>
<EPS-DILUTED> 3.62<F2> 2.98<F2>
<FN>
<F1>(1) Represents Basic EPS as defined under SFAS 128.
<F2>(2) Represents Diluted EPS as defined under SFAS 128.
</FN>
</TABLE>
<PAGE>
Exhibit 99
ALLIANT TECHSYSTEMS INC.
DIRECTORS AND EXECUTIVE OFFICERS
February 6, 1998
<TABLE>
<CAPTION>
Name (Age) Position
- ----------------------------- -------------------------------------------------
<S> <C>
Richard Schwartz (62) Director, Chairman of the Board, President and
Chief Executive Officer
Gilbert F. Decker (60) Director
Thomas L. Gossage (63) Director
Joel M. Greenblatt (40) Director
Jonathan G. Guss (38) Director
David E. Jeremiah (63) Director
Gaynor N. Kelley (66) Director
Joseph F. Mazzella (45) Director
Daniel L. Nir (37) Director
Michael T. Smith (54) Director
Peter A. Bukowick (54) Executive Vice President and Chief Operating
Officer
Robert E. Gustafson (49) Vice President - Human Resources
Galen K. Johnson (43) Vice President and Treasurer
William R. Martin (56) Vice President - Washington, D.C. Operations
Scott S. Meyers (44) Vice President and Chief Financial Officer
Paula J. Patineau (44) Vice President and Controller
Paul A. Ross (60) Group Vice President - Space and Strategic
Systems
Nicholas G. Vlahakis (49) Group Vice President - Conventional Munitions
Kristi Rollag Wangstad (43) Vice President - Public Affairs
Donald E. Willis (53) Group Vice President - Emerging Business; Vice
President - Strategic Planning
Daryl L. Zimmer (54) Vice President and General Counsel
Charles H. Gauck (59) Secretary
</TABLE>
