<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999 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 41-1672694
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Second Street N.E., Hopkins, Minnesota 55343-8384
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 931-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------- -----------------------
Common Stock, par value $.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of May 31, 1999, 10,227,721 shares of the registrant's voting common stock
were outstanding (excluding 3,635,892 treasury shares). The aggregate market
value of such stock held by non-affiliates of the registrant on such date was
approximately $848.3 million.
Documents Incorporated by Reference:
Portions of the Annual Report to stockholders for the fiscal year ended March
31, 1999 are incorporated by reference into Parts I, II and IV. Portions of the
definitive Proxy Statement for the 1999 Annual Meeting of stockholders are
incorporated by reference into Part III.
<PAGE>
EXPLANATORY NOTE
This Form 10-K/A is being filed to amend the registrant's Form 10-K for the
fiscal year ended March 31, 1999 to add thereto Exhibit 13, which was
inadvertently omitted from the Form 10-K as filed, due to an error by the
Company's EDGAR filing agent, which was just discovered by the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: September 9, 1999 By /s/ Charles H. Gauck
----------------------------------
Charles H. Gauck
Vice President and Secretary
<PAGE>
EXHIBIT 13
Alliant Techsystems
1999 Annual Report
[PHOTO OF ROCKET LAUNCH]
[LOGO OF ALLIANT TECHSYSTEMS]
Rising to the Next Plateau
<PAGE>
Alliant Techsystems
. Alliant Techsystems supplies aerospace and defense technologies to the U.S.
government and its allies and major prime contractors. ATK holds market
leadership positions in munitions, solid propulsion, composite structures, and
precision electronic fuzes. Operations are conducted within three businesses.
Conventional Munitions
The largest supplier of conventional ammunition and propellant to the U.S.
Department of Defense and one of the world's leading manufacturers of tactical
missile propulsion systems, warheads, and structures. A leading producer of
infrared decoy flares and commercial gunpowder.
Aerospace
A global leader in the development and production of large solid propulsion
rocket motors for space and strategic applications and a provider of space
launch services. A leading supplier of composite structures for military and
commercial aircraft, launch vehicles, and spacecraft.
Defense Systems
A leading designer and manufacturer of electro-mechanical and electronic fuzes,
antitank and demolition systems, precision-guided munitions, infantry weapons,
secure electronics subsystems, missile warning systems, unmanned aerial
vehicles, and batteries for military and aerospace applications.
Rising to The Next Plateau:
Forging Strong Partnerships With Leading Prime Contractors
ON THE COVER: On February 23, 1999, nine solid propulsion rocket motors
manufactured by Alliant Techsystems helped successfully launch a Boeing Delta II
rocket carrying three satellites - one for the U.S. Air Force and two for the
National Aeronautics and Space Administration (NASA). The launch was one of 11
successful Delta II missions we supported in fiscal year 1999, and one of 64
successful Delta II flights using our motors since we began manufacturing them
in 1989. Forging strong supplier partnerships with leading aerospace and defense
prime contractors like Boeing is a key strategy in our effort to take ATK to the
next plateau. Our partnership with Boeing expanded significantly in fiscal year
1999 with the award of new long-term contracts for production of Delta solid
rocket motors. We also were selected by Boeing to produce composite structures
for the new Boeing Delta IV family of rockets and boosters for three variants of
the Delta IV family.
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands except per share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 1,090,438 $ 1,075,506
Income from continuing operations, before income taxes 79,547 67,958
Income tax provision 11,932 --
Income from continuing operations 67,615 67,958
Gain on disposal of discontinued operations, net of income tax/1/ -- 225
Extraordinary loss on early extinguishment of debt, net of income tax/2/ (16,802) --
Net income 50,813 68,183
----------- -----------
Basic earnings per common share:
Continuing operations 5.67 5.21
Discontinued operations -- .02
Extraordinary loss/2/ (1.41) --
Basic earnings per common share 4.26 5.23
----------- -----------
Diluted earnings per common share:
Continuing operations 5.52 5.08
Discontinued operations -- .02
Extraordinary loss/2/ (1.37) --
Diluted earnings per common share 4.15 5.10
----------- -----------
Depreciation and amortization 45,885 47,517
Cash provided by operations 75,712 62,969
Capital expenditures 43,690 20,406
- ----------------------------------------------------------------------------------------------------------------
Total assets 894,318 908,309
Total debt to total capitalization 74% 43%
Common shares outstanding 10,284,530 12,855,511
Number of employees 6,110 6,550
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Reflects a gain on disposal of the Company's former Marine Systems Group (a
discontinued operation). See Note 15 to the financial statements.
2/ In fiscal year 1999, the Company completed the early extinguishment of its
long-term debt, resulting in an extraordinary loss of $16.8 million (net of $3.0
million tax benefit). See Note 7 to the financial statements.
1
<PAGE>
[PHOTO OF PAUL DAVID MILLER APPEARS HERE]
Chairman and Chief Executive Officer
16 June 1999
Dear Shareholder-
. Having served as your Chairman and CEO since 1 January 1999, I am pleased
to forward this annual report. The news is good. As both a military and business
leader, I look for certain attributes upon which to key success. You will see
that performance, accountability, and opportunity are referenced throughout this
report and more importantly in all that we do at ATK. Yes, we have changed the
logo and introduced calling our company ATK while not setting aside its legacy
as Alliant Techsystems.
. We have witnessed clearly that our national security environment has
changed markedly since "Alliant" was chartered. The calculation of global
security is evolving, and I believe for some time will be out of balance,
battered by the forces of political fragmentation and social upheaval. Kosovo
has been another in a series of such events. Global change and economic
realities have mandated a reshaping of our nation's defenses.
2
<PAGE>
. With this backdrop, the aerospace and defense community is also evolving,
and we are confident the business relationships as well as the products and
services ATK provide match future requirements. There will be increased
opportunities in preferred weapons. Emphasis will be on smart munitions and
precision capability. Our Objective Individual Combat Weapon (OICW),
alternatives to land mines, lightweight composite structures, Sense and Destroy
Armor (SADARM), and new electronic fuzes are such examples. We also see
opportunities in expanding our role in solid propulsion - for launching
reconnaissance and communications satellites and for tactical/strategic
missiles. The stage is set for achieving the next plateau of performance in all
business categories. In summary, I believe ATK is positioned well for our
nation's unfolding security environment of the 21st century.
. The following pages outline clearly our `99 activity. We appreciate greatly
your reviewing this report - all employees join me in thanking our shareholders
_____________
for your support.
You can count on us to do all we possibly can to increase returns on your
investment.
With respect
/s/ Paul David Miller
Admiral U.S.N (RET)
Paul David Miller
Chairman and Chief Executive Officer
[LOGO OF ALLIANT TECHSYSTEMS]
3
<PAGE>
Rising to the Next Plateau
Our Strategy for Growth and Profitability
Building on a Strong Foundation: People, Programs, Performance
. As we move to the next plateau, we are building on a strong foundation of
outstanding people, solid programs, and superior performance.
People - ATK people are the principal reason for our edge in technology,
engineering, and manufacturing. Within each of these disciplines, we are
fortunate to count among our employees some of our industry's most talented
people - a number of whom are featured on the following pages of this report.
Their skills and expertise represent not only a core capability for ATK, but in
many cases a critical asset for our nation.
We are building on this foundation to create a workforce that is second to
none in terms of expertise, commitment, and pride. To that end, we have
realigned our corporate structure to encourage ownership and an entrepreneurial
spirit among our employees and to create a stronger market identity for each of
our businesses.
As part of this realignment, we have created subsidiary companies at the
operating level, each of which is headed by its own president. This new
structure will allow our employees to gain a closer association with their
company and a stronger commitment to its success. Their charter is crystal
clear: to make their companies the best in the marketplace at what they do.
EXECUTIVE LEADERSHIP
Focused on performance, accountability and opportunity: executive leadership
partners Peter A. Bukowick, President and Chief Operating Officer, left, and
Scott S. Meyers, Vice President and Chief Financial Officer
[PHOTO APPEARS HERE]
Most importantly, the realignment will create an environment where the focus
is on performance, accountability, and opportunity. Superior performance from
every employee is essential to our continued success. Accountability -
committing to a plan to deliver superior performance - also is critical, as is
leadership's responsibility to provide opportunities for excellent performers to
rise to their next plateau.
Programs - Another cornerstone of our foundation is a strong portfolio of
businesses involved in important government and commercial programs. Our
companies hold leadership positions in munitions, solid propulsion, composite
structures, and precision fuzes, and are poised for additional growth in new
businesses such as secure electronics. Their programs span a wide spectrum of
technologies and capabilities, many of which are critical to America's national
security.
Common to all of our businesses are strong partnerships with our customers. We
are at the forefront of the Defense Department's acquisition reform movement,
partnering with our military customers on integrated product teams to work for
mission success. Our industry customers, including Boeing, Lockheed Martin, and
Raytheon - the nation's largest aerospace and defense prime contractors - view
us as a key strategic supplier.
Performance - Our clear focus on markets and customers has enabled us to deliver
superior performance. Fiscal year 1999 earnings per share from continuing
operations rose to $5.52 from $5.08 last year and $3.69 in fiscal year 1997,
marking the second successful year of our program to grow earnings per share at
an average annual rate of 15 percent. We have exceeded our earnings growth goal
during these first two years of the program.
EPS GROWTH
Earnings per share from continuing operations have exceeded our 15-percent
average annual EPS growth rate goal over the past two years.
Exclusive of non-recurring charges
99 $5.52
98 $5.08
97 $3.69
4
<PAGE>
Margin improvement has been a major factor in our performance. Operating
margins, which were in the mid-single digits four years ago, are moving steadily
toward the double-digit range. In fiscal year 1999, our operating margin rate
rose to 9.5 percent from 8.6 percent a year ago - the result of greater
operating efficiencies and improved program performance.
Orders reached a record $1.9 billion, up from $1.4 billion a year ago. The
increase, which was driven by large new orders for rocket motors, composite
structures, and tactical missile motors and warheads, brought year-end backlog
to a record $2.5 billion, up from $1.7 billion last year. Major awards included
long-term contracts from Boeing for Delta rocket motors and composite structures
that could potentially be worth up to $2.75 billion.
EXPANDING BACKLOG
Backlog at the end of fiscal year 1999 reached a record $2.5 billion, driven by
large orders for solid rocket motors, composite structures, and tactical
missile motors and warheads.
Billions of dollars
99 $2.5 billion
98 $1.7 billion
97 $1.4 billion
In recognition of our performance, our stock price rose 24 percent from $62-
3/4 per share at the beginning of fiscal year 1999 to $77-11/16 at the end of
the year. In calendar year 1998, our stock price increased 48 percent, sharply
outpacing both the Standard & Poor's 500 Index and the average share price
appreciation among the companies that make up our industry peer group. Over the
past five years, our share price has risen 324 percent, again topping the
Standard & Poor's 500 Index and our industry peer group.
Strategy for Growth: Focusing on the Top Line
. Top-line growth begins with market share expansion. We enjoy strong market
positions in our core businesses, but we think we can do even better by offering
greater value to our customers. One way to do so is to market our capabilities
and services through product and technology bundling, as we have done with
Raytheon Company. Under a recently announced strategic alliance with Raytheon,
we will supply tactical missile rocket motors and warheads to Raytheon Missile
Systems, and will work closely with Raytheon Missile Systems management to
pursue other mutually beneficial initiatives, technologies, and business
opportunities. We will be leveraging our technical excellence and product
breadth to pursue similar agreements with other customers.
Looking outside our current businesses and programs, we intend to diversify
our portfolio to gain greater exposure to additional funding sources within the
Department of Defense budget as well as other U.S. government agencies.
Growth in the international marketplace also figures prominently into our
future plans. Our goal is to increase international sales to 10 percent of our
total revenues - up from the current level of approximately 6 percent - by
expanding our product offering, seeking new customers, and forging strategic
alliances with international aerospace and defense companies. We will be
building on the momentum established in fiscal year 1999, when international
orders exceeded $100 million and the international portion of our total sales
doubled.
Expanding existing customer relationships is key. We want to be the supplier
of choice for our Department of Defense and industry customers. We made
significant strides in this area in fiscal year 1999.
We are extremely proud to have been named in March 1999 to an elite list of
Boeing suppliers that have earned Gold Preferred Supplier Certification status.
The certification reflects our performance in six important areas: management,
quality, delivery, cost, technology, and statistical process control. Of
Boeing's approximately 5,500 suppliers, only 631 are certified under the
Preferred Supplier program, and only one percent of those companies have
achieved the Gold level of certification. We hold the distinction of being the
only company to achieve the Gold level in its first certification attempt.
We recognize that in today's marketplace, growing by internal means alone will
not get us to where we want to be. We must look for mergers and acquisitions
that can help us reach the next plateau. In seeking potential candidates, we
will aim for:
. Businesses we understand. We want to remain an aerospace and defense
contractor, serving our customers in the Department of Defense and the
international defense community.
. Businesses with leading market positions or which provide diversification
into other funding sources within the Department of Defense and other U.S.
government agencies.
. Businesses that are uniquely positioned because of capital investment or
technology base requirements.
5
<PAGE>
Strategy for Profitability: Focusing on the Bottom Line
. Growing our profit margins to improve profitability is a key component of our
strategic plan. Our yardstick for measuring success in profit growth is our goal
to increase earnings per share at an average annual rate of 15 percent.
Our building block approach to earnings per share growth combines revenue
growth, margin improvement, and strategic cash deployment.
BUILDING BLOCKS FOR EPS GROWTH
[CHART APPEARS HERE]
We look to both our core businesses and new program opportunities for revenue
growth. We are strengthening our core businesses by leveraging technical
excellence, world-class manufacturing facilities, excellent customer
relationships, and strong program management teams to increase sales. The
success of this strategy is reflected in steady growth in backlog, which reached
a record level in fiscal year 1999. Our core businesses of solid propulsion,
munitions, and related products accounted for the bulk of the new orders last
year.
During the past year, we captured a number of new program opportunities,
including the U.S. Army's next-generation tactical tank ammunition round, rocket
motors for the National Missile Defense program, and the Hard Target Smart Fuze.
Together with the Objective Individual Combat Weapon (OICW) and secure
electronics products, these programs have the potential to add significantly to
our revenues in the future.
We also see opportunities for growth in our composite structures business,
which is benefiting from strong demand for composite materials for launch
vehicles, military and commercial aircraft, satellites, and weapons systems -
markets in which we are well positioned. In fiscal year 1999, we received new
contracts to produce structures for the Delta IV rocket, the BA 609 tiltrotor
aircraft, the F-22 fighter aircraft, and the JAVELIN anti-tank weapon.
Key strategies to increase margins include reducing manufacturing and overhead
expenses through facility consolidation and focusing on process control to
improve quality, product repeatability, and profitability. Our efforts in this
area are paying large dividends. We are within striking distance of achieving
our goal to raise operating margins to above 10 percent.
IMPROVING MARGINS
Operating profit as a percentage of sales
We are making rapid progress toward our goal to raise operating margins to
above 10 percent by reducing manufacturing and overhead expenses and focusing on
process control to improve quality, repeatability, and profitability.
Exclusive of non-recurring charges
99 9.5 percent
98 8.6 percent
97 7.6 percent
Strategically reinvesting cash in acquisitions, stock repurchases, or internal
investments is fundamental to earnings growth. In fiscal year 1999, we
concentrated on repurchasing our stock, buying back nearly three million shares,
including 1.68 million shares under a modified Dutch auction tender offer. An
additional 813,000 shares were purchased in a private transaction from Hercules
Incorporated. Open-market purchases since April 1998 have totaled 523,000
shares.
STRONG CASH FLOW
Cash flow as indicated by earnings before interest, taxes, depreciation, and
amortization (EBITDA) increased to $149 million in fiscal year 1999.
Millions of dollars
Exclusive of non-recurring charges
99 $149 million
98 $140 million
97 $137 million
Internal cash investments in fiscal year 1999 included facility upgrades to
accommodate new propulsion, composite structures, and fuze production business.
Our confidence in the future is due in large measure to the contributions made
by Dick Schwartz, who retired last year after nearly four years as Chief
Executive Officer. During that time, Dick worked tirelessly to transform ATK
into one of America's leading aerospace and defense contractors. We wish him the
best in his retirement.
6
<PAGE>
1999 Review of Operations
. People, programs, and performance all contributed to our outstanding successes
in fiscal year 1999. Within our three businesses - Conventional Munitions,
Aerospace, and Defense Systems - we saw strong financial performance, new long-
term contracts, major program milestones, and strategic alliances with key
customers. The following pages highlight these successes in words and pictures,
and feature some of the ATK people who made them happen.
Contents
8 ATK at a Glance
10 Conventional Munitions
14 Aerospace
18 Defense Systems
7
<PAGE>
ATK at a Glance
<TABLE>
<CAPTION>
Conventional Munitions Contribution to Company Performance Major Programs and Products
<S> <C> <C>
. Designer, developer, and . 120mm training and tactical tank ammunition
manufacturer of medium-caliber
and large-caliber ammunition, Percent of Total Company Sales: 44% . Medium-caliber training and tactical
munitions propellants, tactical ammunition
missile propulsion systems,
warheads, and metal parts, Fiscal Year 1999 Sales: $481 million . Rocket motors, warheads, and metal parts for
composite structures for AGM-130, AIM-9X, AMRAAM, Hellfire, Hydra-70,
aircraft and weapons systems, Percent of Total Company Backlog: 25% Maverick, TOW II, and other tactical missiles
infrared decoy flares, and
commercial gun powder. Year-End Backlog: $621 million . Propellants for artillery, tank, and medium-
Approximately 2,800 caliber ammunition
employees. Operating companies:
. Gun powders for sporting reloaders and
ALLIANT AMMUNITION AND POWDER ammunition manufacturers
COMPANY
Radford, Virginia . Composite structures for tactical aircraft
and weapons systems
ALLIANT MISSILE PRODUCTS COMPANY
Rocket Center, West Virginia . Infrared decoy flares for aircraft protection
ALLIANT KILGORE FLARES COMPANY . Modular Artillery Charge System (MACS)
Toone, Tennessee
<CAPTION>
Aerospace Contribution to Company Performance Major Programs and Products
<S> <C> <C>
. Designer, developer, and . Solid propulsion systems for Delta, Titan IV B,
manufacturer of solid rocket Percent of Total Company Sales: 36% Pegasus(R), and Taurus(R) space launch vehicles
propulsion systems for space and
strategic applications and Fiscal Year 1999 Sales: $395 million . Launch support services for Titan IV B
composite structures for military
and commercial aircraft, launch . Solid propulsion for Trident II (D5) Fleet
vehicles, and spacecraft. Provider Percent of Total Company Backlog: 66% Ballistic Missile and National Missile Defense
of operations and technical interceptor
support services for space Year-End Backlog: $1.625 billion
launches. Approximately 1,850 . Composite cryogenic hydrogen tanks for X-33
employees. Operating companies: Advanced Technology Demonstrator and
VentureStar(TM) Reusable Launch Vehicle
ALLIANT AEROSPACE COMPANY
Magna and Clearfield, Utah . Composite structures for Delta III and Delta IV
launch vehicles, and Joint Strike Fighter,
ALLIANT SOUTHERN COMPOSITES Boeing 767, C-17 and BA 609 aircraft
COMPANY
Iuka, Mississippi . Satellite system composite piece parts,
instrument benches, and dimensionally stable
assemblies
<CAPTION>
Defense Systems Contribution to Company Performance Major Programs and Products
<S> <C> <C>
. Designer, developer, and . Objective Individual Combat Weapon (OICW)
manufacturer of anti-tank and Percent of Total Company Sales: 20%
demolition systems, precision- . Sense and Destroy Armor (SADARM) munition
guided munitions, electro- Fiscal Year 1999 Sales: $224 million
mechanical and electronic fuzes, . Electro-mechanical and electronic fuzes
infantry weapons systems, unmanned Percent of Total Company Backlog: 9%
aerial vehicles, and batteries . Tank Extended Range Munition - Kinetic Energy
for military and aerospace Year-End Backlog: $214 million (TERM-KE)
applications. Approximately 1,200
employees. Operating companies: . Shielder and VOLCANO munition systems
ALLIANT PRECISION FUZE COMPANY . Secure electronics subsystems
Janesville, Wisconsin
. AN/AAR-47 Missile Warning System
ALLIANT INTEGRATED DEFENSE
COMPANY . Outrider(TM) Tactical Unmanned Aerial Vehicle
Hopkins, Minnesota
. Lithium and polymer batteries for aerospace and
ALLIANT DEFENSE ELECTRONICS SYSTEMS, defense applications
INC.
Clearwater, Florida
ALLIANT POWER SOURCES COMPANY
Horsham, Pennsylvania
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Operating Highlights Customers Competitive Strengths
<S> <C> <C>
. Selected to develop new tactical tank . U.S. Army - 66% . Design and production of conventional
round under contract valued at $30 million. ammunition, ordnance, composite
. U.S. Air Force - 13% structures, and metal parts
. Awarded $397 million contract for tank . High-quality ammunition, rocket
training ammunition. . Commercial - 9% motors, flares, and pyrotechnics
. Selected to supply composite tubes for JAVELIN . U.S. Navy - 8% . Safe manufacture of high-energy
anti-tank weapon under a contract worth $45 million. propellants
. International - 4% . Rigorous process control standards
. Chosen to produce composite component for F-22
aircraft. Contract value with options: $175 million. . Repeatable products
. Selected by Raytheon to be strategic supplier of . Talented and dedicated workforce
missile rocket motors and warheads. Separate product
agreement includes orders that will total at least $235
million.
<CAPTION>
Operating Highlights Customers Competitive Strengths
<S> <C> <C>
. Awarded contracts worth up to approximately $1.75 . U.S. Air Force - 43% . Automated, low-cost production of
billion for Boeing Delta rocket boosters. large rocket motors with repeatable
. Commercial - 32% performance
. Received $12 million contract from Boeing to develop . U.S. Navy - 14% . Rigorous quality and process control
booster for National Missile Defense interceptor. systems to ensure safe, consistent
. NASA - 8% manufacturing
. Selected to build composite structures for new Boeing
Delta IV family of launch vehicles. Estimated contract . Other DoD - 3% . Full-service composite structures
value is up to $1 billion. capability, including automated fiber-
placed and filament-wound structures
. Selected to supply composite fuselage structures for BA
609 tiltrotor aircraft under a contract worth . Repeatable products
approximately $80 million including options.
. Talented and dedicated workforce
. Opened new composite structures manufacturing facility
in Iuka, Mississippi.
. Successfully supported one Lockheed Martin Titan IV B
mission in fiscal year 1999 and three missions in early
fiscal year 2000.
<CAPTION>
Operating Highlights Customers Competitive Strengths
<S> <C> <C>
. Awarded contracts worth $175 million with options to . U.S. Army - 46% . Electro-mechanical and electronic
upgrade the AN/AAR-47 Missile Warning System. fuze design and manufacture
. International - 20%
. Received $16 million contract to develop Hard Target . Munitions design and systems
Smart Fuze. Options could increase value to $54 million. . Commercial - 13% integration
. Design and integration of sensors
. Awarded $7 million contract to produce DSU-33B/B . U.S. Navy - 8% and control electronics for smart
proximity sensors for bombs. Options could bring weapons
value to $30 million. . U.S. Air Force - 7%
. Won $5 million contract to demonstrate alternative to . Battery development and manufacture
anti-personnel landmines. . U.S. Marine Corps - 4%
. Rigorous process control standards
. Awarded $7 million contract to manufacture world's . Other DoD - 2% and safe operations
smallest lithium reserve battery.
. Repeatable products
. Awarded two contracts for development of secure
electronics subsystems. . Talented and dedicated workforce
</TABLE>
9
<PAGE>
[PHOTO APPEARS HERE]
Group Vice President
Nick Vlahakis
Operating Companies
Alliant Ammunition and Powder Company
Alliant Missile Products Company
Alliant Kilgore Flares Company
Conventional Munitions
. Conventional Munitions made significant progress on a number of fronts in
fiscal year 1999, led by growth in sales and orders. We also successfully
undertook an aggressive effort to drive down costs through plant consolidations,
superior technical performance, and rigorous process control.
. Orders rose substantially over last year, resulting in record backlog. New
business included contracts for production of tank training ammunition and
development of the U.S. Army's next generation tactical tank round, which
together could be worth nearly $600 million over the next five years if all
options are exercised. Orders for rocket motors and warheads and composite
structures for aircraft and weapons systems also contributed to our growth.
. During fiscal year 2000, we will continue to focus on our performance turn-
around. Our top priorities for the year are market share and profit growth.
Consolidation activity will include completion of the move of our medium-caliber
ammunition integration operations from Joliet, Illinois to Radford, Virginia,
and our metal parts machining operations from Totowa, New Jersey to Rocket
Center, West Virginia. In addition, we are pursuing important new business
opportunities in small arms ammunition, medium-caliber ammunition, and rocket
propellant.
. With the help of a dedicated and talented workforce committed to providing
best value, technical excellence, and customer satisfaction, I am confident
Conventional Munitions can continue its winning performance in fiscal year 2000.
/s/ Nick Vlahakis
Nick Vlahakis
10
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Ammunition and Powder Company
Patrick S. Nolan, President
[PHOTO APPEARS HERE]
About the Company
. Headquarters: Radford Virginia
. Employees: 1,275
. Manufacturing space: approximately 3.1 million square feet
Market Position
Leading supplier of ammunition and propellant to the U.S. Department of Defense.
Major producer of commercial and military smokeless powder.
Competitive Strengths
. Design and production of ammunition
. Vertical integration of manufacturing and assembly operations
. Strong commercial powder brand identity
Major Products and Programs
. 120mm training and tactical tank ammunition
. Medium caliber training and tactical ammunition
. Propellants for ammunition and tactical rockets
. Modular Artillery Charge System (MACS)
. Management of government-owned ammunition facilities
. Gun powders for sporting reloaders and ammunition manufacturers
[PHOTO APPEARS HERE]
Munitions Integration - Load, assemble, and pack (LAP) operators Jennifer Bonet,
left, and Sharon Kitchner prepare Modular Artillery Charge System (MACS) cases
for propellant loading and assembly at the Radford Army Ammunition Plant in
Radford, Virginia. The integration of LAP activities and propellant production
into a single facility enables us to apply rigorous process control standards at
every stage of production, from propellant manufacturing to final charge
assembly, ensuring the highest levels of quality and reliability. The next
generation in artillery propellant technology, MACS will enable the U.S. Army's
Crusader self-propelled howitzer to fire at targets in excess of 40 kilometers
at a rate of up to 10 rounds per minute using an automated loading system.
11
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Missile Products Company
Alex S. Priskos, President
[PHOTO APPEARS HERE]
About the Company
. Headquarters: Rocket Center, West Virginia
. Employees: 500
. Manufacturing space: approximately 800,000 square feet
Market Position
One of the world's leading suppliers of propulsion systems, warheads, and
structures for tactical missiles. Market leader in manufacture of fiber-placed
composite structures.
Competitive Strengths
. World's most modern small rocket motor production facility
. Insensitive solid propellants
. State-of-the-art composite structures manufacturing capabilities
Major Products and Programs
. Rocket motors, warheads, and metal parts for tactical missiles
. Precision metal parts for 120mm tank ammunition
. Composite pivot shaft and airframe components for F-22 fighter aircraft
. Composite launch tubes for JAVELIN anti-tank missile
[PHOTO APPEARS HERE]
Tactical Missile Motors and Warheads - Tom Dunlap, explosives lead, installs an
o-ring on a safe/ arm igniter prior to installation on a rocket motor for the
Advanced Medium Range Air-to-Air Missile(AMRAAM), which is produced by Raytheon
Missile Systems. In fiscal year 1999, we entered into a new strategic alliance
agreement with Raytheon Company under which we will act as a preferred strategic
supplier to Raytheon Missile Systems. Under a separate product agreement for
orders totaling at least $235 million, we will manufacture all of Raytheon's
requirements for solid propulsion rocket motors for the AIM 9M and AIM 9X
Sidewinder, AMRAAM, RAM, and Sparrow air-to-air missiles, and all warheads for
the AMRAAM missile. Our tactical missile motor and warhead work is conducted at
the Allegany Ballistics Laboratory in Rocket Center, West Virginia.
12
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Kilgore Flares Company
Frank J. Carbonari, President
[PHOTO APPEARS HERE]
About the Company
. Headquarters: Toone, Tennessee
. Employees: 330
. Manufacturing space: approximately 280,000 square feet
Market Position
America's largest producer of infrared countermeasure flares. Full-range
supplier of ignition and pyrotechnic ordnance devices to U.S. armed forces.
Competitive Strengths
. High-volume, low-cost manufacturing capabilities
. Infrared flare launch test facility
. Rigorous process control standards
Major Products and Programs
. Infrared countermeasure flares for aircraft protection
. Marine location markers
. Smoke warhead assemblies for rockets
. Smoke grenades and screening grenades
. Pyrotechnic primers, tracers, flash tubes, pellets
[PHOTO APPEARS HERE]
Infrared Countermeasure Flares - A major supplier of military pyrotechnics since
World War II, Alliant Kilgore Flares Company operates the largest infrared
countermeasure flare production facility in the U.S. in Toone, Tennessee.
Kilgore flares, which are used to protect military aircraft from heat-seeking
missiles, are dispensed from the F-15, F-16, and Harrier tactical fighters, the
AH-64 Apache attack helicopter, and cargo and troop transport aircraft such as
the Hercules C-130 Hercules. Pictured are assemblers Linda Walker, right, and
Carol Perry, who are conducting final assembly work on MJU-7A/B flares, our
largest countermeasure flare program.
13
<PAGE>
[PHOTO APPEARS HERE]
Senior Group Vice President
Paul A. Ross
Operating Companies
Alliant Aerospace Company
Alliant Southern Composites Company
Aerospace
. By every measure, fiscal year 1999 was an outstanding year for the Alliant
Aerospace Company. Among the year's most significant highlights were several key
long-term contracts that solidify our business base and provide a solid
foundation for future growth. These includedawards from Boeing for Delta rocket
motors and composite structures that have a combinedpotential value of up to
$2.75 billion.
. As we look to the future, we see a number of market trends that bode well for
our business. Demand for solid rocket motors is expected to remain strong,
driven by an increasing need for space launch vehicles to service the tremendous
growth in global communications. The market for advanced composite materials
also is expanding to meet requirements for greater performance and lower weight
in aircraft and spacecraft - providing us another significant growth area in the
coming years. As a world leader in these businesses, we are well positioned to
take full advantageof these positive trends.
. Our successes are due in large measure to the drive and determination of our
employees, who are united in their commitment to quality and customer
satisfaction. Thanks to their efforts, we enter the new fiscal year with
momentum and confidence that we can continue to deliver superior results.
/s/ Paul A. Ross
Paul A. Ross
14
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Aerospace Company-Propulsion
Jeffrey O. Foote, Vice President and General Manager
[PHOTO APPEARS HERE]
About the Company
. Propulsion headquarters: Magna, Utah
. Employees: 1,400
. Manufacturing space: approximately 2.2 million square feet
Market Position
Leading supplier of solid propulsion systems to the commercial space launch
industry. Major supplier solid propulsion systems strategic missiles.
Competitive Strengths
. Automated, low-cost production
. Rigorous process control and quality systems to ensure safe, consistent
manufacturing
. Highly repeatable products
Major Products and Programs
. SRMU boosters and support services for Titan IVB launch vehicle
. GEM boosters for Delta II, III, IV launch vehicles
. Propulsion systems for Pegasus(R) and Taurus(R) launch vehicles
. Solid propulsion for Trident II Fleet Ballistic Missile
. First-stage propulsion for National Missile Defense interceptor
[PHOTO APPEARS HERE]
Solid Rocket Motors - Chad Johnson, right, and Kenny Muir complete finishing
work on an Orion 50S-XL rocket motor for Orbital Sciences Corporation's
Pegasus(R), space launch vehicle at our facility in Magna,Utah, which is the
safest, most modern, automated solid propulsion manufacturing plant in the
world. Our design and manufacturing capabilities have made us a global leader in
the production of solid rocket propulsion systems. Today, Alliant motors are
used on a variety of space launch vehicles encompassing all payload classes,
including Delta II, III, and IV, Titan IVB, Pegasus, and Taurus(R). We also
manufacture all three solid propulsion stages for the U.S. Navy's Trident II (D-
5) Fleet Ballistic Missile. In fiscal year 1999, 123 of our solid rocket motors
were flown successfully on 28 flights by eight different launch vehicles and
missiles. We expect flight activity to increase this year, averaging between
three and four missions per month.
15
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Aerospace Company-Composites
Kevin C. Cummings, Vice President and General Manager
[PHOTO APPEARS HERE]
About the Company
. Composites headquarters: Clearfield, Utah
. Employees: 440
. Manufacturing space: approximately 900,000 square feet
Market Position
Leading supplier of composite structures for space launch vehicles. Major
supplier of composite structures for military and commercial aircraft.
Competitive Strengths
. Full service capability, including fiber-placed, filament-wound, and hand-lay
up structures
. Large part-size structures capability
. Rigorous quality and process control standards
Major Products and Programs
. Fuel tanks for X-33 Advanced Technology Demonstrator and VentureStar(TM)
Reusable Launch Vehicle
. Structures for Delta III and Delta IV space launch vehicles
. Structures for Joint Strike Fighter, Boeing 767, BA 609, C-17 aircraft
. Satellite piece parts, instrument benches, and dimensionally stable
assemblies
[PHOTO APPEARS HERE]
Space Launch Vehicle Structures - Workers at our new composite structures
manufacturing facility in Iuka, Mississippi, conduct final inspections of the
first centerbody component of the common booster core for the Boeing Delta IV
family of space launch vehicles. The large structure was shipped to the Boeing
Delta IV assembly facility in Decatur, Alabama, 70 miles southeast of the Iuka
plant. In fiscal year 1999, we were selected by Boeing to produce composite
structures for its new Delta IV family of launch vehicles under a long-term
commercial contract with estimated potential revenues of up to $1 billion. The
Delta IV is the Boeing Evolved Expendable Launch Vehicle (EELV) for the multi-
year U.S. Air Force EELV program, which is aimed at reducing government and
commercial space launch costs.
16
<PAGE>
"The market for advanced composite materials is expanding to meet requirements
for greater performance and lower weight in aircraft and spacecreaft - providing
us another significant growth area in the coming years."
Launch Vehicle Structures
Structures for the Delta III launch vehicle and the Delta IV family of launch
vehicles
Liquid Propulsion Tanks
Liquid propulsion fuel tanks for the X-33 Advanced Technology Demonstrator and
the VentureStar(TM) Reusable Launch Vehicle
Military Aircraft Structures
Components for the Joint Strike Fighter and C-17 military aircraft
Commercial Aircraft Structures
Fuselage panels for the BA 609 tiltrotor and structures for the Boeing 767
aircraft
Satellite Structures
Satellite piece parts, dimensionally stable assemblies, antenna reflectors, and
bus structures
[PHOTO APPEARS HERE]
Commercial Aircraft Structures - In fiscal year 1999, we were selected by The
Aerostructures Corporation to produce fuselage structures for the BA 609, the
world's first commercial tiltrotor aircraft, under contractsthat could be worth
approximately $80 million by 2010 if all production options are exercised.
Pictured at left is Clint Singleton, who is preparing the fiber placement
mandrel for the aircraft's cockpit panels, while Joe A. Garcia, right, operates
an automated fiber placement machine that is fabricating other composite panels.
Fabrication of the skin panels, which form the majority of the aircraft's
fuselage, is being done at our composite structures manufacturing facility in
Clearfield, Utah. The program significantly expands our activity in the
production of commercial aircraft structures.
17
<PAGE>
[PHOTO APPEARS HERE]
Group Vice President
Don L. Sticinski
Operating Companies
Alliant Precision Fuze Company
Alliant Integrated Defense Company
Alliant Defense Electronics Systems, Inc.
Alliant Power Sources Company
Defense Systems
. Defense Systems continued to lay the groundwork for growth during fiscal year
1999, winning new development and production contracts that could add
significantly to our revenues in the coming years. Production awards included
contracts for the AN/AAR-47 Missile Warning System, which could result in
approximately $175 million in sales through 2003 if all options are exercised.
Among our new development programs is a tactical munition system that will serve
as an alternative to anti-personnel land mines and enable the U.S. to sign an
international treaty banning the use of these weapons. Another key development
effort, the Objective Individual Combat Weapon (OICW), is undergoing a number of
important technical milestones that should pave the way for wide user
acceptance.
. In fiscal year 1999, we began to reap the benefits of our acquisition of
Motorola's military fuze operations. We won several new development and
production contracts for fuzes and sensors that firmly establish us as the
nation's leading supplier of this important technology. We also are particularly
excited about two recent program wins in our secure electronics business, which
could become a major growth area for us.
. We begin the new fiscal year with a clear sense of direction, renewed
optimism, and pride in the work we do to support our nation's defense. As
always, I am especially grateful for the outstanding efforts of our employees,
whose dedication to delivering superior performance is the principal reason for
our success.
/s/ Don L. Sticinski
Don L. Sticinski
18
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS] Precision Fuze Company
Michael P. Coyle, President
[PHOTO APPEARS HERE]
About the Company
. Headquarters: Janesville, Wisconsin
. Employees: 400
. Manufacturing space: approximately 240,000 square feet
Market Position
Largest supplier of precision electro-mechanical and electronic fuzes and
proximity sensors to the U.S. government and its allies.
Competitive Strengths
. Full-service electronic and mechanical assembly operations
. Design and development of fuzes and proximity sensors
. Process control driven
Major Products and Programs
. M734, M745 mortar fuzes
. M732/A2, MOFA, MFF artillery fuzes
. FMU139 fuze, Hard Target Smart Fuze for bombs
. DSU33 proximity sensor
. Electronic safe and arm devices and fuzes for munitions
. Munitions for special operations forces
[PHOTO APPEARS HERE]
Precision Electronic Military Fuzes - Marty Davis, left, development program
manager, Multi-Option Fuze for Artillery (MOFA), inspects MOFA fuzes to be used
for test and evaluation as part of the program'sengineering and manufacturing
development phase. The program will transition to low-rate production later this
year. Also pictured is safety engineer Jeff Schultz with the Multi-Function
Fuze, another major fuze program. Alliant Precision Fuze Company is the
country's leading supplier of military fuzes and sensors. Fuzes produced by the
company are used in artillery, mortar, rocket, cannon, air-delivered, and
special operations systems. Since 1951, we have produced more than 260 million
fuzes and fielded over 60 different fuze and munitions types for the U.S. armed
services and America's allies.
19
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS]
Don L. Sticinski, President (Acting)
[PHOTO APPEARS HERE]
About the Company
. Headquarters: Hopkins, Minnesota
. Employees: 580
. Manufacturing space: approximately 350,000 square feet
Market Position
Leading developer and producer of infantry weapons, smart artillery systems,
special operations demolitions, anti-tank barrier systems, and secure
electronics subsystems.
Competitive Strengths
. Design and integration of munitions and sensors
. Design and development of secure electronics
. High-volume munitions production
Major Products and Programs
. Objective Individual Combat Weapon (OICW)
. Sense and Destroy Armor (SADARM)
. Shielder and VOLCANO anti-tank barrier systems
. Demolitions for special operations forces
. Secure electronics subsystems
[PHOTO APPEARS HERE]
Objective Individual Combat Weapon (OICW) - Dave Broden, right, OICW technical
director, and Fred Duffy, engineering assistant, Contraves Brashear Systems,
perform final integration of the OICWweapon and fire control system. The U.S.
military's next-generation individual weapon, the OICW will provide combat
troops with an unprecedented capability that will increase their survivability
on the 21st century battlefield. Program work during fiscal year 1999 was
focused on building OICW weapon systems and ammunition for testing and
evaluation by the joint military services. Current activities are aimed at
completing the program's transition from technology development to engineering
and manufacturing development. Our teammates on the OICW program include
Contraves Brashear Systems and Heckler and Koch.
20
<PAGE>
William G. William Wilson, President
[PHOTO APPEARS HERE]
[LOGO OF ALLIANT TECHSYSTEMS] Defense Electronics Systems, Inc.
About the Company
. Headquarters: Clearwater, Florida
. Employees: 160
. Manufacturing space: approximately 112,000 square feet
Market Position
Leading developer and producer of electronic warfare systems, including laser
radar and missile warning systems, smart weapons, and unmanned aerial vehicles.
Competitive Strengths
. Sensor development and systems integration
. Military-qualified ruggedized computing
. Electronics packaging
. Contractor self-oversight status with U.S. government
Major Products and Programs
. AN/AAR-47 Missile Warning System
. Tank Extended Range Munition - Kinetic Energy
. ADARIO - High-Speed Multi-Channel Multi-Plexer
. Common Munitions Bit/Reprogramming Equipment (CMBRE)
. Advanced solid state LADAR
. Outrider(TM) Tactical Unmanned Aerial Vehicle
Defense Electronics Systems - Technician Bobbi Jackson assembles components for
the optical sensor converter in the AN/AAR-47 Missile Warning System. Alliant
Defense Electronics Systems was awarded contracts with options valued at $175
million to upgrade and produce the system.
[PHOTO APPEARS HERE]
Pat Narendra, President
[PHOTO APPEARS HERE]
[LOGO OF ALLIANT TECHSYSTEMS] Power Sources Company
About the Company
. Headquarters: Horsham, Pennsylvania
. Employees: 55
. Manufacturing space: approximately 52,000 square feet
Market Position
Leading producer of lithium reserve batteries and advanced lithium ion polymer
rechargeable batteries for military, aerospace, and specialized industrial and
commercial applications.
Competitive Strengths
. Rapid design and development
. Computer-aided design and manufacturing
. High-volume automated production
. Dial-a-Size(TM) technology for custom applications
Major Products and Programs
. Lithium reserve batteries for fuzes in artillery projectiles, self-destruct
submu-nitions, and precision-guided munitions
. Lithium ion polymer batteries for satellites and space craft, launch
vehicles, undersea vehicles, and land mobile systems
[PHOTO APPEARS HERE]
Lithium Reserve Batteries - Manufacturing engineer LeRoy Barton monitors
assembly of the world's smallest lithium reserve batteries - the first to be
produced on a new automated production line dedicated to high-volume
manufacturing of micro-miniature lithium batteries.
21
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Amounts in thousands except per share data (years ended March 31) 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<S> <C> <C> <C> <C>
Sales $1,090,438 $1,075,506 $1,089,397 $1,020,605
Cost of sales 893,328 881,237 912,395 834,298
Change in accounting estimate - Environmental liabilities/2/ - - 17,442 -
Research and development 8,874 12,447 16,207 14,126
Selling 26,389 37,757 35,778 33,143
General and administrative 58,629 52,011 41,881 40,186
Restructuring charges - - - -
Change of control charges - - - -
Litigation settlement charges - - - -
-----------------------------------------------
Income (loss) from operations 103,218 92,054 65,694 98,852
Interest expense, net (23,516) (24,531) (34,386) (37,427)
Other income (expense), net (155) 435 651 657
-----------------------------------------------
Income (loss) from continuing operations before income taxes 79,547 67,958 31,959 62,082
Income tax provision 11,932 13,658
-----------------------------------------------
Income (loss) from continuing operations 67,615 67,958 31,959 48,424
Income from discontinued operations, net of income taxes - - 4,819 5,617
Gain (loss) on disposal of discontinued operations, net of income taxes - 225 22,381 (6,240)
-----------------------------------------------
Income (loss) before extraordinary loss and
cumulative effect of accounting change 67,615 68,183 59,159 47,801
Extraordinary loss on early extinguishment of debt, net of income taxes/3/ (16,802) - - -
Cumulative effect of accounting change, net of income taxes - - - -
-----------------------------------------------
Net income (loss) $ 50,813 $ 68,183 $ 59,159 $ 47,801
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Continuing operations $ 5.67 $ 5.21 $ 2.46 $ 3.72
Discontinued operations - .02 2.09 (.05)
Extraordinary loss /3/ (1.41) - - -
Cumulative effect of accounting change - - - -
-----------------------------------------------
Basic earnings (loss) per common share $ 4.26 $ 5.23 $ 4.55 $ 3.67
-----------------------------------------------
Diluted earnings (loss) per common share:
Continuing operations $ 5.52 $ 5.08 $ 2.38 $ 3.61
Discontinued operations - .02 2.03 (.05)
Extraordinary loss/3/ (1.37) - - -
Cumulative effect of accounting change - - - -
-----------------------------------------------
Diluted earnings (loss) per common share $ 4.15 $ 5.10 $ 4.41 $ 3.56
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Net current assets $ 56,620 $ 95,628 $ 108,191 $ 42,978
Property, plant, and equipment, net 335,751 333,538 358,103 382,513
Total assets 894,318 908,309 973,140 1,002,034
Long-term debt 305,993 180,810 237,071 350,000
Total stockholders' equity 118,723 265,754 218,792 157,477
OTHER DATA
Depreciation and amortization $ 45,885 $ 47,517 $ 52,721 $ 58,623
Capital expenditures 43,690 20,406 28,522 25,593
-----------------------------------------------
Gross margin as a percentage of sales 18.1% 18.1% 14.6% 18.3%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Amounts in thousands except per share data (years ended March 31) 1995
- -----------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
<S> <C>
Sales $ 504,190
Cost of sales 438,558
Change in accounting estimate - Environmental liabilities/2/ -
Research and development 11,763
Selling 24,820
General and administrative 19,066
Restructuring charges 35,600
Change of control charges 23,039
Litigation settlement charges 15,000
-----------
Income (loss) from operations (63,656)
Interest expense, net (7,076)
Other income (expense), net (2,332)
-----------
Income (loss) from continuing operations before income taxes (73,064)
Income tax provision -
-----------
Income (loss) from continuing operations (73,064)
Income from discontinued operations, net of income taxes 456
Gain (loss) on disposal of discontinued operations, net of income taxes -
-----------
Income (loss) before extraordinary loss and
cumulative effect of accounting change (72,608)
Extraordinary loss on early extinguishment of debt, net of income taxes/3/ -
Cumulative effect of accounting change, net of income taxes (1,500)
-----------
Net income (loss) $ (74,108)
- -----------------------------------------------------------------------------------------
Basic earnings (loss) per common share:
Continuing operations $ (7.27)
Discontinued operations .05
Extraordinary loss /3/ -
Cumulative effect of accounting change (.15)
-----------
Basic earnings (loss) per common share $ (7.37)
-----------
Diluted earnings (loss) per common share:
Continuing operations $ (7.27)
Discontinued operations .05
Extraordinary loss/3/ -
Cumulative effect of accounting change (.15)
-----------
Diluted earnings (loss) per common share $ (7.37)
- -----------------------------------------------------------------------------------------
FINANCIAL POSITION
Net current assets $ 70,007
Property, plant, and equipment, net 484,985
Total assets 1,022,235
Long-term debt 395,000
Total stockholders' equity 140,370
OTHER DATA
Depreciation and amortization $ 16,283
Capital expenditures 12,635
-----------
Gross margin as a percentage of sales 13.0%
- -----------------------------------------------------------------------------------------
</TABLE>
1 Hercules Aerospace Company was acquired from Hercules Incorporated on March
15, 1995. For the fiscal year ended March 31, 1995, results of operations
include Hercules Aerospace Company only from March 15, 1995, through March
31, 1995.
2 Includes the impact of the fiscal year 1997 adoption of Statement of Position
96-1 "Environmental Remediation Liabilities," which resulted in a $17.4
million charge to earnings, or $1.30 per share on a diluted basis. See Note
16 to the financial statements.
3 In fiscal year 1999, the Company completed the early extinguishment of its
long-term debt, resulting in an extraordinary loss of $16.8 million (net of
$3.0 million tax benefit). See Note 7 to the financial statements.
<PAGE>
Management's Discussion and Analysis
The following should be read in conjunction with the financial statements and
notes thereto, beginning on page 34.
Results Of Operations
The Company conducts its business primarily in three operating segments:
Conventional Munitions, Aerospace, and Defense Systems. These operating segments
are defined by the Company's management based on product similarity and end-use
functionality. The Conventional Munitions operating segment is a designer,
developer, and manufacturer of medium-caliber and large-caliber ammunition,
munitions propellants, tactical missile propulsion systems, warheads, metal
parts, composite structures for aircraft and weapons systems, infrared decoy
flares, and commercial gun powder. The Aerospace operating segment is a
designer, developer, and manufacturer of solid rocket propulsion systems for
space and strategic applications, and composite structures for military and
commercial aircraft and spacecraft. It also provides operations and technical
support services for space launches. The Defense Systems operating segment
designs, develops, and produces tactical weapons systems, air delivered
munitions, fuzes, batteries, secure electronic devices, and unmanned aerial
vehicle systems for the Department of Defense and allied nations.
All of the Company's operating segments derive the majority of their revenues
from contracts with, and prime contractors to, the U.S. Government. The various
U.S. Government customers exercise independent purchasing decisions, and sales
to the U.S. Government generally are not regarded as constituting sales to one
customer, but instead, each contracting entity is considered to be a separate
customer. During fiscal 1999, approximately 76 percent of the Company's sales
were derived from contracts with the U.S. Government or U.S. Government prime
contractors. The Company's sales to U.S. Government prime contractors include
sales to two contractors, Lockheed Martin Corporation and The Boeing Company,
which each comprised greater than 10 percent of the Company's total revenues.
During fiscal 1999, sales to Lockheed Martin and Boeing, respectively,
represented approximately 20 percent and 13 percent of the Company's total
revenue. While the majority of sales to these contractors is derived from rocket
propulsion contracts in the Aerospace segment, the Conventional Munitions and
Defense Systems segments also derive a portion of their revenues from sales to
these contractors. Transactions between operating segments are recorded at the
segment level, consistent with the Company's financial accounting policies.
Intercompany balances and transactions are eliminated at the Company's
consolidated financial statements level.
Sales - In the fiscal year ended March 31, 1999 (fiscal 1999), the Company's
sales were $1,090.4 million, an increase of $14.9 million or 1.4%, from fiscal
1998 sales of $1,075.5 million.
Conventional Munitions sales in fiscal 1999 were $480.7 million, an increase
of $16.9 million or 3.6 percent, from fiscal 1998 sales of $463.8 million. The
increase reflects higher sales in tactical missile rocket motors and infrared
flares.
Aerospace sales in fiscal 1999 were $395.4 million, an increase of $25.4
million or 6.9 percent, from fiscal 1998 sales of $370.0 million. The increase
reflects higher space propulsion sales, up $55 million due primarily to
increased production requirements on the Titan and Delta programs, where the
Company is under contract with Lockheed Martin and Boeing, respectively, to
produce solid rocket motor boosters. Sales on the Titan program increased
approximately $37 million in fiscal 1999, to $147.2 million. Sales on the Delta
programs increased approximately $21 million in fiscal 1999, to $126.2 million.
Both increases were driven by the timing of contractual performance
requirements. These increases were partially offset by a $30 million sales
decrease in composite structures sales. This decrease was driven by the
substantial completion of the X-33 contract for the development and sub-assembly
of liquid hydrogen fuel tanks for the next-generation Space Shuttle.
Defense Systems sales in fiscal 1999 were $223.7 million, a decrease of $12.2
million or 5.2 percent, from fiscal 1998 sales of $235.9 million. The overall
decrease was driven by the completion of the Outrider(TM) Unmanned Aerial
Vehicle development program, for which fiscal 1999 sales of $32 million
represented a $25 million decrease from fiscal 1998 sales. This decrease was
partially offset by sales increases attributable to the timing of deliveries on
anti-tank munition programs.
Sales for the fiscal year ended March 31, 1998 (fiscal 1998) of $1,075.5
million represented a decrease of $13.9 million or 1.3 percent, from fiscal 1997
sales of $1,089.4 million.
Conventional Munitions sales in fiscal 1998 were $463.8 million, a decrease of
$28.0 million or 5.7 percent, from fiscal 1997 sales of $491.8 million. The
decrease was primarily the result of lower tank ammunition sales in fiscal 1998.
Aerospace sales in fiscal 1998 were $370.0 million, an increase of $30.5
million or 9.0 percent, from fiscal 1997 sales of $339.5 million. The fiscal
1998 increase was primarily driven by increased space propulsion and composite
structures sales, up $44 million and $19 million, respectively, compared to
fiscal 1997 sales. Those increases were partially offset by the absence in
fiscal 1998 of sales generated in fiscal 1997 on the Evolved Expendable Launch
Vehicle program (EELV), on which the Company completed its role in the prior
year.
Defense Systems sales in fiscal 1998 were $235.9 million, a decrease of $17.4
million or 6.9 percent, from fiscal 1997 sales of $253.3 million. The overall
decrease in fiscal 1998 sales was reflective of decreased revenues on programs
at or nearing completion, offset partially by increased revenues on
Outrider,(TM) up $28 million compared to fiscal 1997.
The Company currently expects sales for fiscal 2000 to be approximately $1.1
billion.
23
<PAGE>
Gross Margin - The Company's gross margin as a percent of sales was 18.1
percent, 18.1 percent, and 14.6 percent in fiscal 1999, 1998, and 1997,
respectively. Gross margin in fiscal 1999 was $197.1 million, an increase of
$2.8 million compared to fiscal 1998 gross margin of $194.3 million. The
Company's fiscal 1999 gross margin as a percent of sales was equal to fiscal
1998, at 18.1 percent. Slightly higher one-time incentive fees received in
Aerospace were offset by certain non-recurring program costs in Defense Systems,
including costs associated with the development of the Objective Individual
Combat Weapon (OICW).
Gross margin in fiscal 1998 of $194.3 million was approximately $35 million
higher than fiscal 1997 gross margin of $159.6 million. The increased margin in
fiscal 1998 was largely attributable to the absence of the fiscal 1997 one-time
charge of $17.4 million for the Company's adoption of AICPA Statement of
Position No. 96-1 (SOP 96-1), "Environmental Remediation Liabilities". Fiscal
1998 margins also benefited due to the absence of fiscal 1997 expenses of $4.7
million to move certain contract production lines from a facility that the
Company closed as a result of the February 1997 sale of the Company's former
Marine Systems Group (MSG). Further gross margin improvement in fiscal 1998 was
attributable to cost underruns on space propulsion and composite structures
programs, which were partially offset by a $6 million charge booked in fiscal
1998 for estimated unrecoverable contract costs on the Explosive "D" program to
reclaim unused and obsolete ordnance.
The Company currently expects gross margin for fiscal 2000 to be in the 18.5
to 19.0 percent range.
Research and Development - The Company's research and development expenditures
were $8.9 million, or .8 percent of sales in fiscal 1999, compared to $12.4
million, or 1.2 percent of sales in fiscal 1998, and $16.2 million, or 1.5
percent of sales in fiscal 1997. The decrease in fiscal 1999 costs was
reflective of continued focus and selectivity in research and development
projects as the Company continues to emphasize its role as a supplier to the
largest aerospace and defense contractors. The decrease in research and
development costs in fiscal 1998 compared to fiscal 1997 was driven primarily by
the absence of approximately $3 million of costs incurred in fiscal 1997 on the
EELV program. The Company also spent $208.5 million on customer funded research
and development contracts in fiscal 1999, a decrease of $33.1 million when
compared with expenditures of $241.6 million in fiscal 1998. Such expenditures
were $231.3 million in fiscal 1997. The decreased level of fiscal 1999
expenditures reflects reduced development expenditures associated with the
Outrider(TM) Unmanned Aerial Vehicle. Customer funded research and development
contracts primarily represent contracts with the U.S. Government or prime
contractors there to.
Selling - The Company's selling expenses totaled $26.4 million or 2.4 percent of
sales in fiscal 1999, compared to $37.8 million or 3.5 percent of sales in
fiscal 1998. The decrease in current year expenses of $11.4 million is driven
primarily by the absence of fiscal 1998 spending of $7.1 million in the
Company's pursuit of the Intercontinental Ballistic Missile (ICBM) Prime
Integration program, which was ultimately awarded to a competitor in fiscal
1998. Fiscal 1998 selling costs were slightly higher than fiscal 1997 costs of
$35.8 million, or 3.3 percent of sales, due to $3.7 million higher ICBM costs.
General and Administrative - The Company's general and administrative costs
totaled $58.6 million or 5.4 percent of sales in fiscal 1999, compared to $52.0
million or 4.8 percent of sales in fiscal 1998. The increase was primarily the
result of increased legal costs during fiscal 1999. See "Contingencies -
Litigation" for additional discussion of legal matters outstanding at March 31,
1999. General and administrative costs for fiscal 1997 were $41.9 million, or
3.8 percent of sales. Fiscal 1998 costs were higher than fiscal 1997 due to a
combination of higher legal costs and the absence of a $2 million restructure
reserve reversal in fiscal 1997, due to costs underruns relative to the
originally reserved amounts.
The Company currently expects operating expenses for fiscal 2000, stated as a
percentage of sales, to be approximately 8.5 percent.
Interest Expense - Interest expense was $24.7 million in fiscal 1999, a decrease
of $2.9 million, when compared to $27.6 million in fiscal 1998. The decrease in
fiscal 1999 interest expense was largely due to lower overall effective interest
rates. The decreased effective interest rate in the current year was driven by
the September 1998 early extinguishment of substantially all of the Company's
then-outstanding Senior Subordinate Notes. See "Extraordinary Loss" below for
further discussion of the early extinguishment of debt.
Fiscal 1998 interest expense of $27.6 million represented a $7.5 million
decrease when compared to $35.1 million in fiscal 1997. The decrease in fiscal
1998 interest expense was driven by reduced average borrowings outstanding, due
to a combination of regularly scheduled principal paydowns, as well as long term
debt principal prepayments of $88.6 million in March 1997 and $40.0 million in
December 1997. These prepayments were made with portions of the sale proceeds
generated by the February 1997 sale of the Marine Systems Group.
In late fiscal 1998, the Company entered into treasury rate-lock agreements to
hedge against increases in market interest rates on the anticipated refinancing
of its debt. During the third quarter of fiscal 1999, in connection with
completing the refinancing of the Company's debt, these treasury rate-locks were
converted into interest rate swaps, having a total notional amount of $200
million. Of this total, swaps having a $100 million notional amount have 6-year
terms and swap interest rates of between 6.32 and 6.55 percent (6.43% average).
The remaining swap has a $100 million notional amount, a swap interest rate of
6.1 percent, and is effective for 10 years, with a bank cancellation option at 5
years.
Interest Income - Interest income was $1.2 million in fiscal 1999, compared to
$3.1 million in fiscal 1998 and $.7 million in fiscal 1997. The higher level of
fiscal 1998 interest income was reflective of higher cash balances on hand due
to proceeds received from the February 1997 sale of the Marine Systems Group.
24
<PAGE>
Income from Continuing Operations before Income Taxes - The Company's income
from continuing operations before taxes ("earnings before taxes", or "EBT") for
fiscal 1999 was $79.5 million, an increase of $11.6 million or 17.1 percent,
over $68.0 million for fiscal 1998. The fiscal 1999 increase primarily reflected
decreased operating expenses and higher sales.
As previously described, the Company's three operating segments are
Conventional Munitions, Aerospace, and Defense Systems. In addition, certain
administrative functions are primarily managed by the Company at the corporate
headquarters level ("Corporate"). Some examples of such functions are human
resources, pension and post-retirement benefits, legal, tax, and treasury.
Significant assets and liabilities managed at the Corporate level include those
associated with debt, pension and post-retirement benefits, environmental
liabilities, and income taxes. A capital-employed charge (interest expense) is
allocated to each operating segment based on net assets employed, using an 8
percent rate, which approximates the Company's overall borrowing rate. Pension
and post-retirement benefit expenses are allocated to each operating segment
based on relative headcount and types of benefits offered in each respective
segment. Environmental expenses are allocated to each operating segment based on
the origin of the underlying environmental cost.
Earnings before taxes in the Conventional Munitions segment were $19.3 million
in fiscal 1999, compared to $19.4 million in fiscal 1998. Fiscal 1999 EBT
results include improved performance in medium caliber ammunition contracts,
which was offset by profit deterioration on ordnance reclamation contracts (down
approximately $4 million from fiscal 1998 levels) and by approximately $7
million of costs incurred for move costs associated primarily with facility
closure and minor staffing reductions. The moving costs, which are expensed as
incurred, primarily relate to the Company's ongoing facility consolidation
efforts, including consolidation of Minneapolis production facilities, as well
as a move of the Joliet, Illinois facility operations to Radford, Virginia to
improve efficiency and reduce overall costs. The Company currently expects that
these activities will be completed in fiscal 2000, during which it currently
estimates that it will incur approximately $5 million in additional move costs.
Earnings before taxes in the Aerospace segment were $41.1 million in fiscal
1999, an increase of $12.3 million compared to fiscal 1998 EBT of $28.8 million.
The fiscal 1999 increase is primarily driven by the absence of over $7 million
in selling costs incurred in fiscal 1998 in Aerospace's pursuit of ICBM.
Additionally, fiscal 1999 results reflect higher one-time fees (revenue) of
approximately $2 million, due to incentive payments for successful milestone
achievements.
Earnings before taxes in the Defense Systems segment were $3.8 million in
fiscal 1999, a decrease of $2.6 million compared to EBT of $6.4 million in
fiscal 1998. Fiscal 1999 results were impacted approximately $4 million by non-
recurring costs on several programs, including costs associated with development
of the OICW.
Earnings before taxes in Corporate were $15.3 million for fiscal 1999,
compared to $13.4 million in fiscal 1998. EBT results at Corporate were
primarily reflective of the Company's 8 percent charge to the Company's
operating segments for capital employed. Net capital employed at Corporate is
historically a negative number (i.e., a net liability) due primarily to the fact
that certain significant liabilities are accounted for at Corporate, including
accrued post-retirement benefits, taxes, and environmental liabilities.
Income Taxes - Taxes on income from continuing operations in fiscal 1999 reflect
a 15 percent tax rate. Taxes on income from continuing operations in fiscal 1998
and 1997 reflect a zero percent tax rate. These rates vary from statutory tax
rates principally due to utilization of available tax loss carryforwards. The
fiscal 1997 income tax provision includes a $12.1 million tax expense on income
from discontinued operations.
Discontinued Operations
Marine Systems Group
On December 22, 1996, the Company entered into an agreement to sell its Marine
Systems Group, including substantially all of the assets of that business, to
Hughes Aircraft Co. (Hughes) for $141.0 million in cash. The sale was completed
on February 28, 1997, resulting in a pretax gain to the Company of approximately
$31.9 million ($22.4 million, after tax), which the Company recognized in the
fourth quarter of fiscal 1997.
In connection with the sale, the Company began actions during fiscal 1998 to
close certain facilities (not sold to Hughes) that had previously been utilized
for Marine Systems Group contracts. As a direct result of the sale, the Company
booked closure reserves of approximately $16 million in March 1997 (by a charge
to the gain on disposal of discontinued operations) primarily for the estimated
costs of facility closure, severance costs, and anticipated litigation costs
associated with these activities. During fiscal 1998, the Company spent
approximately $6 million on these facility closure and severance costs. As these
facility closure activities were substantially completed, the Company reversed
$10.1 million of these liabilities during the fourth quarter of fiscal 1998,
resulting in an additional gain on the disposal of the Marine business.
Demilitarization Operations - During fiscal 1994, the Company entered into two
joint ventures in Belarus and Ukraine, for the purpose of establishing
demilitarization operations in those countries. In March 1996, Company
management, after evaluating its strategic plans for the future, elected to
discontinue its ownership of its foreign demilitarization businesses
(Demilitarization operations). Accordingly, the Company began actions to
transfer ownership of the joint ventures to the host country governments, or
their agents, and in the fourth quarter of fiscal 1996, the Company estimated
and recorded a $6.2 million loss on disposal of discontinued operations (net of
tax benefit of $4.2 million).
During fiscal 1997, the Company stopped production efforts, and completed its
withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997, the
Company reached agreement with the Ukrainian government to transfer the
Company's interests in the operation to the Ukrainian Government after payment
of a $19.8 million non-interest bearing long-term note receivable. In March
1998, as a result of the Company's continued consideration and evaluation of the
status of the underlying operations, as well as newly imposed export
restrictions in the Ukraine and the increasing
25
<PAGE>
political instability in the region, Company management wrote off approximately
$9.9 million, representing the remaining recorded value of the Company's
investment in that operation. The Company maintains a letter of credit to
support approximately $2.5 million of bank borrowings of the Demilitarization
operations. During fiscal 1999, management has continued to work with the
Ukrainian government to complete the Company's exit from this business. However,
given the political instability in the region and the lack of economic reforms,
the Company now believes that it would be unable to pursue an exit by sale of
its interest in the operation. Consequently, in fiscal 1999, the Company began
the process of removing and salvaging assets. The salvage value of the assets is
believed to be de minimus. During this process, the Company was prevented from
physically recovering all of its assets. The Company has attempted
unsuccessfully to rectify the situation through discussions with the Ukrainian
government. The Company believes that the facts and circumstances surrounding
the unrecovered assets may ultimately be determined to be covered as an insured
loss under the Company's political risk insurance policy. Therefore, the Company
submitted a claim in late calendar 1998 and currently expects resolution on such
claim during the fall of calendar 1999. The maximum insurable value under the
policy is $17.7 million. The amount ultimately collected under such policy will
be dependent on the insurer's rulings as to the validity of the claim, as well
as its determination of what amounts are payable under such claim. Given the
contingent nature of the claim, the Company has not recorded a claim receivable
at March 31, 1999.
Extraordinary Loss - In connection with the Company's September 1998 early
extinguishment of its Senior Subordinated Notes and the refinancing of its bank
borrowings in November 1998, the Company incurred extraordinary charges for the
early extinguishment of debt totaling $16.8 million. The extraordinary charge
includes charges associated with the Company's September 16, 1998 completion of
the tender offer and consent solicitation relating to its then outstanding $150
million 11.75 percent Senior Subordinated Notes which were due March 1, 2003
(the "Notes"). Under the tender offer (the "Offer"), the Company accepted all
validly tendered Notes for payment under the Offer, and accordingly paid
approximately $153 million to purchase the Notes from noteholders holding
approximately $140 million principal amount of the Notes. In February 1999, the
Company completed the early extinguishment of debt by calling the remaining
Notes, par value of $10 million, for $10.6 million. In conjunction with the
early extinguishment of the Notes, the Company also refinanced its bank
borrowings under a new bank credit facility on November 23, 1998. See
"Liquidity, Capital Resources and Financial Condition" (below), for further
discussion of the new bank credit facility. In connection with these early
extinguishments of debt, the Company recorded a $19.8 million extraordinary
charge ($16.8 million, after the tax benefit of $3.0 million), which is
comprised of the $13.6 million cash premium paid to acquire the Notes, as well
as the write-off of approximately $6.2 million, of which $6.0 million
represented the unamortized portion of the debt issuance costs associated with
the original borrowings.
Net Income - Net income reported for fiscal 1999 was $50.8 million, a decrease
of $17.4 million, compared to net income of $68.2 million for fiscal 1998. The
decrease was driven by the $16.8 million extraordinary loss on the early
extinguishment of debt and $11.9 million of higher tax expense in fiscal 1999,
offset partially by $8.3 million lower operating expenses and by increased sales
in fiscal 1999. The Company recorded net income of $68.2 million in fiscal 1998,
an increase of $9.0 million, or 15.3 percent, over net income of $59.2 million
in fiscal 1997. The fiscal 1998 increase in net income was driven by reduced
interest expense due to debt paydowns, and improvements in operating margins,
driven by improved performance on space propulsion and composite structures
programs, as well as the absence of the fiscal 1997 charges for the Company's
adoption of SOP 96-1 ($17.4 million) and non-recurring contract costs to move
contract production lines ($4.7 million). Fiscal 1997 net income also included
$27.2 million from discontinued operations, which is reflective of the Company's
sale of the Marine Systems Group on February 28, 1997.
Liquidity, Capital Resources, and Financial Condition
Cash provided by operations during fiscal 1999 totaled $75.7 million, an
increase of $12.7 million, compared with $63.0 million for fiscal 1998. Net
income in fiscal 1999, excluding the $16.8 million extraordinary loss on early
extinguishment of debt, was $67.6 million, compared to $68.2 million in fiscal
1998. Fiscal 1999 cash provided by operations reflects reduced cash used for
restructuring and facility consolidation activities. During fiscal 1998,
approximately $13 million was expended under the Company's restructure and
facility consolidation activities, primarily for nonrecurring move and employee-
related costs associated with the closure of a facility previously used by the
Company's former Marine Systems Group, sold in February 1997. Fiscal 1999 cash
flow from operations also benefited from decreased use of cash for accounts
payable. These cash flow increases were offset partially by reduced contract
advances, due to the timing of contract awards and the achievement of
performance milestones. Cash provided by operations during fiscal 1998 totaled
$63.0 million, compared with $92.1 million for fiscal 1997. Cash provided by
operations during fiscal 1998 reflects increased net income, offset by the
increased use of cash for working capital purposes during fiscal 1998, primarily
due to the receipt of $24 million higher customer advances in fiscal 1997.
Fiscal 1998 cash flow from operations was also impacted by an increased use of
cash for accounts payable.
As a result of the Accudyne "qui tam" litigation settlement in fiscal 1995,
the Company spent approximately $4.5, $4.0, and $3.0 million in fiscal 1999,
1998, and 1997, respectively. The final payment was paid during fiscal 1999.
As a result of operating losses incurred in prior years, primarily resulting
from restructuring charges, as well as one-time charges incurred in fiscal 1995,
the Company has tax loss carryforwards of approximately $12.8 million,
26
<PAGE>
which are available to reduce future tax payments. Realization of the Company's
net deferred tax assets is dependent upon profitable operations and future
reversals of existing taxable temporary differences. Although realization is not
assured, the Company believes that it is more likely than not that such recorded
benefits will be realized through the reduction of future taxable income. It is
currently expected that required payments for taxes in fiscal 2000 will continue
to be reduced due to the aforementioned tax loss carryforwards. However, the
Company may be subject to the provisions of the Alternative Minimum Tax (AMT),
in which case tax payments could be required. To the extent that AMT is required
to be paid currently, the resulting deferred tax asset can be carried forward
indefinitely, and can be recovered through reductions in tax payments on future
taxable income. During fiscal 1999, the Company paid net AMT of approximately
$.7 million.
Cash used by investing activities for fiscal 1999 was $43.7 million, a $16.9
million increase in cash used, compared to cash used by investing activities of
$26.9 million in fiscal 1998. This difference primarily represented increased
capital expenditures in the current year, up $23.3 million compared to fiscal
1998. The increased expenditures are primarily the result of facilitization
costs required to prepare for significant expected growth in the space
propulsion business. This business increase is primarily associated with orders
received from Boeing in fiscal 1999 for production of solid rocket boosters and
composite structures for the Delta Space Launch Vehicle family. Expenditures
also included facilitization spending associated with moving the Company's
Joliet, Illinois operations to the Radford Army Ammunition Plant in Virginia,
capital spending relating to an electronic fuze business acquired in fiscal
1998, and expenditures relating to the replacement of various business systems
software and hardware, as the Company carries out its Year 2000 Plan. Capital
expenditures in fiscal 2000 are currently expected to approximate fiscal 1999
levels. Cash used by investing activities in fiscal 1998 of $26.9 million
represented a decrease of $139.7 million, compared to cash flow provided by
investing activities of $112.8 million in fiscal 1997. The significant increase
in fiscal 1997 is reflective of the sale of the Company's Marine Systems Group
to Hughes for $141.0 million in cash. In accordance with the terms of its debt
agreements, the Company used $88.6 million of the sale proceeds to pre-pay a
portion of its long-term debt in March 1997.
In December 1997, the Company completed its acquisition of certain assets from
a division of Motorola, Inc., including patent and technology rights related to
military fuze production, for approximately $8.5 million. During fiscal 1999,
the Company made additional purchase price payments totaling $1.1 million. As of
March 31, 1999, approximately $3 million in additional consideration may be
required to be paid to the seller in the future, based on the magnitude of
certain future program wins. Results from the acquisition did not have a
material impact on the Company's fiscal year 1998 results.
On November 23, 1998, the Company entered into bank credit facilities totaling
$650 million (the facilities). The facilities, which refinanced the Company's
previously existing bank credit facility, have a six-year term and consist of
term-debt credit facilities totaling up to $400 million, and a revolving credit
facility of $250 million. Interest charges under the facilities are primarily at
the London Inter-Bank Offering Rate (LIBOR), plus 2.25 percent (which totaled
7.3 percent at March 31, 1999), and will be subject to change in the future, as
changes occur in market conditions and in the Company's financial performance.
Borrowings under the facilities are subject to financial leverage covenants, as
well as other customary covenants (e.g., restrictions on additional indebtedness
and liens, sales of assets, and certain restricted payments, including dividends
and stock repurchases). Fees associated with the refinancing were approximately
$9 million. These costs are classified in "Other Assets and Deferred Charges"
and are being amortized to interest expense, over the six-year term of the
facilities.
At March 31, 1999, the Company had borrowings of $12.0 million against its
$250 million bank revolving credit facility. Additionally, the Company had
outstanding letters of credit of $39.4 million, which further reduced amounts
available on the revolving facility to $198.6 million at March 31, 1999.
Scheduled minimum loan repayments on the Company's outstanding long-term debt
are as follows: fiscal 2000, $36.5 million; fiscal 2001, $49.5 million; fiscal
2002, $61.0 million; fiscal 2003, $61.0 million; fiscal 2004, $61.0 million, and
thereafter, $73.5 million.
The Company's total debt (current portion of debt and long-term debt) as a
percentage of total capitalization increased to 74 percent on March 31, 1999,
from 43 percent on March 31, 1998. This increase reflects higher total debt, up
$143.8 million, which primarily reflects the borrowings required to fund the
Company's purchases of its common stock in fiscal 1999. During the year ended
March 31, 1999, the Company repurchased a total of 2.9 million shares, at a cost
of $210.3 million. These repurchases were primarily made under terms of the
Company's `Dutch auction' and the completion of the Hercules repurchase, as
described below.
On December 15, 1998, the Company completed the repurchase of 1.7 million
shares of its common stock at a price of $77 per share, or approximately $130
million in total. The repurchase occurred via the terms and conditions of a
modified "Dutch auction" tender offer (Dutch auction), and was financed under
the Company's new bank credit facilities.
In connection with the completion of the Dutch auction, the Company's Board of
Directors authorized the Company to repurchase up to an additional 1.1 million
shares of its common stock. Any repurchases made under this plan would be
subject to market conditions and the Company's compliance with its debt
covenants. As of March 31, 1999, repurchases of approximately 436 thousand
shares have been made under the program, aggregating approximately $34 million.
As of March 31, 1999, the Company's debt covenants permit the Company to expend
up to $55.2 million specifically in connection with future share repurchases.
Additionally, the Company may make "restricted payments" (as defined in the
Company's debt covenants) of up to an additional $50 million, which would allow
payments for further stock repurchases (over and above the aforementioned $55.2
million). While it is currently the Company's intention to make stock
repurchases under this program, there can be no assurance that the Company will
purchase all or any portion of the remaining shares, or as to the timing or
terms thereof.
27
<PAGE>
On October 24, 1997, the Company entered into an agreement with Hercules,
Incorporated, providing for the disposition of the 3.86 million shares of
Company common stock then held by Hercules. The shares represented the stock
issued by the Company in connection with the March 15, 1995, acquisition of the
Hercules Aerospace Company operations from Hercules.
Under the agreement with Hercules, during the quarter ended December 28, 1997,
the Company registered for public offering approximately 2.78 million of the
shares (previously unregistered) held by Hercules. The offering was completed on
November 21, 1997. No new shares were issued in the offering, nor did the
Company receive any proceeds from the offering. The remaining 1.1 million shares
then held by Hercules became subject to a put/call arrangement (the "Hercules
repurchase") by which Hercules could require the Company to purchase the shares,
and the Company could likewise require Hercules to sell the shares to the
Company, during 1998. The price for shares purchased under the put/call
arrangement was equal to the per share net proceeds realized by Hercules in the
secondary public offering, $55.32. During February 1998, the Company did
repurchase 271,000 shares, for approximately $15 million. During fiscal 1999,
the Company repurchased the remaining 813,000 shares, for approximately $45
million.
During fiscal 1998, the Company's stock repurchases totaled approximately .6
million shares, at a total cost of $31.7 million. These repurchases were made
primarily under the Hercules repurchase (described above) and through an open
market stock repurchase program.
Based on the financial condition of the Company at March 31, 1999, management
believes the internal cash flows of the Company, combined with the availability
of funding, if needed, under its bank revolving credit facilities, will be
adequate to fund future growth of the Company as well as to service its long-
term debt obligations.
Contingencies - Environmental Matters
The Company is subject to various local and national laws relating to protection
of the environment and is in various stages of investigation or remediation of
potential, alleged, or acknowledged contamination. In March 1997, the Company
adopted the provisions of SOP 96-1, which required a change in, and provided
clarification to, the manner in which companies measure and recognize costs
associated with environmental remediation liabilities. Under the provisions of
the SOP, all future anticipated ongoing monitoring and maintenance costs
associated with known remediation sites are required to be accrued. Such costs
were previously expensed as incurred. The Company's adoption of the provisions
of the SOP resulted in a non-cash charge of $17.4 million in the fourth quarter
of fiscal 1997. The charge was classified in cost of sales in the Company's
consolidated income statement for the quarter ending March 31, 1997.
At March 31, 1999, the accrued liability for environmental remediation of
$31.9 million represents management's best estimate of the present value of the
probable and reasonably estimable costs related to the Company's known
remediation obligations. It is expected that a significant portion of the
Company's environmental costs will be reimbursed to the Company. As collection
of those reimbursements is estimated to be probable, the Company has recorded a
receivable of $10.5 million, representing the present value of those
reimbursements at March 31, 1999. Such receivable primarily represents the
expected reimbursement of costs associated with the Aerospace operations
acquired from Hercules in March 1995 (Aerospace acquisition), whereby the
Company generally assumed responsibility for environmental compliance at
Aerospace facilities. It is expected that much of the compliance and remediation
costs associated with these facilities will be reimbursable under U.S.
Government contracts, and that those environmental remediation costs not covered
through such contracts will be covered by Hercules under various indemnification
agreements, subject to the Company having appropriately notified Hercules of
issues identified prior to the expiration of the stipulated notification periods
(March 2000 or March 2005, depending on site ownership). The Company's accrual
for environmental remediation liabilities and the associated receivable for
reimbursement thereof, have been discounted to reflect the present value of the
expected future cash flows, using a discount rate, net of estimated inflation,
of approximately 4.5 percent. The following is a summary of the Company's
amounts recorded for environmental remediation at March 31, 1999:
<TABLE>
<CAPTION>
Environmental
Accrued Costs -
Environmental Reimbursement
Liability Receivable
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts (Payable)/Receivable $(41,227) $14,238
Unamortized Discount 9,351 (3,706)
--------------------------------------
Present Value Amounts (Payable)/Receivable $(31,876) $10,532
===============================================================================================
</TABLE>
At March 31, 1999, the aggregate undiscounted amounts payable for
environmental remediation costs, net of expected reimbursements, are estimated
to be $3.3, $5.3, $2.1, $1.5, and $4.4 million for the fiscal years ending March
31, 2000, 2001, 2002, 2003, and 2004, respectively; estimated amounts payable
thereafter total $10.3 million. Amounts payable/receivable in periods beyond
fiscal 2000 have been classified as non-current on the Company's March 31, 1999,
balance sheet. At March 31, 1999, the estimated discounted range of reasonably
possible costs of environmental remediation is between $32 and $46 million. The
Company does not anticipate that resolution of the environmental contingencies
in excess of amounts accrued, net of recoveries, will materially affect future
operating results. There were no material insurance recoveries related to
environmental remediations during fiscal 1999, 1998, or 1997.
In future periods, new laws or regulations, advances in technologies, outcomes
of negotiations/litigations with regulatory authorities and other parties,
additional information about the ultimate remedy selected at new and existing
sites, the Company's share of the cost of such remedies, changes in the extent
and type of site utilization, the number of parties found liable at each site
and their ability to pay are all factors that could significantly change the
Company's estimates. It is reasonably possible that management's current
estimates of liabilities for the above contingencies could change in the near
term, as more definitive information becomes available.
28
<PAGE>
Contingencies - Litigation
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 1999) will not materially exceed the amount provided
in the accompanying balance sheets.
The Company is a defendant in a number of 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.
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 were assumed by the Company except for a few specific lawsuits and
disputes including two specific qui-tam lawsuits. Under terms of the purchase
agreement with Hercules, the Company's maximum combined settlement liability for
both of these qui tam matters was approximately $4 million, which the Company
had fully reserved. On May 15, 1998, Hercules announced that it had agreed to a
settlement in the first qui tam lawsuit, which has since been approved by the
court. Therefore, in July 1998 the Company paid $4 million in full satisfaction
of its liability related to these matters.
In March 1997 the Company received a partially unsealed complaint, in a qui
tam action by four former employees (the "Relators") alleging labor mischarging
to the Intermediate Nuclear Force (INF) contract, and other contracts. Damages
were not specified in this civil suit. The Company and Hercules have agreed to
share equally the external attorney's fees and investigative fees and related
costs and expenses of this action until such time as a determination is made as
to the applicability of the indemni-fication provisions of the Aerospace
acquisition purchase agreement. In March 1998, the Company and Hercules settled
with the Department of Justice on the portion of the complaint alleging labor
mischarging to the INF contract and agreed to pay $2.25 million each, together
with Relators' attorney's fees of $150 thousand each, which was paid in April
1998. The Department of Justice declined to intervene in the remaining portion
of the complaint. On October 16, 1998 the Company and Hercules settled with the
Relators all remaining issues in this action by agreeing to each pay $575
thousand, subject to court approval. On January 21, 1999, the court approved the
settlement and entered judgment dismissing the case, subject to the right of the
Department of Justice to appeal such approval and dismissal. On March 22, 1999,
the Department of Justice filed notice of an intent to appeal.
The Company has also been served with a complaint in a civil action captioned
United States v. Alliant Techsystems Inc. and filed in the U.S. District Court
for the District of Minnesota, alleging violations of the False Claims Act, the
Truth in Negotiations Act, and common law and equitable theories of recovery.
The complaint was filed March 10, 1997, and relates to a contract for the AT4
shoulder-fired weapon. The complaint alleges that the contract in question was
defectively priced. Based upon documents provided to the Company in connection
with the action, the Company believes that the U.S. Government may seek damages
and penalties of approximately $5 million. Under the provisions of the False
Claims Act, a civil penalty of between $5,000 and $10,000 can be assessed for
each claim, plus three times the amount of any damages sustained by the U.S.
Government. In addition to damages, a judgment against the Company in such a
suit or a finding of liability in a separate criminal action could carry
penalties of suspension or debarment which would make some or all of the
Company's operations ineligible to be awarded any U.S. Government contracts for
a period of up to three years. The amount of damages, if any, involved in the
above actions filed under the False Claims Act cannot be determined at this
time.
The Company was a defendant in a patent infringement case brought by Cordant
Technologies (formerly Thiokol Corporation), which the Company believed was
without merit. The plaintiff alleged that the rocket motor insulation used by
the Company in certain rocket motors infringed on a patent owned by the
plaintiff. The complaint sought trebling of any damages that might have been
awarded, based on an allegation of deliberate and willful infringement. The
complaint did not quantify the amount of damages sought. Through its analysis of
an October 27, 1997, court filing, the Company believed that, based on an
economist's expert testimony, Cordant Technologies might seek lost profits,
interest and costs of approximately $240 million. Even if the Company was found
liable, it believed that damages should be based upon a reasonable royalty of
less than $5 million. On March 25, 1999, the Court held invalid the patent that
is the subject of the action. The plaintiff filed a notice of appeal on April
23, 1999, and the Company filed a notice of cross appeal on April 30, 1999. On
April 13, 1999, the plaintiff and the Company entered into a "standstill
agreement" under which the parties have agreed to file a joint motion to the
U.S. Court of Appeals for the Federal Circuit for a stay of all proceedings for
up to 150 days, during which the parties have agreed to negotiate in good faith
to settle the litigation. In the judgment of management, the case will not have
a material adverse effect upon the Company's future financial condition or
results of operations. However, there can be no assurance that the outcome of
the case will not have a material adverse effect on the Company.
During fiscal 1998, the Company substantially completed the requirements of
the M117 Bomb reclamation contract. The contract contained a priced option,
having approximate contract value less than $5 million, whereby the customer
could require the reclamation of additional quantities, given that such option
be exercised within the terms and conditions of the contract. On August 4, 1997,
the customer informed the Company that it was exercising the option. The
Company, based on advice from its counsel, maintains that the option exercise
was invalid and has therefore not performed on the option. The Company is
currently appealing the validity of the option to the United States Court of
Appeals, based on the Company's continued belief that such exercise was invalid.
In late December 1997,
29
<PAGE>
the Company was informed by the customer that the Company was being terminated
for default on the contract option. The Company expects the appeals process to
conclude in calendar 1999. Depending on the outcome of the appeal and the
termination for default litigation, management currently estimates that the
range of possible adverse impact to the Company's future operating earnings is
from $0-$4 million, in total.
During fiscal 1998, the Company identified potential technical and safety
issues on its Explosive "D" contracts 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 have caused the Company to delay contract performance until the issues
are resolved to the satisfaction of the Company. As a result, the Government
customer has provided the Company notification that it has been terminated for
default on the contracts. The Company is currently working closely with the
customer to resolve these matters. Based on information known at this time,
management's estimated range of reasonably possible additional cost impact that
could occur as a result of the potential technical and safety issues on the
Explosive "D" program is currently $0-$3 million, on which the ultimate outcome
is dependent on the extent to which the Company is able to mitigate these
potential risks and ultimately resolve the contractual performance issues on a
mutually agreeable basis.
The Company does not believe that the above contract terminations will have
a material adverse impact on the Company's results of operations, its liquidity,
or its financial position.
While the results of litigation cannot be predicted with certainty,
management believes, based upon the advice of counsel, that the actions seeking
to recover damages against the Company either are without merit, are covered by
insurance and reserves, do not support any grounds for cancellation of any
contract, or are not likely to materially affect the financial condition or
results of operations of the Company, although the resolution of any such
matters during a specific period could have a material adverse effect on the
quarterly or annual operating results for that period.
The Company does not generate a significant amount of revenues or costs,
nor does it maintain significant assets or liabilities in European Union (EU)
countries or in European currencies. Therefore, the Company does not expect that
the EU's conversion to the Euro will have a material impact to the Company's
financial position or its results of operations.
Year 2000
Background - The Company utilizes a significant amount of information technology
("IT"), such as computer hardware and software, and operating systems ("IT
systems"), and non-IT systems, such as applications used in manufacturing,
product development, financial business systems and various administrative
functions ("non-IT systems"). To the extent that these IT systems and non-IT
systems contain source code that is unable to distinguish the upcoming calendar
year 2000 from the calendar year 1900 (the "Year 2000 Issue"), some level of
modification or replacement of such systems will be necessary. The Company has
established a Year 2000 Project Management Plan ("Year 2000 Plan") to identify
and address systems requiring such modification or replacement. The Year 2000
Plan also involves assessing the extent to which the Company's suppliers and
customers are addressing the Year 2000 Issue. Company management has identified
certain business systems, suppliers, and customers as critical to its ongoing
business needs ("business critical"). Failure of these business critical
systems, suppliers, or customers to become Year 2000 compliant in a timely
manner could have a material adverse impact to the Company.
State of Readiness - The Year 2000 Plan, which encompasses both IT and non-IT
systems, involves the following five-phase approach to the Year 2000 Issue, with
the indicated timetable for completion of business critical items:
<TABLE>
<CAPTION>
Timetable
Phase Activity for Completion Status
- --------------------------------------------------------------------------------
<S> <C> <C>
1 Ensure Company-wide
awareness of the Year 2000 Issue September 30, 1997 Completed
- --------------------------------------------------------------------------------
2 Assess the impact of the Year 2000
Issue on the Company, and conduct
inventories, analyze systems,
prioritize modification or
replacement, and develop
contingency plans January 31, 1998 Completed
- --------------------------------------------------------------------------------
3 Begin modification, replacement or
elimination of selected platforms,
applications, databases and utilities,
and modify interfaces, as appropriate August 31, 1998 Completed
- --------------------------------------------------------------------------------
4 Complete work begun in Phase 3, and Substantially
test, verify and validate all systems September 30, 1999 Completed
- --------------------------------------------------------------------------------
5 Implement modified or replaced
platforms, applications, databases Substantially
and utilities September 30, 1999 Completed
- --------------------------------------------------------------------------------
</TABLE>
The Company is not aware of any problems reasonably likely to occur as a
result of third party failures to address the Year 2000 Issue. Extensive work
was done to ensure supplier issues were highlighted and prioritized. Suppliers
were requested to provide a Year 2000 Issue status on their products, operating
systems, suppliers and facilities and visits were made to numerous key
suppliers. Contact is occurring on a periodic basis to secure additional
information from suppliers on specific Year 2000 Issues and to ensure that no
issues arise as the year progresses. Phase 4 activity encompasses supplier
visits and phone interviews, final testing, and preparation for complete system
implementation. Phase 4 and 5 activities for business critical items are
substantially complete, except for specific items where validating actions have
been rescheduled into mid-1999 to accommodate business requirements. Critical
actions and completion dates have been identified to ensure that no business
critical system will pass its respective time-horizon-to-failure date.
The Company has utilized the services of several independent industry
consultants to assist it in assessing the reliability of its risk and cost
estimates. The Company's schedule for completing all internal Year 2000 actions,
other than manual actions required on January 1, 2000, are scheduled for
completion by September 30, 1999.
Costs - The Company currently estimates that costs associated with modifying or
replacing systems affected by the Year 2000 Issue, including the amounts
expended in connection with the Company's ongoing, normal course-of-business
efforts to upgrade or replace business critical systems and software
applications as necessary, will be approximately $13 million,
30
<PAGE>
compared to the Company's normal, annual IT operating budget of approximately
$30 million. These costs are being funded through cash flows from operations.
Costs associated with incremental personnel costs, consulting, and hardware and
software modifications are being expensed as incurred. The costs of newly
purchased hardware and software are being capitalized in accordance with normal
policy. The majority of estimated project cost was incurred during fiscal year
1999, as approximately $10 million has been expended through March 31, 1999.
Approximately 37% of the total amount ultimately expended is expected to be for
systems modification, and the balance for systems replacement. There are no IT
projects which the Company has had to delay due to the Year 2000 Issues that
would have a material impact on the Company's results of operations or financial
position. The Company continues to review its contractual obligations relative
to the Year 2000 Issue, and currently believes that there are no such
obligations that would have material impact to the Company's results of
operations or its financial position.
Risks - The failure to resolve a material Year 2000 Issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial position. Due to the general
uncertainty inherent in the Year 2000 Issue, resulting in part from the
uncertainty of the Year 2000 Issue readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of failures resulting from the Year 2000 Issue will have a material
impact on the Company's results of operations, liquidity or financial position.
The Year 2000 Plan is expected to significantly reduce the Company's level of
uncertainty about the Year 2000 Issue and, in particular, about the Year 2000
Issue compliance and readiness of its business critical systems, suppliers, and
customers.
The most significant risk to the Company is the potential impact of
circumstances beyond its control, such as the failure of its business critical
suppliers and/or customers (particularly the U.S. Government) to resolve their
Year 2000 Issues, with a resulting inability of such suppliers to supply
critical goods and services to the Company, or of such customers to pay for
their purchases from the Company. A related significant risk to the Company is
that an inability of its business critical suppliers to resolve their Year 2000
Issues could result in the Company not being able to meet its contractual
obligations. Another significant risk to the Company could be the significant
loss of critical personnel on its Year 2000 Plan team.
The Company currently believes that there is minimal risk that its Year
2000 Plan will be not be successfully implemented in a timely manner. In the
event that the Company is ultimately unable to implement its Year 2000 Plan in a
timely manner, the Company believes that its contingency plans, described below,
adequately accommodate its business critical systems in a way that would not
result in a material adverse impact to the Company's results of operations, its
liquidity, or its financial position. However, there can be no assurance that
the Company and/or relevant third parties will successfully resolve all of their
Year 2000 Issues or that the Company's contingency plans will be entirely
successful in mitigating those issues. Any such failure could have a material
adverse effect on the Company's operations, liquidity, or its financial
position.
Contingency Plans - Alliant has been informed that the U.S. Government has
resolved the Year 2000 Issues affecting its payment system as of March 1999,
which allows about 9 months for testing of the payment system. The Company is
working with the Government payment office on a contingency plan that will
accommodate a manual billing and payment process in the event the Year 2000
Issues affecting the Government payment system are not successfully resolved in
a timely manner. A contingency plan has been established for all business
critical Company systems identified as Year 2000 Issues as of August 31, 1998,
and contingency plans have also been developed for certain critical suppliers,
including identification of backup supply sources, and consideration of the need
to purchase additional critical supplies. Additionally, the Company has started
to develop plans addressing the operation of its facilities during and
immediately after the beginning of calendar 2000, to prepare for the possibility
of infrastructure failure (i.e., power system failure). All contingency plans
will be reviewed during the second quarter of the fiscal year.
Cautionary Statement - The costs of the Year 2000 Plan and the timing in which
the Company believes it will implement the Year 2000 Plan are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no assurance that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the success of the Company in identifying systems and programs
having Year 2000 Issues, the nature and amount of programming required to
upgrade or replace the affected programs, the availability and cost of personnel
trained in this area, and the extent to which the Company might be adversely
impacted by the failure of third parties (i.e., suppliers, customers, etc.) to
remediate their own Year 2000 issues. Failure by the Company and/or its
suppliers and customers (in particular, the U.S. Government, on which the
Company is materially dependent) to complete Year 2000 Issue compliance work in
a timely manner could have a material adverse effect on the Company's
operations, its liquidity, and/or its financial position.
Market Risk
The Company is exposed to market risk from changes in interest rates. To
mitigate the risks from interest rate exposure, the Company enters into various
hedging transactions, mainly interest rate swaps, through derivative financial
instruments that have been authorized pursuant to its corporate policies. The
Company does not use derivative financial instruments for trading or other
speculative purposes, and the Company is not a party to leveraged financial
instruments. Additional information regarding the Company's financial
instruments is contained in Note 7 to the financial statements. The Company's
objective in managing its exposure to changes in interest rates is to limit the
impact of such changes on earnings and cash flow and to lower its overall
borrowing costs.
The Company measures its market risk related to its holdings of financial
instruments based on changes in interest rates utilizing a sensitivity analysis.
The sensitivity analysis measures the potential loss in fair values, cash flows
31
<PAGE>
and earnings based on a hypothetical 10% change (increase and decrease) in
interest rates. The Company used current market rates on its debt and derivative
portfolio to perform the sensitivity analysis. Certain items such as lease
contracts, insurance contracts, and obligations for pension and other post-
retirement benefits were not included in the analysis.
The Company's primary interest rate exposures relate to its variable rate
debt and interest rate swaps. The potential loss in fair values is based on an
assumed immediate change in the net present values of the Company's interest
rate-sensitive exposures resulting from a hypothetical 10% change in interest
rates. The potential loss in cash flows and earnings is based on the change in
the net interest income/expense over a one-year period due to a hypothetical
immediate 10% change in rates. A hypothetical 10% change in interest rates does
not have a material impact on the fair values, cash flows or earnings of the
Company.
New Accounting Rules
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." SFAS No. 131 established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments. It also established standards for related
disclosures about products, services, and geographic areas. Both Statements
require additional disclosure only, and have been adopted in these financial
statements for the fiscal year ended March 31, 1999 - refer to the Consolidated
Statement of Stockholders' Equity (SFAS No. 130) and footnote 18 to the
financial statements (SFAS No. 131).
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP provides
guidance on when costs incurred for internal use computer software are to be
capitalized. The SOP is effective for the Company's fiscal year beginning April
1, 1999. The SOP is not expected to have a material impact to the Company's
results of operations or its financial position.
In October 1996, the AICPA issued SOP 96-1, which required change in, and
provided clarification to, the manner in which companies measure and recognize
costs associated with environmental remediation liabilities. Under the
provisions of the SOP, the most significant change in accounting for the Company
was that all future anticipated ongoing monitoring and maintenance costs
associated with known remediation sites is required to be accrued. Such costs
were previously expensed as incurred. The Company elected to adopt the
provisions of the new rule early, as is permitted under the SOP, which resulted
in a non-cash charge of $17.4 million in the fourth quarter of fiscal 1997. The
charge is classified in cost of sales expenses in the Company's consolidated
income statement for the period ending March 31, 1997.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This accounting standard, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
requires that all derivatives be recognized as either assets or liabilities at
estimated fair value. The Company has not completed its evaluation of the impact
that the adoption of SFAS No. 133 will have.
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 cost 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
Certain of the statements made and information contained in this report,
excluding historical information, are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include those relating to fiscal 2000 sales, gross margin, operating
expenses, tax payments and capital expenditures. Also included are statements
relating to the realization of net deferred tax benefits, the repurchase of
Company common stock, the funding of future growth, long-term debt repayment,
environmental remediation costs and reimbursement prospects, the financial and
operating impact of the resolution of environmental and litigation contingencies
in general, resolution of the Cordant Technologies matter, the M117 and
Explosive "D" contract terminations for default in particular, the resolution of
contingencies related to the Company's discontinued demilitarization business,
and the ultimate cost and impact of the Company's Year 2000 Issue compliance
effort. Such forward-looking statements involve risks and uncertainties that
could cause actual results or outcomes to differ materially. Some of these risks
and uncertainties are set forth in connection with the applicable statements.
Additional risks and uncertainties include, but are not limited to, changes in
government spending and budgetary policies, governmental laws and other rules
and regulations surrounding various matters such as environmental remediation,
contract pricing, changing economic and political conditions in the United
States and in other countries, international trading restrictions, outcome of
union negotiations, customer product acceptance, the Company's success in
program pursuits, program performance, continued access to technical and capital
resources, supply and availability of raw materials and components, timely
compliance with the technical requirements of the Year 2000 Issue, including
timely compliance by the Company's vendors and customers, and merger and
acquisition activity within the industry. All forecasts and projections in this
report are "forward-looking statements," and are based on management's current
expectations of the Company's near-term results, based on current information
available pertaining to the Company, including the aforementioned risk factors.
Actual results could differ materially.
32
<PAGE>
Report of Independent Auditors
To the Stockholders of Alliant Techsystems Inc.:
We have audited the accompanying consolidated balance sheets of Alliant
Techsystems Inc. and subsidiaries as of March 31, 1999, and 1998, and the
related consolidated statements of income, cash flows, and stockholders' equity
for each of the years ended March 31, 1999, 1998, and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Alliant Techsystems Inc. and
subsidiaries at March 31, 1999, and 1998, and the consolidated results of its
operations, its cash flows, and its stockholders' equity for each of the years
ended March 31, 1999, 1998, and 1997, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Minneapolis, Minnesota
May 10, 1999
Report of Management
The management of Alliant Techsystems Inc. is responsible for the integrity,
objectivity, and consistency of the financial information presented in this
report. The financial statements have been prepared in accordance with generally
accepted accounting principles, and necessarily include some amounts based on
management's judgments and best estimates.
To meet its responsibilities, management relies on a comprehensive system
of internal controls designed to provide reasonable assurance that assets are
safeguarded and that transactions are appropriately recorded and reported. The
system is supported by the employment of qualified personnel and by an effective
internal audit function.
Our independent auditors provide an objective, independent review of
management's discharge of its responsibilities as they relate to the financial
statements. Their report is presented separately.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, recommends the independent auditors for appointment by the Board
subject to ratification by shareholders. The Committee also meets periodically
with the independent auditors, internal auditors, and representatives of
management to discuss audit results, the adequacy of internal controls, and the
quality of our financial accounting and reporting. The independent auditors and
the internal auditors have access to the Committee without the presence of
management.
/s/ Paul David Miller
Paul David Miller
Chairman and Chief Executive Officer
/s/ Scott S. Meyers
Scott S. Meyers
Vice President and Chief Financial Officer
33
<PAGE>
Consolidated Income Statements
<TABLE>
<CAPTION>
Amounts in thousands except per share data (years ended March 31) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $1,090,438 $1,075,506 $1,089,397
---------- ---------- ----------
Cost of sales 893,328 881,237 912,395
---------- ---------- ----------
Change in accounting estimate - Environmental liabilities - - 17,442
---------- ---------- ----------
Gross margin 197,110 194,269 159,560
---------- ---------- ----------
Operating expenses:
---------- ---------- ----------
Research and development 8,874 12,447 16,207
---------- ---------- ----------
Selling 26,389 37,757 35,778
---------- ---------- ----------
General and administrative 58,629 52,011 41,881
---------- ---------- ----------
Total operating expenses 93,892 102,215 93,866
---------- ---------- ----------
Income from operations 103,218 92,054 65,694
---------- ---------- ----------
Other income (expense):
---------- ---------- ----------
Interest expense (24,731) (27,621) (35,102)
---------- ---------- ----------
Interest income 1,215 3,090 716
---------- ---------- ----------
Other, net (155) 435 651
---------- ---------- ----------
Total other expense (23,671) (24,096) (33,735)
---------- ---------- ----------
Income from continuing operations before income taxes 79,547 67,958 31,959
---------- ---------- ----------
Income tax provision 11,932 - -
---------- ---------- ----------
Income from continuing operations 67,615 67,958 31,959
---------- ---------- ----------
Discontinued operations:
---------- ---------- ----------
Income from discontinued operations, net of income taxes - - 4,819
---------- ---------- ----------
Gain on disposal of discontinued operations, net of income taxes - 225 22,381
---------- ---------- ----------
Income before extraordinary loss 67,615 68,183 59,159
---------- ---------- ----------
Extraordinary loss on early extinguishment of debt, net of income taxes (16,802) - -
---------- ---------- ----------
Net income $ 50,813 $ 68,183 $ 59,159
---------- ---------- ----------
Basic earnings per common share:
---------- ---------- ----------
Continuing operations $ 5.67 $ 5.21 $ 2.46
---------- ---------- ----------
Discontinued operations - .02 2.09
---------- ---------- ----------
Extraordinary loss (1.41) - -
---------- ---------- ----------
Net income $ 4.26 $ 5.23 $ 4.55
---------- ---------- ----------
Diluted earnings per common share:
---------- ---------- ----------
Continuing operations $ 5.52 $ 5.08 $ 2.38
---------- ---------- ----------
Discontinued operations - .02 2.03
---------- ---------- ----------
Extraordinary loss (1.37) - -
---------- ---------- ----------
Net income $ 4.15 $ 5.10 $ 4.41
---------- ---------- ----------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Amounts in thousands except share data (years ended March 31) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,078 $ 68,960
Receivables 233,499 209,915
Net inventory 44,030 49,072
Deferred income tax asset 41,912 38,280
Other current assets 2,589 6,803
-------------------------
Total current assets 343,108 373,030
===========================================================================================================
Net property, plant, and equipment 335,751 333,538
Goodwill 127,799 131,600
Prepaid and intangible pension assets 77,552 61,667
Deferred charges and other non-current assets 10,108 8,474
-------------------------
Total assets $ 894,318 $908,309
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 36,500 $ 17,838
Accounts payable 93,991 80,071
Contract advances and allowances 49,456 64,318
Accrued compensation 32,433 32,275
Accrued income taxes 13,075 8,049
Accrued restructuring and facility consolidation - 2,637
Other accrued liabilities 61,033 72,214
-------------------------
Total current liabilities 286,488 277,402
===========================================================================================================
Long-term debt 305,993 180,810
Post-retirement and post-employment benefits liability 128,279 136,889
Other long-term liabilities 54,835 47,454
-------------------------
Total liabilities $ 775,595 $642,555
===========================================================================================================
Contingencies (see Notes 14 and 16)
Redeemable common shares (813,000 shares, $.01 par value, redeemable at a
prescribed price totaling $44,979 at March 31, 1998. Redeemed quarterly,
in equal lots of 271,000 shares each, during calendar 1998.) $ - $ 44,979
Stockholders' equity:
Common stock--$.01 par value
Authorized--20,000,000 shares
Issued and outstanding 10,284,530 and 12,855,511 shares
at March 31, 1999, and 1998, respectively 139 139
Additional paid-in-capital 238,513 201,720
Retained earnings 123,357 72,544
Unearned compensation (3,289) (1,251)
Accumulated other comprehensive income (2,940) (4,743)
Common stock in treasury, at cost (3,579,083 and 1,008,102 shares held
at March 31, 1999, and 1998, respectively) (237,057) (47,634)
Total stockholders' equity $ 118,723 $265,754
-------------------------
Total liabilities and stockholders' equity $ 894,318 $908,309
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Amounts in thousands (years ended March 31) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 50,813 $ 68,183 $ 59,159
Adjustments to net income to arrive at cash provided by operations:
Depreciation 38,460 41,416 45,114
Amortization of intangible assets and unearned compensation 7,425 6,101 7,607
Gain on disposition of discontinued operations, net of taxes - (225) (22,381)
Extraordinary loss on early extinguishment of debt, net of taxes 16,802 - -
Loss (gain) on disposal of property 372 330 (72)
Changes in assets and liabilities:
Receivables (23,584) (19,240) (13,201)
Inventories 5,042 19,053 19,349
Accounts payable 13,920 (5,380) 7,726
Contract advances and allowances (14,862) (182) 23,863
Accrued compensation 158 3,883 (280)
Accrued income taxes 7,991 (1,107) (154)
Accrued restructuring and facility consolidation (2,637) (13,219) (18,246)
Accrued environmental liability (919) (1,905) 13,180
Pension and post-retirement benefits (5,973) (7,820) (1,633)
Other assets and liabilities (17,296) (26,919) (23,281)
Operating activities of discontinued operations - - (4,640)
----------- ---------- -----------
CASH PROVIDED BY OPERATIONS 75,712 62,969 92,110
=========================================================================================================================
INVESTING ACTIVITIES
Capital expenditures (43,690) (20,406) (28,522)
Acquisition of business (1,100) (8,466) -
Proceeds from sale of discontinued operations - - 141,000
Proceeds from the disposition of property 1,041 2,021 2,835
Investing activities of discontinued operations - - (2,483)
----------- ---------- -----------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (43,749) (26,851) 112,830
=========================================================================================================================
FINANCING ACTIVITIES
Payments made on bank debt (48,648) (67,447) (128,905)
Payments made to extinguish high-yield debt (163,590) - -
Proceeds from issuance of long-term debt 342,493 - -
Payments made for debt issue costs (9,110) - -
Net purchase of treasury shares (209,290) (28,952) (2,616)
Proceeds from exercised stock options 8,300 9,052 3,995
Other financing activities, net - (2,302) (455)
----------- ---------- -----------
CASH USED FOR FINANCING ACTIVITIES (79,845) (89,649) (127,981)
=========================================================================================================================
(Decrease) increase in cash and cash equivalents (47,882) (53,531) 76,959
Cash and cash equivalents at beginning of period 68,960 122,491 45,532
----------- ---------- -----------
Cash and cash equivalents at end of period $ 21,078 $ 68,960 $ 122,491
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE>
Consolidated Statement Of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Redeemable Common Stock Additional Retained Other
(Amounts in thousands Common $0.01 Par Paid-In Earnings Unearned Comprehensive
----------------
except share data) Shares Shares Amount Capital (Deficit) Compensation Income/1/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 $ - 12,965,542 $139 $249,814 $(54,798) $(2,552) $(1,189)
Comprehensive income:
Net income 59,159
Other comprehensive income:(1)
Pension liability adjustment (1,115)
-----------------------------------------------------------------------------------
Comprehensive income
-----------------------------------------------------------------------------------
Treasury shares received (158,387)
Exercise of stock options 157,023 (1,985)
Restricted stock grants 27,000 247 (1,246)
Amortization of restricted stock 1,894
Other net issuances 90,360 536 580
-----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 - 13,081,538 139 248,612 4,361 (1,324) (2,304)
Comprehensive income:
Net income 68,183
Other comprehensive income:(1)
Pension liability adjustment (2,439)
-----------------------------------------------------------------------------------
Comprehensive income
-----------------------------------------------------------------------------------
Treasury shares received (589,363) (195)
Exercise of stock options 281,455 (2,316)
Restricted stock grants 25,675 294 (1,332)
Amortization of restricted stock 1,118
Redeemable common shares 44,979 (44,979)
Other net issuances 56,206 304 287
-----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 44,979 12,855,511 139 201,720 72,544 (1,251) (4,743)
Comprehensive income:
Net income 50,813
Other comprehensive income:(1)
Pension liability adjustment 1,803
-----------------------------------------------------------------------------------
Comprehensive income
-----------------------------------------------------------------------------------
Treasury shares received (44,979) (2,934,887) 43,015
Exercise of stock options 268,328 (7,458)
Restricted stock grants 48,675 704 (3,479)
Amortization of restricted stock 1,343
Other net issuances 46,903 532 98
-----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 $ - 10,284,530 $139 $238,513 $123,357 $(3,289) $(2,940)
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total
(Amounts in thousands Treasury Stockholders'
except share data) Stock Equity
- ------------------------------------------------------------------
<S> <C> <C>
BALANCE, MARCH 31, 1996 $ (33,937) $ 157,477
Comprehensive income:
Net income 59,159
Other comprehensive income:(1)
Pension liability adjustment (1,115)
------------------------
Comprehensive income 58,044
------------------------
Treasury shares received (7,197) (7,197)
Exercise of stock options 5,980 3,995
Restricted stock grants 999
Amortization of restricted stock 1,894
Other net issuances 3,463 4,579
------------------------
BALANCE, MARCH 31, 1997 (30,692) 218,792
Comprehensive income:
Net income 68,183
Other comprehensive income:(1)
Pension liability adjustment (2,439)
------------------------
Comprehensive income 65,744
------------------------
Treasury shares received (31,693) (31,888)
Exercise of stock options 11,371 9,055
Restricted stock grants 1,038
Amortization of restricted stock 1,118
Redeemable common shares
Other net issuances 2,342 2,933
------------------------
BALANCE, MARCH 31, 1998 (47,634) 265,754
Comprehensive income
Net income 50,813
Other comprehensive income:(1)
Pension liability adjustment 1,803
-------------------------
Comprehensive income 52,616
------------------------
Treasury shares received (210,308) (212,272)
Exercise of stock options 15,758 8,300
Restricted stock grants 2,775
Amortization of restricted stock 1,343
Other net issuances 2,352 2,982
------------------------
BALANCE, MARCH 31, 1999 $(237,057) $ 118,723
- ------------------------------------------------------------------
</TABLE>
/1/ Other income is comprised of a pension liability adjustment (see Note 8).
Comprehensive income is net of income taxes.
The tax effect for the pension liability adjustment was $270, $0, and $0 for
years ended March 31, 1999, 1998, respectively.
See Notes to Consolidated Financial Statements.
37
<PAGE>
Notes To The Consolidated Financial Statements
(Amounts in thousands except share and per share data and unless otherwise
indicated)
1 Basis of Presentation and Significant Accounting Policies
Basis of Presentation - The consolidated financial statements of the Company
include all wholly owned subsidiaries. Intercompany balances and transactions
between entities included in these financial statements have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results reported in future
periods may differ from those estimates.
Long-Term Contracts - Sales under long-term contracts are accounted for under
the percentage of completion method and include cost reimbursement and fixed-
price contracts. Sales under cost reimbursement contracts are recognized as
costs are incurred. Sales under fixed-price contracts are either recognized as
the actual cost of work performed relates to the estimate at completion (cost-
to-cost) or based on results achieved, which usually coincides with customer
acceptance (units-of-delivery).
Profits expected to be realized on contracts are based on the Company's
estimates of total contract sales value and costs at completion. Estimated
amounts for contract changes and claims are included in contract sales only when
realization is estimated to be probable. Assumptions used for recording sales
and earnings are adjusted in the period of change to reflect revisions in
contract value and estimated costs. In the period in which it is determined that
a loss will be incurred on a contract, the entire amount of the estimated loss
is charged to income.
Research and development, selling, and general and administrative costs are
expensed in the year incurred.
Environmental Remediation and Compliance - Costs associated with environmental
compliance and preventing future contamination that are estimable and probable
are accrued and expensed, or capitalized as appropriate. Expected remediation
and monitoring costs relating to the remediation of an existing condition caused
by past operations, and which do not contribute to current or future revenue
generation, are accrued and expensed in the period that such costs become
estimable. Liabilities are recognized for remedial activities when they are
probable and the remediation cost can be reasonably estimated.
The cost of each environmental liability is estimated by engineering,
financial, and legal specialists within the Company based on current law and
existing technologies. Such estimates are based primarily upon the estimated
cost of investigation and remediation required and the likelihood that other
potentially responsible parties (PRPs) will be able to fulfill their commitments
at the sites where the Company may be jointly and severally liable. The
Company's estimates for environmental obligations are dependent on, and affected
by, changes in environmental laws and regulations, the nature and extent of
historical information and physical data relating to a contaminated site, the
complexity of the site, methods of remediation available, the technology that
will be required, the outcome of discussions with regulatory agencies and other
PRPs at multi-party sites, the number and financial viability of other PRPs,
future technological developments, and the timing of expenditures; accordingly,
such estimates could change materially as the Company periodically evaluates and
revises such estimates based on expenditures against established reserves and
the availability of additional information.
Cash Equivalents - Cash equivalents are all highly liquid temporary cash
investments purchased with original maturities of three months or less. The fair
market value of such investments at March 31, 1999 approximates cost.
Inventories - Inventoried costs relating to long-term contracts and programs are
stated at actual production costs, including factory overhead, initial tooling,
and other related nonrecurring costs incurred to date, reduced by amounts
identified with sales recognized on units delivered or progress completed.
Inventoried costs relating to long-term contracts and programs are reduced by
charging any amounts in excess of estimated realizable value to cost of sales.
Progress payments received from customers relating to the uncompleted portions
of contracts are offset first against unbilled receivable balances, then against
applicable inventories. Any remaining progress payment balances are classified
as contract advances.
Property and Depreciation - Property, plant, and equipment is stated at cost and
depreciated over estimated useful lives. Machinery and test equipment is
depreciated using the double declining balance method, converting to straight-
line depreciation for the last third of the asset's life. All other depreciable
property is depreciated using the straight-line method.
Goodwill - Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition, and is being
amortized on a straight-line basis over periods of 25 to 40 years. The
recoverability of the carrying value of goodwill is periodically evaluated by
comparison of the carrying value of the underlying assets which gave rise to the
goodwill (including the carrying value of the goodwill itself), with the
estimated future undiscounted cash flows from the related operations. An
impairment loss would be measured as the amount by which the carrying value of
the asset exceeds the fair value of the asset based on discounted estimated
future cash flows.
38
<PAGE>
Income Taxes - Deferred income taxes result from temporary differences between
the basis of assets and liabilities recognized for differences between the
financial statement and tax basis thereon, and for the expected future tax
benefits to be derived from tax losses and tax credit carryforwards.
Financial Instruments and Hedging - The Company uses interest rate swaps to
manage interest costs and the risk associated with changing interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. Derivatives are used for hedging purposes only, and must be designated
as, and effective as, a hedge of identified risk exposure at the inception of
the derivative contract. Changes in the fair value of the derivative contract
must be highly correlated with the changes in the fair value of the underlying
hedged item, both at the inception of the hedge and over the life of the hedge
contract. Accordingly, derivative contracts designated as a hedge of the
Company's debt obligations are not marked-to-market, but cash flow from such
contracts results in adjustments to interest expense. Gains and losses from
terminated contracts are deferred and amortized over the remaining period of the
original contract.
Earnings Per Share Data - In February 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, "Earnings Per Share", which requires companies
to present basic earnings per share (EPS) and diluted EPS. The Company adopted
the provisions of SFAS 128 during fiscal 1998, as required under the Statement.
Accordingly, the financial statements for the year ended March 31, 1999, and all
periods prior, have been reported consistent with the requirements of SFAS 128.
Basic EPS is computed based upon the weighted average number of common shares
outstanding for each period presented. Diluted EPS is computed based on the
weighted average number of common shares and common equivalent shares. Common
equivalent shares represent the effect of stock options and outstanding
redeemable common stock (see Note 13) during each period presented, which, if
exercised, would have a dilutive effect on earnings per share for fiscal 1999,
1998, and 1997. In computing EPS from continuing operations for the years ended
March 31, 1999, 1998, and 1997, income from continuing operations, as reported
for each respective period, is divided by (in thousands):
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Average shares outstanding 11,924 13,048 13,015
-----------------------------------
Diluted EPS:
Average shares outstanding 11,924 13,048 13,015
Dilutive effect of options and redeemable 322 323 387
common shares
------------------------------------
Diluted EPS shares outstanding 12,246 13,371 13,402
- --------------------------------------------------------------------------------
</TABLE>
For the year ended March 31, 1998, the 813,000 common shares redeemable under
the put/call agreement with Hercules (see Note 13) were not included in the
calculation of diluted EPS, as inclusion of those redeemable shares would have
been anti-dilutive. There were also 225,000 stock options that were not included
in the computation of diluted EPS for the year ended March 31, 1999, due to the
option price being greater than the average market price of the common shares.
Reclassifications - Certain reclassifications have been made to the fiscal 1998
and 1997 financial statements to conform to the fiscal 1999 classification.
2 Receivables
Receivables, including amounts due under long-term contracts (contract
receivables), are summarized as follows:
Years Ended March 31 1999 1998
- -----------------------------------------------------------
Contract receivables
Billed receivables $ 77,025 $ 80,408
Unbilled receivables 147,134 127,231
Other receivables 9,340 2,276
--------------------
Total Current Receivables $233,499 $ 209,915
- -----------------------------------------------------------
Receivable balances are shown net of reductions of $187,174 and $217,042 as of
March 31, 1999 and 1998, respectively, for customer progress payments received
on completed portions of contracts. The increase in unbilled receivables at
March 31, 1999 is due primarily to contract timing as well as to a schedule
delay in tactical tank ammunition shipments.
Unbilled receivables represent the balance of recoverable costs and accrued
profit, comprised principally of revenue recognized on contracts for which
billings have not been presented to the customer because the amounts were earned
but not contractually billable as of the balance sheet date. These amounts
include expected additional billable general overhead costs and fees on flexibly
priced contracts awaiting final rate negotiations, and are generally billable
and collectible within one year.
3 Inventories
Inventory balances are shown net of reductions of $12,705 and $13,254 as of
March 31, 1999 and 1998, respectively, for customer progress payments received
on uncompleted portions of contracts.
4 Property, Plant, and Equipment
The major categories of property consist of the following:
Years Ended March 31 1999 1998
- ------------------------------------------------------------------------
Land $ 20,601 $ 20,036
Buildings and improvements 163,961 168,234
Machinery and equipment 347,924 327,107
Property not yet in service 14,628 6,173
--------------------------
Gross property, plant, and equipment 547,114 521,550
Less accumulated depreciation (211,363) (188,012)
--------------------------
Net property, plant, and equipment $335,751 $333,538
- -------------------------------------------------------------------------
39
<PAGE>
5 Goodwill and Deferred Charges
Goodwill and deferred charges consist of the following:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net of accumulated amortization:
1999 - $15,670, 1998 - $10,769 $127,799 $131,600
======================================================================================
Debt issuance costs, net of accumulated amortization:/1/
1999 - $593, 1998 - $8,569 $ 8,518 $ 6,280
Other 1,590 2,194
---------------------
Total deferred charges and other non-current assets $ 10,108 $ 8,474
======================================================================================
</TABLE>
/1/See Note 7 for discussion of the fiscal 1999 early extinguishment of debt.
6 Other Accrued Liabilities
The major categories of other current and long-term accrued liabilities are as
follows:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Employee benefits and insurance $ 30,231 $ 29,313
Legal accruals 10,045 21,495
Other accruals 20,757 21,406
---------------------
Other accrued liabilities - current $ 61,033 $ 72,214
======================================================================================
Environmental remediation liability 18,044 17,264
Deferred tax liability 25,870 19,498
Supplemental employee retirement plan 10,953 10,119
Other (32) 573
---------------------
Other long-term liabilities $ 54,835 $ 47,454
======================================================================================
</TABLE>
During fiscal 1999 settlement payments of approximately $11 million were
made for legal matters previously accrued. See Note 14 for further discussion.
7 Long-Term Debt
The components of the Company's long-term debt are as follows:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Bank Term Loan with quarterly principal and
interest payments $ 342,493 $ 48,648
11.75% Senior Subordinated Notes with
semi-annual interest payments, maturing 2003 - 150,000
---------------------
Total long-term debt 342,493 198,648
Less current portion (36,500) (17,838)
---------------------
Long-term portion $ 305,993 $180,810
======================================================================================
</TABLE>
On September 16, 1998, the Company completed a tender offer and consent
solicitation related to its $150 million outstanding 11.75 percent Senior
Subordinated Notes due March 1, 2003 (the "Notes"). Under the tender offer (the
"Offer"), the Company accepted all validly tendered Notes for payment under the
Offer, and accordingly paid approximately $153 million to purchase the Notes
from noteholders holding approximately $140 million principal amount of the
Notes. The purchase of the Notes was financed under the Company's revolving
credit facility. In February 1999, the Company completed the early
extinguishment of debt by calling the remaining Notes, par value of $10 million,
for $10.6 million.
In conjunction with the early extinguishment of the Notes, the Company
refinanced its bank borrowings under a new bank credit facility, described
below. In connection with these early extinguishments of debt, the Company
recorded a $16.8 million extraordinary charge (after a $3.0 million tax bene-
fit). The extraordinary charge included a $13.6 million cash premium paid to
acquire the Notes, as well as a write-off of approximately $6.2 million, of
which $6.0 million represented the unamortized portion of debt issuance costs
associated with the original borrowings.
On November 23, 1998, the Company entered into bank credit facilities
totaling $650 million (the facilities). The facilities, which refinanced the
Company's previous bank facility, have a 6-year term and consist of up to $400
million of term-debt facilities and a $250 million revolving credit facility.
Interest charges under the facilities are primarily at the London Inter-Bank
Offering Rate (LIBOR), plus 2.25 percent (which totaled 7.3 percent at March 31,
1999), and will be subject to change in the future, as changes occur in market
conditions and in the Company's financial performance. Borrowings are secured by
substantially all of the assets of the Company. Fees associated with the
refinancing were approximately $9 million. These costs are classified in "Other
Assets and Deferred Charges," and are being amortized to interest expense over
the six-year term of the facilities. Borrowing under the facilities are subject
to financial leverage covenants, as well as other customary covenants (e.g.,
restrictions on additional indebtedness and liens, sales of assets, and limits
on certain restricted payments, including dividends and stock repurchases). At
March 31, 1999, the Company was in compliance with all covenants and
restrictions specified in its debt agreements.
At March 31, 1999, the Company had borrowings of $12 million against its
$250 million revolving credit facility. In addition, the Company had $39.4
million of outstanding letters of credit, which further reduced amounts
available on the revolving facility to $198.6 million at March 31, 1999. The
Company is required to pay a commitment fee (0.5 percent at March 31, 1999) on
the amount committed but not borrowed on the $250 million revolver.
At March 31, 1999, scheduled minimum loan repayments on the Company's
outstanding long-term bank debt are $36.5 million in fiscal year 2000, $49.5
million in fiscal year 2001, and $61.0 million per year in fiscal years 2002
through 2004. $73.5 million is due thereafter. At March 31, 1999, amounts
outstanding under the facilities approximate fair market value, based on current
rates for similar instruments with the same maturities.
The Company's weighted average interest rate on short-term borrowings
during fiscal 1999 and 1998 was 7.0 percent and 6.9 percent, respectively.
In late fiscal 1998, the Company entered into treasury rate-lock agreements
to hedge against increases in market interest rates on the anticipated
refinancing of its debt. During the third quarter of fiscal 1999, in connection
with completing the refinancing of the Company's debt, these
40
<PAGE>
treasury rate-locks were converted into interest rate swaps with a total
notional amount of $200 million. Of this total, swaps with a total notional
amount of $100 million have 6-year terms and swap interest rates between 6.32
and 6.55 percent (6.43 percent average). The remaining swap has a $100 million
notional amount, a swap interest rate of 6.1 percent, and is effective for 10
years, with a bank cancellation option at 5 years. The fair market value of the
Company's interest rate swaps is ($8.7) million at March 31, 1999.
Counter parties to the interest rate swap agreements are major financial
institutions who also participate in the Company's bank credit facilities.
Credit loss from counterparty nonperformance is not anticipated. The estimated
fair market value amounts have been determined using available market
information or other appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop estimates of fair
value; therefore, the estimates are not necessarily indicative of the amounts
that could be realized or would be paid in a current market exchange. The effect
of using different market assumptions and/or estimation methodologies may be
material to the estimated fair value amounts.
8 Employee Benefit Plans
The Company's noncontributory defined benefit pension plans cover substantially
all employees. Plans provide either pension benefits of stated amounts for each
year of credited service, or pension benefits based on employee yearly pay
levels and years of credited service. The Company funds the plans in accordance
with federal requirements calculated using appropriate actuarial methods.
Plan assets for the Company are held in a trust and are invested in a
diversified portfolio of equity securities and fixed income investments.
The following illustrates the change in the Company's projected pension
benefit obligation for fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year $ 880,122 $ 838,107
Service cost of benefits earned during the period 16,283 15,008
Interest cost of projected benefit obligation 61,133 60,354
Plan amendments 179 2,593
Actuarial loss 64,951 39,779
Benefits paid (78,130) (75,719)
----------------------
Projected benefit obligation at end of year $ 944,538 $ 880,122
======================================================================================
</TABLE>
Changes in the Company's pension plan assets are summarized as follows for
fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan asset at beginning of year $1,016,617 $ 915,574
Actual return on plan assets 134,180 163,528
Company Contributions 11,927 12,604
Benefits paid (77,467) (75,089)
-----------------------
Fair value of plan assets at end of year $1,085,257 $1,016,617
======================================================================================
</TABLE>
The components of prepaid pension cost and the amounts recognized in the
Company's balance sheet for its pension plans are as follows for fiscal years
1999 and 1998:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Funded status $140,719 $136,495
Accrued contribution 1,409 2,990
Unrecognized net actuarial gain (83,024) (94,452)
Unrecognized prior service cost 11,829 13,267
Unrecognized net transition asset (1,394) (2,009)
---------------------
Prepaid pension cost $ 69,539 $ 56,291
- --------------------------------------------------------------------------------------
Prepaid benefit cost 76,405 $ 56,555
Accrued benefit liability (10,953) $(10,119)
Intangible asset 1,147 5,112
Accumulated other comprehensive income 2,940 4,743
---------------------
Total prepaid pension cost recognized in balance sheet $ 69,539 $ 56,291
======================================================================================
</TABLE>
In accordance with SFAS No. 87, "Employer's Accounting for Pensions," the
Company has recognized the minimum liability for underfunded pension plans equal
to the excess of the accumulated benefit obligation over plan assets. A
corresponding amount is recognized as an intangible asset to the extent of any
unrecognized prior service cost, with the remaining balance recorded as
reduction to equity. As of March 31, 1999, the minimum pension liability in
excess of the unrecognized prior service cost was $2,940.
The change in the additional minimum pension liability recognized in the
Company's consolidated statement of stockholders' equity was as follows for
fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
Year ended March 31 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Change in:
Intangible assets $(3,965) $ (626)
Accrued pension benefit costs 5,768 (1,813)
----------------------
Total change in additional minimum pension liability $ 1,803 $ (2,439)
======================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with accumulated benefits in excess of
plan assets were $13,604, $11,355, and $111, respectively as of March 31, 1999,
and $72,188, $70,512, and $42,907, respectively, as of March 31, 1998. During
fiscal year 1999, five defined benefit pension plans were merged into one plan,
which caused previously underfunded plans to become fully funded.
The components of the Company's net periodic pension costs are as follows
for fiscal years 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the period $ 16,283 $ 15,008 $ 16,636
Interest costs of projected benefit obligation 61,133 60,354 61,563
Expected return on plan assets (80,876) (73,098) (68,834)
Amortization of unrecognized net loss 218 132 121
Amortization of unrecognized prior service cost 1,618 1,452 1,753
Amortization of unrecognized net transition asset (615) (615) (596)
----------------------------------
Net periodic pension cost $ (2,239) $ 3,233 $ 10,643
=================================================================================================
</TABLE>
41
<PAGE>
The weighted-average assumptions used in the accounting for defined benefit
plans were:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Discount rate used in
determining present values 6.75% 7.25% 7.50%
-----------------------------
Annual increase in future
compensation levels:
Union 3.25% 3.25% 3.25%
Salaried 4.25% 4.25% 4.25%
Expected long-term rate of
return on plan assets 9.25% 8.75% 8.75%
===========================================================
</TABLE>
The Company also sponsors a number of defined contribution plans.
Participation in one of these plans is available to substantially all employees
The two principal defined contribution plans are Company-sponsored 401(k) plans
to which employees may contribute up to 18 percent of their pay. The Company
contributes in Company common stock or cash, amounts equal to 50 percent of
employee contributions up to 4 or 6 percent of the employee's pay. The amount
expensed for the Company match provision of the plans was $5,523, $5,538, and
$5,881 in fiscal 1999, 1998, and 1997, respectively. The Company employs
approximately 1,920 employees (31 percent of its total employees) covered by
collective bargaining agreements, 272 of whom are covered under agreements
expected to be renegotiated during fiscal 2000, due to current agreement
expirations.
9 Post-Retirement Benefits
Generally, employees retiring from the Company after attaining age 55 who have
had at least five years of service are entitled to post-retirement health care
benefits and life insurance coverage until the retiree reaches age 65 or later,
depending on plan provisions. The portion of the premium cost borne by the
Company for such benefits is dependent on the employee's years of service.
Further contributions from retirees are also required based on plan deductibles
and co-payment provisions.
The following illustrates the change in the Company's accumulated non-pension
post-retirement benefit obligation for fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
<S> <C> <C>
Accumulated benefit obligation at beginning of year $ 145,219 $ 142,675
Service cost of benefits earned during the period 915 1,203
Interest cost on accumulated obligation 9,942 9,649
Plan amendments - (5,885)
Actuarial loss 15,155 12,949
Net benefits paid (16,275) (15,372)
----------------------------
Accumulated benefit obligation at end of year $ 154,956 $ 145,219
========================================================================================
Changes in the Company's post-retirement plan assets are summarized as
follows for fiscal year 1999 and 1998:
Years Ended March 31 1999 1998
- ----------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 8,618 $ 4,797
Actual return on plan assets 732 (260)
Retiree contributions 4,534 4,185
Company contributions 16,761 16,734
Gross benefits paid (20,295) (16,838)
----------------------------
Fair value of plan assets at end of year $ 10,350 $ 8,618
========================================================================================
The Company's nonpension post-retirement benefit obligations are generally not
prefunded. The following table illustrates the status of retiree benefit
obligations as of March 31, 1999 and 1998.
Years Ended March 31 1999 1998
- ----------------------------------------------------------------------------------------
Funded status $ (144,606) $ (136,601)
Accrued contribution 1,744 1,504
Unrecognized net actuarial loss 22,172 7,966
Unrecognized prior service cost (5,393) (5,747)
----------------------------
Post-retirement benefit liability recognized in
balance sheet $ (126,083) $ ( 132,878)
========================================================================================
</TABLE>
The components of the Company's net periodic post-retirement benefit costs are
as follows for fiscal years 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the period $ 915 $ 1,204 $ 899
Interest costs of accumulated post-retirement
benefit obligation 9,942 9,649 7,506
Expected return on plan assets (526) (315) (165)
Amortization of unrecognized net loss 21 - 399
Amortization of unrecognized prior service cost (355) (318) (21)
--------------------------------
Net post-retirement periodic benefit cost $ 9,997 $ 10,220 $ 8,618
============================================================================================
</TABLE>
The weighted-average assumptions used in the accounting for non-pension post-
retirement benefits were as follows:
<TABLE>
Years Ended March 31 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used in determining present values 6.75% 7.25% 7.50%
Expected long-term rate of return on plan assets 6.00% 6.00% 6.00%
Medical trend rate 5.00% 5.00% 5.00%
============================================================================================
</TABLE>
For measurement purposes, a weighted average annual rate of increase of
approximately 5.2 percent in the cost of covered health care benefits was
assumed for fiscal year 2000. The rate was assumed to be 5 percent thereafter.
The following illustrates the effect of a one-percentage point increase or
decrease in the assumed health care cost trend rates, as of March 31, 1999:
<TABLE>
One Percentage One Percentage
Point Increase Point Decrease
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Effect on service and interest cost components $ 626 $ (555)
Effect on accumulated post-retirement
benefit obligation $ (6,891) $ (6,151)
=========================================================================================
</TABLE>
42
<PAGE>
10 Income Taxes
The components of the Company's income tax provision consist of:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 5,450 $ - $ -
State 778 - -
Deferred 2,739 - 12,115
---------------------------------------------------------
Income tax provision $ 8,967 $ - $ 12,115
================================================================================================================
The items responsible for the differences between the federal statutory rate
and the Company's effective rate are shown as follows:
Years Ended March 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Income taxes computed at statutory federal rate $ 20,923 $ 23,864 $ 24,946
State income taxes-net of federal impact 2,989 3,409 3,564
Permanent non-deductible costs 1,556 1,361 1,462
Unrecorded tax benefits (16,501) (28,634) (17,857)
---------------------------------------------------------
Income tax provision $ 8,967 $ - $ 12,115
================================================================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and operating loss and
tax credit carryforwards. Significant items comprising the net deferred tax
asset shown on the statement of financial position are:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred sales $(26,501) $(29,243)
Accelerated depreciation (51,907) (60,417)
---------------------------------------
Deferred income tax liabilities (78,408) (89,660)
---------------------------------------
Reserves for employee benefits 39,338 50,594
Restructuring and environmental reserves 8,538 9,960
Research tax credits 25,178 25,228
Net operating loss carryforwards 12,836 37,634
Other 8,560 16,943
---------------------------------------
Deferred income tax assets 94,450 140,359
Valuation allowance - (31,917)
---------------------------------------
Net deferred income tax asset $ 16,042 $ 18,782
---------------------------------------
Current deferred income tax asset 41,912 38,280
Noncurrent deferred income tax liability (25,870) (19,498)
---------------------------------------
Net deferred income tax asset $ 16,042 $ 18,782
======================================================================================================
</TABLE>
During fiscal 1999, the deferred tax asset valuation allowance decreased by
$31,917. This decrease is primarily the result of the Company's analysis of the
likelihood of realizing the future tax benefit of tax loss carryforwards and
additional temporary differences. Realization of the net deferred tax asset is
dependent upon profitable operations and future reversals of existing taxable
temporary differences. Although realization is not assured, the Company believes
it is more likely than not that the recorded benefits will be realized through
the reduction of future taxable income. The amount of the net deferred tax
assets considered realizable, however, could be reduced in the near term if
actual future taxable income is lower than estimated, or if there are
differences in the timing or amount of future reversals of existing taxable
temporary differences.
Federal and state operating loss carryforwards for tax purposes available to
offset future taxable income, are $32,089 at March 31, 1999. These carryforwards
begin to expire in 2008. Research tax credits available to offset future tax
payments are $25,178, and begin to expire in 2006. At March 31, 1999, the
Company's deferred tax assets include Alternative Minimum Tax (AMT) assets of
approximately $8.6 million.
11 Leases
The Company leases land, buildings, and equipment under various operating leases
which generally have renewal options of one to five years. Rental expense for
the years ended March 31, 1999, 1998, and 1997 was $12,359, $13,199, and
$14,447, respectively.
Minimum rental commitments payable under noncancellable lease commitments
outstanding at March 31, 1999 are $12,881, $9,277, $7,709, $6,685, and $6,000,
respectively, for the fiscal years ending March 31, 2000, 2001, 2002, 2003, and
2004.
12 Restructuring Charges
The Company initiated a restructuring program in fiscal 1995 which resulted in a
fiscal 1995 fourth-quarter pre-tax charge of $35.6 million of which
approximately $12 million was a non-cash charge associated with accruals for
certain pension-related liabilities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits."
In mid-fiscal 1996, various executive management changes were made within the
Company. As a result of these changes, new management reevaluated business
strategies, including its restructure plans and as a result, the anticipated
timing of certain severance and facility closure costs pushed into fiscal 1997.
Cash expenditures under this completed restructuring program, primarily for
employee-related costs, totaled approximately $3 million and $8 million in
fiscal 1998 and 1997, respectively. In the fourth quarter of fiscal 1997, the
Company reversed approximately $2 million of this reserve against general and
administrative costs, due to cost underruns relative to the originally reserved
amounts.
Additional restructure expenditures of approximately $12 million were made in
fiscal 1997, in connection with the Company's closure plan for certain
facilities acquired in the March 15, 1995 acquisition of the Aerospace
operations from Hercules, Incorporated. As these closure activities were
anticipated and planned for at the acquisition date, the Company had estimated
and recorded these costs as part of the March 1995 acquisition price. The actual
costs incurred did not vary significantly from those estimated and recorded. See
also Note 15 for discussion of facility closure expenditures associated with the
Marine Systems Group.
43
<PAGE>
13 Stockholders' Equity
The Company has authorized 5,000,000 shares of preferred stock, par value $1.00,
none of which has been issued.
The Company has authorized up to 3,320,679 shares to be granted under the 1990
Equity Incentive Plan of which 474,104 were available at March 31, 1999, for
future grants. Stock options are granted periodically, at the fair market value
of the Company's common stock on the date of grant, and are generally
exercisable from one to three years from the date of grant. Restricted stock
issued to non-employee directors and certain key employees totaled 48,675,
25,675, and 27,000 for the fiscal years ended March 31, 1999, 1998, and 1997,
respectively. Restricted shares vest over periods of one to four years from the
date of award. As of March 31, 1999, net restricted shares of up to 25,100
shares were reserved for certain key officers which will vest upon achievement
of certain financial performance goals through fiscal 2001.
As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue following the guidance of APB 25 for measurement
and recognition of stock-based transactions with employees. Accordingly,
compensation cost has not been recognized for the awards made to employees in
the form of stock options. If compensation cost for the Company's stock-based
compensation plan had been determined based on the fair value at the grant dates
for awards under the plan (consistent with the method provided in SFAS 123), the
Company's net income and earnings per share would have been reduced to the
proforma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $50,813 $68,183 $59,159
Proforma $47,633 $65,434 $57,032
Basic EPS As reported $ 4.26 $ 5.23 $ 4.55
Proforma $ 3.99 $ 5.01 $ 4.38
Diluted EPS As reported $ 4.15 $ 5.10 $ 4.41
Proforma $ 3.89 $ 4.89 $ 4.26
============================================================================================================
</TABLE>
A summary of the company's stock option activity is as follows:
<TABLE>
<CAPTION>
Years Ended March 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 731,782 $35.74 896,333 $33.49 991,210 $30.23
Granted 363,850 74.17 150,850 44.61 150,650 46.28
Exercised (268,328) 30.93 (281,455) 32.16 (157,023) 25.43
Canceled (33,811) 50.01 (33,946) 44.70 (88,504) 32.77
-------------------------------------------------------------------------
Outstanding at
end of year 793,493 $54.39 731,782 $35.74 896,333 $33.49
Options exercisable
at year end 318,508 35.48 440,964 30.34 532,815 29.64
-------------------------------------------------------------------------
Weighted average
fair value of
options granted
during the year $32.15 $20.18 $21.88
=======================================================================================================
</TABLE>
The weighted average fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and represents the
difference between fair market value on the date of grant and the estimated
market value on the expected exercise date. The following weighted average
assumptions were used for grants in fiscal 1999, 1998, and 1997 respectively:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free rate 5.1% 6.1% 6.5%
Expected volatility 29.4 30.4 31.5
Expected option life 7 years 7 years 7 years
================================================================================================
</TABLE>
A summary of stock options outstanding at March 31, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Range of Remaining Weighted Weighted
Exercise Contractual Average Average
Prices Shares Life Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10-$24 76,479 3.7 years $18.81 76,479 $18.81
$25-$30 21,700 2.4 years 30.00 21,700 30.00
$31-$40 107,509 5.4 years 37.49 107,509 37.49
$41-$52 228,255 7.3 years 45.31 111,488 45.75
$53-$65 134,050 9.1 years 64.52 1,332 61.16
$66-$76 75,500 9.6 years 75.25 - -
$77-$85 150,000 9.8 years 82.44 - -
=======================================================================================================
</TABLE>
On December 15, 1998, the Company completed the repurchase of 1.7 million
shares of its common stock at a price of $77 per share, or approximately $130
million in total. The repurchase occurred via the terms and conditions of a
modified "Dutch auction" tender offer (Dutch auction), and was financed under
the Company's new bank credit facilities.
In connection with the completion of the Dutch auction, the Company's Board of
Directors authorized the Company to repurchase up to an additional 1.1 million
shares of its common stock. Any repurchases made under this plan would be
subject to market conditions and the Company's compliance with its debt
covenants. As of March 31, 1999, repurchases of 436 thousand shares have been
made under the program, aggregating approximately $34 million. As of March 31,
1999, the Company's debt covenants permit the Company to expend up to $55.2
million specifically in connection with future share repurchases. Additionally,
the Company may make "restricted payments" (as defined in the Company's debt
covenants) of up to an additional $50 million, which among other items, would
allow payments for further stock repurchases (over and above the aforementioned
$55.2 million). While it is currently the Company's intention to make stock
repurchases under this program, there can be no assurance that the Company will
purchase all or any portion of the remaining shares, or as to the timing or
terms thereof.
On October 24, 1997, the Company entered into an agreement with Hercules,
Incorporated, providing for the disposition of the 3.86 million shares of
Company common stock then held by Hercules. The shares represented the stock
issued by the Company in connection with the March 15, 1995, acquisition of the
Hercules Aerospace Company operations from Hercules.
44
<PAGE>
Under the agreement with Hercules, during the quarter ended December 28, 1997,
the Company registered for public offering approximately 2.78 million of the
shares (previously unregistered) held by Hercules. The offering was completed on
November 21, 1997. No new shares were issued in the offering, nor did the
Company receive any proceeds from the offering. The remaining 1.1 million shares
then held by Hercules became subject to a put/call arrangement (the "Hercules
repurchase") by which Hercules could require the Company to purchase the shares,
and the Company could likewise require Hercules to sell the shares to the
Company, during 1998. The price for shares purchased under the put/call
arrangement was equal to the per share net proceeds realized by Hercules in the
secondary public offering, $55.32. During February 1998, the Company did
repurchase 271,000 shares for approximately $15 million. During fiscal 1999, the
Company repurchased the remaining 813,000 shares, for approximately $45 million.
During fiscal 1998, the Company's stock repurchases totaled approximately 0.6
million shares, at a total cost of $31.7 million. These repurchases were made
primarily under the Hercules repurchase (described above) through an open-market
stock repurchase program.
14 Contingencies
As a U.S. government contractor, the Company is subject to defective pricing and
cost accounting standards noncompliance claims by the government. Additionally,
the Company has substantial government contracts and subcontracts, the prices of
which are subject to adjustment. The Company believes that resolution of such
claims and price adjustments made or to be made by the government for open
fiscal years (1987 through 1999) will not materially exceed the amount provided
in the accompanying balance sheets.
The Company is a defendant in a number of 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.
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 were assumed by the Company except for a few specific lawsuits and
disputes including two specific qui-tam lawsuits. Under terms of the purchase
agreement with Hercules, the Company's maximum combined settlement liability for
both of these qui tam matters was approximately $4 million, which the Company
had fully reserved. On May 15, 1998, Hercules announced that it had agreed to a
settlement in the first qui tam lawsuit, which has since been approved by the
court. Therefore, in July 1998 the Company paid $4 million in full satisfaction
of its liability related to these matters.
In March 1997 the Company received a partially unsealed complaint, in a qui
tam action by four former employees (the "Relators") alleging labor mischarging
to the Intermediate Nuclear Force (INF) contract, and other contracts. Damages
were not specified in this civil suit. The Company and Hercules have agreed to
share equally the external attorney's fees and investigative fees and related
costs and expenses of this action until such time as a determination is made as
to the applicability of the indemnification provisions of the Aerospace
acquisition purchase agreement. In March 1998, the Company and Hercules settled
with the Department of Justice on the portion of the complaint alleging labor
mischarging to the INF contract and agreed to pay $2.25 million each, together
with Relators' attorney's fees of $150 thousand each, which was paid in April
1998. The Department of Justice declined to intervene in the remaining portion
of the complaint. On October 16, 1998 the Company and Hercules settled with the
Relators all remaining issues in this action by agreeing to each pay $575
thousand, subject to court approval. On January 21, 1999, the court approved the
settlement and entered judgment dismissing the case, subject to the right of the
Department of Justice to appeal such approval and dismissal. On March 22, 1999,
the Department of Justice filed notice of an intent to appeal.
The Company has also been served with a complaint in a civil action captioned
United States v. Alliant Techsystems Inc. and filed in the U.S. District Court
for the District of Minnesota, alleging violations of the False Claims Act, the
Truth in Negotiations Act, and common law and equitable theories of recovery.
The complaint was filed March 10, 1997, and relates to a contract for the AT4
shoulder-fired weapon. The complaint alleges that the contract in question was
defectively priced. Based upon documents provided to the Company in connection
with the action, the Company believes that the U.S. Government may seek damages
and penalties of approximately $5 million. Under the provisions of the False
Claims Act, a civil penalty of between $5,000 and $10,000 can be assessed for
each claim, plus three times the amount of any damages sustained by the U.S.
Government. In addition to damages, a judgment against the Company in such a
suit or a finding of liability in a separate criminal action could carry
penalties of suspension or debarment which would make some or all of the
Company's operations ineligible to be awarded any U.S. Government contracts for
a period of up to three years. The amount of damages, if any, involved in the
above actions filed under the False Claims Act cannot be determined at this
time.
The Company was a defendant in a patent infringement case brought by Cordant
Technologies (formerly Thiokol Corporation), which the Company believed was
without merit. The plaintiff alleged that the rocket motor insulation used by
the Company in certain rocket motors infringed on a patent owned by the
plaintiff. The complaint sought trebling of any damages that might have been
awarded, based on an allegation of deliberate and willful infringement. The
complaint did not quantify the amount of damages sought. Through its analysis of
an October 27, 1997, court filing, the Company believed that, based on an
economist's expert testimony,
45
<PAGE>
Cordant Technologies might seek lost profits, interest and costs of
approximately $240 million. Even if the Company was found liable, it believed
that damages should be based upon a reasonable royalty of less than $5 million.
On March 25, 1999, the Court held invalid the patent that is the subject of the
action. The plaintiff filed a notice of appeal on April 23, 1999, and the
Company filed a notice of cross appeal on April 30, 1999. On April 13, 1999, the
plaintiff and the Company entered into a "standstill agreement" under which the
parties have agreed to file a joint motion to the U.S. Court of Appeals for the
Federal Circuit for a stay of all proceedings for up to 150 days, during which
the parties have agreed to negotiate in good faith to settle the litigation. In
the judgment of management, the case will not have a material adverse effect
upon the Company's future financial condition or results of operations. However,
there can be no assurance that the outcome of the case will not have a material
adverse effect on the Company.
During fiscal 1998, the Company substantially completed the requirements of
the M117 Bomb reclamation contract. The contract contained a priced option,
having approximate contract value less than $5 million, whereby the customer
could require the reclamation of additional quantities, given that such option
be exercised within the terms and conditions of the contract. On August 4, 1997,
the customer informed the Company that it was exercising the option. The
Company, based on advice from its counsel, maintains that the option exercise
was invalid and has therefore not performed on the option. The Company is
currently appealing the validity of the option to the United States Court of
Appeals, based on the Company's continued belief that such exercise was invalid.
In late December 1997, the Company was informed by the customer that the Company
was being terminated for default on the contract option. The Company expects the
appeals process to conclude in calendar 1999. Depending on the outcome of the
appeal and the termination for default litigation, management currently
estimates that the range of possible adverse impact to the Company's future
operating earnings is from $0-$4 million, in total.
During fiscal 1998, the Company identified potential technical and safety
issues on its Explosive "D" contracts 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 have caused the Company to delay contract performance until the issues
are resolved to the satisfaction of the Company. As a result, the Government
customer has provided the Company notification that it has been terminated for
default on the contracts. The Company is currently working closely with the
customer to resolve these matters. Based on information known at this time,
management's estimated range of reasonably possible additional cost impact that
could occur as a result of the potential technical and safety issues on the
Explosive "D" program is currently $0-$3 million, on which the ultimate outcome
is dependent on the extent to which the Company is able to mitigate these
potential risks and ultimately resolve the contractual performance issues on a
mutually agreeable basis.
The Company does not believe that the above contract terminations will have a
material adverse impact on the Company's results of operations, its liquidity,
or its financial position.
While the results of litigation cannot be predicted with certainty, management
believes, based upon the advice of counsel, that the actions seeking to recover
damages against the Company either are without merit, are covered by insurance
and reserves, do not support any grounds for cancellation of any contract, or
are not likely to materially affect the financial condition or results of
operations of the Company, although the resolution of any such matters during a
specific period could have a material adverse effect on the quarterly or annual
operating results for that period.
The Company does not generate a significant amount of revenues or costs, nor
does it maintain significant assets or liabilities in European Union (EU)
countries or in European currencies. Therefore, the Company does not expect that
the EU's conversion to the Euro will have a material impact to the Company's
financial position or its results of operations.
15 Discontinued Operations
Marine Systems Group - On December 22, 1996, the Company entered into an
agreement to sell its Marine Systems Group, including substantially all of the
assets of that business, to Hughes Aircraft Co. (Hughes) for $141.0 million in
cash. The sale was completed on February 28, 1997, resulting in a pretax gain to
the Company of approximately $31.9 million ($22.4 million, after tax), which the
Company recognized in the fourth quarter of fiscal 1997.
In connection with the sale, the Company began actions during fiscal 1998 to
close certain facilities (not sold to Hughes) that had previously been utilized
for Marine Systems Group contracts. As a direct result of the sale, the Company
booked closure reserves of approximately $16 million in March 1997 (by a charge
to the gain on disposal of discontinued operations) primarily for the estimated
costs of facility closure, severance costs, and anticipated litigation costs
associated with these activities. During fiscal 1998, the Company spent
approximately $6 million on these facility closure and severance costs. As these
facility closure activities were substantially completed, the Company reversed
$10.1 million of these liabilities during the fourth quarter of fiscal 1998,
resulting in an additional gain on the disposal of the Marine business.
Demilitarization Operations - During fiscal 1994, the Company entered into two
joint ventures in Belarus and Ukraine, for the purpose of establishing
demilitarization operations in those countries. In March 1996, Company
management, after evaluating its strategic plans for the future, elected to
discontinue its ownership of its foreign demilitarization businesses
(Demilitarization operations). Accordingly, the Company began actions to
transfer ownership of the joint ventures to the host country governments, or
their agents, and in the fourth quarter of fiscal 1996, the Company estimated
and recorded a $6.2 million loss on disposal of discontinued operations (net of
tax benefit of $4.2 million).
46
<PAGE>
During fiscal 1997, the Company stopped production efforts, and completed its
withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997, the
Company reached agreement with the Ukrainian government to transfer the
Company's interests in the operation to the Ukrainian Government after payment
of a $19.8 million non-interest bearing long-term note receivable. In March
1998, as a result of the Company's continued consideration and evaluation of the
status of the underlying operations, as well as newly imposed export
restrictions in the Ukraine and the increasing political instability in the
region, Company management wrote off approximately $9.9 million, representing
the remaining recorded value of the Company's investment in that operation. The
Company maintains a letter of credit to support approximately $2.5 million of
bank borrowings of the Demilitarization operations. During fiscal 1999,
management has continued to work with the Ukrainian government to complete the
Company's exit from this business. However, given the political instability in
the region and the lack of economic reforms, the Company now believes that it
would be unable to pursue an exit by sale of its interest in the operation.
Consequently, in fiscal 1999, the Company began the process of removing and
salvaging assets. The salvage value of the assets is believed to be de minimus.
During this process, the Company was prevented from physically recovering all of
its assets. The Company has attempted unsuccessfully to rectify the situation
through discussions with the Ukrainian government. The Company believes that the
facts and circumstances surrounding the unrecovered assets may ultimately be
determined to be covered as an insured loss under the Company's political risk
insurance policy. Therefore, the Company submitted a claim in late calendar 1998
and currently expects resolution on such claim during the fall of calendar 1999.
The maximum insurable value under the policy is $17.7 million. The amount
ultimately collected under such policy will be dependent on the insurer's
rulings as to the validity of the claim, as well as its determination of what
amounts are payable under such claim. Given the contingent nature of the claim,
the Company has not recorded a claim receivable as of March 31, 1999.
The consolidated income statements of the Company reflect the operating
results and the gain (loss) on disposal of discontinued operations separately
from continuing operations. The components of the gain (loss) from the Company's
two discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
MARINE SYSTEMS GROUP
Years Ended March 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ - $ - $107,746
Income from discontinued operations - - 7,415
Gain on disposal of assets - 10,125 31,900
Income tax expense - - (12,115)
-----------------------------------------
Gain from discontinued operations $ - $10,125 $ 27,200
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DEMILITARIZATION OPERATIONS
Years Ended March 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ - $ - $ -
Income from discontinued operations - - -
Loss on disposal of assets - (9,900) -
Income tax expense - - -
-----------------------------------------
Loss from discontinued operations $ - $(9,900) $ -
====================================================================================================
</TABLE>
16 Environmental Remediation Liabilities
The Company is subject to various local and national laws relating to protection
of the environment and is in various stages of investigation or remediation of
potential, alleged, or acknowledged contamination. In March 1997, the Company
adopted the provisions of SOP 96-1 "Environmental Remediation Liabilities,"
which required a change in, and provided clarification to, the manner in which
companies measure and recognize costs associated with environmental remediation
liabilities. Under the provisions of the SOP, all future anticipated ongoing
monitoring and maintenance costs associated with known remediation sites are
required to be accrued. Such costs were previously expensed as incurred. The
Company's adoption of the provisions of the SOP resulted in a non-cash charge of
$17.4 million in the fourth quarter of fiscal 1997. The charge was classified in
cost of sales in the Company's consolidated income statement for the fourth
quarter ending March 31, 1997.
At March 31, 1999, the accrued liability for environmental remediation of
$31.9 million represents management's best estimate of the present value of the
probable and reasonably estimable costs related to the Company's known
remediation obligations. It is expected that a significant portion of the
Company's environmental costs will be reimbursed to the Company. As collection
of those reimbursements is estimated to be probable, the Company has recorded a
receivable of $10.5 million, representing the present value of those
reimbursements at March 31, 1999. Such receivable primarily represents the
expected reimbursement of costs associated with the Aerospace operations
acquired from Hercules in March 1995 (Aerospace acquisition), whereby the
Company generally assumed responsibility for environmental compliance at
Aerospace facilities. It is expected that much of the compliance and remediation
costs associated with these facilities will be reimbursable under U.S.
Government contracts, and that those environmental remediation costs not covered
through such contracts will be covered by Hercules under various indemnification
agreements, subject to the Company having appropriately notified Hercules of
issues identified prior to the expiration of the stipulated notification periods
(March 2000 or March 2005, depending on site ownership). The Company's accrual
for environmental remediation liabilities and the associated receivable for
reimbursement thereof, have been discounted to reflect the present value of the
expected future cash flows, using a discount rate, net of estimated inflation,
of approximately 4.5 percent. The following is a summary of the Company's
amounts recorded for environmental remediation at March 31, 1999:
<TABLE>
<CAPTION>
Environmental
Accrued Costs -
Environmental Reimbursement
Liability Receivable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts (Payable)/Receivable $(41,227) $14,238
Unamortized Discount 9,351 (3,706)
-----------------------------------
Present Value of Amounts (Payable)/Receivable $(31,876) $10,532
====================================================================================================
</TABLE>
47
<PAGE>
At March 31, 1999, the aggregate undiscounted amounts payable for
environmental remediation costs, net of expected reimbursements, are estimated
to be $3.3, $5.3, $2.1, $1.5, and $4.4 million for the fiscal years ending March
31, 2000, 2001, 2002, 2003, and 2004, respectively; estimated amounts payable
thereafter total $10.3 million. Amounts payable/receivable in periods beyond
fiscal 2000 have been classified as non-current on the Company's March 31, 1999
balance sheet. At March 31, 1999, the estimated discounted range of reasonably
possible environmental remediation costs is between $32 and $46 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.
17 Supplemental Cash Flow Information
Net income taxes paid in the fiscal years ended March 31, 1999, 1998, and 1997,
totaled $1,018, $1,107, and $107, respectively.
Amounts paid for interest were $24,019, $27,400, and $39,015 for fiscal
1999, 1998, and 1997, respectively. Amounts received for interest in those same
periods were $1,215, $3,090, and $716, respectively. The significant decrease in
interest paid during fiscal 1998 compared to fiscal 1997, reflects a reduction
in long-term debt due to an $88.6 million loan prepayment made in March 1997
with proceeds received from the sale of the Marine Systems Group. The increase
in interest received in fiscal 1998 compared to fiscal 1997 reflects increased
average cash balances also due to the proceeds received from the sale of the
Marine Systems Group.
18 Business Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131) during the fourth quarter of 1999. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments. It also established
standards for related disclosures about products, services, and geographic
areas.
The Company conducts its business primarily in three operating segments:
Conventional Munitions, Aerospace, and Defense Systems. These operating segments
are defined by the Company's management based on product similarity and end-use
functionality. The Conventional Munitions operating segment is a designer,
developer, and manufacturer of medium-caliber and large-caliber ammunition,
munitions propellants, tactical missile propulsion systems, warheads, metal
parts, composite structures for aircraft and weapons systems, infrared decoy
flares, and commercial gun powder. The Aerospace operating segment is a
designer, developer, and manufacturer of solid rocket propulsion systems for
space and strategic applications, and composite structures for military and
commercial aircraft and spacecraft. It also provides operations and technical
support services for space launches. The Defense Systems operating segment
designs, develops, and produces tactical weapons systems, air delivered
munitions, fuzes, batteries, secure electronic devices, and unmanned aerial
vehicle systems for the Department of Defense and allied nations.
All of the Company's operating segments derive the majority of their revenues
from contracts with, and prime contractors to, the U.S. Government. The various
U.S. Government customers exercise independent purchasing decisions, and sales
to the U.S. Government generally are not regarded as constituting sales to one
customer, but instead, each contracting entity is considered to be a separate
customer. During fiscal 1999, approximately 76 percent of the Company's sales
were derived from contracts with the U.S. Government or U.S. Government prime
contractors. U.S. Government contract sales were $828,804, $879,056, and
$884,707 in fiscal years 1999, 1998, and 1997, respectively.
The Company's sales to U.S. Government prime contractors include sales to two
contractors, Lockheed Martin Corporation and The Boeing Company, which each
comprised greater than 10 percent of the Company's total revenues. During fiscal
1999, sales to Lockheed Martin and Boeing, respectively, represented
approximately 20 percent and 13 percent of the Company's total revenue. While
the majority of sales to these contractors is derived from rocket propulsion
contracts in the Aerospace segment, the Conventional Munitions and Defense
Systems segments also derive a portion of their revenues from sales to these
contractors.
The Company's export sales to customers were $61.8 million, $33.2 million, and
$58.0 million in fiscal years 1999, 1998, and 1997, respectively. Company sales
to the United Kingdom comprised $45.0 million of the total fiscal 1999 export
sales, representing an increase of $36.3 million compared to fiscal 1998. The
increase in export sales in fiscal 1999 is primarily due to increased production
volume on an antitank munitions contract in the Defense Systems segment. The
decrease in export sales in fiscal 1998 compared to fiscal 1997 primarily
reflects reduced sales of medium caliber ammunition in the Conventional
Munitions segment.
48
<PAGE>
The following summarizes the Company's results, by operating segment, in fiscal
years 1999 and 1998:
<TABLE>
<CAPTION>
Conventional
Year Ended March 31, 1999 Munitions Aerospace Defense Systems Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
External customers $471,542 $395,274 $223,622 $ - $1,090,438
Intercompany 9,116 146 116 (9,378) -
---------------------------------------------------------------------
Total $480,658 $395,420 $223,738 $ (9,378) $1,090,438
Capital Expenditures 14,104 23,938 5,648 - 43,690
Depreciation 8,339 25,233 4,888 - 38,460
Amortization 1,824 2,495 1,925 1,181 7,425
Income from continuing operations before income taxes 19,328 41,116 3,812 15,291 79,547
Long-lived assets 109,535 304,748 38,533 19,252 472,068
Total assets 242,692 379,245 103,236 169,145 894,318
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Conventional
Year Ended March 31, 1998 Munitions Aerospace Defense Systems Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue
External customers $457,630 $369,721 $234,618 $ 13,537 $1,075,506
Intercompany 6,181 275 1,286 (7,742) -
---------------------------------------------------------------------
Total $463,811 $369,996 $235,904 $ 5,795 $1,075,506
Capital Expenditures 8,940 8,224 3,193 49 20,406
Depreciation 8,367 26,458 4,940 1,651 41,416
Amortization 1,624 2,470 538 1,469 6,101
Income from continuing operations before income taxes 19,437 28,783 6,374 13,364 67,958
Long-lived assets 103,346 308,222 38,424 21,426 471,418
Total assets 224,027 380,869 103,621 199,792 908,309
=================================================================================================================================
</TABLE>
As previously described, the Company's three operating segments are
Conventional Munitions, Aerospace, and Defense Systems. In addition, certain
administrative functions are primarily managed by the Company at the corporate
headquarters level ("Corporate"). Some examples of such functions are human
resources, pension and post-retirement benefits, legal, tax, and treasury.
Significant assets and liabilities managed at the Corporate level include those
associated with debt, pension and post-retirement benefits, environmental
liabilities, and income taxes. As the Company's results of operations are
substantially all earned in the United States for federal tax purposes,
substantially all of the Company's deferred tax assets and liabilities reflect
temporary basis differences between U.S. tax regulations and generally accepted
accounting practices. A capital-employed charge (interest expense) is allocated
to each operating segment based on net assets employed, using an 8 percent rate,
which approximates the Company's overall borrowing rate. Interest expenses
included in segment results for fiscal 1999 (in millions) were ($12.6), ($27.1),
($5.3), and $21.5, for Conventional Munitions, Aerospace, Defense Systems, and
Corporate, respectively. Interest expenses in fiscal 1998 (in millions) were
($13.2), ($26.4), ($4.4), and $19.5 for Conventional Munitions, Aerospace,
Defense Systems, and Corporate, respectively. Income from continuing operations
before taxes in Corporate (earnings before taxes, or "EBT") was $15.3 million
for fiscal 1999, compared to $13.4 million in fiscal 1998. EBT results at
Corporate were primarily reflective of the Company's 8 percent charge to the
Company's operating segments for capital employed, as discussed above. Net
capital employed at Corporate is historically a negative number (i.e., a net
liability) due primarily to the fact that certain significant liabilities are
accounted for at Corporate, including accrued post-retirement benefits, taxes,
and environmental liabilities.
Long-lived assets held at the operating segment level primarily reflect
property, plant and equipment, goodwill, and capitalized debt issuance costs.
Pension and post-retirement benefit expenses are allocated to each operating
segment based on relative headcount and types of benefits offered in each
respective segment. Environmental expenses are allocated to each operating
segment based on the origin of the underlying environmental cost. Transactions
between operating segments are recorded at the segment level, consistent with
the Company's financial accounting policies. Intercompany balances and
transactions are eliminated at the Company's consolidated financial statements
level. These eliminations are shown above in "Corporate."
In the fiscal year ending March 31, 1997, the Company's total sales of
$1,089.4 million were comprised of sales from the Conventional Munitions
segment, $492 million, Aerospace segment, $340 million, Defense Systems segment,
$253 million, and Corporate (other) of $4 million. Sales results in Corporate
that year include sales from minor businesses that are no longer pursued by the
Company.
49
<PAGE>
19 Quarterly Financial Data (Unaudited)
Quarterly financial data is summarized for the years ended March 31, 1999 and
1998 as follows:
<TABLE>
<CAPTION>
Fiscal Year 1999 Quarter Ended June 28 Sep. 27 Dec. 27 Mar. 31
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $256,321 $258,998 $274,446 $300,673
Gross margin 45,232 45,434 48,360 58,084
Income before extraordinary loss 15,801 16,668 18,019 17,127
Basic earnings per share before extraordinary loss 1.24 1.33 1.50 1.63
Diluted earnings per share before extraordinary loss 1.21 1.30 1.45 1.59
-----------------------------------------------
Net income 15,801 2,041 16,358 16,613
Basic earnings per share 1.24 .16 1.36 1.58
Diluted earnings per share 1.21 .16 1.32 1.54
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998 Quarter Ended June 29 Sep. 28 Dec. 28 Mar. 31
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $251,639 $266,954 $269,217 $287,696
Gross margin 43,720 45,829 48,065 56,655
Income before extraordinary loss 14,657 15,920 18,027 19,579
Basic earnings per share before extraordinary loss 1.13 1.22 1.37 1.49
Diluted earnings per share before extraordinary loss 1.10 1.18 1.33 1.45
-----------------------------------------------
Net income 14,657 15,920 18,027 19,579
Basic earnings per share 1.13 1.22 1.37 1.51
Diluted earnings per share 1.10 1.18 1.33 1.47
================================================================================================================================
</TABLE>
In connection with the Company's September 1998 early extinguishment of its
Senior Subordinated Notes and refinancing of its bank borrowings in November
1998, the Company recorded a $16.8 million extraordinary charge (after the tax
benefit of $3.0 million) - (see Note 7). In conjunction with such early
extinguishment of debt, the Company incurred extraordinary charges of $14,627
(after $2,581 tax benefit), $1,661 (after $293 tax benefit), and $514 (after $91
tax benefit), for the quarters ended September 27, 1998, December 27, 1998, and
March 31, 1999, respectively.
Following is a summary of the Company's stock price for the past three
years.
<TABLE>
<CAPTION>
Common Stock Price
Quarter Ended High Low
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
March 31, 1999 $88.00 $72.63
December 27, 1998 83.06 65.00
September 27, 1998 68.88 61.38
June 28, 1998 65.56 57.88
March 31, 1998 65.00 54.50
December 28, 1997 65.69 53.75
September 28, 1997 69.00 51.44
June 29, 1997 52.88 40.50
March 31, 1997 55.00 42.00
December 29, 1996 57.38 47.63
September 29, 1996 53.25 46.25
June 30, 1996 49.13 43.75
March 31, 1996 50.50 46.25
=====================================================================================================
</TABLE>
The Company does not currently pay dividends on its common stock.
50
<PAGE>
Board of Directors
Paul David Miller
Admiral, U.S. Navy (Retired). Chairman of the Board and Chief Executive Officer,
Alliant Techsystems. Joined Alliant in January 1999. Previously headed the
Litton Marine Systems and Sperry Marine Inc. divisions of Litton Industries,
Inc. Retired from U.S. Navy in 1994, following 30-year career. Major posts
included Commander-in-Chief, U.S. Atlantic Command; NATO Supreme Allied
Commander-Atlantic; Commander, U.S. Atlantic Fleet; and Commander, U.S. Seventh
Fleet. Bachelor's degree, Florida State University. MBA, University of Georgia.
Peter A. Bukowick
President and Chief Operating Officer, Alliant Techsystems. Served as acting
Chief Executive Officer in 1998. Joined Alliant in 1995 as Group Vice President,
Aerospace Systems. Background includes more than 30 years' experience in
technical, research and development, and business management. Joined Hercules
Incorporated in 1968. Held various management positions, including Vice
President, Technology, Hercules Aerospace Company. Bachelor's degree, Lafayette
College. Ph.D., organic chemistry, University of Virginia.
Gilbert F. Decker
Executive Vice President, Operations, Walt Disney Imagineering, a provider of
planning, design, engineering, production, and development services to The Walt
Disney Company. Served as Assistant Secretary of the Army, Research,
Development, and Acquisition from 1994 to 1997. Also held Chief Executive
Officer positions with Xeruca Holding, Incorporated, and Penn Central Federal
Systems Company. Bachelor's degree, The Johns Hopkins University. Master's
degree in industrial engineering, Stanford University.
Thomas L. Gossage
Retired Chairman of the Board and Chief Executive Officer, Hercules,
Incorporated. Joined Hercules in 1988 as President, Hercules Specialty Chemicals
Co. Named Chairman and Chief Executive Officer of Hercules Incorporated in 1991.
Served with Monsanto Co. for 26 years prior to joining Hercules. Bachelor's
degree and master's degree in chemical engineering, Georgia Institute of
Technology.
Joel M. Greenblatt
Managing and General Partner, Gotham III, an investment partnership. Responsible
for portfolio management. Former Chairman of the Board of Directors, Alliant
Techsystems. Chairman, St. Lawrence Seaway Corporation. Bachelor's degree and
MBA, Wharton School of the University of Pennsylvania.
Jonathan G. Guss
Director and Chief Executive Officer, Bogen Communications International, Inc.,
a producer of sound processing equipment and telecommunications peripherals.
Also Principal and Chief Executive Officer, EK Management Corp. Previously
Principal and President, Active Management Group, and a consultant with Booz,
Allen & Hamilton, Inc. Bachelor's degree, Reed College. MBA, Harvard Business
School.
David E. Jeremiah
Admiral, U.S. Navy (Retired). Partner and President, Technology Strategies &
Alliances Corporation, a strategic advisory and investment banking firm. Held a
variety of command and staff positions during 39-year military career, including
Vice Chairman, Joint Chiefs of Staff. Also has chaired and served on
intelligence and defense advisory panels, including National Defense Panel and
Defense Policy Board. Bachelor's degree, University of Oregon. Master's degree
in financial management, George Washington University.
Gaynor N. Kelley
Retired Chairman of the Board and Chief Executive Officer, The Perkin-Elmer
Corporation, a manufacturer of analytical and biotechnology instrumentation.
Joined The Perkin-Elmer Corporation in 1950. Held numerous management positions
before being elected Chairman and CEO in 1990. Also serves as a director of
Hercules, Incorporated and The Prudential Insurance Company of America.
Bachelor's degree, Delchanty Institute.
Joseph F. Mazzella
Partner, Lane Altman & Owens, a law firm in Boston, Massachusetts. Joined Lane
Altman & Owens as an associate in 1980. Previously served as an attorney with
the Securities and Exchange Commission in Washington, D.C. Also serves as a
director of Data Transmission Network Corporation and Insurance Auto Auctions,
Inc. Bachelor's degree, College of the City of New York. Juris Doctor, Rutgers
University.
Daniel L. Nir
Managing Partner, Sargeant Capital Ventures, L.L.C, an investment partnership.
Responsible for portfolio management. Formerly Managing and General Partner,
Gotham III. Director, St. Lawrence Seaway Corporation. Bachelor's degrees,
University of Pennsylvania College of Arts and Sciences, Wharton School of the
University of Pennsylvania.
Michael T. Smith
Chairman of the Board and Chief Executive Officer, Hughes Electronics
Corporation, a satellite and wireless communications company. Joined Hughes
Electronics in 1985 after the company was formed following the acquisition of
Hughes Aircraft Company by General Motors. Also served in a variety of financial
management positions with General Motors. Bachelor's degree, Providence College.
MBA, Babson College.
51
<PAGE>
Corporate Officers
Corporate officers who serve as directors are listed under the Board of
Directors.
Charles H. Gauck
Vice President, Corporate Secretary, and Associate General Counsel. Extensive
corporate legal and corporate secretary experience. Joined Honeywell in 1990.
Previously served as Secretary of The Pillsbury Company. Also held legal
positions and secretary post with a national retailer. Bachelor's degree and
Juris Doctor, University of Minnesota.
Robert E. Gustafson
Vice President, Human Resources. More than 20 years' experience in human
resources management. Joined Honeywell in 1980. Held various human resources
management positions with military and commercial divisions. Corporate staff
assignments included Director of Executive Compensation and Director of
Compensation and Benefits. Also held posts with Litton Industries, The Pillsbury
Company, and Hormel. Bachelor's degree, St. Cloud State University.
Richard N. Jowett
Vice President, Investor Relations and Public Affairs. More than 25 years'
experience in operations analysis, finance, and strategic planning. Joined
Honeywell in 1971 and held management positions with several defense and
commercial business divisions and corporate departments. Named Director of
Investor Relations for Alliant in 1990. Bachelor's degree, Georgia Institute of
Technology. MBA, Georgia State University.
John L. Lotzer
Vice President, Tax and Investments. Extensive background in strategic tax
planning and finance. Joined Honeywell in 1987 as Manager, Federal Income Taxes.
Named Director of Taxation for Alliant in 1994. Also held tax management
positions with GE Capital, Inc., and the international public accounting firm
Deloitte & Touche. Certified Public Accountant. Bachelor's degree and MBA,
University of Minnesota.
William R. Martin
Vice President, Washington, D.C. Operations. More than 30 years' experience in
design, manufacturing, and business planning in the aerospace and defense
industry. Previously Vice President of Business Development for Aerospace
Systems Group. Joined Hercules Aerospace Company in 1979 and held various
management positions, including Vice President, Business Development and
Washington Operations.
Mark L. Mele
Vice President, Strategic Planning. Extensive background in finance, marketing,
business development, and strategic planning. Joined Hercules Incorporated in
1979 and held posts with Aerospace Systems Group and Hercules Aerospace Company
before being named Director, Business Development, for Alliant in 1995.
Bachelor's degree, Tulane University. Master's degree in science management,
Georgia Institute of Technology.
Scott S. Meyers
Vice President, Treasurer, and Chief Financial Officer. Joined Alliant in 1996.
Formerly Executive Vice President and Chief Financial Officer for Magnavox
Electronic Systems Company. Extensive experience in financial and administrative
management. Background also includes 14 years' experience in public accounting
as a partner with KPMG Peat Marwick. Certified Public Accountant. Bachelor's
degree, Elmhurst College.
Paula J. Patineau
Vice President and Controller. Background includes more than 20 years of
experience in accounting and finance management, including process and systems
improvement, acquisition integration, labor negotiations, and cost management.
Joined Honeywell in 1977. Also held accounting position with Sperry Univac
Corporation. Bachelor's degree, College of St. Catherine.
Paul A. Ross
Senior Group Vice President, Aerospace. Previously Vice President and General
Manager, Space and Strategic Propulsion Division, Aerospace Systems Group. More
than 30 years' experience in program management, engineering, quality assurance,
finance, and operations with Rockwell International, Cordant Technologies
(formerly Thiokol Corporation), and Hercules Aerospace Company. Bachelor's
degree, University of Redlands.
Don L. Sticinski
Group Vice President, Defense Systems. Formerly Vice President, Operations,
Space and Strategic Systems Group. Joined Hercules Aerospace Company in 1980.
Held key program and operations management positions on all major space and
strategic propulsion programs. Bachelor's degree, U.S. Naval Academy. Master's
degree in systems engineering, University of Southern California. MBA,
University of Colorado.
Nick Vlahakis
Group Vice President, Conventional Munitions. Previously Vice President and
General Manager, Ordnance Division, Conventional Munitions Group. Background
includes engineering and management positions in composite structures and space
and tactical propulsion programs. Joined Hercules Aerospace Company in 1982.
Bachelor's degree, Northwestern University. Master's degree in mechanical
engineering, Carnegie-Mellon University. MBA, University of Utah.
Daryl L. Zimmer
Vice President and General Counsel. Background includes legal and management
positions in government and defense contracting. Experienced in programs dealing
with business ethics and conduct. Joined Honeywell in 1967. Served as program
director for defense industry ethics at Honeywell. Bachelor's degree, St. John's
University. Juris Doctor, William Mitchell College of Law.
52
<PAGE>
Corporate Information
Corporate Headquarters
600 Second Street N.E., Hopkins, Minnesota 55343 Telephone: 612-931-6000 E-mail
address: [email protected] Internet address: www.atk.com
Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held at 2:00 p.m. on August 3, 1999,
at Alliant Techsystems Corporate Headquarters, 600 Second Street N.E., Hopkins,
Minnesota.
Stock Exchange Listing
The common stock of Alliant Techsystems is listed on the New York Stock Exchange
under the symbol ATK. It is listed in newspaper stock tables under AlliantTech.
Nearly 15 million shares were traded in fiscal year 1999. The stock price ranged
from a low of $58 to a high of $87 3/4.
Transfer Agent and Registrar
Shareholder inquiries concerning the transfer of shares, lost certificates, or
address changes should be directed to Transfer Agent/Registrar, ChaseMellon
Shareholder Services, 450 West 33rd Street, New York, New York 10001. Telephone:
800-851-9677 (toll free). Internet address: www.chasemellon.com.
Investor Relations
Inquiries from shareholders, securities analysts, and others in the professional
investment community should be directed to Richard N. Jowett, Vice President,
Investor Relations and Public Affairs, Alliant Techsystems, 600 Second Street
N.E., MN11-2015, Hopkins, Minnesota 55343. Telephone: 612-931-6080. E-mail
address: [email protected].
Media Relations
Inquiries from the media should be directed to Rod Bitz, Director of Public
Affairs, Alliant Techsystems, 600 Second Street N.E., MN11-2015, Hopkins,
Minnesota 55343. Telephone: 612-931-5413. E-mail address: [email protected].
Alliant news releases are posted on the Company's Internet site at www.atk.com.
Form 10-K Annual Report
Shareholders who wish to obtain a copy of the Form 10-K Annual Report filed with
the Securities and Exchange Commission for Alliant Techsystems' fiscal year
ended March 31, 1999, may do so by writing to the Vice President, Investor
Relations and Public Affairs.
Community Investment
In keeping with our commitment to be a positive force where we operate, Alliant
Techsystems invests both financial and human resources in our communities. For
information on the company's giving and volun-teerism programs, write to Wayne
E. Gilbert, Director of State and Community Affairs, Alliant Techsystems, 600
Second Street N.E., MN11-2015, Hopkins, Minnesota 55343. Telephone: 612-931-
5422. E-mail address: [email protected].
Independent Auditors
Deloitte & Touche LLP
400 One Financial Plaza
120 South Sixth Street
Minneapolis, Minnesota 55402
Facilities and Offices
Conventional Munitions
Wilmington, Illinois
DeSoto, Kansas
Hopkins, Minnesota
New Brighton, Minnesota
Totowa, New Jersey
Socorro, New Mexico
Toone, Tennessee
Radford, Virginia
Rocket Center, West Virginia
Aerospace
Vandenberg Air Force Base, California
Cape Canaveral, Florida
Iuka, Mississippi
Clearfield, Utah
Magna, Utah
Tekoi, Utah
Defense Systems
Clearwater, Florida
Elk River, Minnesota
Hopkins, Minnesota
Hondo, Texas
Horsham, Pennsylvania
Janesville, Wisconsin
Marketing and Sales
Huntsville, Alabama
Tucson, Arizona
Los Angeles, California
Ridgecrest, California
Colorado Springs, Colorado
Rock Island, Illinois
Mt. Arlington, New Jersey
Arlington, Virginia
53
<PAGE>
[LOGO OF ALLIANT TECHSYSTEMS]
Alliant Techsystems
600 Second Street N.E.
Hopkins, Minnesota
USA 55343
