Management's Discussion and Analysis

Business Environment

Alliant Techsystems (the Company) holds leading market positions as a designer, developer, and manufacturer of launch vehicle systems, solid rocket propulsion, ordnance, munitions, and smart weapons, as well as selected areas of defense electronics, torpedoes, and underwater surveillance. The Company is committed to increasing shareholder value by improving performance in its core businesses, pursuing continued cost reduction opportunities, participating in future industry consolidation activities, and capitalizing on growth opportunities relevant to our core competencies for future earnings growth.

The Company completed the integration of the Aerospace Systems Group, which was acquired in March 1995. The Aerospace Systems Group added approximately $553 million in sales in fiscal 1996 and contributed significantly to the Company's increased net income of $47.8 million in fiscal 1996, compared to a net loss of $74.1 million in fiscal 1995.

Cash flow provided by operations of $88.7 million was significantly improved compared to cash flow used by operations in fiscal 1995 of $57.5 million. The Company used a portion of its free cash flows to buy back approximately $37 million of its stock under its $50 million share repurchase program, as well as to make payments of $30 million on its long-term debt.

Results of Operations

Sales--Sales from continuing operations in fiscal 1996 were $1,194 million, an increase of $407 million or 51.7 percent from $787 million in fiscal 1995. Fiscal 1996 sales include $553 million attributable to the Aerospace operations of Hercules Aerospace Company (Aerospace operations) acquired from Hercules, Incorporated (Hercules) on March 15, 1995 (Aerospace acquisition), compared to fiscal 1995 sales of $20 million. Sales for fiscal 1995 have not been restated to include the Aerospace operations. Fiscal 1995 sales, including the $20 million from Aerospace operations, were $14 million, or 1.8 percent, more than fiscal 1994 sales of $775 million. Sales for fiscal 1997 are expected to be approximately $1.2 billion.

Aerospace Systems Group sales were $553 million for fiscal 1996, down $84 million or 13 percent, compared to $637 million for the prior year on a proforma basis, as if the Aerospace acquisition had been completed at the beginning of fiscal 1995. The prior year's results included recognition of previously deferred sales of $48 million on the Titan rocket motor program, and $18 million of sales from the Harm missile program, which is now complete.

Defense Systems Group sales in fiscal 1996 were $437 million, a decrease of $36 million or 8 percent when compared to $473 million in fiscal 1995. The sales decline was primarily due to a $44 million decrease in volume on the Combined Effects Munition program (CEM), compared to fiscal 1995, and technical issues that delayed shipments of the M830A1 tank ammunition round, which resulted in a sales decrease of $25 million compared to fiscal 1995. These delayed shipments are currently expected to be recognized in fiscal 1997. These sales declines were partially offset by volume increases on Shoulder Launched Multipurpose Assault Weapons (SMAW) and on Medium Caliber Lightweight 30mm ammunition (LW30).

Marine Systems Group sales in fiscal 1996 were $164 million, a decrease of $109 million or 40 percent when compared to $273 million in fiscal 1995. The sales decline was largely the result of a $67 million decrease due to the completion of the MK 50 Lightweight Torpedo program, as well as lower volume on the NT37 heavyweight torpedo program and AN-SQQ-89 Surface Ship Anti-Submarine Warfare Combat System (SQQ-89) programs.

Emerging Business Group sales from continuing operations in fiscal 1996 were $40 million, an increase of $19 million when compared to fiscal 1995 sales of $21 million, primarily attributable to increased volume in the Advanced Technology Applications business area.

Gross Margin--The Company's gross margin as a percentage of sales was 18.6, 13.6, and 16.0 percent in fiscal 1996, 1995, and 1994, respectively. The increased gross margin in fiscal 1996 (as measured in dollars and as a percentage of sales) was due primarily to the Aerospace acquisition. Additionally, Marine Systems Group gross margin results improved as compared to fiscal 1995 results, due to recognition of a $3.5 million claim award relating to work performed by the Company for a Navy contract in prior years, as well as higher profit recognition on the SQQ-89 contract, which is nearing completion. Additionally, Defense Systems Group margins were improved due to performance improvement actions, along with a results-based accountability system, which were put in place at the end of fiscal 1995. Fiscal 1995 gross margin included significant gross margin write-offs (i.e., estimated costs of completing a contract in excess
of contract revenues) of 1 percent on the SMAW and LW30 programs and another 1 percent on other programs due to the identification of financial and technical issues.

Fiscal 1997 gross margin is expected to be in the 17.5-18.0% range. This is down from fiscal 1996, which had approximately one percentage point of gross margin due to one-time events related
to claim settlements and lower plant closing costs.

Research and Development--The Company's research and development expenditures were $16.6 million or 1.4 percent of sales in fiscal 1996, compared with $14.6 million or 1.9 percent of sales in fiscal 1995 and $15.6 million or 2.0 percent of sales in fiscal 1994. Research and development expenditures as a percent of sales decreased in fiscal 1996 due to a more focused approach to program pursuit. The Company also spent $301.1 million on government customer-funded research and development contracts in fiscal 1996, an increase of $164.2 million when compared to $136.9 million in fiscal 1995, due primarily to the Aerospace acquisition. Fiscal 1995 expenditures represented a $7.7 million or 5.3 percent decrease when compared to $144.6 million in fiscal 1994. Fiscal 1997 spending for research and development, as a percent of sales, is expected to approximate fiscal 1996 levels.

Selling--The Company's selling expenses totaled $41.4 million or 3.5 percent of sales in fiscal 1996, compared with $38.7 million or 4.9 percent of sales in fiscal 1995, and $36.1 million or 4.7 percent of sales in fiscal 1994. The fiscal 1996 decline as a percent of sales is due to the synergistic benefits of eliminating duplicative selling expenses, as well as a more focused approach to program pursuits. Fiscal 1997 selling expenses, as a percent of sales, are expected to approximate fiscal 1996 levels.

General and Administrative--General and administrative costs for fiscal 1996 totaled $49.9 million or 4.2 percent of sales, compared with $31.8 million or 4.0 percent of sales in fiscal 1995, and $31.5 million or 4.1 percent of sales in fiscal 1994. Fiscal 1996 general and administrative expenditures as a percent of sales remained relatively flat when compared to fiscal 1995 and 1994 rates, reflecting ongoing cost control efforts. Fiscal 1997 general and administrative costs, as a percent of sales, are expected to approximate fiscal 1996 levels.

Restructuring Charges--The Company initiated a restructuring program in the quarter ending March 31, 1995, which resulted in a fourth-quarter pre-tax charge of $38.0 million. The program was designed to achieve greater efficiency and competitiveness, and to improve margins in the Defense and Marine Systems businesses. During fiscal 1996 the Company experienced lower than expected severance costs due to higher than expected employee attrition.

As a result, the Company recorded a $3.2 million credit in the fourth quarter of fiscal 1996 to reduce the restructure accrual. In mid-fiscal 1996, various executive management changes were made within the Defense Systems Group. As a result of these changes, new management re-evaluated business strategies for the Group, including its restructure plans and, while the significant components of the restructure plan did not change, the anticipated timing of certain severance and facility closure costs did change to enable management to achieve those strategies. The balance of the reserve at March 31, 1996 represents specifically identified incremental employee severance and facility closure costs to be incurred in fiscal 1997.

Change of Control--In August 1994, six new directors nominated by Capstay Partners, L.P. were elected to the Company's Board of Directors, resulting in a "change of control" as defined in the Company's compensation and benefit plans and in agreements with certain employees. These change of control agreements resulted in the Company incurring an "unusual" charge of $24.6 million in fiscal 1995.

Litigation Settlement--The Company had been a defendant in a "qui tam" lawsuit under the False Claims Act (Accudyne "qui tam"). On June 23, 1995, the Company and claimants reached agreement to settle the lawsuit. Accordingly, the Company recorded an unusual charge of $15.0 million as of the fourth quarter of fiscal 1995.

Interest Expense--Interest expense was $45.1 million in fiscal 1996, an increase of $33.7 million, when compared to $11.4 million in fiscal 1995. Fiscal 1995 interest expense increased by $3.2 million or 39 percent from $8.2 million in fiscal 1994. The significant increase in interest expense in fiscal 1996 as compared to fiscal 1995 reflects increased borrowings to fund the Aerospace acquisition on March 15, 1995. The increase in interest expense in fiscal 1995 as compared to fiscal 1994 is due to increased borrowings against the working capital credit line, which was necessary to finance the change of control payments, restructuring activity, advance payments relating to the Aerospace acquisition, and increased working capital requirements.

The Company has entered into hedging transactions to protect against increases in market interest rates on its long-term debt.

At March 31, 1996, the notional amount of amortizing interest rate swap agreements was approximately $156 million. Under the swap agreements, the Company currently pays an average fixed rate of 6.9 percent, and receives interest at a rate equal to three-month LIBOR (5.44 percent at March 31, 1996). These agreements have terms of one to three years. The interest rate cap agreements limit the Company's LIBOR exposure to 7 percent, and expire on October 1, 1997. The notional amount of amortizing interest rate cap agreements at March 31, 1996 was $52.5 million.
Income Taxes &shyp Fiscal 1996 taxes allocated to continuing operations of $16.8 million reflect a 22 percent tax rate. This varies from statutory tax rates principally due to partial utilization of available tax loss carryforwards. The fiscal 1996 income tax provision includes a tax benefit of $7.8 million for discontinued operations. Fiscal 1995 taxes reflect a zero percent tax rate. This varies from statutory tax rates principally because SFAS No. 109 does not permit current recognition of deferred tax benefits in excess of the amount more likely than not to be realized. The fiscal 1994 tax rate of zero percent differs from statutory tax rates due principally to the utilization of tax loss carryforwards against current year earnings.

Discontinued 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 role as an owner-operator of foreign demilitarization businesses ("Demilitarization operations"). Accordingly, in the fourth quarter of fiscal 1996, the Company recorded a $6.2 million loss on disposal of discontinued operations (net of taxes of $4.2 million). The net assets of the Demilitarization operations at March 31, 1996 were approximately $13.1 million, which consisted primarily of net working capital. The Company has provided a letter of credit to support approximately $2.5 million of bank borrowings of the joint ventures. The disposition of the Demilitarization operations is expected to be completed by sale of the operations. Negotiations with prospective buyers are currently underway and are expected to be completed during fiscal 1997. The results of operations of the discontinued business during the disposal period is expected to be at an approximate break-even level.

Cumulative Effect of Change in Accounting for Post-Employment Benefits &shyp Effective April 1, 1994, the Company changed its method of accounting for post-employment benefit obligations to comply with Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Post-Employment Benefits." This new rule requires such obligations to be accounted for on an accrual basis rather than the "pay-as-you-go" basis. An accrued liability was established for such obligations as of April 1, 1994, resulting in a reduction of earnings after tax for fiscal 1995 of $1.5 million or $.15 per share. Other than this cumulative effect charge, earnings were not materially affected by this accounting change.

Net Income/(Loss)--The Company recorded net income of $47.8 million ($3.56 per share) in fiscal 1996, an increase of $121.9 million, when compared to a net loss of $74.1 million ($7.37 per share) in fiscal 1995. Fiscal 1996 results include a full year of operations of the Aerospace Systems Group, a significant contributor to the improved results. The Aerospace operation was acquired from Hercules on March 15, 1995. Additionally, fiscal 1996 results were impacted positively by improved gross margins in the Defense and Marine Systems Groups, and reduced operating expenses as a percent of sales, due to a more focused approach to program pursuits and the synergistic benefits of eliminating duplicative selling expenses as a result of the Aerospace acquisition. Fiscal 1995's net loss was a decrease of $106.6 million when compared to net income of $32.5 million ($3.21 per share) in fiscal 1994. Fiscal 1995 results were adversely affected by lower gross margins in the Defense and Marine Systems Groups, recognition of the cumulative effect of an accounting change of $1.5 million after tax and pretax restructuring and other unusual charges of $77.6 million.

Liquidity, Capital Resources, and Financial Condition

Cash provided by operations during fiscal 1996 totaled $88.7 million, compared with cash used by operations of $57.5 million for fiscal 1995 and cash provided by operations of $59.5 million for fiscal 1994. Cash provided by operations for fiscal 1996 reflects significantly increased profits from operations and improved working capital management. These improvements were partially offset by cash expenditures associated with the Company's restructure program. Approximately $12 million was expended under the Company's Defense and Marine Systems Group restructure plans, primarily for employee-related costs. Additional restructure expenditures of approximately $8 million and $13 million were made in fiscal 1996 for employee-related costs and facility closure costs, respectively, in connection with the Company's closure plan of certain facilities acquired in the Aerospace acquisition. The balance of the reserve at March 31, 1996 represents specifically identified incremental employee severance and facility closure costs expected to be incurred in fiscal 1997. Cash used by operations for fiscal 1995, as compared to cash provided by operations for fiscal 1994, reflects the impact of the restructuring programs, change of control-related payments, and increased working capital.

The Company incurred cash expenditures in fiscal 1996 of approximately $2.7 million in connection with the change of control that occurred in fiscal 1995. An additional $5 million is expected to be expended under these agreements by the end of the fiscal year ending March 31, 1998.

As a result of the Accudyne "qui tam" litigation settlement recorded as of the fourth quarter of fiscal 1995, the Company spent approximately $3.5 million in fiscal 1996. The remaining $11.5 million, plus interest, is expected to be expended through the fiscal year ending March 31, 1999, with $3 million payable in fiscal 1997.

As a result of operating losses incurred in prior years, primarily resulting from restructuring charges, as well as one-time charges incurred in fiscal 1995 for change of control and the litigation settlement, the Company has tax loss carryforwards of $33.7 million, which are available to reduce future tax payments. Realization of the net deferred tax asset (net of recorded valuation allowance) is dependent upon profitable operations and future reversals of existing taxable temporary differences. Although realization is not assured, the Company believes that it is more likely than not that such net benefits will be realized through the reduction of future taxable income.

The Company's future cash flow from operations is not expected to be significantly affected as a result of discontinued operations.

Net outlays for capital expenditures during fiscal 1996 were $28 million, or 2.3 percent of sales, compared with fiscal 1995 outlays of $19.3 million, or 2.5 percent of sales, and $20.7 million, or 2.7 percent of sales in fiscal 1994. The reduction in capital expenditure levels in fiscal 1996 reflects management's focus on controlling expenditures to improve operations and increase shareholder value. Management expects total capital expenditures for fiscal 1997 to increase to approximately 2.8 percent of sales, due to facility commitments on the Aerospace Delta III and D5 programs.
In fiscal 1995, the Company acquired the Aerospace operations from Hercules for $306 million in cash and $112 million in stock. During fiscal 1996, the Company received a net amount of $29.1 million from Hercules as an adjustment to the purchase price. The adjustment was primarily the result of large receivables collections just prior to the closing of the acquisition, which reduced assets and lowered the final purchase price.

Principal payments made on the Company's long-term debt and notes payable during fiscal 1996 totaled $30.7 million.

As of March 31, 1996, no borrowings were outstanding against the Company's $225.0 million revolving line of credit. Letters of credit totaling $75.6 million at that date reduced the borrowings available under this credit line.

The Company's total debt (current portion of long-term debt, notes payable and long-term debt) as a percentage of total capitalization decreased to 71.6 percent at March 31, 1996, compared with 75.3 percent at March 31, 1995, reflecting debt repayment offset by the cost of shares repurchased under the Company's share repurchase program.

The Company initiated a $50 million share repurchase program in fiscal 1996. In connection with that program, the Company has repurchased 975,880 shares of the Company's stock in the open market as of March 31, 1996, at an average price of $37.79 per share, for an aggregate amount of $36.9 million. The Company is authorized to purchase up to a total of $50 million of its stock.
The Company satisfied all its needs for cash in fiscal 1996, primarily used for operating capital, capital expenditures, debt repayment and share repurchases, entirely from operating cash flows. Based on the financial condition of the Company at March 31, 1996, management believes the internal cash flows of the Company, combined with the availability of funding, if needed, under its line of credit, will be adequate to fund the future growth of the Company as well as to service its long-term debt obligations.

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. Capital expenditures necessary for compliance with environmental laws and regulations were not material during fiscal 1996, nor are they anticipated to be material in the foreseeable future.

The Company records environmental remediation-related liabilities when the event obligating the Company has occurred and the cost is both probable and reasonably estimable. As of March 31, 1996, the Company had reserves totaling $11 million available to cover all environmental clean-up costs. In future periods, new laws or regulations, advances in technologies, and additional information about the ultimate remedy selected at new and existing sites, and the Company's share of the cost of such remedies, could significantly change the Company's estimates.

As part of the Aerospace acquisition, the Company has generally assumed responsibility for environmental compliance at the Aerospace facilities. There may also be significant environmental remediation costs associated with the Aerospace facilities that will, at some facilities, be funded in the first instance by the Company. It is expected that most of the compliance and remediation costs associated with the Aerospace facilities will be reimbursable under U.S. government contracts and that the portion of those environmental remediation costs not covered through such contracts will be covered by Hercules under various agreements. The estimated nondiscounted range of these reasonably possible costs of study and remediation in the Aerospace operations is between $0 and $27 million. Where the Company is required to first conduct the remediation and then seek reimbursement from the U.S. Government or Hercules, the Company's working capital may be materially affected until the Company receives such reimbursement.

The estimated nondiscounted study and remediation costs to be incurred over the next three years for non-Aerospace sites could range from $6.0 million to $27.4 million.

It is reasonably possible that management's current estimates of liabilities for the above contingencies could change in the near term, as more definitive information becomes available.

Litigation

The Company is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. Such matters arise out of the normal course of business and relate to product liability, government regulations, including environmental issues, and other errors. Certain of the lawsuits and claims seek damages in very large amounts. In these legal proceedings, no director, officer, or affiliate is a party or named a defendant.

The Company is involved in two "qui tam" lawsuits involving operations acquired in the Aerospace acquisition. The government did not join in either of these lawsuits. All litigation and legal disputes arising in the ordinary course of the acquired Aerospace operations will be assumed by the Company except for a few specific matters, including the two "qui tam" lawsuits referred to above. The Company has agreed to indemnify and reimburse Hercules for a portion of litigation costs incurred, and a portion of damages, if any, awarded in these lawsuits. Under terms of the purchase agreement with Hercules, the Company's maximum settlement liability is approximately $4 million, for which the Company has fully reserved at March 31, 1996.

While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of counsel, that the actions seeking to recover damages against the Company either are without merit, are covered by insurance and reserves, do not support any grounds for cancellation of any contract, or are not likely to materially affect the financial condition or results of operations of the Company, although the resolution of any of such matters during a specific period could have a material effect on the quarterly or annual operating results for that period.

It is reasonably possible that management's current estimates of liabilities for the above contingencies could change in the near term, as more definitive information becomes available.

New Accounting Rules

Effective April 1, 1995, the Company adopted SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The statement requires disclosures about derivative financial instruments futures, forward, swaps, and option
contracts, and other financial instruments with similar characteristics.

In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement requires that assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss should be recognized when the estimated future cash flows from the asset are less than the carrying value of the asset. Assets to be disposed of should be reported at the lower of their carrying amount or their fair value, less cost to sell. This Statement is effective for financial statements for fiscal years beginning after December 15, 1995, and adoption by the Company in fiscal 1997 is not expected to have a material impact on results of operations or financial position.

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company currently believes it will elect to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees and therefore the adoption of SFAS 123 will not have an impact on the Company's financial position or results of operations. The Company will adopt the disclosure provisions of SFAS No. 123 in fiscal 1997.

Inflation

In the opinion of management, inflation has not had a significant impact upon the results of the Company's operations. The selling prices under contracts, the majority of which are long-term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable in cost-type contracts.

Risk Factors

Except for the historical information contained herein, certain of the matters discussed in this annual report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties, including, but not limited to changing economic and political conditions in the United States and in other countries, changes in governmental spending and budgetary policies, governmental laws and regulations surrounding various matters such as environmental remediation, contract pricing, and international trading restrictions, outcome of union negotiations, customer product acceptance, and continued access to capital markets. 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.


Report of Independent Auditors

To the Stockholders of Alliant Techsystems:

We have audited the accompanying consolidated balance sheets of Alliant Techsystems Inc. and subsidiaries as of March 31, 1996, and 1995, and the related consolidated statements of income and of cash flows for each of the years ended March 31, 1996, 1995, and 1994. 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, 1996, and 1995, and the consolidated results of its operations and its cash flows for each of the years ended March 31, 1996, 1995, and 1994, in conformity with generally accepted accounting principles.

As discussed in Notes 1 and 10 to the financial statements, effective April 1, 1994, the Company changed its method of accounting for certain long-term production contracts and its method of accounting for postemployment benefit costs to conform with Statement of Financial Accounting Standards No. 112.


Deloitte & Touche LLP
Minneapolis, Minnesota
May 15, 1996

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.



Richard Schwartz
President and Chief Executive Officer



Scott S. Meyers
Vice President and Chief Financial Officer