To Our Shareholders

A year ago, we outlined our plans to increase shareholder value by improving performance, capturing opportunities, and ensuring management accountability. We are pleased to report the results of this strategy: significant increases in orders, sales, margins, earnings, and shareholder value.

 

Richard Schwartz, President and Chief Executive Officer
R. Keith Elliot, Chairman of the Board of Directors

"We are leveraging our historical strengths to provide total systems solutions - a strategy that will provide value to our customers through affordable, smart solutions, and value to our shareholders through profitable growth without commensurate capital investment."

Performance: Higher Margins, Increased Sales Bring Improved Earnings and Cash Flow

A strong focus on increasing operating margins to our target range of 8 to 10 percent was the key to improved performance. We achieved a margin rate of 10.0 percent from continuing operations - the highest in company history - by capitalizing on the benefits of the Aerospace Systems acquisition, lowering costs, improving operating efficiencies, and resolving several technical and financial program issues.

Margin improvement, combined with higher sales resulting from the addition of Aerospace Systems' operations, brought net earnings to $3.56 per share versus a net loss of $7.37 per share last year. Earnings from continuing operations were $4.43 per share. Sales rose to $1.2 billion from $787 million a year ago.

We also improved our cash flow performance in fiscal year 1996 by concentrating on effective working capital management. These efforts, combined with increased earnings, resulted in free cash flow of $85 million, including restructuring costs of $33 million and capital expenditures of $28 million. This performance generated sufficient cash flow to repurchase approximately $37 million of stock and reduce long-term debt by $30 million while still leaving a year-end cash balance of $45 million.

Program performance was strengthened by improvements in our processes to design, test, and manufacture our products.

We are committed to delivering high-quality, low-cost products to our customers on time and within budget. We were disappointed, however, by the time it took to resolve a technical issue on a key tank ammunition program, which delayed sales from fiscal year 1996 to fiscal year 1997.

Opportunity: Leveraging our Business Base to Provide Total Systems Solutions

Success in capturing new opportunities during fiscal year 1996 was reflected in strong orders and backlog. Orders rose to $1.7 billion from $635 million last year, while backlog at the end of the year was $1.8 billion or approximately 17 months of sales, the highest level in five years.

Leadership in our core technologies - rocket motors, energetics, warheads, sensors, composites, and controls and analysis - was instrumental in winning significant new business awards. These awards included contracts to produce propulsion systems for the Delta II and Delta III space launch vehicles and the Trident II intercontinental ballistic missile, and large-share awards for production of tank and medium caliber ammunition.

Increasingly, we are leveraging our historical strengths to provide total systems solutions to our customers. By capitalizing on our core technologies and teaming with the best firms in the industry, we have been selected as one of four companies for the first development phase of the Evolved Expendable Launch Vehicle, America's new space booster program, and recently won the new Tactical Unmanned Aerial Vehicle (TUAV) program. As the systems integrator and prime contractor on TUAV, we are now well positioned in the promising reconnaissance, surveillance, and target acquisition market.

Our strategy for delivering total systems will provide increased value to our customers through affordable, smart solutions. Just as important, it allows us to increase revenues and earnings, enabling us to deliver shareholder value through profitable growth without commensurate capital investment.

Opportunities to leverage our historical strengths exist not only in our traditional businesses, but also in commercial markets, including law enforcement, security, and data acquisition. In the international marketplace, we see continuing sales of torpedoes and growing potential for naval surveillance systems and ammunition.

With the successful integration of Aerospace Systems accomplished, we are strengthening our balance sheet to take advantage of potential mergers, acquisitions, or joint ventures that will deliver shareholder value, and realigning our business portfolio to maximize future performance and profitability. In international demilitarization, for example, we have shifted from being an owner-operator to a supplier of equipment and services to improve our focus and performance. Across all our operations, we will direct our attention and resources toward businesses that offer the greatest potential for superior performance and profitability.

 

ProgramNext Expected
Award Date
Potential
Program Revenue²
¹Tactical Unmanned Aerial Vehicle1996$750 Million
¹Lightweight Hybrid Torpedo1996$1 Billion
Evolved Expendable Launch Vehicle1996$1 Billion/Year
Extended Range Guided Munition1996$600 Million
Undersea Surveillance1995-01$500 Million
National Missile Defense1996/97$250 Million
Wind Corrected Munitions Dispenser1997$1 Billion
Improved KE Tank Round1998$1 Billion
¹Program captured in first quarter of fiscal year 1997.
²According to government and industry association projections.

Accountability: The Cornerstone of Our Management Philosophy

Accountability for delivering results is the cornerstone of our management philosophy. It begins with the members of our Board of Directors, who represent combined stock holdings of more than 30 percent of our outstanding shares, and who ultimately are accountable for shareholder value. It extends throughout the entire organization to individual managers who are accountable for clearly defined results.

During fiscal year 1996, we made excellent progress in implementing a management accountability system that links compensation to corporate performance. Our goal is to expand the system to the entire salaried workforce by the end of the current fiscal year.

Our management team was significantly strengthened by the appointment of Scott S. Meyers, Vice President and Chief Financial Officer, who is accountable for the company's financial strategies and controls, and Hugo Fruehauf, Group Vice President, Defense Systems, who is accountable for the operations of our second largest business group. Mr. Meyers' background includes extensive financial and administrative management experience in the defense electronics industry and in public accounting. Mr. Fruehauf has more than 35 years of engineering and management experience in space launch systems, satellite systems, and precision frequency products.

An Excellent Start...But Only the Beginning

Our success in fiscal year 1996 was an excellent start to a new era for Alliant, but we believe it represents only the beginning of what our team can accomplish.

Favorable trends in the aerospace and defense marketplace are creating better opportunities today than in many years. Budgets in our markets of interest are stabilizing or trending upward, and the acquisition environment is changing in ways that favor our strong engineering capabilities, clear focus, and ability to move quickly. Many of our programs are at the forefront of acquisition reform.

The Evolved Expendable Launch Vehicle, the Tactical Unmanned Aerial Vehicle, and the Wind Corrected Munitions Dispenser, for example, make extensive use of commercial practices and performance specifications. In addition, greater use of integrated product teams is improving our ability to leverage the combined knowledge of government and industry in designing the complex systems required by our customers.

Our optimism is reflected in our goal to grow earnings per share at an annual average rate of 15 percent over the next five years. We expect to achieve this goal by a combination of revenue growth, margin improvement, and use of cash to pay down debt and repurchase shares.

Our strengths, capabilities, and prospects for the future are embodied in the talented and dedicated people who make up our workforce. In the aerospace and defense industry, they are the best at what they do. Their commitment to delivering excellent performance, capturing opportunities, and ensuring accountability for results is the most important factor in Alliant Techsystems' success today and in our future ability to deliver shareholder value.

Sincerely,

Richard Schwartz
President and Chief Executive Officer

R. Keith Elliott
Chairman of the Board of Directors

June 14, 1996