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Alliant Techsystems Inc.

Alliant Techsystems Inc.

5050 Lincoln Drive
Edina, Minnesota 55436
U.S.A.
Telephone: (952) 351-3000
Fax: (952) 351-3009
Web site: http://www.atk.com

Public Company
Incorporated:
1990
Employees: 14,000
Sales: $2.8 billion (2005)
Stock Exchanges: New York
Ticker Symbol: ATK
NAIC: 332993 Ammunition (Except Small Arms) Manufacturing; 332995 Other Ordnance and Accessories Manufacturing

In 1990 Honeywell Inc. spun off its defense-related business to form a new company, Alliant Techsystems Inc. Alliant quickly became a leading producer of conventional munitions. The company grew an aerospace business with the acquisition of Hercules Aerospace Company in 1995 and Thiokol Propulsion in 2001. A series of subsequent acquisitions has positioned Alliant as a producer of precision weapon systems.

HONEYWELL'S INVOLVEMENT IN THE DEFENSE INDUSTRY: 194189

Honeywell's entrance into the defense industry came in 1941, when the war in Europe and Japan's occupation of China led the administration of Franklin D. Roosevelt to begin preparations for the possibility that the United States might be involved in the conflicts. At the time the company, then called Minneapolis-Honeywell, was one of the few U.S. manufacturers with the workforce, facilities, tooling, and expertise to produce precision instruments and controls for the military.

Minneapolis-Honeywell's first military contracts were for an automatic system for releasing payloads at high altitudes for precision bombing. The company's chairman, Harold Sweatt, assigned the company's heating regulator division to develop the system. The company's volume of military business expanded rapidly after the Japanese attack on Pearl Harbor and the U.S. entry into World War II. During the course of the war, the firm turned out turbo engine regulators and complex automatic ammunition firing control devices, among other items, and served as the only U.S. manufacturer of tank periscopes.

At the end of the war Sweatt was determined to keep Minneapolis-Honeywell in the electronic controls business. The most lucrative customer at the time was the Pentagon, which was gearing up for cold war hostilities with the Soviet Union. These circumstances drew Minneapolis-Honeywell even deeper into the stable and lucrative government contracting business. In addition, research dollars provided for Pentagon projects were almost always applicable to commercial projects. The formula worked in reverse as well. Minneapolis-Honeywell purchased the Micro Switch division of First Industrial in 1950. The company's switches were used to operate relays in vending machines and other manually operated devices, but they soon found military ap-plications in battle tanks, artillery, and guided missile systems.

Minneapolis-Honeywell's brief association with the radar powerhouse Raytheon, coupled with their subsequent computer venture, Datamatic, firmly established the company's reputation as a high-technology electronics manufacturer. It led to increased activity in aviation control systems and the company's eventual participation in the manned space program.

In 1964, after shortening its name to Honeywell, the company opted out of the competition for major defense and space projects. Honeywell simply was not in a position to compete economically with such industry giants as Boeing, General Electric, or General Dynamics. Instead, Honeywell concentrated on working as a subcontractor within a narrow range of electronics systems. The company's profitable defense systems businesses, however, created public relations difficulties. Headquartered in the politically liberal state of Minnesota, Honeywell endured a series of protests launched by groups opposed to American involvement in the Vietnam War.

As the war effort in Vietnam wound down during the administrations of Richard Nixon and Gerald Ford, defense budgets were scaled back. This produced less work for Honeywell's defense businesses and later caused the company to reduce its operations. In 1982 Chairman James Renier carried out a corporate downsizing that claimed 3,500 jobs. With this restructuring Honeywell abandoned its adversarial position in the marketplace in relation to IBM and later sold off much of its computer manufacturing assets.

In 1986 and 1988 Honeywell's defense businesses recorded tremendous losses, stemming from huge cost overruns. Unable to collect for the losses and penalized for the late delivery of products under contract, Renier decided to immediately reduce Honeywell's exposure to Pentagon projects. He initially attempted to reposition much of the government defense business toward commercial aviation and flight control markets. In the short run the strategy appeared effective. At this time the company's defense and aerospace operations comprised nearly half of Honeywell's total income and a significant portion of its total profits.

Renier, however, was determined to refocus Honeywell on its core commercial operations. While they made money, its defense businesses, specifically the Defense & Marine Systems division, were not as profitable or promising as other groups in the company. Thus it was felt that defense operations were diluting the company's profitability. In addition, the lessening in tensions between the United States and the Soviet Union raised increasing questions about the long-term viability of involvement in the defense market.

FORMATION OF ALLIANT TECHSYSTEMS IN 1990

Renier decided to organize the Defense & Marine Systems and Test Instruments divisions along with the Signal Analysis Center into a separate corporate entity. The new entity would operate as an independent subsidiary until it could be sold, preferably to another defense contractor. After several months, however, no company stepped forward with an acceptable bid. Eager to dispense with the low-margin division and to get on with the business of running Honeywell, Renier decided to distribute shares in the new entity to Honeywell shareholders. To do this, the subsidiary would have to be prepared for life as an independent corporation.

Renier offered the chairmanship of the new company to Toby G. Warson, a former naval commander and CEO of Honeywell's subsidiary in the United Kingdom. Completing the management team were Kenneth Jenson, a former executive in the division, and Dean Fjestul, the head of finance for Honeywell Europe. With his management team in place, it came time to choose a new name. (Renier asked that the new company not use the venerable Honeywell name.) The management eventually settled on the name Alliant Techsystems. This name was based on the word alliance, which they believed accurately described the relationship the new company hoped to maintain with the U.S. Department of Defense.

COMPANY PERSPECTIVES

Our ability to successfully compete against larger, more established companies in our industry is due in large measure to our size and speed. Unlike our competition, we are not dependent upon large platforms or programs of record that often constrain the ability to think out of the box. As a result, we are able to bring to the market non-traditional approaches to the way business has always been done in our industryand we do so with speed and innovation.

After a distribution of one Alliant share for every four Honeywell shares, Alliant began business as an independent company in October 1990. It entered the market with a 50-year history, 8,300 employees, and a position as the Pentagon's 17th largest contractor. Its operations were divided into four main units: precision armament, ordnance, marine systems, and information storage systems. At the time of the company's creation, Alliant consisted of two groups, six divisions, and two operations, representing tremendous bureaucracy and redundancy. One of Warson's first actions as chairman was to consolidate the work functions among the company's various fiefdoms and, in the process, to eliminate 800 administrative jobs.

Within months the operation had been streamlined into a manufacturing and materials arm and an engineering and technology center. Sales were handled by four market groups that were organized in the same fashion as the Department of Defense. In another important move, Warson used the company's entire first quarter operating income to pay for Alliant's restructuring costs and to partially pay down debt. Still, Alliant was saddled with a $14 million charge for legal and administrative costs, $30 million in severance payments, a $165 million loan from Honeywell, and a $60 million dividend payment to Honeywell. This brought the new company's debt-to-equity ratio to a precarious 1.4 to one.

EFFECT OF THE PERSIAN GULF WAR ON SALES

With 1989 earnings of $53.8 million on sales of $1.14 billion, it seemed that Alliant was off to a difficult start. But the company gained its independence only three months after the Iraqi invasion of Kuwait. Suddenly, the dynamics of Pentagon work changed drastically. The invasion, coupled with the evaporation of the Soviet military threat because of the collapse of communism, forced U.S. military strategists to focus their combat planning on a new type of enemy, the well-armed third world dictator. Battling this type of opponent did not require nuclear weapons or new weapons platforms.

With the demise of the Soviet military machine, the administration of George H.W. Bush increasingly turned to lower-cost improvements in existing weapons systems, those necessary to battle armies such as Iraq's. Alliant was perfectly suited for this approach to modernization. In 1990 Warson told Industry Week, "If you look at the U.S. defense budget, it's clear that the major new weapons systemsfor instance the B-2 bomber, the advanced tactical fighters, new tanks and submarinesare in trouble. The Pentagon is looking for ways to enhance existing systems and to improve the performance of the individual soldier. And that's the market we're in."

Warson noted that budget constraints were likely to preclude the Army from replacing its aging Abrams tanks. Instead, he suggested that the Pentagon would opt to upgrade the weapons by equipping them with the new 120mm ammunition that Alliant made. By and large, the company's products were cheap and effective, and because ammunition, a large part of Alliant's production, had to be continually replaced, the company was assured of a more stable market than airplane, rocket, and submarine builders could enjoy.

As the confrontation in Kuwait became a shooting war and Operation Desert Shield was transformed into Desert Storm, more than 1,300 Alliant workers represented by the Teamsters went out on strike in a dispute over wages, benefits, and the terms of another contract. These workers, who manufactured 25mm shells for the Bradley Fighting Vehicle, were quickly replaced by managers struggling to keep production running.

The strike, a notably unpopular one because of the timing, was short-lived, however, as both sides managed to resolve the dispute. Alliant served the war effort well, turning out 120mm uranium-tipped antitank shells, 30mm bullets for the A-10 Warthog and Apache helicopter, and a variety of other ordnance. In addition, Alliant was the sole manufacturer of MK 46 and MK 50 antisubmarine torpedoes, although none were employed during the war.

KEY DATES

1941:
Honeywell-Minneapolis enters defense industry.
1950:
Commercial switch business is purchased and applied to military use.
1964:
Honeywell opts out of competition for major defense and space projects.
1982:
Major corporate downsizing takes place.
1990:
Renamed defense business is spun off as independent company.
1991:
Persian Gulf War temporarily boosts sales.
1993:
Employee count falls below 4,000.
1995:
Company enters new niche with purchase of rocket motor maker.
2000:
Company is awarded operation of government's only small ammunition plant.
2005:
Acquisitions serve to more than double revenue from start of decade.

Alliant continued to gain momentum after the Gulf War was over. Warson carried out a successive wave of consolidations, mostly within the management ranks, dropping a further 800 employees by October 1991. In addition, the number of layers of management was cut from 14 to seven. This enabled the company to compete more efficiently for the dwindling number of Pentagon contracts for new weapons systems.

The one weak spot in Alliant's organization was the company's Metrum Information Storage division. Metrum, Alliant's only nonmunitions unit, manufactured data recording and storage devices. While half of Metrum's sales were to commercial customers, the unit suffered from numerous production setbacks that forced the company to write off millions of dollars. The Metrum division was eventually sold. Still, by 1992 Warson had made tremendous progress in clearing up Alliant's balance sheet. With a manageable debt of $148 million and interest payments under control, it was expected that Alliant would work its debt off the books by 1994.

With a strong financial position, Warson hoped to broaden Alliant's markets by acquiring another company or establishing a joint venture. His first effort in this direction met a swift rebuke. Warson proposed merging the ordnance division of Stamford, Connecticut-based Olin Corporation into those of Alliant, and he had even sealed the $68 million agreement when the U.S. Federal Trade Commission became involved, opposing the sale on the basis that the combination would leave the Pentagon with only one supplier of specialized munitions.

Warson and his colleagues at Olin argued that the market could support only one manufacturer. Far from conspiring to gouge the Pentagon with monopoly pricing, Warson argued that, by preventing the two companies from realizing economies of scale under reduced orders, the Pentagon would in fact be shelling out more for its ammunition. Despite gaining the support of the army for its case, Alliant called off the proposed merger in December 1992.

A NEW BUSINESS PLAN FOR THE 1990S

Because the company's business was heavily dependent on military contracts, the continuing decrease in the size of the U.S. defense budget posed a threat to Alliant's profitability. Between 1985 and 1993 the U.S. weapons-procurement budget plummeted by more than half, and further cuts loomed in the future. "It's important that we manage our business to the realities of the marketplace during this period of rapid change in the defense industry," Warson told the Wall Street Journal on January 28, 1993. To reduce costs, Alliant shed another 1,700 employees in 1993, dropping the company's total below 4,000. Alliant also scaled back production of its Adam land mine, disposable AT-4 infantry weapon, and MK 46 torpedo. With the savings from these curtailed operations, Alliant hoped to raise profit margins to offset the impact of declining sales, which dropped from $1.1 billion in 1992 to $800 million in 1993.

Alliant ultimately recognized that its continued survival would require strategic shifts as well as organizational restructuring. As the July 13, 1994, Wall Street Journal explained, Alliant strove to gain "entry into new markets" instead of relying for business predominantly on waning government procurement contracts. In 1993, for instance, Alliant formed a joint venture with the Ukrainian government to dismantle stockpiles of munitions left over from the Soviet Union. In this way the company sought to apply its substantial expertise in munitions handling to an arena that was not dependent on the Pentagon's budget.

As a further effort to widen the scope of its business, Alliant acquired the aerospace division of Hercules Inc. in 1995. The aerospace operations of Delaware-based Hercules produced rocket motors for space launch and strategic nuclear missiles. This market segment was a new realm for Alliant, but it provided the company with an array of opportunities since the demand for communications satellites was growing rapidly. Such satellites provided mobile telephone services, direct-to-home television feeds, and paging and messaging services. According to the November 10, 1995, Wall Street Journal, analysts speculated that more than 350 satellites would be sent into space between 1995 and 2000. Armed with the capacity to manufacture the rocket motors used to launch these satellites, which it had gained by purchasing Hercules, Alliant was ideally situated to capitalize on the boom. Nevertheless, to ensure continued profitability, the company cut its workforce by an additional 20 percent (about 700 jobs) in 1995.

Alliant also began to eliminate units that did not conform to its new strategy. In December 1996 the company sold its Marine Systems Groups, which produced torpedoes, mine-detection equipment, and other naval weaponry, to General Motors' Hughes Electronics. The move enabled Alliant to reduce its debt by an additional $89 million and to concentrate more fully on its profitable rocket technology.

Alliant instituted other changes as well. Instead of continuing to compete head-on with defense industry giants such as Boeing and Raytheon, Alliant began to forge partnerships with them. In June 1995, for example, Alliant was awarded a multimillion-dollar contract from the McDonnell Douglas Corporation to produce solid rocket propulsion systems for the Delta III space launch vehicle. In addition to its 1997 contract with the Lock-heed Martin Corp. to manufacture a component of the F-22 Raptor fighter jet, Alliant received a long-term contract from the Boeing Co. in June 1998, worth $750 million, to manufacture solid rocket boosters for Boeing's Delta space launch vehicles.

Of course, Alliant did not abandon its lucrative position in the munitions industry. While the end of the cold war had changed the needs of the U.S. military, the outbreak of bloody regional conflicts in the former Yugoslavia and in various parts of Africa underscored the importance of basic munitions. With the U.S. Congress reluctant to devote vast sums to develop entirely new weapons platforms, the Department of Defense focused heavily on upgrading the capabilities of existing ammunition and electronic warfare and surveillance systems. Alliant strove to meet these needs. The company's low-cost mortar and artillery fuses led the field, and Alliant was also the sole provider of VOLCANO and Shielder antitank systems.

Alliant's strategy of creating new markets while simultaneously bolstering its existing sectors proved to be successful. After a dismal year in 1995, in which Alliant's net income dropped as a result of restructuring charges, the company's sales and profits rose in 1996 and 1997. In 1998 Alliant's net income rose, and the ratio of its total debt to capitalization declined. Sales in 1999 grew 1.4 percent to reach $1.09 billion. Even more telling was the tectonic shift in Alliant's commercial-to-military sales ratio. In 1995, 3 percent of Alliant's sales were to commercial clients, with the remaining 97 percent going to the military. Fueled by its burgeoning aerospace sector, 16 percent of Alliant's sales were to commercial clients by 1999, with 84 percent to the military.

With a new chairman and CEO in place by January 1999, Alliant's future looked hopeful. Paul David Miller had served 30 years with the U.S. Navy, retiring as an Admiral in 1994. He had also headed up Litton Industries, Inc.'s Litton Marine Systems before signing with Alliant. The company's chief assured stockholders that Alliant's defense business would remain stable and that its role in solid propulsion would continue to expand.

HOMELAND DEFENSE TAKING ON NEW MEANING: 200005

The outgoing Clinton administration increased the defense budget, driving up stock of weapons builders to record levels, according to a November 2000 Los Angeles Times article. The upward trend for the industry continued, when the defense-minded George W. Bush administration came on board. As 2001 began, Minnesota had a senator, Mark Dayton, on the Armed Services Committee improving the prospects for companies in that state with regard to defense contracts.

According to Alliant President Scott Meyers, the company was ready. Weapons in the pipeline were in sync with the U.S. military's move toward high-tech warfare, including the two-barreled, computerized Objective Individual Combat Weapon, in development, which offered bursting ammunition and long-range precision. "As the military downsizes and the likelihood of fighting in urban areas increases, the military wants a greater ability to wage war from afar," Meyers told the Star Tribune in March 2001.

Attacks on American soil a few months later and subsequent talk of American military action abroad further drove up Alliant's prospects. The company had taken over the production of the government's only small-caliber ammunition manufacturing facility in 2000. But Miller had additional plans for Alliant.

"In the Navy in the early 1990s, Admiral Miller championed the shift to 'adaptive joint forces'military jargon for increased cooperation among the Navy, Army and Air Force. And he foresaw the move to the lighter, more precise weapons that has been behind his push to transform Alliant," Amy Cortese reported for the New York Times.

Miller had asked Daniel J. Murphy, another ex-admiral, to make a recommendation regarding the company's proposed entry into the precision guided missile business. The consultant role led to a job with Alliant beginning in 2001; he turned down one with Lockheed Martin.

Early in 2002, Alliant announced the addition of a third business, Precision Systems Group, joining Alliant's other two businesses, defense and aerospace, and charged to develop precision guided weapon systems. The company also announced a management change: head of the Utah-based aerospace group, Paul Ross, would succeed Meyers as president. Nick Vlahakis, head of the defense group, was named senior vice-president and COO.

Alliant was at the same time on an acquisitions spree. In rapid succession it acquired and assimilated Alcoa's solid rocket booster maker Thiokol Propulsion, in 2001; missile-guidance electronics company Science and Applied Technologies, Inc. and a high-tech gun operation of Boeing's, in 2002; and composite space structure business Composite Optics, Inc. and two Allied Aerospace's units, in 2003.

Murphy, who directed the Precision Systems Group as it gathered the pieces of an entire weapons system, succeeded Miller as CEO in October 2003. Miller continued on as chairman of the board.

Meanwhile, the ammunition business grew. Late in 2001, the company had acquired Blount International's commercial ammunition businesses, becoming the nation's largest manufacturer of ammunition. For the war in Iraq, Alliant supplied all of the Army's small-arms ammunition for rifles and machine guns, about half of the medium-caliber rounds coming from armored vehicles and tanks, as well as parts for more sophisticated weaponry, according to the New York Times. Munitions sales climbed during the end of 2002 due to military sales and the Blount acquisition.

With nearly half of Alliant's aerospace revenue derived from NASA, the Columbia explosion in February 2003 also rocked Alliant's price per share. The company under Miller had been outperforming heavy hitters in the industry and the Standard and Poor's 500.

Twelfth among American defense companies in terms of revenue, Alliant needed to continue to pick its battlefield carefully: "We are very selective in the pursuits that would have us go head to head with the giants in our industry," Murphy told the Twin Cities Business Monthly in 2004. "We enter a competition with a very large defense contractor only after careful analysis of our likelihood of a win."

Precision-guided weaponry, a niche expected to grow rapidly in support of the 'war on terror,' spelled opportunity for Alliant. The company bested Lockheed for a laser guided mortar shell contract in December 2003. The U.S. Army contract, an estimated $500 million, ran through 2008.

During its first full year of operation, fiscal 2003, Precision Systems produced $649 million in sales. Murphy expected double digit growth during the decade, according to Twin Cities Business Monthly. Ammunition and aerospace sales helped finance the growth of the smaller operation.

Alliant's stock, which had begun underperforming after the loss of the Space Shuttle Columbia, continued to lag behind others in the defense industry and the S&P 500. Thiokol Propulsion had been making shuttle rocket boosters for 21 years; the company took much of the blame for the 1986 Challenger disaster. Additionally, investors had yet to fully come on board with the Alliant of the future.

During the first half of 2004, the company purchased Mission Research Corp., bringing in more technology expertise. Miller stepped down as chairman at the end of fiscal 2005, succeeded by Murphy. Under his leadership, Alliant had grown from $1.1 billion in revenue to $2.8 billion.

With critical high-tech expertise in place, Murphy turned his attention to organic growth. He also had his eyes toward the sky as the Space Shuttle Discovery prepared for takeoff. On the ground back in Minnesota outside Alliant's headquarters, antiwar protesters held vigil, hearkening back to the company's Honeywell days.

                                             John Simley

                    Updated, Rebecca Stanfel; Kathleen Peippo

PRINCIPAL DIVISIONS

Precision Systems; ATK Thiokol; Ammunition; Advanced Propulsion & Space Systems; ATK Mission Research.

PRINCIPAL COMPETITORS

Aerojet-General Corp.; General Dynamics Corporation; Raytheon Company.

FURTHER READING

"Alliant to Cut 30% of Work Force; Posts Loss of $90 Million," Wall Street Journal, January 28, 1993, p. B4.

"At Military Contractor, Strikers Face Winter's Chill and Neighbors' Wrath," New York Times, February 16, 1991, p. 10.

Cole, Jeff, "Re-Entry Mission: U.S. Rocket Makers Rely on Foreign Rivals for New Shot at Space," Wall Street Journal, November 10, 1995.

Cortese, Amy, "Quiet, but Central, Role for Ammunition Maker," New York Times, March 23, 2003, p. 4.

Crock, Stan, "The Little Contractor That Could," Business Week, July 4, 2005, p. 78.

Cruz, Sherri, "Technology to the Defense," Star Tribune, March 18, 2001, p. 1D.

Davies, Phil, "With a Bullet," Twin Cities Business Monthly," pp. 46-49.

DePass, Dee, "Alliant Launches Ad Campaign," Star Tribune, March 29, 2005, p. 2D.

, "Nine Years on the Protest Line," Star Tribune, November 4, 2005, p. 1D.

, "Rocket Man," Star Tribune, July 10, 2005, p. 1D.

Flanigan, James, "New Growth, Role for Defense in a Changing World," Los Angeles Times, November 19, 2000, p. C1.

"FTC Seeks to Block Merger of Defense Firms," Washington Post, November 7, 1992, p. C1.

Hinds, Gary, "Minneapolis-Based Aerospace Company Promotes Utah Executive," Knight Ridder/Tribune Business News, February 27, 2002.

"Honeywell Board OKs Spin-Off of Defense Units," Electronic News, October 1, 1990, p. 6.

"Honeywell Defense Business Can't Find Buyer; Spin-off Set," Electronic News, July 30, 1990, p. 27.

"Linkage Plan of Olin, Alliant Is Called Off," Wall Street Journal, December 9, 1992, p. A4. Miller, James, "Alliant Techsystems to Pay $465 Million for Hercules Inc.'s Aerospace Business," Wall Street Journal, July 13, 1994.

"Precision Pick on Target," Barron's, June 17, 1991, pp. 44-45.

Price, Dave, "Who Will Become Next CEO, President of Alliant Techsystems?" Finance and Commerce Daily Newspaper, January 25, 2003.

"Sink or Swim," Forbes, October 14, 1991, pp. 66-71.

"Toby Warson Dives for Profits," Industry Week, December 3, 1990, pp. 35-38.

Wall, Robert, and Barry Rosenberg, "Company Makeover," Aviation Week & Space Technology," June 14, 2004, pp. 53-53.

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Alliant Techsystems Inc.

Alliant Techsystems Inc.

600 Second Street, Northeast
Hopkins, Minnesota 55343
U.S.A.
(612) 931-6000
Fax: (612) 931-5920
Web site: http://www.atk.com

Public Company
Incorporated: 1990
Employees: 6,110
Sales: $1.09 billion (1999)
Stock Exchanges: New York
Ticker Symbol: ATK
NAIC: 336415 Guided Missile & Space Vehicle Propulsion Unit & Propulsion Unit Parts Manufacturing; 332993 Ammunition (Except Small Arms) Manufacturing; 332995 Other Ordnance & Accessories Manufacturing 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System & Instrument Manufacturing; 54133 Engineering Services

In 1990 Honeywell Inc. spun off its defense-related business to form a new company, Alliant Techsystems Inc. Alliant quickly became a leading producer of conventional munitions and aerospace and defense systems. As one of the largest manufacturers of low-cost, high-quality munitions in the country, Alliant sells its products to the U.S. Department of Defense and to nations allied to the United States as well as to contractors. The companys aerospace division primarily focuses on solid rocket motors for expendable space launch vehicles, such as those used to propel communications satellites into orbit. Alliants defense systems division designs and manufactures weapon systems upgrades and works in precision guided munitions development. Alliant operates facilities in more than a dozen states.

Honeywells Involvement in the Defense Industry: 194189

Honeywells entrance into the defense industry came in 1941, when the war in Europe and Japans occupation of China led the administration of Franklin D. Roosevelt to begin preparations for the possibility that the United States might be involved in the conflicts. At the time the companythen called Minneapolis-Honeywellwas one of the few U.S. manufacturers with the workforce, facilities, tooling, and expertise to produce precision instruments and controls for the military.

Minneapolis-Honeywells first military contracts were for an automatic system for releasing payloads at high altitudes for precision bombing. The companys chairman, Harold Sweatt, assigned the companys heating regulator division to develop the system. The companys volume of military business expanded rapidly after the Japanese attack on Pearl Harbor and the U.S. entry into World War II. During the course of the war, the firm turned out turbo engine regulators and complex automatic ammunition firing control devices, among other items, and served as the only U.S. manufacturer of tank periscopes.

At the end of the war Sweatt was determined to keep Minneapolis-Honeywell in the electronic controls business. The most lucrative customer at the time was the Pentagon, which was gearing up for cold war hostilities with the Soviet Union. These circumstances drew Minneapolis-Honeywell even deeper into the stable and lucrative government contracting business. In addition, research dollars provided for Pentagon projects were almost always applicable to commercial projects. The formula worked in reverse as well. Minneapolis-Honeywell purchased the Micro Switch division of First Industrial in 1950. The companys switches were used to operate relays in vending machines and other manually operated devices, but they soon found military applications in battle tanks, artillery, and guided missile systems.

Minneapolis-Honeywells brief association with the radar powerhouse Raytheon, coupled with their subsequent computer venture, Datamatic, firmly established the companys reputation as a high-technology electronics manufacturer. It led to increased activity in aviation control systems and the companys eventual participation in the manned space program.

In 1964, after shortening its name to Honeywell, the company opted out of the competition for major defense and space projects. Honeywell simply was not in a position to compete economically with such industry giants as Boeing, General Electric, or General Dynamics. Instead, Honeywell concentrated on working as a subcontractor within a narrow range of electronics systems. The companys profitable defense systems businesses, however, created public relations difficulties. Headquartered in the politically liberal state of Minnesota, Honeywell endured a series of protests launched by groups opposed to American involvement in the Vietnam War.

As the war effort in Vietnam wound down during the administrations of Richard Nixon and Gerald Ford, defense budgets were scaled back. This produced less work for Honeywells defense businesses and later caused the company to reduce its operations. In 1982 Chairman James Renier carried out a corporate downsizing that claimed 3,500 jobs. With this restructuring Honeywell abandoned its adversarial position in the marketplace with regard to IBM and later sold off much of its computer manufacturing assets.

In 1986 and 1988 Honeywells defense businesses recorded tremendous losses, stemming from huge cost overruns. Unable to collect for the losses and penalized for the late delivery of products under contract, Renier decided to immediately reduce Honeywells exposure to Pentagon projects. He initially attempted to reposition much of the government defense business toward commercial aviation and flight control markets. In the short run the strategy appeared effective. At this time the companys defense and aerospace operations comprised nearly half of Honeywells total income and a significant portion of its total profits.

Renier, however, was determined to refocus Honeywell on its core commercial operations. While they made money, its defense businessesspecifically the Defense & Marine Systems divisionwere not as profitable or promising as other groups in the company. Thus it was felt that defense operations were diluting the companys profitability. In addition, the lessening in tensions between the United States and the Soviet Union raised increasing questions about the long-term viability of involvement in the defense market.

Formation of Alliant Techsystems in 1990

Renier decided to organize the Defense & Marine Systems and Test Instruments divisions along with the Signal Analysis Center into a separate corporate entity. The new entity would operate as an independent subsidiary until it could be sold, preferably to another defense contractor. After several months, however, no company stepped forward with an acceptable bid. Eager to dispense with the low-margin division and to get on with the business of running Honeywell, Renier decided to distribute shares in the new entity to Honeywell shareholders. To do this, the subsidiary would have to be prepared for life as an independent corporation.

Renier offered the chairmanship of the new company to Toby G. Warson, a former naval commander and CEO of Honeywells subsidiary in the United Kingdom. Completing the management team were Kenneth Jenson, a former executive in the division, and Dean Fjestul, the head of finance for Honeywell Europe. With his management team in place, it came time to choose a new name. (Renier asked that the new company not use the venerable Honeywell name.) The management eventually settled upon the name Alliant Techsystems. This name was based on the word alliance, which they believed accurately described the relationship the new company hoped to maintain with the U.S. Department of Defense.

After a distribution of one Alliant share for every four Honeywell shares, Alliant began business as an independent company in October 1990. It entered the market with a 50-year history, 8,300 employees, and a position as the Pentagons 17th largest contractor. Its operations were divided into four main units: precision armament, ordnance, marine systems, and information storage systems. At the time of the companys creation, Alliant consisted of two groups, six divisions, and two operations, representing tremendous bureaucracy and redundancy. One of War sons first actions as chairman was to consolidate the work functions among the companys various fiefdoms and, in the process, to eliminate 800 administrative jobs.

Within months the operation had been streamlined into a manufacturing and materials arm and an engineering and technology center. Sales were handled by four market groups that were organized in the same fashion as the Department of Defense. In another important move, Warson used the companys entire first quarter operating income to pay for Alliants restructuring costs and to get it operating under lower debt. Still, Alliant was saddled with a $14 million charge for legal and administrative costs, $30 million in severance payments, a $165 million loan from Honeywell, and a $60 million dividend payment to Honeywell. This brought the new companys debt-to-equity ratio to a precarious 1.4 to one.

Effect of the Persian Gulf War on Sales

With 1989 earnings of $53.8 million on sales of $1.14 billion, it seemed that Alliant was off to a difficult start. But the company gained its independence only three months after the Iraqi invasion of Kuwait. Suddenly, the dynamics of Pentagon work changed drastically. The invasion, coupled with the evaporation of the Soviet military threat because of the collapse of communism, forced U.S. military strategists to focus their combat planning on a new type of enemy, the well-armed third world dictator. Battling this type of opponent did not require nuclear weapons or new weapons platforms.

Company Perspectives:

The Alliant way is our commitment to excellence in everything we do. As leaders in our field, we want to set the standard for delivering low-cost, high-quality solutions to our customers every time. We will act with integrity, operate safely, and grow the value of our company to our people, our shareholders, and our communities.

With the demise of the Soviet military machine, the administration of George Bush increasingly turned to lower-cost improvements in existing weapons systems, those necessary to battle armies such as Iraqs. Alliant was perfectly suited for this approach to modernization. In 1990 Warson told Industry Week, If you look at the U.S. defense budget, its clear that the major new weapons systemsfor instance the B-2 bomber, the advanced tactical fighters, new tanks and submarinesare in trouble. The Pentagon is looking for ways to enhance existing systems and to improve the performance of the individual soldier. And thats the market were in.

Warson noted that budget constraints were likely to preclude the Army from replacing its aging Abrams tanks. Instead, he suggested that the Pentagon would opt to upgrade the weapons by equipping them with the new 120mm ammunition that Alliant made. By and large, the companys products were cheap and effective, and because ammunition, a large part of Alliants production, had to be continually replaced, the company was assured of a more stable market than airplane, rocket, and submarine builders could enjoy.

As the confrontation in Kuwait became a shooting war and Operation Desert Shield was transformed into Desert Storm, more than 1,300 Alliant workers represented by the Teamsters went out on strike in a dispute over wages, benefits, and the term of another contract. These workers, who manufactured 25mm shells for the Bradley Fighting Vehicle, were quickly replaced by managers struggling to keep production running.

The strike, a notably unpopular one because of the timing, was short-lived, however, as both sides managed to resolve the dispute. Alliant served the war effort well, turning out 120mm uranium-tipped antitank shells, 30mm bullets for the A-10 Warthog and Apache helicopter, and a variety of other ordnance. In addition, Alliant was the sole manufacturer of MK 46 and MK 50 antisubmarine torpedoes, although none were employed during the war.

Alliant continued to gain momentum after the Gulf War was over. Warson carried out a successive wave of consolidations, mostly within the management ranks, dropping a further 800 employees by October 1991. In addition, the number of layers of management was cut from 14 to seven. This enabled the company to compete more efficiently for the dwindling number of Pentagon contracts for new weapons systems.

The one weak spot in Alliants organization was the companys Metrum Information Storage division. Metrum, Alliants only nonmunitions unit, manufactured data recording and storage devices. While half of Metrums sales were to commercial customers, the unit suffered from numerous production setbacks that forced the company to write off millions of dollars. The Metrum division was eventually sold. Still, by 1992 Warson had made tremendous progress in clearing up Alliants balance sheet. With a manageable debt of $148 million and interest payments under control, it was expected that Alliant would work its debt off the books by 1994.

With a strong financial position, Warson hoped to broaden Alliants markets by acquiring another company or establishing a joint venture. His first effort in this direction met a swift rebuke. Warson proposed merging the ordnance division of Stamford, Connecticut-based Olin Corporation into those of Alliant, and he had even sealed the $68 million agreement when the U.S. Federal Trade Commission became involved, opposing the sale on the basis that the combination would leave the Pentagon with only one supplier of specialized munitions.

Warson and his colleagues at Olin argued that the market could support only one manufacturer. Far from conspiring to gouge the Pentagon with monopoly pricing, Warson argued that, by preventing the two companies from realizing economies of scale under reduced orders, the Pentagon would in fact be shelling out more for its ammunition. Despite gaining the support of the army for its case, Alliant called off the proposed merger in December 1992.

A New Business Plan for the 1990s

Because the companys business was heavily dependent on military contracts, the continuing decrease in the size of the U.S. defense budget posed a threat to Alliants profitability. Between 1985 and 1993 the U.S. weapons-procurement budget plummeted by more than half, and further cuts loomed in the future. Its important that we manage our business to the realities of the marketplace during this period of rapid change in the defense industry, Warson told the Wall Street Journal on January 28, 1993. To reduce costs, Alliant shed another 1,700 employees in 1993, dropping the companys total below 4,000. Alliant also scaled back production of its Adam land mine, disposal AT-4 infantry weapon, and MK 46 torpedo. With the savings from these curtailed operations, Alliant hoped to raise profit margins to offset the impact of declining sales, which dropped from $1.1 billion in 1992 to $800 million in 1993.

Alliant ultimately recognized that its continued survival would require strategic shifts as well as organizational restructuring. As the July 13, 1994, Wall Street Journal explained, Alliant strove to gain entry into new markets instead of relying for business predominantly on waning government procurement contracts. In 1993, for instance, Alliant formed a joint venture with the Ukrainian government to dismantle stockpiles of munitions left over from the Soviet Union. In this way the company sought to apply its substantial expertise in munitions handling to an arena that was not dependent on the Pentagons budget.

As a further effort to widen the scope of its business, Alliant acquired the aerospace division of Hercules Inc. in July 1994. The aerospace operations of Delaware-based Hercules produced rocket motors for space launch and strategic nuclear missiles. This market segment was a new realm for Alliant, but it provided the company with an array of opportunities since the demand for communications satellites was growing rapidly. Such satellites provided mobile telephone services, direct-to-home television feeds, and paging and messaging services. According to the November 10, 1995, Wall Street Journal, analysts speculated that more than 350 satellites would be sent into space between 1995 and 2000. Armed with the capacity to manufacture the rocket motors used to launch these satelliteswhich it had gained by purchasing HerculesAlliant was ideally situated to capitalize on the boom. Nevertheless, to ensure continued profitability, the company cut its workforce by an additional 20 percent (about 700 jobs) in 1995.

Alliant also began to eliminate units that did not conform to its new strategy. In December 1996 the company sold its Marine Systems Groupswhich produced torpedoes, mine-detection equipment, and other naval weaponryto General Motors Hughes Electronics. The move enabled Alliant to reduce its debt by an additional $89 million and to concentrate more fully on its profitable rocket technology.

Alliant instituted other changes as well. Instead of continuing to compete head-on with defense industry giants such as Boeing and Raytheon, Alliant began to forge partnerships with them. In June 1995, for example, Alliant was awarded a multimillion-dollar contract from the McDonnell Douglas Corporation to produce solid rocket propulsion systems for the Delta III space launch vehicle. In addition to its 1997 contract with the Lockheed Martin Corp. to manufacture a component of the F-22 Raptor fighter jet, Alliant received a long-term contract from the Boeing Co. in June 1998worth $750 millionto manufacture solid rocket boosters for Boeings Delta space launch vehicles.

Of course, Alliant did not abandon its lucrative position in the munitions industry. While the end of the cold war had changed the needs of the U.S. military, the outbreak of bloody regional conflicts in the former Yugoslavia and in various parts of Africa underscored the importance of basic munitions. With the U.S. Congress reluctant to devote vast sums to develop entirely new weapons platforms, the Department of Defense focused heavily on upgrading the capabilities of existing ammunition and electronic warfare and surveillance systems. Alliant strove to meet these needs. The companys low-cost mortar and artillery fuses led the field, and Alliant was also the sole provider of VOLCANO and Shielder antitank systems.

Alliants strategy of creating new markets while simultaneously bolstering its existing sectors proved to be successful. After a dismal year in 1995, in which Alliants net income dropped as a result of restructuring charges, the companys sales and profits rose in 1996 and 1997. In 1998 Alliants net income rose, and the ratio of its total debt to capitalization declined. Sales in 1999 grew 1.4 percent to reach $1.09 billion. Even more telling was the tectonic shift in Alliants commercial-to-military sales ratio. In 1995 three percent of Alliants sales were to commercial clients, with the remaining 97 percent going to the military. Fueled by its burgeoning aerospace sector, 16 percent of Alliants sales were to commercial clients by 1999, with 84 percent to the military. With a new chairman and CEO in place by January 1999, Alliants future looked hopeful. Paul David Miller, the companys chief, assured stockholders that Alliants defense business would remain stable and that its role in solid propulsion would continue to expand.

Further Reading

Alliant to Cut 30% of Work Force; Posts Loss of $90 Million, Wall Street Journal, January 28, 1993, p. B4.

At Military Contractor, Strikers Face Winters Chill and Neighbors Wrath, New York Times, February 16, 1991, p. 10.

Cole, Jeff, Re-Entry Mission: U.S. Rocket Makers Rely on Foreign Rivals for New Shot at Space, Wall Street Journal, November 10, 1995.

FTC Seeks to Block Merger of Defense Firms, Washington Post, November7, 1992, p. C1.

Honeywell Board OKs Spin-Off of Defense Units, Electronic News, October 1, 1990, p. 6.

Honeywell Defense Business Cant Find Buyer; Spin-off Set, Electronic News, July 30, 1990, p. 27.

Linkage Plan of Olin, Alliant Is Called Off, Wall Street Journal, December 9, 1992, p. A4.

Miller, James, Alliant Techsystems to Pay $465 Million for Hercules Inc.s Aerospace Business, Wall Street Journal, July 13, 1994.

Precision Pick on Target, Barrons, June 17, 1991, pp. 4445.

Sink or Swim, Forbes, October 14, 1991, pp. 6671.

Toby Warson Dives for Profits, Industry Week, December 3, 1990, pp. 3538.

John Simley

updated by Rebecca Stanfel

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