Alliant Techsystems, Inc.

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Alliant Techsystems, Inc.

5901 Lincoln Drive
Edina, Minnesota 55436
(612) 939-2000
Fax: (612) 939-2480

Public Company
Incorporated: September 28, 1990
Employees: 4,200
Sales: $1.0 billion
Stock Exchanges: New York
SICs: 3489 Ordnance and Accessories Nec; 3483 Ammunition, Except for Small Arms

Alliant Techsystems is the product of a corporate spin-off of defense-related businesses that had been acquired or built up by Honeywell Inc. over a period of 50 years. Having become an independent company only in 1990, the majority of Alliants existence has been spent as a set of divisions of Honeywell Inc., which had made its name making buttons, switches, appliances and other industrial and consumer electronics products.

Honeywells entrance into the defense industry came in 1941, when the war in Europe and Japans occupation of China convinced the Roosevelt Administration to begin preparations for the possibility that the United States might be dragged into the conflict. At the time, the companythen called MinneapolisHoneywellwas one of the few American manufacturers with the work force, 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, as Roosevelt had feared, the United States was drawn into the war. During the course of the hostilities, the Minnesota-based firm turned out turbo engine regulators and complex automatic ammunition firing control devices, among other items, and served as the only American manufacturer of tank periscopes.

At the end of the war, Sweatt was determined to keep Minneapolis-Honeywell thoroughly 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 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 NASA projects. Honeywell simply wasnt in a position to compete economically with the likes of industry giants such as Boeing, General Electric, or General Dynamics. Instead, Honeywell concentrated on working as a subcontractor within a narrow range of electronics systems. Honeywells 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.

During the Nixon and Ford Administrations, as the war effort in Vietnam wound down, defense budgets were scaled back. This produced less work for Honeywells defense businesses and later caused the company to scale back 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.

The break to Honeywell came in 1986 and 1988 when its defense businesses recorded tremendous losses, stemming from huge cost overruns. Unable to collect for these losses, and penalized for late delivery of products under contract, Renier decided to immediately reduce Honeywells exposure to Pentagon projects. Initially Renier attempted to reposition much of the government defense business toward commercial aviation and flight control markets. In the short run, this strategy appeared effective. 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 profitable, the defense businessesspecifically the Defense & Marine Systems divisionwere not as profitable or promising as other groups in the company. Defense operations, it was felt, 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.

Renier decided to organize the Defense & Marine Systems and Test Instruments divisions and the Signal Analysis Center into a separate corporate entity. This new entity would operate as an independent subsidiary until it could be sold, hopefully to another defense contractor. After several months, however, no company stepped forward with an acceptable bid. Eager to dispense of the low-margin division and get on with the business of running Honeywell, Renier decided to distribute shares in the division to Honeywell shareholders. To do this, the division 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 borrow the venerable Honeywell name). The team eventually settled upon the name Alliant Techsystems. This name was based on the word alliance which, it was felt, accurately described the relationship it hoped to maintain with the Defense Department.

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, 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 Warsons first actions as chairman was to consolidate work functions among the companys various fiefdoms and, in the process, 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 the Defense Department is aligned. In another important move, Warson used the companys entire first quarter operating income to pay for Alliants restructuring costs and 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 1.4:1.

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 armys 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 American 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 Bush Administration 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 instead 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 who struggled 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 and get back to work. Alliant served the war effort well, turning out 120mm uranium-tipped anti-tank 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 anti-submarine torpedoes, although none were employed during the war.

Alliant continued to gain momentum after the war in Kuwait 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 were 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 non-munitions 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, Warson made tremendous progress in clearing up Alliants balance sheet by 1992. With interest payments under control, and a manageable debt of $148 million, it was expected that Alliant would manage to work its debt off the books by 1994.

With a strong financial position, Warson hoped to broaden the companys markets by acquiring another company or establishing a joint venture. His first effort in this direction met a swift rebuke. Warson proposed merging the Stamford, Connecticut-based Olin Corporations ordnance division into those of Alliant, and had even sealed the $68 million agreement when the 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 only support 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 its proposed merger in December 1992.

Eventually, softening defense budgets proved too light to sustain Alliants business. Unable to affect further consolidation, Alliant further cut its work forcealready down to 5,600by 1,700 employees. 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 expected to raise margins against declining sales, down from $1.1 billion in 1992 to only $800 million in 1993. Further military defense budget reductions are likely, however, under the Clinton Administration. Alliant thus faces a challenging period for the immediate future as it seeks to carve out a place in a shrinking market.

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.

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

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.

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

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Alliant Techsystems, Inc.

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Alliant Techsystems, Inc.