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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 company's aerospace division primarily focuses on solid rocket motors for expendable space launch vehicles, such as those used to propel communications satellites into orbit. Alliant's 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.
Honeywell's Involvement in the Defense Industry: 1941--89
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 applications 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 with regard 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 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 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 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 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 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 systems--for instance the B-2 bomber, the advanced tactical fighters, new tanks and submarines&mdashe 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 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 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, 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 Pentagon's 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 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&mdashø 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 1998--worth $750 million&mdashø 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 three 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, 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.