SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
-
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2001
Commission File Number 1-8137
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3770 Howard Hughes Parkway, Suite 300
Las Vegas, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ No / /
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 7,017,000 as of July 31,
2001.
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
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The information required by Rule 10-01 of Regulation S-X is provided on
pages 4 through 11 of this Report on Form 10-Q.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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The information required by Item 303 of Regulation S-K is provided on
pages 12 through 16 of this Report on Form 10-Q.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
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The Company has certain fixed-rate debt which it believes to have a
fair value that approximates reported amounts. The Company believes
that any market risk arising from these financial instruments is not
material.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information required by Item 103 of Regulation S-K is provided on
page 9 of this Report on Form 10-Q.
ITEM 2. Changes in Securities
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None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
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None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) None.
b) None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PACIFIC CORPORATION
Date: August 8, 2001 /S/ JOHN R. GIBSON
-------------------------
John R. Gibson
Chief Executive Officer and President
Date: August 8, 2001 /S/ DAVID N. KEYS
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David N. Keys
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer; Principal
Financial and Accounting Officer
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Income Statements
(unaudited)
For the three months ended For the nine months
June 30, ended June 30,
2001 2000 2001 2000
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Sales and Operating Revenues $15,353,000 $17,021,000 $42,062,000 $54,316,000
Cost of Sales 9,142,000 10,866,000 28,063,000 34,563,000
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Gross Profit 6,211,000 6,155,000 13,999,000 19,753,000
Operating Expenses 2,412,000 2,572,000 7,158,000 7,812,000
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Operating Income 3,799,000 3,583,000 6,841,000 11,941,000
Net Interest and Other Expense 720,000 756,000 2,040,000 2,864,000
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Income Before Income Taxes 3,079,000 2,827,000 4,801,000 9,077,000
Income Taxes 1,139,000 1,776,000
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Net Income Before Extraordinary Loss 1,940,000 2,827,000 3,025,000 9,077,000
Extraordinary Loss-Debt Extinguishments 980,000 1,594,000
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Net Income $ 1,940,000 $ 1,847,000 $ 3,025,000 $ 7,483,000
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Basic Net Income Per Share:
Income Before Extraordinary Loss $ .28 $ .40 $ .43 $ 1.23
Extraordinary Loss (.14) (.22)
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Net Income $ .28 $ .26 $ .43 $ 1.01
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Average Shares Outstanding 7,026,000 7,080,000 7,047,000 7,399,000
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Diluted Net Income Per Share:
Income Before Extraordinary Loss $ .28 $ .40 $ .43 $ 1.22
Extraordinary Loss (.14) (.22)
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Net Income $ .28 $ .26 $ .43 $ 1.00
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Diluted Shares 7,030,000 7,090,000 7,050,000 7,469,000
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See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
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June 30, September 30,
2001 2000
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ASSETS
Current Assets:
Cash and Cash Equivalents $ 37,591,000 $ 30,128,000
Accounts and Notes Receivable 8,637,000 9,461,000
Related Party Notes Receivable 361,000 477,000
Inventories 15,977,000 10,875,000
Prepaid Expenses and Other Assets 1,109,000 661,000
Deferred Income Taxes 600,000 650,000
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Total Current Assets 64,275,000 52,252,000
Property, Plant and Equipment, Net 7,175,000 7,064,000
Intangible Assets, Net 26,518,000 29,805,000
Real Estate Equity Investments 2,243,000 6,838,000
Development Property 4,755,000 5,482,000
Deferred Income Taxes 13,030,000 14,756,000
Other Assets, Net 1,149,000 1,393,000
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TOTAL ASSETS $119,145,000 $117,590,000
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See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
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June 30, September 30,
2001 2000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 7,164,000 $ 8,494,000
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Total Current Liabilities 7,164,000 8,494,000
Long-Term Debt 44,175,000 44,175,000
SERP Obligation and Other Non-Current Liabilities 1,875,000 1,743,000
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TOTAL LIABILITIES 53,214,000 54,412,000
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Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
Shareholders' Equity:
Common Stock 852,000 852,000
Capital in Excess of Par Value 80,094,000 80,094,000
Accumulated Deficit (6,523,000) (9,548,000)
Treasury Stock (12,050,000) (11,722,000)
Receivable from the Sale of Stock (11,000) (67,000)
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Total Shareholders' Equity 62,362,000 59,609,000
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $119,145,000 $117,590,000
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See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
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For the three months For the nine months
ended June 30, ended June 30,
2001 2000 2001 2000
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Cash Flows From Operating Activities $ 7,510,000 $ 1,099,000 $ 4,464,000 $ 11,726,000
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Cash Flows From Investing Activities:
Capital Expenditures (875,000) (1,066,000) (1,268,000) (2,221,000)
Real Estate Equity Investment
Capital Activity 1,411,000 563,000 4,595,000 3,257,000
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Net Cash Flows From Investing Activities 536,000 (503,000) 3,327,000 1,036,000
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Cash Flows From Financing Activities:
Debt Related Payments (14,567,000) (24,889,000)
Issuance of Common Stock 342,000
Treasury Stock Acquired (120,000) (328,000) (6,688,000)
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Net Cash Flows From Financing Activities (120,000) (14,567,000) (328,000) (31,235,000)
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Net Change in Cash and Cash Equivalents 7,926,000 (13,971,000) 7,463,000 (18,473,000)
Cash and Cash Equivalents,
Beginning of Period 29,665,000 35,932,000 30,128,000 40,434,000
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Cash and Cash Equivalents,
End of Period $37,591,000 $ 21,961,000 $37,591,000 $ 21,961,000
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Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 2,045,000 $ 3,050,000
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See the accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
1. BASIS OF REPORTING
The accompanying Condensed Consolidated Financial Statements are unaudited
and do not include certain information and disclosures included in the
Annual Report on Form 10-K of American Pacific Corporation (the "Company").
The Condensed Consolidated Balance Sheet as of June 30, 2001 was derived
from the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2000. Such statements
should therefore be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2000. In the opinion of
Management, however, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. The
operating results and cash flows for the three-month and nine-month periods
ended June 30, 2001 are not necessarily indicative of the results that will
be achieved for the full fiscal year or for future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Significant
estimates used by the Company include estimated useful lives for
depreciable and amortizable assets, the estimated valuation allowance for
deferred tax assets, and estimated cash flows in assessing the
recoverability of long-lived assets. Actual results may differ from these
and other estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued two
new pronouncements: Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and other
Intangible Assets". SFAS 141 prohibits the use of the pooling-of-interest
method for business combinations initiated after June 30, 2001 and also
applies to all business combinations accounted for by the purchase method
that are completed after June 30, 2001. There are also transition
provisions that apply to business combinations completed before July 1,
2001, that were accounted for by the purchase method. SFAS 142 is
effective for fiscal years beginning after December 14, 2001 to all
goodwill and other intangible assets recognized in an entity's balance
sheet at that date, regardless of when those assets were initially
recognized. The Company is currently evaluating the provisions of SFAS 141
and SFAS 142 and has not adopted such provisions in its June 30, 2001
financial statements.
2. NET INCOME PER COMMON SHARE
Basic per share amounts are computed by dividing net income by average
shares outstanding during the period. Diluted per share amounts are
computed by dividing net income by average shares outstanding plus the
dilutive effect of common share equivalents. The effect of stock options
and warrants outstanding to purchase approximately 3.0 million shares of
common stock were not included in diluted per share calculations during the
three-month and nine-month periods ended June 30, 2001 and 2000, since the
average exercise price of such options and warrants was greater than the
average price of the Company's common stock during these periods.
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3. INVENTORIES
Inventories consist of the following:
June 30, September 30,
2001 2000
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Work-in-process $11,170,000 $ 8,429,000
Raw materials and supplies 4,807,000 2,446,000
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Total $15,977,000 $10,875,000
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4. COMMITMENTS AND CONTINGENCIES
Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark
County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee
Chemical Corporation's ("Kerr-McGee") ammonium perchlorate ("AP")
operations, and was the location of the Company's AP operations until May
1988. The Company is cooperating with State and local agencies, and with
Kerr-McGee and other interested firms, in the investigation and evaluation
of the source or sources of these trace amounts, possible environmental
impacts, and potential remediation methods. Until these investigations and
evaluations have reached definitive conclusions, it will not be possible
for the Company to determine the extent to which, if at all, the Company
may be called upon to contribute to or assist with future remediation
efforts, or the financial impact, if any, of such cooperation,
contributions or assistance. Accordingly, no accrual for potential costs
has been made in the accompanying Condensed Consolidated Financial
Statements.
In 1999, two lawsuits were filed in Utah state court against the Company
and certain unrelated equipment and product manufacturers claiming
unspecified monetary damages as a result of a fire and explosion on July
30, 1997 at the Company's AP production facility that resulted in the death
of one employee and the injury of three employees. In March 2001, the
Company was dismissed without prejudice from these lawsuits.
5. ELECTRIC ENERGY
Electric energy is one of the Company's primary raw material costs for the
production of AP. The Company is a party to an agreement with Utah Power
("UP") for its electrical requirements. The agreement provided for the
supply of power for a minimum of a ten-year period, which began in 1989.
This agreement had a three year notice of termination provision and, on
April 7, 1999, UP provided written notice of termination, effective April
7, 2002.
The Company recently experienced unusual increases in its monthly power
bills at its Utah production facilities as compared to average historical
monthly amounts. For the months of November and December 2000, and January
2001, the Company received power bills from UP totaling approximately $1.9
million, which were approximately $1.5 million in excess of average
historical monthly amounts. The Company claimed that UP had improperly
calculated replacement energy costs and breached the agreement by failing
to comply with the advance notice provisions of the agreement. Accordingly,
the Company disputed all power bills received from UP since January 1999,
claiming it had been overcharged by approximately $2.9 million through
January 2001.
A partial settlement of this dispute has been reached in which the Company
and UP have entered into an amendment of the electric supply agreement
dated February 21, 2001. Under the terms of the amendment, the Company has
been placed on the equivalent of Utah's Electric Service Schedule No. 9.
Under this rate schedule, the Company's estimated monthly power bills will
be approximately 20% to 30% higher than historical monthly amounts prior to
the dispute. As a result, the Company will
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experience an estimated annual increase in power costs that could be as
much as $0.6 million. This amendment has been approved by the Utah Public
Service Commission.
In May 2001, the Company and UP reached a settlement on the remaining
disputed matters. The settlement includes both a cash payment from UP to
the Company and a demand curtailment arrangement under Utah's Electric
Service Schedule No. 71. Under the curtailment, the Company has accepted
UP's offer to curtail demand during the months of June, July and August
2001. As a result of the Company's lower perchlorate sales volumes expected
in fiscal 2001, the Company believes it can operate at lower total and peak
electric energy consumption levels during these months and, at the same
time, operate efficiently and meet its customers' product delivery
requirements. The Company estimates that the settlement and curtailment
arrangement will result in approximately an additional $2.0 million in cash
flow (over the amount which would otherwise be expended on monthly power
bills under the February 21, 2001 amendment described above) to the
Company. Through June 30, 2001, the Company had realized and recognized
(initially as an adjustment to inventories) approximately $1.1 million
resulting from the settlement and curtailment arrangement. However, there
can be no assurances given with respect to this estimate. The ultimate
amount of incremental cash flow to the Company will depend upon the
Company's ability to effectively operate under the curtailment arrangement.
6. INCOME TAXES
The Company's effective income tax rates were approximately 37% and 0%
during the nine-month periods ended June 30, 2001 and 2000, respectively.
In fiscal 1997, the Company established a deferred tax valuation allowance.
In the fourth quarter of fiscal 2000, the Company released its deferred tax
valuation allowance and recognized approximately $15.4 million in net
deferred tax assets.
7. REAL ESTATE EQUITY INVESTMENTS
The Company's interest in Gibson Ranch Limited Liability Company ("GRLLC")
is accounted for using the equity method. GRLLC operates on a calendar
year. The Company recognizes its share of the earnings in GRLLC (after
amortization of differences in basis) on a current quarterly basis.
Summarized financial information for GRLLC as of and for the three-month
and nine-month periods ended June 30, 2001 was as follows:
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Three-Month Period Ended Nine-Month Period Ended
June 30, 2001 June 30, 2001
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Income Statement:
Revenues $7,819,000 $32,029,000
Gross Profit 1,149,000 4,169,000
Operating Expenses 351,000 1,017,000
Net Income 812,000 3,198,000
8. SEGMENT INFORMATION
The Company's three reportable operating segments are specialty chemicals,
environmental protection equipment and real estate sales and development.
These segments are based upon business units that offer distinct products
and services, are operationally managed separately and produce products
using different production methods.
The Company evaluates the performance of each operating segment and
allocates resources based upon operating income or loss before an
allocation of interest expense and income taxes. The accounting policies of
each reportable operating segment are the same as those of the Company.
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The Company's specialty chemicals segment manufactures and sells
perchlorate chemicals used principally in solid rocket propellants for the
space shuttle and defense programs, sodium azide used principally in the
inflation of certain automotive airbag systems and Halotron(TM) I, a clean
gas fire extinguishing agent designed to replace Halon 1211. The specialty
chemicals segment production facilities are located in Iron County, Utah.
The Company's environmental protection equipment operating segment designs,
manufactures and markets systems for the control of noxious odors, the
disinfection of waste water streams and the treatment of seawater. These
operations are also located in Iron County, Utah.
At June 30, 2001, the Company's real estate operating segment had
approximately 58 remaining acres of improved land in the Gibson Business
Park near Las Vegas, Nevada, that is held for development and sale. Recent
activity has consisted of sales of land parcels. Although not included in
operating activities, this segment also has an equity investment in a
residential joint venture that is located across the street from the Gibson
Business Park. (See Note 7).
Additional information about the Company's operations, by segment, for the
three months and nine months ended June 30, is provided below.
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Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
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Revenues:
Specialty chemicals $10,911,000 $15,572,000 $35,915,000 $48,587,000
Environmental protection 2,296,000 124,000 3,525,000 3,251,000
Real estate 2,146,000 1,325,000 2,622,000 2,478,000
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Total revenues $15,353,000 $17,021,000 $42,062,000 $54,316,000
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Operating income (loss):
Specialty chemicals $ 1,981,000 $ 3,522,000 $ 4,699,000 $10,838,000
Environmental protection 424,000 (148,000) 427,000 544,000
Real estate 1,365,000 456,000 1,395,000 1,034,000
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Total segment operating income 3,770,000 3,830,000 6,521,000 12,416,000
Unallocated net expenses
(principally net interest) 691,000 1,003,000 1,720,000 3,339,000
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Income before income taxes $ 3,079,000 $ 2,827,000 $ 4,801,000 $ 9,077,000
=================================================================================
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is principally engaged in the production of AP for the aerospace and
national defense industries. In addition, the Company produces and sells sodium
azide, the primary component of a gas generant used in certain automotive airbag
safety systems, and Halotron(TM), a chemical used in fire extinguishing systems
ranging from portable fire extinguishers to airport firefighting vehicles. The
perchlorate, sodium azide and Halotron facilities are located on the Company's
property in Southern Utah and the chemicals produced and sold at these
facilities collectively represent the Company's specialty chemical segment. The
Company's other lines of business include the development of real estate in
Nevada and the production of environmental protection equipment, including waste
and seawater treatment systems.
During 1998, the Company entered into a Purchase Agreement with Kerr-McGee. On
March 12, 1998, the Company sold $75.0 million of Senior Unsecured Notes (the
"Notes"), consummated an acquisition (the "Acquisition") of certain assets from
Kerr-McGee and repurchased the remaining $25.0 million principal amount balance
outstanding of subordinated secured notes (the "Azide Notes"). Upon
consummation of the Acquisition, the Company effectively became the sole North
American producer of AP.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
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products, consisting almost entirely of AP sales, accounted for approximately
60% and 68% of revenues during the nine-month periods ended June 30, 2001 and
2000, respectively. In general, demand for AP is driven by a relatively small
number of DOD and NASA contractors; as a result, any one AP customer usually
accounts for a significant portion of the Company's revenues.
Sodium azide sales accounted for approximately 18% and 17% of revenues during
the nine-month periods ended June 30, 2001 and 2000, respectively. The
Company's principal sodium azide customer accounted for in excess of 75% of such
revenues.
Sales of Halotron(TM) amounted to approximately 8% and 4% of revenues during the
nine-month periods ended June 30, 2001 and 2000, respectively. Halotron(TM) is
designed to replace halon-based fire extinguishing systems. Accordingly, demand
for Halotron depends upon a number of factors including the willingness of
consumers to switch from halon-based systems, as well as existing and potential
governmental regulations.
Real estate and related sales amounted to approximately 6% and 5% of revenues
during the nine-month periods ended June 30, 2001 and 2000, respectively. The
nature of real estate development and sales is such that the Company is unable
reliably to predict any pattern of future real estate sales or the recognition
of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 8% and 6%
of revenues during the nine-month periods ended June 30, 2001 and 2000,
respectively. As of July 31, 2001, this segment had no significant backlog.
Cost of Sales. The principal elements comprising the Company's cost of sales
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are depreciation and amortization, raw materials, electric power, labor,
manufacturing overhead and the basis in real estate sold. The major raw
materials used by the Company in its production processes are graphite, sodium
chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC 123.
Significant increases in the cost of raw materials may have an adverse impact on
margins if the Company is unable to pass along such increases to its customers.
During the first six months of fiscal 2001, the Company purchased greater
quantities of certain raw materials because of recent excessive power costs (see
Note 5 to the Condensed Consolidated Financial Statements). Prices paid by the
Company for raw materials have historically been relatively stable, although the
Company has recently experienced cost increases on certain raw materials,
particularly on HCFC 123 and those requiring substantial energy costs to
produce. All the raw materials used in the Company's manufacturing processes
have been available in commercial quantities and the Company has had no
difficulty obtaining
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necessary raw materials. A substantial portion of the total costs of operating
the Company's specialty chemical plants, consisting mostly of labor and
overhead, are largely fixed in nature.
Income Taxes. The Company's effective income tax rates were approximately 37%
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and 0% during the nine-month periods ended June 30, 2001 and 2000, respectively.
In fiscal 1997, the Company established a deferred tax valuation allowance. In
the fourth quarter of fiscal 2000, the Company released its deferred tax
valuation allowance and recognized approximately $15.4 million in net deferred
tax assets.
Net Income. Although the Company's net income and diluted net income per share
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have not been subject to seasonal fluctuations, they have been and are expected
to continue to be subject to variations from quarter to quarter and year to year
due to the following factors, among others: (i) as discussed in Note 4 of the
Condensed Consolidated Financial Statements, the Company may incur material
costs associated with certain contingencies; (ii) the timing of real estate and
related sales and the equity in earnings of real estate ventures is not
predictable; (iii) the recognition of revenues from environmental protection
equipment orders not accounted for as long-term contracts depends upon orders
generated and the timing of shipment of the equipment; (iv) weighted average
common and common equivalent shares for purposes of calculating diluted net
income per share are subject to significant fluctuations based upon changes in
the market price of the Company's Common Stock due to outstanding warrants and
options; and (v) the results of periodic reviews of impairment issues; (vi) the
ability to pass on increases in raw material costs, including electric power
costs, to customers; and (vii) the magnitude, pricing and timing of AP, sodium
azide, Halotron(TM), and environmental protection equipment orders in the future
is uncertain. (See "Forward Looking Statements/Risk Factors" below.)
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Sales and Operating Revenues. Sales decreased $1.6 million, or 10%, during the
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three months ended June 30, 2001, to $15.3 million from $17.0 million in the
corresponding period of the prior year. This decrease was principally
attributable to lower specialty chemical sales. This decrease was partially
offset by an increase in environmental protection equipment and real estate
sales of approximately $3.0 million.
Cost of Sales. Cost of sales decreased $1.8 million, or 16%, in the three
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months ended June 30, 2001, to $9.1 million from $10.9 million in the
corresponding period of the prior year. As a percentage of sales, cost of sales
was 60% during the three-month period ended June 30, 2001 compared to 64% during
the same period last year. These decreases were principally due to a decrease
in sales, slightly better margins associated with the Company's specialty
chemicals segment and differences in the mix of sales and associated margins.
Operating Expenses. Operating (selling, general and administrative) expenses
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decreased $0.2 million, or 8%, in the three months ended June 30, 2001, to $2.4
million from $2.6 million in the corresponding period of 2000.
Net Interest Expense. Net interest and other expense was approximately $0.7
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million during the three-month periods ended June 30, 2001 and 2000.
Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000
Sales and Operating Revenues. Sales decreased $12.2 million, or 23%, during the
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nine months ended June 30, 2001, to $42.1 million from $54.3 million in the
corresponding period of the prior year. The decrease was principally due to a
decrease in specialty chemical sales. Such decrease resulted principally from
decreased perchlorate and sodium azide shipments.
In March 2000, the Company received notification from Thiokol Propulsion
("Thiokol") of a change in the fiscal 2000 purchase order for AP that resulted
in a decrease of approximately 3.23 million pounds of AP (from 10.48
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million pounds of AP). The Company submitted a price adjustment claim under the
change order and, in September 2000, negotiated and settled the claim which
resulted in a $3.0 million payment from Thiokol. Sales volume levels for AP
declined from approximately 20.2 million pounds in fiscal 1999 to approximately
16.4 million pounds in fiscal 2000. The Company estimates sales volumes for AP
in fiscal 2001 will decrease further to between 12.5 million and 13.0 million
pounds. The recent weakness in sales volumes is primarily attributable to lower
requirements for applications in certain commercial space launch vehicles used
primarily in satellite launches, particularly telecommunication satellites. In
addition, purchases of AP for use in the solid rocket motors for the Space
Shuttle, as evidenced by the change order referred to above, have declined as a
result of existing excess inventory levels. The Company believes that such
excess should be reduced over the next few years by reason of the number of
shuttle flights planned for the construction and servicing of the International
Space Station. The Company also understands that existing plans call for
significant AP requirements over the next several years for use in the Minuteman
program. Accordingly, the Company believes that the estimated future AP
requirements for these two programs should bring North American demand for AP
back to an annual level of between 16.0 and 20.0 million pounds over the next
few years, although there can be no assurance given with respect to these
estimates. The Company has no ability to influence the demand for AP.
Cost of Sales. Cost of sales decreased $6.5 million, or 19%, in the nine months
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ended June 30, 2001, to $28.1 million from $34.6 million in the corresponding
period of the prior year. As a percentage of sales, cost of sales was 67%
during the first nine months of this fiscal year as compared to 64% during the
same period last year. The increase in the percentage of cost of sales to sales
was principally attributable to lower specialty chemical sales volumes and the
significant increase in power costs (mostly in the first quarter of fiscal 2001)
discussed in Note 5 to the Condensed Consolidated Financial Statements.
Operating Expenses. Operating expenses were $7.2 million during the nine-month
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period ended June 30, 2001 compared to $7.8 million in the corresponding period
of the prior year. Operating expenses during the nine-month periods ended June
30, 2001 and 2000 include approximately $0.8 million and $0.6 million,
respectively, in costs associated with the investigation and evaluation of trace
amounts of perchlorate chemicals found in Lake Mead. (See Note 4 to the
Condensed Consolidated Financial Statements).
Net Interest Expense. Net interest and other expense decreased to $2.0 million
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in the nine months ended June 30, 2001, from $2.9 million in the corresponding
period of the prior year, principally as a result of lower average debt
balances.
Segment Operating Income. Operating income of the Company's industry segments
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during the nine-month periods ended June 30, 2001 and 2000 was as follows:
------------------------------------
2001 2000
---------------- ---------------
Specialty chemicals $4,699,000 $10,838,000
Environmental protection equipment 427,000 544,000
Real Estate 1,395,000 1,034,000
---------------- ---------------
Total $6,521,000 $12,416,000
================ ===============
The decreases in operating income in the Company's specialty chemical industry
segment was primarily attributable to lower sales and increased power costs (See
Note 5 to the Condensed Consolidated Financial Statements).
Inflation
General inflation did not have a significant effect on the Company's sales and
operating revenues or costs during the three-month or nine-month periods ended
June 30, 2001 or 2000. General inflation may have an effect on gross profit in
the future as certain of the Company's agreements with AP and sodium azide
customers require
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fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation. As discussed above, the Company has recently experienced
significant increases in certain raw material costs and power costs, although
the Company believes that such increases are not specifically related to the
effects of general inflation.
Liquidity and Capital Resources
In March 1998, the Company sold Notes in the principal amount of $75.0 million,
acquired certain assets from Kerr-McGee for a cash purchase price of $39.0
million and paid $28.2 million to repurchase the remaining $25.0 million
principal amount outstanding of the Azide Notes. In June 1999 and September
1998, the Company repurchased and retired $3.0 million and $5.0 million,
respectively, in principal amount of Notes. The Company incurred extraordinary
losses on debt extinguishment of approximately $0.2 million on each of these
transactions principally as a result of writing off costs associated with the
issuance of the Notes. During the second quarter of fiscal 2000, the Company
repurchased and retired approximately $8.8 million in principal amount of Notes.
The Company incurred extraordinary losses on debt extinguishment of
approximately $0.6 million on these transactions. In April and May 2000, the
Company repurchased and retired an additional $14.0 million in principal amount
of Notes. Since the original issuance of the Notes, the Company has repurchased
and retired approximately $30.8 million in principal amount at a weighted
average cost of approximately 102.7% of par.
Cash flows provided by operating activities were $4.5 million and $11.7 million
during the nine-months ended June 30, 2001 and 2000, respectively. The decrease
in cash flows from operating activities was principally due to lower sales and
operating profits as described above. The Company believes that its cash flows
from operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations. However, the resolution of
contingencies and litigation, and the timing, pricing and magnitude of orders
for AP, sodium azide and Halotron(TM), may have an effect on the use and
availability of cash.
Capital expenditures were $1.3 million during the nine months ended June 30,
2001, compared to $2.2 million during the same period last year. Capital
expenditures are budgeted to amount to approximately $2.5 million in fiscal 2001
and are expected to relate primarily to specialty chemical segment capital
improvement projects.
During the nine-month period ended June 30, 2001, the Company received cash of
approximately $4.6 million attributable to the return of capital invested in
GRLLC. The Company currently anticipates that cash returns of invested capital
and equity in earnings will continue through the conclusion of the project
currently projected to be the end of calendar 2001.
During the nine-month period ended June 30, 2001, the Company spent
approximately $0.3 million on the repurchase of its Common Stock. The Company
may (but is not obligated to) continue to repurchase its Common Stock but is
limited in its ability to use cash to repurchase stock by certain covenants
contained in the Indenture governing the Notes.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this Report may be forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the risk factors set forth below.
The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Weakness in demand (including excess customer inventories) or
downward pricing pressure for the Company's products as a result of
general or specific economic conditions, (b) governmental budget
decreases affecting the DOD or NASA that would cause a decrease in
demand for AP, (c) the results achieved by the Suspension Agreement
resulting from the
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Company's anti-dumping petition against foreign sodium azide producers
and the possible termination of such agreement, (d) technological
advances and improvements with respect to existing or new competitive
products causing a reduction or elimination of demand for AP, sodium
azide or Halotron(TM), (e) the ability and desire of purchasers to
change existing products or substitute other products for the Company's
products based upon perceived quality, environmental effects and
pricing, (f) future power costs including the ultimate impact of the
settlement of the Company's disputes concerning its power agreement, and
(g) the fact that perchlorate chemicals, sodium azide, Halotron(TM) and
the Company's environmental products have limited applications and
highly concentrated customer bases.
2. Competitive factors including, but not limited to, the Company's
limitations respecting financial resources and its ability to compete
against companies with substantially greater resources, significant
excess market supply in the sodium azide market and recently in the
perchlorate market, potential patent coverage issues, and the
development or penetration of competing new products, particularly in
the propulsion, airbag inflation and fire extinguishing businesses.
3. Underutilization of the Company's manufacturing facilities resulting in
production inefficiencies and increased costs, the inability to recover
facility costs and reductions in margins.
4. Risks associated with the Company's real estate activities, including,
but not limited to, dependence upon the Las Vegas commercial, industrial
and residential real estate markets, changes in general or local
economic conditions, interest rate fluctuations affecting the
availability and cost of financing, the performance by the managing
partner of its residential real estate joint venture (GRLLC) and
regulatory and environmental matters that may have a negative impact on
sales or costs.
5. The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations and other activities of governments, agencies or
similar organizations, including, but not limited to, environmental,
safety and transportation issues.
6. The cost and effects of legal and administrative proceedings,
settlements and investigations, particularly those investigations
described in Note 4 of Notes to Condensed Consolidated Financial
Statements and claims made by or against the Company relative to patents
or property rights.
7. The results of the Company's periodic review of impairment issues under
the provisions of SFAS No. 121.
8. The dependence upon a single facility for the production of most of the
Company's products.
9. Provisions of the Company's Certificate of Incorporation and By-laws and
Series D Preferred Stock, dividend of preference stock purchase rights
and related Rights Agreement could have the effect of making it more
difficult for potential acquirors to obtain a control position in the
Company.
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