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 March 31, 2005
OR
Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Commission File Number 1-8137
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AMERICAN PACIFIC CORPORATION |
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(Exact name of registrant as specified in its charter) |
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Delaware |
59-6490478 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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3770 Howard Hughes Parkway, Suite 300 |
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Las Vegas, NV |
89109 |
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(Address of principal executive offices) |
(Zip Code) |
(702) 735-2200
(Registrant’s telephone number, including area code)
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 S No £
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES £ No S
The number of shares of the Registrant’s Common Stock outstanding as of April 30, 2005 was 7,300,000.
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ITEM 1. |
3 |
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4 |
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6 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
7 |
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ITEM 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
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ITEM 3. |
27 |
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ITEM 4. |
27 |
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ITEM 1. |
28 |
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ITEM 2. |
28 |
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ITEM 3. |
28 |
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ITEM 4. |
28 |
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ITEM 5. |
28 |
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ITEM 6. |
29 |
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- 2 -
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
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For the three months ended |
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For the six months ended |
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2005 |
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2004 |
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2005 |
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2004 |
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Sales and Operating Revenues |
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$ |
18,513,000 |
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$ |
18,787,000 |
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$ |
36,767,000 |
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$ |
23,581,000 |
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Cost of Sales |
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11,986,000 |
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11,398,000 |
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24,531,000 |
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15,723,000 |
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Gross Profit |
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6,527,000 |
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7,389,000 |
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12,236,000 |
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7,858,000 |
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Operating Expenses |
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7,113,000 |
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6,102,000 |
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13,808,000 |
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9,866,000 |
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Operating Income (Loss) |
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(586,000 |
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1,287,000 |
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(1,572,000 |
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(2,008,000 |
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Interest Income |
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148,000 |
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309,000 |
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257,000 |
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553,000 |
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Interest and Other Expense |
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42,000 |
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110,000 |
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108,000 |
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450,000 |
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Income (Loss) Before Income Taxes, Extraordinary Item and Cumulative Effect |
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(480,000 |
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1,486,000 |
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(1,423,000 |
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(1,905,000 |
) |
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Income Taxes (Benefit) |
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(177,000 |
) |
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520,000 |
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(526,000 |
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(667,000 |
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Income (Loss) Before Extraordinary Item and Cumulative Effect |
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(303,000 |
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966,000 |
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(897,000 |
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(1,238,000 |
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Extraordinary Item, Net |
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1,622,000 |
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Cumulative Effect of Change in Accounting Principle |
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769,000 |
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769,000 |
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Net Income (Loss) |
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$ |
(303,000 |
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$ |
197,000 |
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$ |
725,000 |
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$ |
(2,007,000 |
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Basic Income (Loss) Before Extraordinary Item and Cumulative Effect Per Share |
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$ |
(0.04 |
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$ |
0.13 |
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$ |
(0.12 |
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$ |
(0.17 |
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Basic Net Income (Loss) Per Share |
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$ |
(0.04 |
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$ |
0.03 |
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$ |
0.10 |
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$ |
(0.28 |
) |
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Average Shares Outstanding |
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7,292,000 |
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7,285,000 |
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7,292,000 |
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7,270,000 |
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Diluted Net Income (Loss) Before Extraordinary Item and Cumulative Effect Per Share |
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$ |
(0.04 |
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$ |
0.13 |
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$ |
(0.12 |
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$ |
(0.17 |
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Diluted Net Income (Loss) Per Share |
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$ |
(0.04 |
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$ |
0.03 |
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$ |
0.10 |
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$ |
(0.28 |
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Diluted Shares |
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7,312,000 |
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7,363,000 |
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7,313,000 |
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7,270,000 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
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March 31, |
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September 30, |
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
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$ |
28,446,000 |
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$ |
23,777,000 |
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Accounts and Notes Receivable |
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12,434,000 |
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15,963,000 |
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Related Party Notes and Accrued Interest Receivable |
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274,000 |
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268,000 |
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Inventories |
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17,200,000 |
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13,827,000 |
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Prepaid Expenses and Other Assets |
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1,505,000 |
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666,000 |
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Deferred Income Taxes |
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526,000 |
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320,000 |
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Total Current Assets |
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60,385,000 |
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54,821,000 |
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Property, Plant and Equipment, Net |
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16,517,000 |
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16,573,000 |
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Intangible Assets, Net |
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11,813,000 |
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13,679,000 |
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Investment in Joint Venture |
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22,000 |
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227,000 |
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Deferred Income Taxes |
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10,776,000 |
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11,585,000 |
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Other Assets, Net |
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3,421,000 |
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3,743,000 |
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TOTAL ASSETS |
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$ |
102,934,000 |
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$ |
100,628,000 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
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March 31, |
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September 30, |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts Payable |
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$ |
5,023,000 |
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$ |
4,481,000 |
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Accrued Liabilities |
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6,166,000 |
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5,649,000 |
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Other Long-Term Liabilities |
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5,938,000 |
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5,698,000 |
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TOTAL LIABILITIES |
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17,127,000 |
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15,828,000 |
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Commitments and Contingencies |
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Shareholders’ Equity: |
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Common Stock |
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932,000 |
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932,000 |
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Capital in Excess of Par Value |
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86,171,000 |
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86,148,000 |
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Retained Earnings |
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16,643,000 |
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15,897,000 |
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Treasury Stock |
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(16,982,000 |
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(16,982,000 |
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Accumulated Other Comprehensive Loss |
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(957,000 |
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(1,195,000 |
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Total Shareholders’ Equity |
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85,807,000 |
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84,800,000 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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$ |
102,934,000 |
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$ |
100,628,000 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flow
(unaudited)
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For the six months |
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2005 |
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2004 |
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Cash Flows From Operating Activities |
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$ |
9,806,000 |
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$ |
7,055,000 |
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Cash Flows For Investing Activities: |
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Capital Expenditures |
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(1,147,000 |
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(788,000 |
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Asset Purchase |
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(4,468,000 |
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Net Cash Used in Investing Activities |
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(5,615,000 |
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(788,000 |
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Cash Flows For Financing Activities: |
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Dividends |
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(3,055,000 |
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Equity Purchased by Minority Shareholders |
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125,000 |
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Proceeds from Issuance of Debt |
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300,000 |
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Issuance of Common Stock |
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24,000 |
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2,290,000 |
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Treasury Stock Acquired |
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(2,752,000 |
) |
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Net Cash Provided by (Used in) Financing Activities |
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449,000 |
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(3,517,000 |
) |
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Effect of foreign currency exchange rate changes on cash |
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29,000 |
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Net Change in Cash and Cash Equivalents |
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4,669,000 |
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2,750,000 |
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Cash and Cash Equivalents, Beginning of Period |
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23,777,000 |
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27,140,000 |
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Cash and Cash Equivalents, End of Period |
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$ |
28,446,000 |
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$ |
29,890,000 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
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1. |
BASIS OF REPORTING |
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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”, “we”, “us”, or “our”). The Condensed Consolidated Balance Sheet as of September 30, 2004, was derived from the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2004. Such statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2004. In our opinion, however, all adjustments necessary for a fair presentation have been included. The operating results and cash flows for the three-month and six-month periods ended March 31, 2005 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods. |
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A summary of our significant accounting policies is included in our Annual Report on Form 10-K for the year ended September 30, 2004. We believe that the application of these policies on a consistent basis enables us to provide the users of the financial statements with useful and reliable information about our operating results and financial condition. |
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Judgments and assessments of uncertainties are required in applying our accounting policies in many areas. For example, key assumptions and estimates are particularly important when determining our projected liabilities for pension benefits, useful lives for depreciable and amortizable assets, deferred tax assets and long-lived assets, including intangible assets. Other areas in which significant uncertainties exist include, but are not limited to, costs that may be incurred in connection with environmental matters and the resolution of litigation and other contingencies. Actual results will inevitably differ to some extent from estimates on which our Condensed Consolidated Financial Statements were prepared. |
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Revenue recognition of the specialty chemicals and water treatment equipment sales are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. We offer some of our perchlorate product customers the option, at their request, of storing purchased materials in our Cedar City facility (“Bill and Hold” transactions). We recognize the revenue and profit from these Bill and Hold transactions at the point at which the risks of ownership and transfer of title are transferred to the customers. Sales of the water treatment equipment segment are recognized when the product is shipped. We receive cash for the full amount of real estate sales at the time of closing which is when the sale is recorded. |
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Revenues from the Company’s Aerospace Equipment segment is derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (“AICPA”) audit and accounting guide, “Audits of Federal Government Contracts” and the AICPA’s Statement of Position No. 81-1 (“SOP 81-1”), Accounting for Performance of Construction-Type and Certain Production Type Contacts. The Company accounts for these contracts using the percentage-of-completion method, and progress is measured on a cost-to-cost basis. Sales include estimated earned fees or profits calculated on the relationship between contract milestones and the estimate at completion. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately. |
- 7 -
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Intangible assets are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under the provisions of SFAS No. 142, the intangible asset related to our perchlorate acquisition (the “Acquisition”) in fiscal 1998 will continue to be amortized under its originally assigned life of ten years. At March 31, 2005, this intangible asset had a gross carrying value of approximately $39 million and accumulated amortization of approximately $27.5 million. Amortization expense was approximately $2.0 million during both the six months ended March 31, 2005, and 2004. Amortization expense is estimated to amount to approximately $3.9 million in each of the years during the three-year period ending September 30, 2007. |
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In January 2003, FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. In December 2003, FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), was issued to clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as amended by FASB Statement No. 94, “Consolidation of All Majority-Owned Subsidiaries.” |
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We historically treated our 50% equity interest in the Energetic System (“ES”) joint venture as an unconsolidated operation whose financial performance was disclosed, but not consolidated in our financial results. However under FIN 46(R), we are required to consolidate the ES joint venture due to a number of factors including our majority ownership of the joint venture’s debt securities. |
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We consolidated the ES joint venture as of March 31, 2004. We reported a cumulative effect of an accounting change of $769,000 (net of tax benefit of $414,000) on our 2004 second quarter income statement to reflect the loss that we would have incurred had the ES joint venture been consolidated since its inception. The consolidation of the ES joint venture significantly changed various line items of our balance sheet, statement of operations and cash flow presentations as compared to financial presentations in earlier reports. |
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In November 2004, the FASB issued SFAS 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4”. The Statement amends the guidance of ARB No. 43, Chapter 4, Inventory Pricing, by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Statement is effective for us beginning in fiscal 2006. We are in the process of assessing the extent of the impact such adoption would have on our financial statements, if any. |
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In December 2004, the FASB issued a revision to SFAS 123 (revised in 2004, as described below), Share-Based Payment. The revision requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees. The revision eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. In April 2005, the U.S. Securities and Exchange Commission extended the deadline for small companies to expense employee stock options to the fiscal year after December. 15, 2005. The announcement does not change the new accounting requirement issued by the Financial Accounting Standards Board, but only amends the required compliance dates. Beginning in our first quarter of fiscal 2006, the revision will be reflected in our consolidated financial statements. |
- 8 -
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Certain reclassifications, which have no effect on previously reported net income, have been made to the 2004 condensed consolidated financial statements to conform to the 2005 presentation. |
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Other comprehensive income (loss) represents a minimum pension liability and foreign currency transaction adjustments. Comprehensive income (loss) for the three-month and six-month periods ended March 31, 2005 and 2004, was as f ollows: |
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Three Months |
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Six Months |
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Three Months |
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Six Months |
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Income (Loss) before Extraordinary Gain and Cumulative Effect |
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$ |
197,000 |
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$ |
(2,007,000 |
) |
$ |
(303,000 |
) |
$ |
(897,000 |
) |
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Foreign Currency Transaction Adjustment |
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— |
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— |
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(42,000 |
) |
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29,000 |
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Minimum Pension Liability Adjustment |
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23,000 |
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|
703,000 |
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(221,000 |
) |
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209,000 |
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Comprehensive Income (Loss) |
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$ |
220,000 |
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$ |
(1,304,000 |
) |
$ |
(566,000 |
) |
$ |
(659,000 |
) |
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2. |
NET INCOME (LOSS) PER COMMON SHARE |
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Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted per share amounts are calculated by dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. |
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Three Months |
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Six Months |
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Three Months |
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Six Months |
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Average shares outstanding |
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7,285,000 |
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7,270,000 |
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|
7,292,000 |
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7,292,000 |
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Dilutive options and restricted shares outstanding |
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78,000 |
|
|
71,000 |
|
|
20,000 |
|
|
21,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
7,363,000 |
|
|
7,341,000 |
|
|
7,312,000 |
|
|
7,313,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosures of loss per share are in accordance with SFAS No. 148 “Accounting for Stock Based Compensation-Transition and Disclosure,” which amended SFAS No. 123, “Accounting for Stock-Based Compensation.” We have elected to follow APB No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our stock options. Under APB No. 25, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. |
|
|
|
|
|
We granted stock options to our directors in the first quarters of both fiscal 2005 and fiscal 2004. The effect on net income (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 to our stock option grants would have been as follows: |
- 9 -
|
|
|
Three Months Ended March 31 |
|
Six Months Ended March 31 |
|
||||||||
|
|
|
|
|
|
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before extraordinary item and cumulative effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(303,000 |
) |
$ |
966,000 |
|
$ |
(897,000 |
) |
$ |
(1,238,000 |
) |
|
Total stock based employee compensation expense using the fair value based method, net of related tax |
|
|
16,000 |
|
|
112,000 |
|
|
98,000 |
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(319,000 |
) |
$ |
854,000 |
|
$ |
(995,000 |
) |
$ |
(1,350,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(303,000 |
) |
$ |
197,000 |
|
$ |
725,000 |
|
$ |
(2,007,000 |
) |
|
Total stock based employee compensation expense using the fair value based method, net of related tax |
|
|
16,000 |
|
|
112,000 |
|
|
98,000 |
|
|
112,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
(319,000 |
) |
$ |
85,000 |
|
$ |
627,000 |
|
$ |
(2,119,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss), before extraordinary item and cumulative effect, as reported |
|
$ |
(0.04 |
) |
$ |
0.13 |
|
$ |
(0.12 |
) |
$ |
(0.17 |
) |
|
Pro forma |
|
$ |
(0.04 |
) |
$ |
0.12 |
|
$ |
(0.14 |
) |
$ |
(0.19 |
) |
|
Net income (loss), as reported |
|
$ |
(0.04 |
) |
$ |
0.03 |
|
$ |
0.10 |
|
$ |
(0.28 |
) |
|
Pro forma |
|
$ |
(0.04 |
) |
$ |
0.01 |
|
$ |
0.09 |
|
$ |
(0.29 |
) |
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss), before extraordinary item and cumulative effect, as reported |
|
$ |
(0.04 |
) |
$ |
0.13 |
|
$ |
(0.12 |
) |
$ |
(0.17 |
) |
|
Pro forma |
|
$ |
(0.04 |
) |
$ |
0.12 |
|
$ |
(0.14 |
) |
$ |
(0.19 |
) |
|
Net income (loss), as reported |
|
$ |
(0.04 |
) |
$ |
0.03 |
|
$ |
0.10 |
|
$ |
(0.28 |
) |
|
Pro forma |
|
$ |
(0.04 |
) |
$ |
0.01 |
|
$ |
0.09 |
|
$ |
(0.29 |
) |
|
|
The fair value of the options granted were estimated on the date of their grant. Options granted during fiscal 2005 had a fair value of $3.74 and options granted during fiscal 2004 had a fair value of $4.18. This fair value was determined using a Black-Scholes option-pricing model with the following assumptions: |
|
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
|
|
|
|
Dividend yield |
|
|
0 |
% |
|
0 |
% |
|
Volatility |
|
|
50 |
% |
|
50 |
% |
|
Risk-free interest rate |
|
|
3.5 |
% |
|
3.0 |
% |
|
Expected life |
|
|
4.5 years |
|
|
4.5 years |
|
- 10 -
|
3. |
INVENTORIES |
|
|
|
|
|
Inventories consist of the following: |
|
|
|
March 31, 2005 |
|
September 30, 2004 |
|
||
|
|
|
|
|
|
|
|
|
|
Work-in-process |
|
$ |
8,816,000 |
|
$ |
6,321,000 |
|
|
Raw materials and supplies |
|
|
8,384,000 |
|
|
7,506,000 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,200,000 |
|
$ |
13,827,000 |
|
|
|
|
|
|
|
|
|
|
|
4. |
DEBT |
|
|
|
|
|
As of March 31, 2005, we had approximately $2.1 million in outstanding standby letters of credit with $1.0 million of additional availability with US Bank. These letters of credit principally secure performance of certain water treatment equipment sold by us and payment of fees associated with the delivery of natural gas and power. During the three month period ending March 31, 2005 our ES joint venture issued $300,000 of senior secured debt securities to minority shareholders for working capital and other business purposes. |
|
|
|
|
5. |
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
Although they are not currently included in the list of hazardous substances compiled by the Environmental Protection Agency (“EPA”), perchlorates have been added to the EPA’s Contaminant Candidate List. We manufactured perchlorate chemicals at a facility on the Henderson site until the facility was destroyed in May 1988, after which we relocated our perchlorate production to our chemical facility located in Iron County, Utah. Kerr-McGee also operated a perchlorate production facility in Henderson, Nevada for many years prior to the start of our facility in that area. In 1998, Kerr-McGee ceased the production of perchlorates at the Henderson site. As a result of their longer production history in Henderson, Nevada, the Kerr-McGee operation has manufactured significantly greater amounts of perchlorates over time than did our operation. |
|
|
|
|
|
The EPA is conducting a risk assessment relating to perchlorates and has recommended a preliminary reference dose for perchlorates that would equate to 1 parts per billion (“ppb”) in drinking water. Certain states are also conducting risk assessments and some have set preliminary levels as low as 1 ppb. To our knowledge, virtually all independent and qualified experts believe that such preliminary levels have been arbitrarily established and are not based upon credible science. The National Academy of Sciences (“NAS”) was requested to review the work done by EPA to date along with other science that was disregarded or developed after EPA had drawn their conclusions. The NAS report was released January 11, 2005. The recommendations contained in this NAS report indicate that human health is protected in drinking water at a level of 24.5 ppb. The EPA has adopted the 24.5 ppb perchlorate level for its Drinking Water Equivalent Level (“DWEL”) and we believe that the agency is likely to adopt the 24.5 ppb level as its published reference dose for perchlorates. Public statements indicate that the EPA intends to complete its risk assessment and make a final reference dose recommendation, along with a decision of whether or not a Maximum Contaminate Level (“MCL”) is required. |
|
|
|
|
|
In 1997, the Southern Nevada Water Authority detected trace amounts of perchlorate chemicals in Lake Mead and the Las Vegas Wash, bodies of water near our real estate development property in Henderson, Nevada (in the Las Vegas area). Lake Mead is a source of drinking water for the City of Las Vegas, neighboring areas and certain areas of metropolitan Southern California. Perchlorate chemicals (at levels thousands of times higher than found in Lake Mead) are a potential health concern because they can interfere with the uptake of iodine by the thyroid gland. While iodine uptake inhibition is a mundane occurrence, if the uptake inhibition is high enough and lasts for a substantial period, then thyroid hormone production is affected. |
- 11 -
|
|
The Water Authority’s testing has shown perchlorate concentrations of 4 to 18 ppb in Clark County drinking water. In response to this discovery, we engaged environmental consultants to drill ground water monitoring wells in order to characterize ground water at, and in the vicinity of, the Henderson site. The results of our tests over a period of time have shown perchlorate concentrations in the ground water near, and at a distance from, the former Henderson site range from 0 to approximately 750,000 ppb at certain monitoring wells. We have continued to evaluate the sources of these amounts of perchlorate, possible environmental impacts, and potential remediation methods (including the pilot process described below). We also completed a pilot remediation testing process to remediate groundwater containing perchlorate at and near the Henderson site in 2003 using a biological in situ method. This pilot remediation test achieved all its operational objectives. |
|
|
|
|
|
We are cooperating with Federal, State and local agencies in the investigation and evaluation of perchlorate contamination found in Henderson, Nevada, possible environmental impacts and potential remediation methods. By the end of fiscal 2005, we expect to finalize a work plan with various state regulatory authorities for the installation and operation of a perchlorate system on a site in Henderson, Nevada. In addition, prior to the end of this fiscal year we expect to take a charge for the accrual of the potential costs of this remediation system once they can be reasonably determined or estimated. We are also exploring whether we can seek reimbursement for these potential remediation costs. |
|
|
|
|
|
In January 2002, the Company received a claim for approximately $1.7 million from Frontier Insurance Company (“Frontier”), alleging liability arising from indemnity agreements. The Company rejected the claim and filed a complaint with the District Court, Clark County, Nevada on February 28, 2002, seeking a declaratory judgment declaring that the indemnity agreements have been terminated and that we have no liability to Frontier. Frontier was declared insolvent and ordered into rehabilitation status by the Supreme Court of New York on October 15, 2001, which Order also stayed all lawsuits involving Frontier. On March 31, 2004, the Nevada District Court dismissed our declaratory judgment suit without prejudice because the case had been pending for more than two years. Recent information indicates that Frontier’s rehabilitation status has not changed. |
|
|
|
|
|
On June 4, 2004, Alan Andrew Curtis and Linda Ann Curtis, residents of Bullhead City, Arizona, filed an action in the United States District Court for the District of Arizona entitled Alan Andrew Curtis, an individual (“Husband”); Linda Ann Curtis, an individual (“Wife”), Plaintiffs, vs. City of Bullhead City, Arizona a municipality; The County of Mohave, Arizona; The State of Arizona; Arizona Department of Environmental Quality; Arizona-American Water Company; The State of Nevada; Clark County Nevada; The Southern Nevada Water Authority; Kerr-McGee Corporation LLC; American Pacific Corporation; State Title Corporation of Arizona; Mister and Miss Edward Koontz; The United States Department of the Interior; The United States Environmental Protection Agency Region IX; and Does 1 through 100, Inclusive, Defendants, alleging that various combinations of defendants are liable under federal and state law for damages and injuries suffered by the Curtis’ and the environment as a result of perchlorate and other contaminants found in the Colorado River, and requesting compensation and injunctive relief. We waived service of the summons and complaint on August 12, 2004, and filed a motion to dismiss based on perceived jurisdictional, procedural, and substantive defects in the Curtis’ complaint on September 20, 2004. Several other defendants also filed motions to dismiss. There have been numerous motions to strike documents filed by the Curtis’. A Hearing to consider the various motions to dismiss by |
- 12 -
|
|
several Defendants is scheduled for June 20, 2005. The court has not yet ruled on any motion to dismiss, and we are therefore not in a position to know with any degree of certainty how the Court views the merits of the Curtis’ claims. We expect decisions from the court on our and other defendants’ motions to dismiss in the near term. In the event one or more of the Curtis’ claims survive the initial motions, our plan is to conduct thorough discovery of all remaining claims. |
|
|
|
|
|
We have been and are also involved in other lawsuits. We believe that these other lawsuits, individually and in the aggregate, will not have a material adverse effect on our financial condition or results of operations. |
|
|
|
|
6. |
SEGMENT INFORMATION |
|
|
|
|
|
Our fiscal 2004 financial statements included two operating segments: Specialty Chemicals and Other Businesses. 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 Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, used principally in solid rocket propellants for the space shuttle and defense programs, (ii) sodium azide, used principally in the inflation of certain automotive airbag systems, (iii) Halotron®, clean gas fire extinguishing agents designed to replace halons, and (iv) the ES joint venture which manufactures commercial explosives and specializes in the development and testing of energetic compounds. |
|
|
|
|
|
The Other Businesses segment contains our water treatment equipment and real estate activities. Our water treatment equipment business designs, manufactures and markets systems for the control of noxious odors, the disinfection of water streams and the treatment of seawater. As of March 31, 2005, we have completed the sale of all our improved land in the Gibson Business Park (near Las Vegas, Nevada) that we intend to monetize and we do not anticipate significant real estate sales activity in future financial reporting periods. |
|
|
|
|
|
On October 1, 2004, we created a new operating segment, Aerospace Equipment, to report the financial performance of the former Atlantic Research Corporation’s in-space propulsion business (“ISP”) that we acquired from Aerojet-General Corporation. The financial performance of ISP was included for the first time in our Condensed Consolidated Financial Statements for the first quarter of 2005. |
|
|
|
|
|
We had one customer that accounted for 10% or more of our total sales during at least one of the six-month periods ended March 31, 2005 and 2004. Sales to this customer during the six months ended March 31 were as follows: |
|
Customer |
|
Chemical |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
A |
|
Perchlorates |
|
$ 9,282,000 |
|
$ 13,367,000 |
|
|
|
Additional information about our operations in different segments for the three months and six months ended March 31, 2005 and 2004, is provided below. |
- 13 -
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
|
|
|
|
|
||||||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Chemicals |
|
$ |
13,097,000 |
|
$ |
17,678,000 |
|
$ |
26,734,000 |
|
$ |
22,305,000 |
|
|
Aerospace Equipment |
|
|
2,144,000 |
|
|
— |
|
|
5,879,000 |
|
|
— |
|
|
Other Businesses |
|
|
3,272,000 |
|
|
1,109,000 |
|
|
4,154,000 |
|
|
1,276,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
18,513,000 |
|
$ |
18,787,000 |
|
$ |
36,767,000 |
|
$ |
23,581,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty chemicals |
|
$ |
(2,351,000 |
) |
$ |
1,393,000 |
|
$ |
(3,375,000 |
) |
$ |
(1,523,000 |
) |
|
Aerospace Equipment |
|
|
(360,000 |
) |
|
— |
|
|
(546,000 |
) |
|
— |
|
|
Other Businesses |
|
|
2,125,000 |
|
|
(106,000 |
) |
|
2,349,000 |
|
|
(485,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income (loss) |
|
|
(586,000 |
) |
|
1,287,000 |
|
|
(1,572,000 |
) |
|
(2,008,000 |
) |
|
Unallocated net income (expense) |
|
|
106,000 |
|
|
199,000 |
|
|
149,000 |
|
|
103,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, extraordinary item and cumulative effect |
|
$ |
(480,000 |
) |
$ |
1,486,000 |
|
$ |
(1,423,000 |
) |
$ |
(1,905,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. |
ACQUISITION |
|
|
|
|
|
As discussed in Note 6, on October 1, 2004, we acquired the former Atlantic Research Corporation’s in-space propulsion business (the “Acquisition”) from Aerojet-General Corporation. The purchase price for this acquisition included: (i) $3.5 million in cash, (ii) the assumption of certain liabilities, and (iii) a post-closing working capital adjustment. This working capital purchase price adjustment for this transaction has not been completed. |
|
|
|
|
|
Approximately $8.5 million of net assets were acquired as part of this transaction. Since the purchased price was less than the net assets acquired, non-current assets were recorded at zero and an after-tax extraordinary gain of $1.6 million was recognized (net of approximately $1.0 million income tax expense). The purchase price allocation has been reflected in the Condensed Consolidated Financial Statements, however, this allocation is still subject to possible future reallocations. |
|
|
|
|
8. |
DIVIDEND AND STOCK REPURCHASE PROGRAM |
|
|
|
|
|
In January 2003, our Board of Directors approved a Dividend and Stock Repurchase Program (the “Program”). The Program is designed to allocate a portion of our annual free cash flows (as calculated) for the purposes of paying cash dividends and repurchasing our Common Stock. The amount available for these purposes each fiscal year will equal 25% of our annual cash flows from operating activities less our annual capital expenditures, plus the amount of cash received from the issuance of our Common Stock resulting from the exercise of stock options. We will subtract the total amount spent on the repurchase of our Common Stock (if any) during the fiscal year from the total amount otherwise available under the Program, and pay the resultant amount as an annual dividend to our shareholders. As part of the stock repurchase portion of the Program, our Board of Directors has approved a provision that permits the repurchase of Common Stock from our employees and directors. |
|
|
|
|
|
In accordance with the provisions of the Program, during the six months ended March 31, 2004, the Company repurchased 300,000 shares of its Common Stock for $2.8 million, and on December 18, 2003, our Board of Directors declared a cash dividend of $0.42 per share payable on January 9, 2004, to shareholders of record on December 29, 2003. The total amount of the cash dividend paid in January 2004 was approximately $3.1 million. |
- 14 -
|
9. |
DEFINED BENEFIT PLAN |
|
|
|
|
|
As of March 31, 2005 the Company has contributed $771,000 to the Defined Benefit Plan to fund benefit payments and anticipates making approximately $841,000 in additional contributions during fiscal 2005. No contributions to the Supplemental Executive Retirement Plan have been made during the first six months of fiscal 2005, and the Company does not anticipate making any contributions during the remainder of the fiscal year. |
Defined Benefit Plan
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
|
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
||||
|
Components Of Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
Service Cost |
|
$ |
250,000 |
|
$ |
236,000 |
|
|
Interest Cost |
|
|
400,000 |
|
|
366,000 |
|
|
Return on Assets |
|
|
-343,000 |
|
|
-291,000 |
|
|
Amortization of prior service credits |
|
|
15,000 |
|
|
15,000 |
|
|
Recognized actuarial loss |
|
|
102,000 |
|
|
118,000 |
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
424,000 |
|
$ |
444,000 |
|
|
|
|
|
|
|
|
|
|
Supplemental Executive Retirement Plan
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
|
|
||||
|
|
|
2005 |
|
2004 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
||||
|
Components Of Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
Service Cost |
|
|
|
|
$ |
4,000 |
|
|
Interest Cost |
|
$ |
37,000 |
|
|
46,000 |
|
|
Amortization of prior service credits |
|
|
11,000 |
|
|
11,000 |
|
|
Recognized actuarial loss |
|
|
7,000 |
|
|
7,000 |
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
55,000 |
|
$ |
68,000 |
|
|
|
|
|
|
|
|
|
|
- 15 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: statements about our business strategy, the effect of GAAP accounting pronouncements on our recognition of revenue, uncertainty regarding our future operating results and our profitability, anticipated sources of revenue and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” or “certain” or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout the document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We disclaim any obligation to update these forward-looking statements as a result of subsequent events. The business risks discussed later in this report, among other things, should be considered in evaluating our prospects and future financial performance.
The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto.
OVERVIEW
We are principally engaged in the production of Grade I ammonium perchlorate (“AP”) for the aerospace and national defense industries. In addition, we produce and sell sodium azide, the primary component of a gas generator used in certain automotive airbag safety systems, and Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting vehicles. We also hold a 50% ownership stake in Energetic Systems, an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. These businesses collectively represent our Specialty Chemicals operating segment.
On October 1, 2004, we acquired the ISP business from Aerojet-General Corporation. Due to ISP’s operational and financial characteristics, we created a new Aerospace Equipment segment to report the financial performance of the ISP business unit. The financial performance of ISP has been included in our Condensed Consolidated Financial Statements since the first quarter of fiscal 2005.
Our Other Businesses segment includes the production of water treatment equipment, including equipment for odor control and disinfection of water. The Other Businesses segment also includes the sale of our improved land in the Gibson Business Park (near Las Vegas, Nevada). All of the real estate assets that were targeted for sale have been monetized and we do not anticipate significant real estate sales activity in the future financial reporting periods.
A summary of our significant accounting policies is included in Note 1 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 30, 2004. We believe that the application of these policies on a consistent basis enables us to provide the users of our financial statements with useful and reliable information about our operating results and financial condition.
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Sales and Operating Revenues:
Specialty Chemicals Segment:
The Specialty Chemicals segment accounts for approximately 71% and 94% of our revenues during the three-month periods ended March 31, 2005 and 2004, respectively.
Perchlorate chemicals account for a major portion of the Specialty Chemicals segment revenues. In general, demand for Grade I AP is driven by a relatively small number of Department of Defense (“DOD”) and National Aeronautics and Space Administration (“NASA”) contractors. As a result, any one individual AP customer usually accounts for a significant portion of our revenues.
In connection with the Acquisition, we entered into an agreement with the Thiokol Propulsion Division of Alcoa (“Thiokol”) with respect to the supply of AP through the year 2008. The agreement, as amended, provides that during its term Thiokol will make all of its AP purchases from us. In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior years. The agreement also establishes a pricing matrix under which Grade I AP unit prices vary inversely with the quantity of Grade I AP sold by us to all of our customers. Grade I AP unit prices in the matrix at all quantity levels escalate each year through fiscal 2003 and, in fiscal 2004, were adjusted downward by approximately 20%. Such downward adjustment had the effect of reducing revenues and operating cash flows on Grade I AP sold to Thiokol by 20% in fiscal 2004. After the adjustment, AP unit prices continue to escalate each year through fiscal 2008.
In connection with the Acquisition, we entered into an agreement with Alliant Techsystems, Inc. (“Alliant”) to extend an existing agreement through the year 2008. The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliant’s Bacchus Works.
During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual agreements in place prior to Alliant’s acquisition of Thiokol remain in place. All Thiokol programs existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.
Since the Acquisition, our annual sales volumes of Grade I AP have been approximately 20.2 million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000, 2001, 2002 and 2003 fiscal years (ended September 30) respectively. Prior to the Space Shuttle Columbia disaster on February 1, 2003, and based principally upon information we had received from our major customers, we previously estimated that annual demand for Grade I AP would range between 16.0 million and 20.0 million pounds over the next several years.
The suspension of Space Shuttle missions since the Columbia disaster reduced the sales volume of our Grade I AP products in fiscal 2004 to 11.2 million pounds. This reduced sales volume exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers’ inventory levels of Grade I AP increased throughout the year. The Space Shuttle is currently expected to resume flights beginning in July 2005 with four to five flights per year thereafter, although there is no assurance in this regard. Based principally upon market information we received from our customers, we currently estimate that our annual sales volumes of Grade I AP will range between 10.0 and 13.0 million pounds over the next three years. In addition, the new space exploration initiative for NASA announced by President Bush in January 2004 could have a significant impact on the demand for Grade I AP, however, the ultimate impact from this initiative remains uncertain at this time.
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We also produce and sell other perchlorates. Other perchlorates have a wide range of prices per pound, depending upon the type and grade of the product. We have experienced a change in the sales mix of other perchlorates, from lower price per pound products to higher price and margin per pound products. Other perchlorates are used in a variety of applications, including munitions, explosives, propellants, and initiators. Some of these applications are in a development phase, and there can be no assurance that sales of the higher price and higher margin products will continue. A significant reduction in these sales would have a material adverse effect on our results of operations and financial condition.
Other significant sales contributors to the Specialty Chemicals segment are: (i) packaged explosives, (ii) sodium azide, and (iii) Halotron ® fire extinguishing agents.
As discussed in Note 1 to the Condensed Consolidated Financial Statements, we began consolidating the financial performance of our ES packaged explosive joint venture as of March 31, 2004. Geographic markets for ES products include the US, Canada and Mexico. The primary buyers of Slurry Explosives Corp.’s products are explosive distributors who provide products and services to companies in the aggregates, construction, Eastern U.S. coal, precious mineral and metal mining industries.
Overall consumption of commercial explosives is expected to increase throughout 2005, in line with improved performance of the economy in general, and more specifically the aggregates, construction, Eastern U.S. coal, and metal mining sectors. We also expect Congress to pass a new, multi-year Transportation Bill in 2005, and as this works its way through the construction industry it will stimulate spending on new road construction, as well as infrastructure maintenance and renewal. The bill has already passed the House vote, and it is currently before the Senate. Passage of the bill will increase demand for package products used in road construction and quarrying, particular the Company’s Presplit product line and the new emulsion products. Significant investments have also been made in the development of new Presplit formulations manufactured under private label, and we expect the product to be well received by the market. The increased mining activity in the coal industry seen during 2004 is expected to continue as long as there is no significant downturn in the price of oil and natural gas, with coal being broadly recognized as a leading future commodity in the energy sector. We expect sales of products sold to the Eastern U.S. coal industry to remain robust in 2006.
Worldwide demand for sodium azide has declined considerably over the last several years. Currently, worldwide demand for sodium azide is substantially less than worldwide supply. Based principally upon market information received from airbag inflator manufacturers, we expect sodium azide use to continue to decline and that inflators using sodium azide will be phased out over some period of time.
Halotron is designed to replace halon-based fire extinguishing systems. Accordingly, demand for Halotron depends upon a number of factors including the willingness of commercial, government, and military consumers to switch from halon-based systems, the effects of competing products, as well as existing and potential governmental regulations.
Aerospace Equipment Segment:
The newly formed Aerospace Equipment segment accounts for approximately 16% of our revenues during the six-month period ended March 31, 2005. Prior to this most recent six month period, the segment did not exist.
The ISP business is the sole contributor to the Aerospace Equipment segment. The ISP business manufactures in-space propulsion thrusters that are either monopropellant or bipropellant based products. Monopropellant thrusters utilize a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters use a combination of a liquid fuel (typically monomethylhydrazine) and an oxidizer.
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The selection of a propulsion system is based on the satellite’s or spacecraft’s mission and encompasses a variety of factors. The factors generally include type of mission, mission length, type of orbit, mass, type of launch vehicle and price. The ISP business supplies both government and commercial satellite customers. Sales to these customers are usually awarded based on product performance, pricing, and reliability.
The market for ISP products is expected to grow modestly over the next several years. Government funding for defense, earth observation and space systems satellites is stable, but continued budget pressure will stretch some of these programs. Funding for missile defense programs is also expected to remain flat given budget pressures. The commercial satellite industry is expecting higher growth as a result of demand from broadband, HDTV and communications applications. Higher growth rates are expected in the markets for ISP products after the next several years as a result of the replacement of existing military and defense communications constellation systems.
Other Businesses Segment:
The Other Businesses segment accounts for approximately 11% and 5% of our revenues during the six-month periods ended March 31, 2005 and 2004, respectively. This segment included sales from our real estate and water treatment equipment businesses.
Real estate sales accounted for approximately 9% and 0% of our revenues during the six-month periods ended March 31, 2005 and 2004, respectively. We have approximately 2 acres remaining in our Nevada portfolio and real estate sales will cease after the sale of this property.
We sell electrochemical equipment used to purify air or water in municipal, industrial and power generation applications. At the heart of these systems is a proprietary bi-polar electrochemical cell which uses brine or seawater to produce the necessary chemicals. We compete with companies that utilize other technologies and those that utilize technologies similar to ours. Our success depends principally upon our ability to be cost competitive and, at the same time, to provide a quality product.
Cost of Sales:
The principal elements comprising our cost of sales are raw materials, electric power, labor, manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The major raw materials used in our 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 we are unable to pass along such increases to our customers.
Prices paid by us for raw materials have historically been relatively stable, although we have experienced cost increases on certain raw materials. All the raw materials used in our manufacturing processes have been available in commercial quantities. Although we recently had some difficulty in obtaining graphite, significant progress has been made in establishing an assured source of supply. We continue to explore other technologies that would reduce our dependence on graphite. A substantial portion of the total cash costs of operating our specialty chemical plants, consisting mostly of labor and overhead, are largely fixed in nature.
Net Income (Loss):
Although our net income (loss) and diluted net income (loss) per common share 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 5
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to our Condensed Consolidated Financial Statements, we may incur material legal and other costs associated with certain litigation and contingencies; (ii) the magnitude, pricing and timing of perchlorate chemicals, sodium azide, Halotron, packaged explosives and water treatment equipment sales in the future is uncertain; (iii) weighted average common and common equivalent shares for purposes of calculating diluted net income per common share are subject to significant fluctuations based upon changes in the market price of our Common Stock due to outstanding warrants and options; (iv) the results of periodic reviews of impairment issues; and (v) the ability to pass on increases in raw material costs to our customers.
Critical Accounting Policies and the Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.
Application of the critical accounting policies discussed below requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. However, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different results.
Sales and Revenue Recognition:
Sales of the specialty chemicals and water treatment products are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. We offer some of our perchlorate product customers the option, at their request, of storing purchased materials in our Cedar City facility (“Bill and Hold” transactions). We recognize the revenue and profit from these Bill and Hold transactions at the point at which the risks of ownership and transfer of title are transferred to the customers. Sales of the water treatment equipment segment are recognized when the product is shipped. We receive cash for the full amount of real estate sales at the time of closing which is when we record the sale.
Depreciable Lives of Plant and Equipment:
Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of cost of each asset from earnings every year over its estimated economic useful life. Economic useful life is the duration of time the asset is expected to be productively employed by the company, which may be less than its physical life. Management’s assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, changes in market demand and raw material availability.
The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, changes in technological advances, changes in the estimated future demand for products, or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In these cases, the Company would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.
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Impairment of Long-Lived Assets - Plant and Equipment:
Plant and equipment held for use is grouped for impairment testing at the lowest level for which there are identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses recoverability by comparing the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets. If an asset group is considered impaired, the impairment loss to be recognized would be measured as the amount by which the asset group’s carrying amount exceeds its fair value. Assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.
The estimate of plant and equipment fair value is based on estimated discounted future cash flows expected to be generated by the asset group. The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include: industry and market conditions, sales volume and prices, costs to produce and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.
Impairment of Long-Lived Assets – Goodwill and Intangible Assets:
The purchase method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of net assets of an acquired entity. The Company currently has no goodwill in its financial statements. Disclosures related to intangible assets are included in Note 1.
The Company performs an impairment test annually in the fourth quarter of the fiscal year. In addition, additional tests will be conducted if changes in circumstances indicate a potential impairment exists. The impairment test requires the Company to compare the fair value of business reporting units to carrying value. The results of the impairment tests have indicated fair value amounts exceeded carrying amounts.
The Company primarily uses the present value of future cash flows to determine fair value. The Company’s valuation model assumes a five-year growth period for the business and an estimated exit trading multiple. Management judgment is required in the estimation of future operating results and to determine the appropriate exit multiple. The exit multiple is determined from comparable industry transactions. Future operating results and exit multiples could reasonably differ from the estimates.
Income Taxes:
We account for income taxes using the asset and liability approach required by SFAS No. 109. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of our assets and liabilities. Future tax benefits attributable to temporary differences are recognized to the extent that realization of such benefits are more likely than not. These future tax benefits are measured by applying currently enacted tax rates.
Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.
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Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when there are not sufficient sources of future taxable income to realize the benefit of the operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.
Pension Benefits:
The Company sponsors defined benefit pension plans in various forms for employees who meet eligibility requirements. Several assumptions and statistical variables are used in actuarial models to calculate the pension expense and liability related to the various plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. Depending on the assumptions selected, pension expense could vary significantly and could have a material effect on reported earnings. The assumptions used can also materially affect the measurement of benefit obligations. Information with respect to pension expenses and liabilities, together with the impact of changes in key assumptions is discussed in Note 8 to our Consolidated Financial Statements included in our September 30, 2004 Annual Report on Form 10-K.
Other areas in which significant uncertainties exist include, but are not limited to, projected costs to be incurred in connection with environmental matters, tax matters, the resolution of litigation, and the recoverability of investments in and advances to our ES joint venture. A discussion of environmental and legal matters is included in Note 5 to our Condensed Consolidated Financial Statements. Information on some of the key estimates and assumptions on which our annual provision for income taxes is based may be found in Note 7 to our Consolidated Financial Statements included in our September 30, 2004 Annual Report on Form 10-K.
Actual results will inevitably differ to some extent from the estimates on which our Condensed Consolidated Financial Statements are prepared at any given point in time. Despite these inherent limitations, we believe that our Management’s Discussion and Analysis and Condensed Consolidated Financial Statements provide a meaningful and fair perspective on our Company.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Sales and Operating Revenues:
For the three months ended March 31, 2005, sales decreased by $0.3 million, or 1% to $18.5 million from $18.8 million in the corresponding period of the prior year. This decrease was attributable to a decrease in Specialty Chemicals segment sales of $4.6 million. In comparison to the comparable period in the prior year, the decline in Specialty Chemicals segment sales was substantially offset by the $2.1 million of sales from (i) our recently acquired ISP business whose financial results are reported in our new Aerospace Equipment segment and (ii) the $2.2 million increase in Other Businesses segment sales.
The decline in Specialty Chemicals segment sales volume during the three month period ending March 31 was principally due to lower levels of perchlorate sales in comparison to the comparable period in the prior year. The increased sales volumes of our Other Businesses segment was principally due to a higher level of real estate activity completed during the period in comparison to the comparable period in the prior year.
Cost of Sales:
Cost of sales increased $0.6 million, or 5%, in the three months ended March 31, 2005, to $12.0 million from $11.4 million in the comparable period in the prior year. As a percentage of sales, cost of sales was 65% in the second quarter of fiscal 2005, compared to 61% in the comparable period in the prior year.
The increase in cost of sales during in the three months ended March 31, 2005 versus the corresponding period ended March 31, 2004, was principally a result of higher cost of sales from our Aerospace Equipment and Other Businesses segments, which were partially offset by lower cost of sales from our Specialty Chemicals segment.
Operating Expenses:
Operating (selling, general and administrative) expenses increased $1.0 million, or 17%, in the three months ended March 31, 2005, to $7.1 million from $6.1 million in the corresponding period of 2004. The increase in operating expenses was due primarily to: (i) the consolidation of our packaged explosive joint venture as of the third quarter of fiscal 2004, (ii) the addition of the ISP business into the newly formed Aerospace Equipment segment on October 1, 2004, (iii) an increase in environmental remediation expenditures, and (iv) corporate development costs.
Interest Income/Interest and Other Expense:
Interest income decreased to $0.1 million in the three months ended March 31, 2005, from $0.3 million in the corresponding period of the prior year. Interest and other expense decreased to $42,000 in the three months ended March 31, 2005, from $0.1 million in the corresponding period of the prior year. The decline in: (i) interest income and (ii) interest and other expense, for the three month period ending March 31 was primarily as a result of the elimination of interest and other expense from the consolidation of our packaged explosive joint venture.
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Six Months Ended March 31, 2005 Compared to Six Months Ended March 31, 2004
Sales and Operating Revenues:
For the six months ended March 31, 2005, sales increased by $13.2 million, or 56% to $36.8 million from $23.6 million in comparison to the comparable period in the prior year. This increase was attributable to (i) an increase in Specialty Chemicals and Other Businesses segment sales of $4.4 million and $2.9 million respectively, and (ii) $5.9 million of sales from our ISP business whose financial results are reported in our new Aerospace Equipment segment.
In comparison to the comparable period in the prior year, the increase in Specialty Chemicals segment sales during the six month period ending March 31 resulted principally from higher sales volume of perchlorate chemicals and the inclusion of our packaged explosives sales in our financial results in fiscal 2005 in comparison to the comparable period in the prior year. The increased sales volume in our Other Businesses segment was principally due to a higher level of real estate activity completed during the period in comparison to the comparable period in the prior year.
Cost of Sales:
Cost of sales increased $8.8 million, or 56%, in the six months ended March 31, 2005, to $24.5 million from $15.7 million in the corresponding period of the prior year. As a percentage of sales, cost of sales was 67% in the first six months of fiscal 2005 and fiscal 2004.
The increase in cost of sales during in the six months ended March 31, 2005 versus the corresponding period ended March 31, 2004, was principally a result of higher Specialty Chemicals and Other Businesses segment sales respectively. In addition, our recently acquired ISP business also increased our cost of sales for the six months ended March 31, 2005.
Operating Expenses:
Operating (selling, general and administrative) expenses increased $3.9 million, or 40%, in the six months ended March 31, 2005, to $13.8 million from $9.9 million in the corresponding period of 2004. The increase in operating expenses was due primarily to: (i) the consolidation of the our packaged explosive joint venture as of the third quarter of fiscal 2004, (ii) the addition of the ISP business into the newly formed Aerospace Equipment segment on October 1, 2004, (iii) an increase in environmental remediation expenditures, and (iv) corporate development costs.
Interest Income/Interest and Other Expense:
Interest income decreased to $0.3 million in the six months ended March 31, 2005, from $0.5 million in the corresponding period of the prior year. Interest and other expense decreased to $0.1 million in the six months ended March 31, 2005, from $0.4 million in the corresponding period of the prior year. The decline in: (i) interest income and (ii) interest and other expense, for the six month period ending March 31 was primarily as a result of the elimination of interest and other expense from the consolidation of our packaged explosive joint venture.
INFLATION
General inflation did not have a significant effect on our sales and operating revenues or costs during the three months ended March 31, 2005 and 2004. General inflation may have an effect on gross profit in the future as certain of our agreements relating to Grade I AP, sodium azide, in-space propulsion thrusters require fixed prices, although certain of such agreements contain escalation features that should somewhat insulate us from increases in costs associated with inflation.
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $9.8 million and $7.1 million during the six months ended March 31, 2005 and 2004, respectively. The increase in cash flows from operating activities was primarily due to higher sales volumes. We believe that our cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of our operations, including the repurchase of our Common Stock and/or dividends under the Program. However, the resolution of litigation and contingencies, and the timing, pricing and magnitude of orders for our products may have an effect on the use and availability of cash.
Capital expenditures were $1.1 million and $0.8 million during the six months ended March 31, 2005 and 2004, respectively. Capital expenditures relate principally to specialty chemicals segment capital improvement projects. Capital expenditures are expected to be funded from existing cash balances and operating cash flows.
We did not repurchase any of our Common Stock during the six-month period ended March 31, 2005. As a result of the exercise of stock options, we issued 5,000 shares, for an aggregate price of $24,000, of our Common Stock during the six-month period ended March 31, 2005.
As a result of the litigation and contingencies discussed in Note 5 to our Condensed Consolidated Financial Statements, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. Any such costs, to the extent not recovered by insurance, would adversely affect our liquidity. We are currently unable to predict or quantify the amount or range of such costs or the period of time over which such costs may be incurred.
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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Various discussions in this Quarterly Report on Form 10-Q contain forward-looking statements concerning our future products, expenses, revenue, liquidity and cash needs, as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause our actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.
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1. |
(a) Declining demand (including excess customer inventories) or downward pricing pressure for our products as a result of general or specific economic conditions, (b) governmental budget decreases affecting the DOD or NASA, including the status of the Space Shuttle Program (including President Bush’s current plan to ultimately terminate shuttle operations), that would cause further decreases in demand for Grade I AP, (c) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for Grade I AP and other perchlorates, sodium azide, Halotron, explosives or thrusters (d) the ability and desire of purchasers to change existing products or substitute other products for our products based upon perceived quality, environmental effects and pricing, and (e) the fact that perchlorate chemicals, sodium azide, Halotron and our water treatment products have limited applications and highly concentrated customer bases. |
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2. |
The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 5 to our Condensed Consolidated Financial Statements, as well as the costs resulting from regulatory and environmental matters that may have a negative impact on sales or costs. |
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3. |
Our ability to profitably integrate, manage and operate new businesses and/or investments competitively and cost effectively (including recently acquired ES and Ampac-ISP). |
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4. |
Competitive factors including, but not limited to, our limitations respecting financial resources and our ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and in the perchlorate market, potential patent coverage issues, and the development or penetration of competing new products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives businesses. |
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5. |
Underutilization of our manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs, reductions in margins, and impairment issues. |
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6. |
The near depletion of our Clark County, Nevada commercial real estate, with only 2 acres remaining for sale. |
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7. |
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. |
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8. |
The dependence upon a single facility for the production of most of our products. |
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9. |
Provisions of our Certificate of Incorporation and Bylaws and Series D Preferred Stock, and the 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 us. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates, commodity prices and foreign currency exchange rates. We did not have any long-term debt outstanding for the period ending March 31, 2005 and 2004, respectively. As of March 31, 2005, we did not have any derivative-based financial instruments. However, the amount of any outstanding debt may fluctuate and we may at some time be subject to financing risk. There have been no material changes in market risk since March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of March 31, 2005, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Voting results of matters submitted to a vote of Security Holders at our Annual Meeting of Stockholders held on March 8, 2005 were as follows:
Item No. 1 – Election of Class A Directors (through March 2007).
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Name |
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Votes For |
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Votes Withheld |
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John R. Gibson |
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6,122,510 |
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980,000 |
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Jan H. Loeb |
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6,155,037 |
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947,473 |
Item No. 2 – Election of Class B Directors (through March 2008).
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Name |
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Votes For |
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Votes Withheld |
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Norval F. Pohl |
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6,145,185 |
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957,325 |
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C. Keith Rooker |
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5,464,983 |
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1,637,527 |
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Jane L. Williams |
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6,141,185 |
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931,325 |
Mr. Rooker received less than 80% (approximately 76.9%) of the votes cast. Accordingly, under the Registrant’s Certificate of Incorporation and Bylaws, he will remain in office, but must be renominated for election by the stockholders at the next Annual Meeting in March 2006.
Item No. 3 – Ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm:
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Votes For |
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Against |
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Abstained |
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6,675,288 |
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9,165 |
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418,057 |
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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a) |
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Exhibits |
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Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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b) |
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Reports on Form 8-K |
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We filed a Current Report on Form 8-K on February 11, 2005, announcing our financial results for the first quarter of fiscal year 2005. |
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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.
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AMERICAN PACIFIC CORPORATION |
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Date: May 12, 2005 |
/s/ JOHN R. GIBSON |
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John R. Gibson |
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Date: May 12, 2005 |
/s/ SETH L. VAN VOORHEES |
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Seth L. Van Voorhees |
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