Airbag sales deflate for LV firm

John Wilen

Thursday, Dec. 10, 1998 | 11:42 a.m.

American Pacific Corp. reported vastly improved earnings on slightly higher sales in the company's fourth fiscal quarter that ended Sept. 30.

Earnings at the Las Vegas-based chemical manufacturer jumped from a loss of $47 million, or $5.78 per share, in the 1997 quarter, to a gain of $221,000, or 3 cents per share, this year. Revenues increased slightly, from $13.5 million to $13.8 million.

In the 1998 fiscal year, American Pacific lost $2 million, or 24 cents per share, compared to a loss of $48.7 million, or $6.01 per share, in 1997. Annual revenues increased to $52.3 million from $44.1 million.

The huge 1997 loss was due mostly to a $52.6 million impairment charge taken for the company's sodium azide fixed assets. Sodium azide is a chemical used in the inflation of automobile airbags. The charge was taken because American Pacific believes it overestimated its share of the existing sodium azide market, and because competing technologies are expected to lead to the chemical's phasing-out.

American Pacific also took a $4 million charge to reorganize its management in the fourth fiscal quarter of 1997.

"We've enjoyed a tremendous improvement in operating performance this year, and we're looking to enjoy continued improvement next year," said David Keys, chief financial officer, during a conference call with investors Wednesday.

Sales of perchlorate, the rocket fuel component that makes up the majority of American Pacific's business, increased to $10.8 million in the fourth quarter from $8.1 million last year.

The increase was due largely to the company's March acquisition of Kerr-McGee Chemical Corp., at the time American Pacific's last perchlorate competitor. But Keys said the growing communications satellite industry is also driving perchlorate sales. The space shuttle program, shifting into a new phase now with the construction of the international space station, is also a strong demand driver, accounting for about half the company's perchlorate sales, said Keys.

The company said it has firm orders for $35.9 million worth of perchlorate, of which $30 million in scheduled for 1999 delivery. In the 1998 fiscal year, the company generated $35 million from perchlorate sales.

However, sales of sodium azide, the chemical used in automobile airbags, declined sharply, from $4.9 million in the 1997 fourth quarter to $2.1 million. The company blamed the downturn on the summer General Motors strike, but also conceded that sodium azide was being phased out of airbags.

"I don't think there's any dispute that sodium azide use in the production of airbags will become minimal," said Keys.

In an interview, Keys explained that allegations of toxicity are driving down demand for sodium azide. The chemical is used in a pyrotechnical reaction that instantly creates enough gas to inflate an airbag. New technologies, including reactions of other chemicals and competing technologies like compressed gas cylinders, are gaining wider acceptance and are expected to lead to the phasing-out of sodium azide, Keys said.

Investment advisors on the conference call were more interested in American Pacific's recent hiring of an investment advisor and in its real estate holdings than in the company's chemical business. Keys and John Gibson, president and chief executive, said the company's recent hiring of Wasserstein Perella & Co. to help it evaluate its strategic alternatives is not an indication American Pacific is up for sale.

"Basically, everything is open," said Keys.

But "everything" is a relative term, he said.

"When you think of the so-called alternatives, there really aren't that many," said Keys.

The alternatives for a company of American Pacific's size include growing internally, acquiring other companies, merging, selling all or part of the company, selling assets or stock, recapitalizing or buying back stock, said Keys.

Wasserstein was hired for two reasons, said Keys. First, management believes American Pacific stock is undervalued, and wants a third-party opinion on whether that is the case, and what should be done about it.

"I'd like somebody to tell me that I'm not nuts," said Keys.

American Pacific stock rose 13 cents Wednesday to close at $7.50. Keys said the company is worth $15 to $20 per share.

Second, American Pacific's acquisition of Kerr-McGee will dramatically increase company cash flows, and management just wants to make sure it spends the money correctly, said Keys.

"It looks like we're going to be generating some significant cash flow in comparison to where we were," said Keys. "We want to have a specific plan and strategy in place for the use of that cash. It's really as simple as that."

Gibson said an on-going investigation of the company's responsibility for traces of perchlorate found in Lake Mead would not be a "major hurdle" for anyone wanting to buy or merge with the company.

Investors also wanted to know what happened to $13 million in real estate sales the company had expected as recently as 3 months ago. American pacific reported $2.5 million in real estate sales in fiscal 1998. The company sold $1.5 million in real estate last month, and has $5 million currently in escrow.

American Pacific owns 320 acres in fast-growing Clark County.

Keys said a weak market for financing real estate acquisitions killed several of the deals.

"Over the last six months, it's really a reflection of the weakening ... of the financing that's available to the industry in general," said Keys. "The guys just didn't come up with the money in the end."

The rest of the real estate will likely be sold over the next three to four years, said Keys.

American Pacific revenues will likely grow 20 percent next year, Keys said.