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| APFC > SEC Filings for APFC > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
relationships. We work collaboratively with our customers to develop customized solutions that meet rigorous federal and other international regulatory standards. We generally sell our products through long-term contracts under which we are the sole-source or limited-source supplier.
OUR BUSINESS SEGMENTS
Our operations comprise four reportable business segments: (i) Fine Chemicals,
(ii) Specialty Chemicals, (iii) Aerospace Equipment and (iv) Other Businesses.
The following table reflects the revenue contribution percentage from our
business segments and each of their major product lines:
Three Months Ended Nine Months Ended
June 30, June 30,
2009 2008 2009 2008
Fine Chemicals 50 % 53 % 51 % 58 %
Specialty Chemicals:
Perchlorates 14 % 29 % 28 % 28 %
Sodium Azide 3 % 0 %* 1 % 0 %*
Halotron 3 % 4 % 2 % 3 %
Total Specialty Chemicals 20 % 33 % 31 % 31 %
Aerospace Equipment 29 % 9 % 16 % 9 %
Other Businesses:
Real Estate 0 %* 0 %* 0 %* 0 %*
Water Treatment Equipment 1 % 5 % 2 % 2 %
Total Other Businesses 1 % 5 % 2 % 2 %
Total Revenues 100 % 100 % 100 % 100 %
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* less than 1%
FINE CHEMICALS. Our Fine Chemicals segment, acquired on November 30, 2005,
reflects the operating results of our wholly-owned subsidiary Ampac Fine
Chemicals LLC ("AFC"). AFC is a custom manufacturer of active pharmaceutical
ingredients ("APIs") and registered intermediates. The pharmaceutical
ingredients that we manufacture are used by our customers in drugs with
applications in three primary areas: anti-viral, oncology, and central nervous
system. We generate nearly all of our Fine Chemicals sales from manufacturing
chemical compounds that are proprietary to our customers. We operate in
compliance with the U.S. Food and Drug Administration's (the "FDA") current Good
Manufacturing Practices or "cGMP" and other regulatory agencies such as the
European Union's European Medicines Agency ("EMEA"). Our Fine Chemicals
segment's strategy is to focus on high growth markets where our technological
position, combined with our chemical process, development and engineering
expertise, leads to strong customer allegiances and limited competition.
We have distinctive competencies and specialized engineering capabilities in
performing chiral separations, manufacturing high potency products (including
cytotoxic products), and performing energetic and nucleoside/nucleotide
chemistries at commercial scale. We have invested significant resources in our
facilities and technology base. We believe we are the U.S. leader in performing
chiral separations using commercial-scale simulated moving bed ("SMB")
technology and own and operate two large-scale SMB machines, both of which are
among the largest in the world operating under cGMP. We have distinctive
competency in handling highly toxic chemicals using our specialized high
containment facilities in applications such as drugs used for oncology. We have
significant experience and specially engineered facilities for energetic
chemistry on a commercial-scale under cGMP. We use this capability in
development and production of products such as those used in anti-viral drugs,
including HIV-related and influenza-combating drugs.
We have established long-term, sole-source and limited-source contracts, which
help provide us with earnings stability and visibility. In addition, the
inherent nature of custom pharmaceutical fine chemicals manufacturing encourages
stable, long-term customer relationships. We work collaboratively with our
customers to develop reliable, safe and cost-effective, custom solutions. Once a
custom manufacturer has been qualified as a supplier on a cGMP product, there
are several potential barriers that discourage transferring the manufacturing
method to an alternative supplier, including the following:
• Alternative Supply May Not Be Readily Available. We are currently the
sole-source supplier on several of our fine chemicals products.
• Regulatory Approval. Applications to and approvals from the FDA and other regulatory authorities generally require the chemical contractor to be named. Switching contractors may require additional regulatory approval and could take as long as six months to two years.
• Significant Financial Costs. Switching contractors and amending various filings can result in significant costs associated with technology transfer, process validation and re-filing with the FDA and other regulatory authorities.
SPECIALTY CHEMICALS. Our Specialty Chemicals segment is principally engaged in
the production of perchlorates, including ammonium perchlorate ("AP"). We are
the only North American producer of AP, which is the predominant oxidizing agent
for solid propellant rockets, booster motors and missiles used in space
exploration, commercial satellite transportation and national defense programs.
In addition, we produce and sell sodium azide, a chemical used in pharmaceutical
manufacturing, and Halotron, a series of clean fire extinguishing agents used in
fire extinguishing products ranging from portable fire extinguishers to total
flooding systems.
We have supplied AP for use in space and defense programs for over 50 years and
we have been the only AP supplier in North America since 1998. A significant
number of existing and planned space launch vehicles use solid propellant and
thus depend, in part, upon our AP. Many of the rockets and missiles used in
national defense programs are also powered by solid propellants.
Alliant Techsystems Inc. or "ATK" is our largest AP customer. We sell Grade I AP
to ATK under a long-term contract that requires us to maintain a ready and
qualified capacity for Grade I AP and that requires ATK to purchase its Grade I
AP requirements from us, subject to certain terms and conditions. The contract,
which expires in 2013, provides fixed pricing in the form of a price volume
matrix for annual Grade I AP volumes ranging from 3 million to 20 million
pounds. Pricing varies inversely to volume and includes annual escalations.
AEROSPACE EQUIPMENT. Our Aerospace Equipment segment reflects the operating
results of our wholly-owned subsidiary Ampac-ISP Corp. ("ISP") and its
wholly-owned subsidiaries, which include the recently acquired AMPAC ISP
Holdings beginning on October 1, 2008. Our Aerospace Equipment segment is one of
two major North American manufacturers of monopropellant and bipropellant liquid
propulsion systems and thrusters for satellites, launch vehicles, and
interceptors. Our products are utilized on various satellite and launch vehicle
programs such as Space Systems/Loral's 1300 series geostationary satellites.
Effective October 1, 2008, our Aerospace Equipment segment completed the
acquisition of Marotta Holdings Limited (subsequently renamed Ampac ISP Holdings
Limited) and its wholly-owned subsidiaries (collectively "AMPAC ISP Holdings")
for a cash purchase price, including direct expenses and net of cash acquired,
of $6,725. AMPAC ISP Holdings is included in our consolidated financial
statements beginning on October 1, 2008. We are accounting for this acquisition
using the purchase method of accounting. The allocation of the purchase price
among the fair values of assets acquired and liabilities assumed is preliminary
as of June 30, 2009.
AMPAC ISP Holdings designs, develops and manufactures high performance valves,
pressure regulators, cold-gas propulsion systems, and precision structures for
space applications, especially in the European space market. These products are
used on various satellites and spacecraft, as well as on the Ariane 5 launch
vehicle. Combined with our existing ISP operations in Westcott, U.K, these
operations constitute AMPAC ISP Europe.
OTHER BUSINESSES. Our 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. Our real estate
activities are not material.
RESULTS OF OPERATIONS
REVENUES
June 30, Increase Percentage
2009 2008 (Decrease) Change
Three Months Ended:
Fine Chemicals $ 15,644 $ 19,654 $ (4,010 ) (20 %)
Specialty Chemicals 6,299 11,942 (5,643 ) (47 %)
Aerospace Equipment 9,085 3,380 5,705 169 %
Other Businesses 462 1,764 (1,302 ) (74 %)
Total Revenues $ 31,490 $ 36,740 $ (5,250 ) (14 %)
Nine Months Ended:
Fine Chemicals $ 67,766 $ 76,920 $ (9,154 ) (12 %)
Specialty Chemicals 40,940 40,278 662 2 %
Aerospace Equipment 21,977 11,350 10,627 94 %
Other Businesses 2,871 3,429 (558 ) (16 %)
Total Revenues $ 133,554 $ 131,977 $ 1,577 1 %
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Fine Chemicals. The decrease in Fine Chemicals segment revenues for the fiscal
2009 third quarter compared to the prior fiscal year third quarter is primarily
due to a decrease in revenues from central nervous system products. The decrease
results from a customer reducing its order for the product until calendar year
2010.
For the nine months ended June 30, 2009, the decrease in Fine Chemicals segment
revenues, compared to the prior fiscal year nine-month period, primarily
reflects a decline in revenues from oncology products of 22% due to timing
between the interim periods, and a decline in revenues from central nervous
system products of 41% related to the aforementioned production delay.
Fine Chemicals segment revenues are anticipated to decline by approximately 25%
in fiscal 2009 as compared to fiscal 2008. In addition, because our customer
orders are typically based on calendar year requirements, we anticipate that
these AFC business conditions will continue into the first quarter of fiscal
2010.
Specialty Chemicals. Our Specialty Chemicals segment revenues include the
operating results from our perchlorate, sodium azide and Halotron product lines,
with perchlorates comprising 89% and 91% of Specialty Chemicals revenues in the
fiscal 2009 and fiscal 2008 nine-month periods, respectively.
The variances in Specialty Chemicals revenues for the three and nine-month
periods ended June 30, 2009 as compared to the prior fiscal year three and
nine-month periods reflect the following factors:
• A 75% decrease in perchlorate volume and a 70% increase in the related average
price per pound for the fiscal 2009 third quarter.
• A 25% decrease in perchlorate volume and a 32% increase in the related average price per pound for the nine months ended June 30, 2009.
• Sodium azide revenues increased $1,287 for the nine-month period ended June 30, 2009.
• Halotron revenues decreased $529 for the nine-month period ended June 30, 2009.
The decreases in perchlorate volume for the fiscal 2009 third quarter and
nine-month period reflect the timing of Grade I AP orders among the fiscal 2009
quarterly periods. The average price per pound increased for the fiscal 2009
third quarter and nine-month period because we sold more specialized blend
product than in the comparable prior fiscal year periods.
For the fiscal 2009 nine-month period, the greatest contribution to segment
revenue was product for the Space Shuttle Reusable Solid Rocket Motor ("RSRM")
program. We currently expect annual demand for Grade I AP in fiscal 2009 to be
consistent with fiscal 2008, and as a result, our fiscal 2009 fourth quarter is
anticipated to reflect a significant volume and revenue increase over our fiscal
2009 third quarter. Increases in demand in fiscal 2009 for the Space Shuttle
RSRM program, the Atlas V Solid Rocket Booster ("SRB") program and the Guided
Multiple Launch Rocket System ("MLRS") program should offset declines from the
completion in fiscal 2008 of the three-year Minuteman III propulsion replacement
program.
Specialty Chemicals segment revenues are expected to be consistent to up 5% in
fiscal 2009 as compared to fiscal 2008. Over the longer term, we expect annual
demand for Grade I AP to average within the range of 6 million to 9 million
pounds based on current NASA and U.S. Department of Defense production programs.
Grade I AP demand could vary outside this range for a twelve-month period
depending on the scope and timing of the Space Shuttle and/or Ares programs.
Aerospace Equipment. Our Aerospace Equipment segment reflects the operating
results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned
subsidiaries, which include the recently acquired AMPAC ISP Holdings beginning
on October 1, 2008.
For the nine months ended June 30, 2009, Aerospace Equipment segment revenues
increased $10,627 due to both organic growth and the AMPAC ISP Holdings
acquisition. AMPAC ISP Holdings contributed $4,013 in revenues. The remainder of
the revenue increase is primarily attributed to this segment's U.S. operations
which experienced success in the latter part of fiscal 2008 with new contract
awards. This improvement in backlog resulted in revenue increases in the fiscal
2009 periods.
Aerospace Equipment segment revenues are expected to increase substantially in
fiscal 2009 as compared to fiscal 2008, reflecting at least 40% organic revenue
growth and revenue contributions from our fiscal 2009 acquisition of AMPAC ISP
Holdings.
COST OF REVENUES AND GROSS MARGIN
June 30, Increase Percentage
2009 2008 (Decrease) Change
Three Months Ended:
Revenues $ 31,490 $ 36,740 $ (5,250 ) (14 %)
Cost of Revenues 24,227 23,990 237 1 %
Gross Margin 7,263 12,750 (5,487 ) (43 %)
Gross Margin Percentage 23% 35%
Nine Months Ended:
Revenues $ 133,554 $ 131,977 $ 1,577 1 %
Cost of Revenues 94,260 85,188 9,072 11 %
Gross Margin 39,294 46,789 (7,495 ) (16 %)
Gross Margin Percentage 29% 35%
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For our fiscal 2009 third quarter, cost of revenues was $24,227 compared to $23,990 for the prior fiscal year third quarter. The consolidated gross margin percentage was 23% and 35% for our fiscal 2009 and fiscal 2008 third quarters, respectively. For the nine months ended June 30, 2009, cost of revenues was $94,260 compared to $85,188 for the prior fiscal year nine-month period. The consolidated gross margin percentage was 29% and 35% for our fiscal 2009 and fiscal 2008 nine-month periods, respectively.
One of the most significant factors that affects, and should continue to affect,
the comparison of our consolidated gross margins from period to period is the
change in revenue mix between our segments. The revenue contribution by each of
our segments is indicated in the table above under the heading "Our Business
Segments".
In addition, consolidated gross margins for our fiscal 2009 periods reflect:
Fine Chemicals.
• A decrease in the gross margin percentage of approximately six points for the
fiscal 2009 third quarter due to lower production volume and the related
impact on gross margin due to less absorption of fixed manufacturing costs.
• A decrease in gross margin percentage of approximately thirteen points for the nine months ended June 30, 2009. In addition to the factor that contributed to the gross margin decline in the fiscal 2009 third quarter, the fiscal 2009 year-to-date decline in gross margin percentage includes:
• During the fourth quarter of fiscal 2008, we implemented a new process for a large-volume anti-viral product and experienced start-up difficulties that negatively impacted margins for this product for the first half of fiscal 2009. These factors, combined with price reductions, account for approximately eight points in the gross margin decline for the fiscal 2009 nine-month period.
• A decrease in revenues for central nervous system products, including a price reduction for a large-volume product, account for approximately two points in the gross margin decline.
• The remaining decline is attributed primarily to product mix.
Specialty Chemicals.
• For the fiscal 2009 third quarter, perchlorates comprised 72% of Specialty
Chemicals segment revenues compared to 89% in the prior year third quarter.
The change in product mix to lower-margined azide and Halotron products was
the primary contributor to a twenty-two point reduction in Specialty Chemicals
segment gross margins.
• Gross margin as a percentage of revenues was consistent between the nine-month periods.
Aerospace Equipment.
For the fiscal 2009 third quarter, Aerospace Equipment segment gross margins
improved 5 points, primarily due to improvement at our U.K. facility.
Aerospace Equipment segment gross margin as a percentage of revenue was
consistent between the fiscal 2009 and 2008 nine-month periods.
OPERATING EXPENSES
June 30, Increase Percentage
2009 2008 (Decrease) Change
Three Months Ended:
Operating Expenses $ 10,915 $ 10,377 $ 538 5 %
Percentage of Revenues 35% 28%
Nine Months Ended:
Operating Expenses $ 33,295 $ 31,824 $ 1,471 5 %
Percentage of Revenues 25% 24%
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For our fiscal 2009 third quarter, operating expenses increased $538 to $10,915 from $10,377 in the third quarter of the prior fiscal year primarily as a result of:
• A $415 decrease in Fine Chemicals segment incentive compensation, as a result of recording no incentive compensation in fiscal 2009.
• An increase in Aerospace Equipment segment operating expenses primarily due to additional operating expenses in the amount of $736 from the acquisition of AMPAC ISP Holdings.
• A decrease in corporate expenses, primarily due to a decrease of $321 in incentive compensation, as a result of recording no incentive compensation in fiscal 2009.
• Other increases of $538.
For the nine months ended June 30, 2009, operating expenses increased $1,471 to
$33,295 from $31,824 for the nine months ended June 30, 2008 as a result of:
• A $1,218 decrease in Fine Chemicals segment incentive compensation, as a
result of recording no incentive compensation in fiscal 2009.
• A $783 increase in Specialty Chemicals operating expenses primarily due to increases in employee benefit costs.
• An increase in Aerospace Equipment segment operating expenses primarily due to additional operating expenses in the amount of $1,673 from the acquisition of AMPAC ISP Holdings.
• Consistent corporate expenses, primarily including increases in rent of $546, and increases in stock-based compensation of $383, offset by a decrease of $1,034 in incentive compensation, as a result of recording no incentive compensation in fiscal 2009.
• Other increases of $338.
SEGMENT OPERATING INCOME (LOSS)
June 30, Increase Percentage
2009 2008 (Decrease) Change
Three Months Ended:
Fine Chemicals $ (752 ) $ 621 $ (1,373 ) NM
Specialty Chemicals 552 5,998 (5,446 ) (91 %)
Aerospace Equipment 417 (330 ) 747 NM
Other Businesses (215 ) 341 (556 ) NM
Segment Operating Income 2 6,630 (6,628 ) (100 %)
Corporate Expenses (3,654 ) (4,257 ) 603 14 %
Operating Income (Loss) $ (3,652 ) $ 2,373 $ (6,025 ) NM
Nine Months Ended:
Fine Chemicals $ (370 ) $ 9,426 $ (9,796 ) NM
Specialty Chemicals 16,481 16,768 (287 ) (2 %)
Aerospace Equipment 1,571 248 1,323 533%
Other Businesses 164 340 (176 ) (52 %)
. . .
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