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APFC > SEC Filings for APFC > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN PACIFIC CORP



Quarterly Report

OF OPERATIONS (Dollars in Thousands)

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: our expectations regarding changes in cash flow and working capital and related variances in the future, our potential incurrence of additional debt, including through refinancing, or legal or other costs in the future, our belief that our cash flows, existing cash balances and debt will be adequate for the foreseeable future to satisfy the needs of our operations, our expectations regarding anticipated contributions and obligations with respect to our defined benefit pension plans and supplemental executive retirement plan, our estimates and expectations regarding anticipated costs, timing and funding in the short and long term for environmental remediation in connection with our former Henderson, Nevada site, our statement regarding the impact that change in revenue mix among our segments will have on comparisons of our consolidated gross profit and gross margin in the future, our expectations with respect to the substantial fulfillment of existing backlog within the next twelve months, our statement regarding anticipated capital activities for Fiscal 2013, statements regarding our expectations for product revenues, sales volumes, interest expense, tax obligations and capital expenditures, statements regarding the impact of process improvements and other efficiency and cost savings initiatives, statements regarding the expected impact of the timing of individual orders, sales and production activities on quarterly revenues, statements regarding our perceived competitive advantages, statements regarding the expected benefits of our interest rate swap arrangement, statements regarding the potential future impact of critical accounting policies and changes in accounting standards and judgments, estimates and assumptions relating thereto, statements regarding the impact that principal payments under our Credit Facility will have on our liquidity, statements regarding our ability to focus on the growth and performance of our pharmaceutical-related product lines following the sale of our Aerospace Equipment segment, statements regarding the effects of regulatory proposals, statements regarding the effects of the Administrative Order of Consent with NDEP regarding our remediation efforts at the AMPAC Henderson Site and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as "may," "can," "will," "could," "would," "should," "continue," "expect," "anticipate," "believe," "estimate," or "future," or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout this document. These forward-looking statements involve certain risks and uncertainties, such as, for example, with respect to the actual placement, timing and delivery of orders for new and/or existing products, that could cause actual results to differ materially from future results or outcomes expressed or implied in such forward-looking statements. Please see the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of factors that could affect future results. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement, unless otherwise required by law. Any business risks discussed later in this Item 2, among other things, should be considered in evaluating our prospects and future financial performance.

The terms "Company," "we," "us," and "our" are used herein to refer to American Pacific Corporation and, where the context requires, one or more of the direct and indirect subsidiaries or divisions of American Pacific Corporation. We report our results based on a fiscal year which ends on September 30. References to Fiscal years refer to the twelve months ended or ending September 30 of the Fiscal year referenced. The following discussion and analysis is intended to provide a narrative discussion of our financial results and an evaluation of our financial condition and results of operations with respect to the third quarter and nine-month period of Fiscal 2013 as compared to the third quarter and nine-month period of Fiscal 2012. The discussion should be read in conjunction with our Annual Report on Form 10-K for Fiscal 2012 filed with the Securities and Exchange Commission (the "SEC") and the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 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 Fiscal 2012.

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American Pacific Corporation and its predecessors have been engaged in chemical manufacturing since 1955. We are a leading custom manufacturer of fine chemicals and specialty chemicals within our focused markets. Through our Fine Chemicals segment, we supply active pharmaceutical ingredients ("APIs") and registered intermediates to the pharmaceutical industry. Our Specialty Chemicals segment produces various perchlorate chemicals and is the only North American producer of Ammonium Perchlorate ("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. We produce clean agent chemicals for the fire protection industry, as well as electro-chemical equipment for the water treatment industry. Our products are designed to meet customer specifications and often must meet certain governmental and regulatory approvals. Our technical and manufacturing expertise and customer service focus has gained us a reputation for quality, reliability, technical performance and innovation. Given the mission critical nature of our products, we maintain long-standing strategic customer relationships and generally sell our products through long-term contracts under which we are the sole-source or limited-source supplier.

                             OUR BUSINESS SEGMENTS

Our continuing operations comprise three reportable business segments: Fine
Chemicals, Specialty Chemicals, and Other Businesses. The following table
reflects the revenue contribution percentage from our business segments and
their major product lines:

                                       Three Months Ended           Nine Months Ended
                                            June 30,                    June 30,
                                       2013           2012         2013           2012

       Fine Chemicals                     64%           63%           66%          58%

       Specialty Chemicals:
       Perchlorates                       27%           33%           26%          35%
       Sodium Azide                        1%            2%            2%           2%
       Halotron                            2%            2%            2%           3%

       Total Specialty Chemicals          30%           37%           30%          40%
       Other Businesses:
       Real Estate                         *             *             *            *
       Water Treatment Equipment           6%            *             4%           2%

       Total Other Businesses              6%            *             4%           2%

       Total Revenues                    100%          100%          100%         100%

* less than 1%

FINE CHEMICALS. Our Fine Chemicals segment, operated through our wholly-owned subsidiaries Ampac Fine Chemicals LLC and AMPAC Fine Chemicals Texas, LLC (collectively "AFC"), is a custom manufacturer of APIs and registered intermediates for customers in the pharmaceutical industry. The pharmaceutical ingredients we manufacture are generally used by our customers in drugs with indications in three primary areas: anti-viral, oncology, and central nervous system. AFC's customers include some of the world's largest pharmaceutical and biotechnology companies, as well as emerging pharmaceutical companies. Most of the products that AFC sells are proprietary to our customers and used in existing drugs that are approved by the U.S. Food and Drug Administration ("FDA") and commercially available. We operate in compliance with the FDA's current Good Manufacturing Practices ("cGMP") and the requirements of certain other regulatory agencies such as the European Union's European Medicines Agency and Japan's Pharmaceuticals and Medical Devices Agency. 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 relationships and limited competition. We have distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing products that require high containment and performing energetic

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chemistries at commercial scale. We have recently expanded our technology offerings to include commercial scale production of Schedule II to V controlled substances in our high-security facilities in Rancho Cordova, California.

We have invested significant resources in our facilities, workforce and technology base. We believe we are the U.S. leader in performing chiral separations using Simulated Moving Bed ("SMB") chromatography and own and operate two large-scale SMB systems, both of which are among the largest in the world operating under cGMP. We offer a full range of SMB equipment and related services from laboratory-scale to our large systems. We believe our distinctive competency in manufacturing chemical compounds that require specialized high containment facilities and handling expertise provide us a significant competitive advantage in competing for various opportunities associated with high potency, highly toxic and cytotoxic products. Many oncology drugs are made with APIs that are high potency or cytotoxic. AFC is one of the few companies in the world that can manufacture such compounds at a multi-ton annual rate. Moreover, our significant experience and highly engineered facilities make us one of the few companies in the world with the capability to use 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, and in some cases sole-source, contracts with customers that represent the majority of our revenues. Contracts that are not sole-source are limited-source considering the nature of our industry and the products that we manufacture. 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 of the product to an alternative supplier. For example, 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 approvals and could take as long as two years to complete. 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 around the world.

SPECIALTY CHEMICALS. Our Specialty Chemicals segment is principally engaged in the production of perchlorates, which include several grades of ammonium perchlorate ("AP"), sodium perchlorate and potassium perchlorate. AP is the predominant oxidizing agent for solid propellant rockets, booster motors and missiles used in national defense, space exploration and commercial satellite transportation programs. We have supplied rocket-grade AP for use in space and defense programs for over 50 years and we have been the only rocket-grade AP supplier in North America since 1998, when we acquired the AP business of our principal competitor, Kerr-McGee Chemical Corporation. AP is a key component of solid propellant rockets, booster motors and missiles that are utilized in U.S. Department of Defense ("DoD") tactical and strategic missile programs, as well as various space programs such as the Delta and Atlas families of commercial space launch vehicles and space exploration programs for the National Aeronautics and Space Administration ("NASA"). There is currently no domestic alternative to these solid rocket motors. As a result, we believe that the U.S. government views us as a strategic national asset.

Alliant Techsystems Inc. or "ATK" is a significant AP customer. We sell rocket-grade AP to ATK under a long-term contract that requires us to maintain a ready and qualified capacity for rocket-grade AP and that requires ATK to purchase its rocket-grade AP requirements from us, subject to certain terms and conditions. The current contract provides fixed pricing in the form of a price volume matrix for annual rocket-grade AP volumes ranging from 3 million to 20 million pounds through Fiscal 2013. In May 2013, we extended our contract with ATK to include Fiscal 2014 through Fiscal 2016 and established a similar price volume matrix that provides fixed pricing for annual rocket-grade AP volumes ranging from 2.5 million to 7.5 million pounds. Pricing varies inversely to volume and includes annual escalations.

In addition, we produce and sell sodium azide, a chemical primarily 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.

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OTHER BUSINESSES. Our Other Businesses segment contains our water treatment equipment division and real estate activities. Our water treatment equipment business markets, designs, and manufactures electrochemical On Site Hypochlorite Generation, or OSHG systems. These systems are used in the disinfection of drinking water, control of noxious odors, and the treatment of seawater to prevent the growth of marine organisms in cooling systems. We supply our equipment to municipal, industrial and offshore customers. Our real estate activities are not material.

DISCONTINUED OPERATIONS. In May 2012, our board of directors approved and we committed to a plan to sell our Aerospace Equipment segment, which was comprised of Ampac-ISP Corp. and its wholly-owned foreign subsidiaries ("AMPAC-ISP"). We completed the sale of substantially all of the assets of AMPAC-ISP effective August 1, 2012. The divestiture was a strategic shift that allows us to place more focus on the growth and performance of our pharmaceutical-related product lines. Revenues and expenses associated with the operations of AMPAC-ISP are presented as discontinued operations for all periods presented.



For our Fiscal 2013 third quarter, revenues increased 21% to $69,519 compared to $57,623 for the Fiscal 2012 third quarter. For the Fiscal 2013 nine-month period, revenues increased 15% to $155,881 compared to $136,026 for the prior year nine-month period. The increases are supported by growth from our Fine Chemicals segment, offset partially by the inter-quarter timing of Specialty Chemicals segment and Other Businesses segment revenues. See further discussion below under the heading "Business Segment Results".

                                     June 30,                Increase        Percentage
                               2013            2012         (Decrease)         Change

     Three Months Ended:
     Fine Chemicals         $    44,223     $    36,359     $    7,864               22%
     Specialty Chemicals         20,897          21,001          (104)              (0%)
     Other Businesses             4,399             263          4,136            1,573%

     Total Revenues         $    69,519     $    57,623     $   11,896               21%

     Nine Months Ended:
     Fine Chemicals         $   102,837     $    78,428     $   24,409               31%
     Specialty Chemicals         47,181          54,182        (7,001)             (13%)
     Other Businesses             5,863           3,416          2,447               72%

     Total Revenues         $   155,881     $   136,026     $   19,855               15%


                                     June 30,                Increase        Percentage
                               2013            2012         (Decrease)         Change

     Three Months Ended:
     Revenues               $    69,519     $    57,623     $   11,896               21%
     Cost of Revenues            44,313          36,736          7,577               21%

     Gross Profit                25,206          20,887          4,319               21%

     Gross Margin                   36%             36%
     Nine Months Ended:
     Revenues               $   155,881     $   136,026     $   19,855               15%
     Cost of Revenues            99,369          89,291         10,078               11%

     Gross Profit                56,512          46,735          9,777               21%

     Gross Margin                   36%             34%

In addition to the factors discussed below under the heading "Business Segment Results", one of the most significant factors that affects, and should continue to affect, the comparison of our consolidated gross profit and gross margin from period to period is the change in revenue mix between our segments.

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                                       June 30,                Increase       Percentage
                                 2013            2012         (Decrease)        Change

     Three Months Ended:
     Operating Expenses        $   11,395      $    9,904      $    1,491             15%
     Percentage of Revenues           16%             17%

     Nine Months Ended:
     Operating Expenses        $   32,908      $   28,212      $    4,696             17%
     Percentage of Revenues           21%             21%

For our Fiscal 2013 third quarter, operating expenses were $11,395 compared to $9,904 for the Fiscal 2012 third quarter. For our Fiscal 2013 nine-month period, operating expenses were $32,908 compared to $28,212 for the Fiscal 2012 nine-month period. The most significant components of the increase in operating expenses for the nine-month period were approximately $1,900 for accrued incentive compensation, approximately $1,200 for increased costs from our defined benefit retirement plans, approximately $600 for Fine Chemicals segment research and development, and approximately $300 for corporate shareholder matters. The increase in incentive compensation occurred primarily due to the timing of incentive compensation accruals. Strong operating performance year-to-date in Fiscal 2013 has resulted in incentive-based compensation costs of approximately $800 being recorded earlier in Fiscal 2013 than in Fiscal 2012. The third quarter operating expense variances reflect similar conditions.


                                            June 30                Increase       Percentage
                                     2013            2012         (Decrease)        Change

 Three Months Ended:
 Interest and Other Income. Net    $       93      $       10      $       83            830%
 Interest Expense                         587           2,594         (2,007)           (77%)

 Nine Months Ended:
 Interest and Other Income. Net    $      105      $       24      $       81            338%
 Interest Expense                       2,423           7,824         (5,401)           (69%)
 Loss on Debt Extinguishment            2,835               -           2,835               -

Interest expense decreased 77% and 69% in the Fiscal 2013 third quarter and nine-month period, respectively, each compared to the prior year periods. The decreases reflect both a decrease in the average outstanding principal balance on our long term debt and a reduction in the effective interest rate that resulted from the refinancing of our long-term debt. See further discussion below under the heading "Long-Term Debt and Credit Facilities".

In connection with our entering into the Credit Facility (as defined below), on October 26, 2012, a notice of redemption was issued for all remaining outstanding Senior Notes specifying a redemption date of November 25, 2012. The Redemption Price for the Notes was 102.250% of the outstanding principal amount of $65,000, plus accrued and unpaid interest to, but not including, the redemption date. On October 26, 2012, we irrevocably deposited funds with the trustee in an amount equal to the Redemption Price for the Senior Notes and the related indenture was discharged. The transaction resulted in a net loss on debt retirement of $2,835 which includes the call premium of $1,463, the write-off of then unamortized debt issuances costs of $1,252 and other expenses of $120.


In May 2012, our board of directors approved and we committed to a plan to sell our Aerospace Equipment segment, which was comprised of Ampac-ISP Corp. and its wholly-owned foreign subsidiaries ("AMPAC-ISP"). The divestiture was a strategic shift that allows us to place more focus on the growth and performance of our pharmaceutical-related product lines.

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On June 4, 2012, we entered into an Asset Purchase Agreement with Moog Inc. ("Moog") (the "Asset Purchase Agreement"), pursuant to which we sold to Moog substantially all of the assets of Ampac-ISP Corp., including all of the equity interests in its foreign subsidiaries (collectively, the "Purchased Assets"). Additionally, Moog assumed certain liabilities related to the operations and the Purchased Assets. The transaction was completed effective August 1, 2012.

Under the terms of the Asset Purchase Agreement, the total consideration was approximately $46,000 (the "Purchase Price") in cash. In addition, $4,000 of the Purchase Price (the "Escrow Amount") will be held in an escrow account for 15 months following the closing of the transaction (the "Escrow Period") and applied towards our indemnification obligations in favor of Moog. The Asset Purchase Agreement provides that we, subject to certain limitations, indemnify Moog for damages and losses incurred or suffered by Moog as a result of, among other things, breaches of our respective representations, warranties and covenants contained in the Asset Purchase Agreement as well as any of the liabilities that we retained. During the three months ended June 30, 2013, $650 of the Escrow Amount was released to Moog in settlement of certain retained liabilities. The balance of the Escrow Amount remaining at the end of the Escrow Period shall be released to us. We have accounted for the Escrow Amount as a contingent gain, and accordingly have deferred recognition of the amount until all contingencies have lapsed or been resolved.

Revenues and expenses associated with the operations of AMPAC-ISP are presented as discontinued operations for all periods presented. Summarized financial information for AMPAC-ISP is as follows:

                                                                                     Nine Months
                                                   Three Months Ended                   Ended
                                                        June 30,                      June 30,
                                                  2013            2012           2013           2012

Discontinued Operations:
Revenues                                        $        -     $   12,368     $        -     $  40,207

Income (loss) from Discontinued Operations,
Net of Tax:
Operating income (loss) before tax              $       29     $    (215)     $       54     $      86
Income tax expense (benefit)                            11           (38)             20           329

Net loss from discontinued operations                   18          (177)             34         (243)

Adjustment to gain on sale of discontinued
operations before tax                                  (4)              -           (68)             -
Income tax expense (benefit)                           (2)              -           (25)             -

Net adjustment to gain on sale of
discontinued operations                                (2)              -           (43)             -

Loss from discontinued operations, net of
tax                                             $       16     $    (177)     $      (9)     $   (243)


Segment operating income or loss includes all sales and expenses directly associated with each segment. Environmental remediation charges, corporate general and administrative costs and interest are not allocated to segment operating results.


                                Three Months Ended             Nine Months Ended
                                     June 30,                      June 30,
                                2013           2012           2013           2012

          Revenues           $   44,223     $   36,359     $  102,837     $  78,428
          Operating Income   $    5,805     $    5,204     $   10,832     $   3,039
          Operating Margin          13%            14%            11%            4%

Revenues. Fine Chemicals segment revenues increased 22% and 31% for the Fiscal 2013 third quarter and nine-month period, respectively, each compared to the corresponding Fiscal 2012 periods. The increase in revenues for the Fiscal 2013 third quarter is primarily associated with an increase in development product revenues which included the completion of a validation campaign for an anti-viral

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