American Pacific Corporation (NASDAQ:APFC)
F4Q 2012 Earnings Call
December 13, 2012 4:30 pm ET
Linda Ferguson - Vice President, Administration, Secretary
Joseph Carleone - President, Chief Executive Officer, Director
Dana Kelley - Chief Financial Officer, Vice President, Treasurer
Welcome to the fourth quarter 2012 American Pacific Corporation earnings conference call. My name is Tilda and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Ms. Linda Ferguson. Ms. Ferguson, you may begin.
Thank you. Good afternoon, everyone. Welcome to our review of the financial results for our fiscal year 2012. Joe Carleone, Chief Executive Officer and Dana Kelley, Chief Financial Officer will each provide remarks. Following their remarks, we will be happy to take your questions.
Today’s call includes forward-looking statements. You can identify these statements by the facts that they use words such as will, expect, anticipate, believe and other words in terms of similar meaning. These forward-looking statements are not historical facts and are subject to risks and uncertainties.
Our actual results may differ materially. For a description of the factors that may cause actual results to differ materially from our forward-looking statements, please refer to the risk factors forward-looking statements section of our earnings release furnished today to the SEC on Form 8-K, our most recent Annual Report on Form 10-K and our other filings made with the SEC. All forward-looking statements are made as of the date hereof and we assume no obligation to update these statements except as required by law.
In addition, we will be referring to both GAAP and non-GAAP financial measures. Our recently published earnings release contains definitions of the non-GAAP measures and a reconciliation of these non-GAAP measures to the most comparable GAAP measures. Our earnings release can be found in the news release section of our website at apfc.com.
I will now turn the call over to Joe.
Thank you, Linda, and good afternoon, ladies and gentlemen. Thank you for joining our conference call. Fiscal 2012 has proven to be a year of positive e change for AMPAC, both strategically and financially.
With the forecasted consolidation of the aerospace and defense sector, we decided to digress our in-space propulsion business which specialized in developing and producing liquid propulsion thrusters. This strategic shift allows us to focus on our chemical businesses, especially in the growing and potentially more profitable pharmaceutical sector.
The proceeds from this transaction were used to pay down debt and significantly delever the company. The remainder of the 9% notes were redeemed in October 2012 and replaced with a term loan at a very attractive interest rate. The lower interest provides a significant savings of approximately $5 million in the first year and approximately $7 million per year thereafter.
I am also pleased to report that both of our chemical segments performed exceptionally well during the latter half of fiscal 2012 and profit results exceeded our previous expectations by a significant margin. Fiscal 2013 is shaping up to be another good year for AMPAC.
New pharmaceutical products are now in production. These products are poised to replace some of our legacy products as demand for those older products decreased with an increase in demand for the newer products. Our specialty chemical segment remains stable and profitable. Dana Kelley will be discussing detailed guidance for fiscal 2013 in her remarks.
Let us now discuss each of the business segments beginning with our fine chemical segment. The fine chemical exceeded our expectations for the second half of fiscal 2012. Fiscal 2012 revenue increased 25% compared to fiscal 2011 with a major portion 62% being realized in the second half of the year. We therefore overcame the gap in certain pharmaceutical orders of the previous year plus additional growth.
EBITDA margin also increased significantly to 18.5%. The team has dedicated significant efforts over the last two years to improve the efficiency of its manufacturing activity. Client utilization and throughput has improved, resulting in increased EBITDA margins.
Redesigned processes are now providing increased throughput on key product lines. Also our cost reduction initiative, especially in the area of solvent recycling has contributed to the bottom-line performance. These actions, together with improved overhead absorption a result of higher production volumes, have resulted in increased margins for all major pharmaceutical product categories.
This year also witnessed a five-year contract renewal of our major central nervous system product which uses our large-scale simulated moving bed chromatographic facilities. We have also signed a significant agreement to produce a new antiviral product that is in late Phase 3 and has a high probability of approval by the FDA.
Our three new cancer product are beginning to see increased demand and will contribute meaningful sale in fiscal 2013 and will be partially replacing sales of one of our legacy products for which the demand has been reduced. We continue to focus on the oncology products using our technological position. The oncology market continues to grow and offer new opportunities.
We have also signed multiyear agreement for some of the new oncology products. Our product pipeline continues to be strong and is an essential part of the long-term stability of the fine chemical segment. We continue to pursue active pharmaceutical ingredient development and production opportunities in the antiviral and oncology areas.
In addition to our ongoing HIV and influenza indications, we are also pursuing the new therapies for other antivirals, including hepatitis. Our controlled substance venture, while not yet providing significant revenue, is quite promising and we are proposing on a number of new opportunities while completing the validation of our first controlled substance, a material used in the production of a drug for pain release.
Development products continue to be a significant portion of the fine chemical segment sales for fiscal '13, again in the 20% range, consistent with the previous two fiscal years. Our development products focus on the use of our chemical and chromatographic technologies. We continue to focus on target rich and growing therapeutic areas such as antiviral, oncology central nervous system and pain management.
We are seeing an increased demand for products that use our midscale production facilities. To keep up with the demand, we are expanding our midscale facilities in fiscal 2013 and have contract at hand to fill this new capacity expansion.
In addition to new pharmaceutical products, we have explored the areas of very high purity and very specialized organic chemicals for our high-end communications applications and are starting to gain momentum in these areas. So our fine chemicals pipeline continues to be strong providing the path for future opportunities, potential growth and ultimately the stability of this business.
Moving on to the specialty chemicals segment. Our specialty chemical segment also exceeded expectations for fiscal 2012. The initial forecast predicted a small decline in performance compared to the exceptional performance in fiscal 2011. Increased deliveries in the second half of the year brought EBITDA results up to the fiscal 2011 level.
For the past two years, Department of Defense applications have represented a significant percentage of the end users of ammonium perchlorate for solid rockets. Furthermore, there is strong support by the government agencies, specifically NASA and the Department of Defense for the continuance of the U.S. industrial base capability for the production of ammonium perchlorate.
While DOD will continue to be a major user, the continued bipartisan support of the new space launch system and its associated heavy lift vehicle will help support the demand for ammonium perchlorate. Note that the heavy lift vehicle uses the large five segment solid motors similar to those on Constellation and are produced by ATK, our customer.
The space exploration program is being funded by NASA at $1.8 billion, which is consistent with the funding needed to support the industry. ATK's recent award will allow them to test the five segment booster this coming spring. AMPAC has current orders to deliver ammonium perchlorate for this program in both fiscal 2013 and fiscal 2014.
We would like to reiterate that we believe this business is sustainable with the demand from Department of Defense alone. The continuance of NASA's commitment to heavy lift provides additional support to this product line.
In summary, we initiated a major strategic shift with the divestiture of our in-space propulsion business. This allows us to refocus our efforts on our chemical businesses especially in the pharmaceutical area. We have reduced debt and substantially lowered our interest payments which strengthens our balance sheet and will improve net income.
Furthermore, we are now seeing the benefits of our initiatives to diversify our customer base and expand our product lines. Of course we will continue to control spending, reduce costs and improve operational performance.
I would like now to introduce our CFO, Dana Kelley, who will discuss the financial aspects of fiscal 2012 and our guidance for fiscal 2013. Dana?
Thank you, Joe. As Joe stated, we are very pleased with our fiscal 12 result which exceeded our expectations for the year. Before we begin discussing results, I would like to cover a couple of presentation matters.
First, our current year and all prior period result have been restated to exclude our divested aerospace equipment segment and present that segment's pre-divestiture results as discontinued operations.
Second, our actual results for the year increased several unusual and infrequent items, both gains and losses. To facilitate our year-over-year comparison, we have excluded these amounts from our as adjusted results. Please refer to today's earnings release for further details on these adjustments.
For fiscal 12, we are reporting consolidated revenues of $186 million, which is an increase of 16% over the prior year. Each of our operating segments contributed to the improvement. We are reporting consolidated adjusted operating profit in fiscal '12 of $27.1 million, or 15% of consolidated revenues, reflecting primarily fine chemical operating performance improvements.
Adjusted net income increased to $10.1 million in fiscal '12 from breakeven in fiscal '11. Adjusted diluted earnings per share was $1.32 dollar compared to $0.01 in fiscal '11.
Our fine chemical segment reported fiscal '12 revenues of $111.5 million improving 25% from the prior year. This improvement is in part a recovery from our prior year lag in antiviral product sales and in part growth from existing or new products. Specifically, antiviral product revenues in fiscal '12 were nearly twice the fiscal '11 level. Revenues from our CNS products improved over 50% reflecting both price and volume increases from the five-year contract which was executed this year.
Oncology product revenues declined in fiscal '12, but nonetheless, we are very satisfied with the results in this area. In the latter part of fiscal '12, we began recognizing revenue from three new commercial oncology products. These products have been in our development pipelines for several years and the transition to commercial product is a key milestone for us. Of equal importance is that each of these new products brings a new customer into our commercial product providing further customer diversification.
Our fine chemicals segment returned to profitable performance in fiscal '12 reporting adjusted operating income of $7 million compared to a loss of $9.2 million fiscal '11 or an improvement of more than $16 million. Our fine chemical group dedicated significant efforts over the last two years to improve efficiency of its manufacturing process.
Redesigned key processes are now achieving target throughput. This operating improvement, combined with increased coverage of fixed manufacturing costs, resulted in a 16 point improvement in gross margin for fiscal '12.
The gross profit improvement was offset somewhat by higher general and administrative costs which included well-deserved incentive compensation for achievement of performance targets.
For our fiscal '12 fourth quarter, fine chemical segment revenues increased 15% to $33.1 million reflecting factors similar to the annual comparison. Adjusted operating income was $2.9 million compared to an operating loss in the fourth quarter of fiscal '11.
Our specialty chemicals segment reported fiscal '12 revenues of $68.5 million compared to $66.9 million in the prior fiscal. This small year-over-year variance in revenue occurred due to a change in the mix of our specialty chemicals products between the two fiscal years.
Both years are within our expected stable range for this segment. Operating margin for fiscal '12 declined slightly compared to the prior year as this segment transitioned back to a more typical mix of products.
For our fiscal '12 fourth quarter, specialty chemicals is reporting both revenue and operating profit decline when compared to the prior year fourth quarter. As evidenced by the annual comparison, this is attributed to the inter-quarter timing of product shipments and revenue. This segment historically experiences significant variances in its quarterly revenues while maintaining stable annual results. We expect this trend to continue.
Our fiscal '12 fourth quarter and subsequent of October '12 were significant in terms of strategic and capital activities. In August 2012, we completed the sale of our aerospace equipment segment, which resulted in net pre-tax proceeds of $37.4 million. This amount excludes $4 million of the purchase price which was placed in an escrow account for 15 months post close.
We have fully redeemed our 9% senior notes, $40 million in September 2012 and the remaining $65 million in October 2012 and we entered into a new $85 million credit facility that includes a $60 million term-loan and 25 million revolving undrawn credit line. The current interest on the term loan is LIBOR plus 225 basis points.
As Joe indicated, the reduced debt level and substantially lower interest rate will provide meaningful interest savings going forward. Funds used to redeem the notes were provided by a combination of proceeds from the sale of ISP, proceeds from our $60 million term-loan and our available cash balances.
As a result of these actions and our improved performance we have significantly reduced our leverage, computed as total debt divided by EBITDA, our leverage with 1.5 times as of September 30, 2012 compared to 3.2 times the year before.
Looking to fiscal '13, we expect consolidated revenues of at least $200 million which is an expected increase of approximately 8% from fiscal '12. This reflects an approximately 5% to 10% increase in fine chemicals segment revenue, supported by growth in revenues from both development products and new core products and a 10% increase in specialty chemicals segment revenue.
Our specialty chemicals segment is currently performing on several nonrecurring development projects that should contribute to expected revenues in fiscal '13. The core products for this segment are expected to continue to perform within their historical stable range.
Our guidance for fiscal '13 adjusted EBITDA is at least $43 million, which is an increase of approximately 4% from fiscal '12 adjusted EBITDA excluding the fiscal '12 other operating gains of $1.7 million. Fiscal '13 adjusted EBITDA guidance includes an anticipated increase in our pension expense from $7 million in fiscal '12 to $9.7 million in fiscal '13 as a result of a decline in the discount rates used to determine the actuarial values of pension expense.
Both product margins and operating expense are expected to be relatively consistent and/or improve slightly in fiscal '13 as compared to '12 with the exception of production expense.
A substantial portion of our anticipated revenue for 2013 is currently in our backlog. However the timing of our customer product requirements is anticipated to result in fiscal '13 quarterly revenue trends that is heavily weighted towards the latter half of the year. Our current expectation of product mix and shipping schedule should result in approximately 50% of our fiscal '13 revenues occurring in the second half of the year and approximately 70% of our fiscal '13 adjusted EBITDA occurring in our fourth quarter.
That concludes our remarks. We wish you all happy holidays and we would be happy to take your questions at this time.
(Operator Instructions) Thank you. At this moment, I am not showing any questions in queue.
Okay, thank you very much. I would like to thank everyone who joined our call today. All of you please have very happy and safe holidays as we go forward to this most joyous season coming up and we hope you will join us again in February for our first quarter fiscal '13 release. Thank you
Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.
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