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Executives

Linda Ferguson - Vice President, Administration, Secretary

Joe Carleone - Chief Executive Officer

Dana Kelley - Chief Financial Officer

Analysts

Gunnar Hansen - Sidoti

Bruce Baughman - Franklin

American Pacific Corporation (APFC) F1Q 2013 Earnings Conference Call February 7, 2013 4:30 PM ET

Operator

Welcome to the Q1 2013 American Pacific Corporation Earnings Conference Call. My name is John 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.

Linda Ferguson - Vice President, Administration, Secretary

Thank you, and good afternoon. Welcome to our review of the financial results for fiscal year 2013 first quarter. 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 these 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.

Joe Carleone - Chief Executive Officer

Thank you, Linda and good afternoon, ladies and gentlemen, and thank you for joining our conference call. The outlook for fiscal 2013 continues to be positive as demand for our legacy core products remained strong and the introduction of new pharmaceutical products is beginning to have meaningful financial impact.

As a result of our positive and quite transformational fiscal 2012, the AMPAC’s focus on our chemical business lines is having a very positive effect on our day-to-day operations as well as on responding to new opportunities. We are very pleased with the results of our first quarter in this new fiscal year. As indicated on our conference call in December, we expected to have a somewhat weak first quarter. This was largely due to timing of sales and the plant, pharmaceutical plant shutdown for maintenance in the first quarter. Results remained consistent with our initial expectations. Because of our confidence in the AMPAC’s performance, we are reaffirming our fiscal 2013 guidance. Dana will be discussing the specifics in her remarks.

Let us now move strategic business segments beginning with our Fine Chemicals segment. Over the past year, we have seen a strengthening of the pharmaceutical fine chemicals industry. Opportunities for pharmaceutical ingredient suppliers remained strong as indicated by the number of inquiries we are seeing and the number of new drugs being approved. The FDA approved 39 new drugs in 2012, almost twice the number approved just two years ago and the highest figure the agency has seen since 1996. The excellent quality, reliability of supply, and development capabilities afforded by U.S. suppliers is once again very attractive to pharmaceutical customers and causing them to maintain a consistent base of suppliers within the United States.

We are very pleased with the growth in our development products. We now expect that our development products will generate over 25% of our Fine Chemicals segment revenue in fiscal 2013. This growth in development products revenue is highlighted by a large validation program of a new antiviral product within the expected FDA approval during fiscal 2014. Our controlled substance program, while not yet providing significant revenue remains promising.

In January the Drug Enforcement Agency branded our Fine Chemicals business registration as a manufacturer of Tapentadol, which is used to treat acute pain. We are also proposing on a number of opportunities while completing the validation campaign of our first controlled substance pain reliever. Our product pipeline continues to device the path for future opportunities, potential growth and is an essential part of the long-term stability of the Fine Chemicals segment. Production products are continuing as planned for 2013 with the antiviral and central nervous system products making up a large portion of production activities.

We are essentially pleased with the growth of our new oncology products. Two of these products use new inhibitor mechanisms to address the growth or spread of the cancer as compared to the cytotoxic mechanisms of the more traditional cancer therapies. These new cancer products are beginning to contribute meaningful sales in fiscal 2013.

Now moving on to the specialty chemicals segment, our specialty chemicals segment continues to provide stable revenue on an annual basis. There will be variations as in the past on a quarterly basis because of customer delivery requirements. Our forecast for fiscal 2013 shows specialty chemicals revenue to be relatively weak in the next few quarters with a very strong fourth quarter. This was driven by a few large rocket grade ammonium perchlorate deliveries scheduled for the fourth quarter based on current customer requirements.

We believe the continuance of a viable U.S. industrial base capability for the production of ammonium perchlorate is strongly supported by the government agencies specifically NASA and the Department of Defense. The total annual demand for rocket grade ammonium perchlorate in fiscal 2013 is expected to be approximately the same as it was for fiscal 2012. While the Department of Defense should continue to be the major user, the continued bipartisan support of the new space launch system and its associated heavy lift vehicle or HLV will help support the demand for ammonium perchlorate. Note that HLV uses the large five segment solid motors similar to those on the Constellation and are produced by Alliant Techsystems, our customer. AMPAC has 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 the Department of Defense alone. The continuance of NASA’s commitment to heavy lift provides additional support to this product line.

Let me conclude by saying that AMPAC executed the first quarter in line with our expectations. Both of our two major segments are forecast to provide strong results for fiscal 2013 as evidenced by the reaffirmation of the guidance we gave in December. In addition, we are beginning to see the benefits of our strategy to diversify our customer base and expand our product lines, especially in our pharmaceutical product areas. Our employees continued to deliver customer satisfaction and execution excellence. Of course, we remain committed to safety and environmental stewardship as we operate our facilities.

I’d like now to introduce our CFO, Dana Kelly, who will discuss the financial aspects of the quarter and our guidance for fiscal 2013.

Dana Kelley - Chief Financial Officer

Thank you, Joe. As Joe indicated our first quarter results are consistent with our expectations and keep us on track for this fiscal year. Our fiscal 2013 first quarter, we are reporting consolidated revenues of $36 million, which is a slight decline from our first quarter of fiscal 2012 due to the inter-quarter timing of water treatment equipment sale.

Revenues from our two primary business segments were consistent quarter-over-quarter. Operating margins improved to 14% of revenue from 7% in the prior fiscal year first quarter largely due to the improved performance of our Fine Chemicals segment. Net income of $1.2 million or $0.15 per diluted share is a substantial improvement from diluted earnings per share of $0.02 from our prior year first quarter. In addition, our fiscal 2013 first quarter net income was reduced by approximately $1.8 million or $0.23 per diluted share for a non-recurring charge related to our refinancing activities that were completed in October.

Moving to our segments, our Fine Chemicals segment reported revenues of $21 million in both the fiscal 2013 and 2012 first quarters. Development product revenues were particularly strong during the first quarter as we completed the pilot campaign for an anticipated new antiviral product. In addition, revenues from our new oncology products are performing as expected. We continue to anticipate that our Fine Chemicals segment revenues will grow in the range of 5% to 10% in fiscal 2013. Fine Chemicals segment operating income of $1.3 million compared to a loss for the prior year first quarter of $1.2 million. Our manufacturing operations continued to perform at targeted efficiency levels this quarter.

In addition, in October our (indiscernible) facility conducted a two-week shutdown of its major production line to perform planned major maintenance activity. This has the effect of reducing margins somewhat in the quarter. Our Specialty Chemicals segment reported revenues of $40 million for each of the fiscal 2013 and 2012 first quarters. Demand in each quarter was supported substantially by tactical missile programs.

As Joe just indicated, our current backlog and expectation of product delivery schedules, we anticipate that Specialty Chemicals segment revenues for the next two quarters should be slightly lower than its first quarter and we will end the year with a substantial fourth quarter revenue to achieve our overall guidance for the fiscal year.

Our balance sheet continued to improve. We ended our first quarter with $19 million in cash and debt of $59 million. Our total leverage ratio was 1.3. As we discussed in our last call in October, we completed the refinancing of our long-term debt by replacing our 9% senior notes with a term loan. In January, we executed an interest rate swap agreement, which effectively fixed our term loan interest rate at 3% with our leverage level is between 1 and 2. Our results for this first quarter did not yet reflect the full benefit of our refinancing.

Based on our first quarter performance, backlog and our positive business outlook, we are reaffirming our fiscal 2013 guidance. We expect consolidated revenues of at least $200 million which is growth of approximately 8% from fiscal 2012 and our guidance for fiscal 2013 adjusted EBITDA is at least $42 million.

That concludes our remarks and we’ll be happy to take your questions at this time.

Joe Carleone - Chief Executive Officer

John, would you like to open it for questions?

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) Our first question comes from Gunnar Hansen from Sidoti. Please go ahead.

Gunnar Hansen - Sidoti

Hey, guys, just a quick clarification question. Dana, what was the interest rate that you guys locked you just say 3% or 3.5%?

Dana Kelley

The swap rate is 0.775 so, when you mix that with the stated rate in the credit agreement, it comes to 3.0275.

Gunnar Hansen - Sidoti

Okay, great. And I guess just maybe just give us a little bit more color on the plant maintenance of the fine chemical plant, was that maybe just kind of give us a little more background on the specifics of the maintenance there?

Joe Carleone

Well, basically with our annual maintenance that we normally do in the pharmaceuticals facility and with a little more expense in this year than in the past in terms of replacing some of the older equipment and fields and so forth. So, it’s very normal maintenance. There wasn’t any of broken equipment or anything like that, but it took the better part of two weeks to get that done.

Gunnar Hansen - Sidoti

And I think you mentioned just you will see kind of maybe some sequential improvement, I guess, in margins in that business just due to the full run rate there?

Joe Carleone

Well, we will definitely see improvements in sales, because of that not having that two weeks delay. Margins depend a lot on the product mix. So, it’s really hard to say exactly what’s going to happen there depending on which quarter you look at and so forth. So, I don’t know that the margins for the first quarter were atypical or probably a little lower on the operating side than we would normally see.

Gunnar Hansen - Sidoti

Great. And I guess just lastly maybe just kind of speak a little bit more on the developmental products. And maybe obviously you have referenced the expectations for the full year, but maybe even the year after maybe kind of give us some longer term expectations kind of where that pipeline is going?

Joe Carleone

Well, again we – I think what we mentioned here that the development product revenue has increased to about the 25% of the segment sales. We had been talking in the past of roughly 20% in the past. This went little higher, because of this much larger validation program turned into a much larger program in our development than we had anticipated which was positive news just because the customer want to move a little faster. I think you will see coming back to more normally in the - what we have targeted at the 20% range and we will stay at the 25% sales range.

Gunnar Hansen - Sidoti

Great. And I guess just with the concentration of some of the specialty chemicals in the fourth quarter, I mean any sort of kind of risk at all in terms of timing of when that order will come through, I mean what I guess from the customer standpoint, any sort of challenges there?

Joe Carleone

No, I understand we are going that we could – when you have a heavy fourth quarter, things could slip out, but we don’t see that, because the one of the major orders we are in manufacturing right now on that product. It’s just the delivery date when the customer can accept it. That will determine when we can recognize the revenue. The other order we have a firm commitment that it should be coming shortly and we are getting ready to manufacture that as well. So, we don’t see any real timing problems with those deliveries. It’s strictly customer schedules driving that and we don’t expect them to delay delivery for any reason.

Gunnar Hansen - Sidoti

Great, guys. Thanks so much.

Joe Carleone

You are welcome.

Operator

(Operator Instructions) Our next question comes from Bruce Baughman from Franklin. Please go ahead.

Bruce Baughman - Franklin

Thank you. Dana, why did we have a tax benefit this quarter?

Dana Kelley

Okay. One of the liabilities that we carry on our balance sheet is referred to as the unrecognized tax positions, which we basically provide reserves for. In the event, we are examined and a position we take on a tax return and not sustain through examination. During this last quarter, we completed our IRS examinations through Joint Committee of Review and they were very favorable in their conclusions. And as a result of that, we were able to release the reserves on some of those exposures, which pushed through like a benefit tax provision.

Bruce Baughman - Franklin

Okay. But apart from that, it would have been the normal tax rate?

Dana Kelley

Yeah. Correct.

Bruce Baughman - Franklin

Okay.

Dana Kelley

I mean, and when you look at the absolute numbers right now, it shows a benefit of roughly 300,000, it would have been in expense of roughly 300,000 that we have this $600,000 item that flipped, because we have a favorable tax examination.

Bruce Baughman - Franklin

Good, okay, thank you.

Dana Kelley

You’re welcome.

Operator

(Operator Instructions) We have no further questions at this time.

Joe Carleone - Chief Executive Officer

Hey, thank you very much and thank you for your interest in our company and joining our call. Our next conference call is planned for May. We certainly hope you will again join us. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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