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Executives

Linda Ferguson – VP, Administration and Corporate Secretary

Joe Carleone – President and CEO

Dana Kelley – CFO, VP, Treasurer

Analysts

Dennis O'Rourke – Regiment Capital

American Pacific Corporation (APFC) F4Q2010 Earnings Call Transcript December 16, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 American Pacific Corporation earnings conference call. My name is Keisha and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Ms. Linda Ferguson, Vice President and Corporate Secretary. Please proceed.

Linda Ferguson

Good afternoon, welcome to our reviews of financial results for fiscal year 2010. 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 fact 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. This was furnished today to the SEC on Form 8-K and also to our most recent quarterly report on Form 10-Q and our other filings made with the SEC.

All forward-looking statements remained 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 may be found in the News Release section of our website at apfc.com. I will now turn the call over to Joe.

Joe Carleone

Thank you, Linda. Good afternoon ladies and gentlemen and thank you for joining our conference call. AMPAC met or exceeded its latest guidance for fiscal year 2010 with results demonstrating $176 million of sales and $24 million of EBITDA. Our Specialty Chemicals segment produced strong results despite the very low volume of perchlorate material produced that resulted from reduced demand for NASA related programs. As we have forecast in our fiscal year 10 third quarter conference call however, our Fine Chemicals segment sales continued to be weak in the fourth quarter in fact somewhat weaker than we had predicted.

Guidance for the full fiscal 2011 forecast of sales increased of roughly 10% and an EBITDA increase of 20% compared to 2010. The first two quarters however will be very weak and will continue to show a net loss caused primarily by weak sales in both Fine and Specialty Chemicals segments. Dana will give more details on fiscal 2010 results and fiscal 2011 guidance in her remarks.

As you know from previous reports, 2010 was a year of repositioning the company to take advantage of emerging opportunities especially in the Fine Chemicals business and to improve our profitability. While improving bottom line performance will take the first two or perhaps three quarters of 2011. It is the actions we have taken in 2010 that will provide the infrastructure and cost basis for a successful growing business phase in the latter half of 2011 and beyond.

I would like to highlight some of the 2010 actions taken. We have for example repurchased and retired $5 million of our senior notes, purchased the former PPG Fine Chemicals facility in La Porte, Texas at an exceptionally attractive price, slowed our defined benefits pension plan, evaluated key professional services including the appointment of new auditors. Implemented and recommended corporate governance changes to align better with stockholders interest and also we have recently appointed two directors with pharmaceutical and healthcare backgrounds. These actions along with continued business development activities will enable profitable growth.

Let us now discuss each of the business segments beginning with the Fine Chemicals segment. Our Fine Chemicals segment encountered a very difficult year in 2010 with sales down 27% from 2009 levels. In addition there were serious delays and expense associated with facilities improvements required as a result of an FDA audit. All facilities improvements are now in place. Furthermore, there were operational challenges associated with introducing new processes for one of our core products that delayed sales as well. These and several other reductions in product orders contributed to a fourth quarter that was Fine Chemicals weakest in over five years.

One of this is behind us. Production is now at levels required to meet our plans. However there will be an overhang effect during the first half of 2011 while we are building up products and are able to ship products in serious quantities. On the positive side, major core product volumes are returning to higher levels in our anti-viral and oncology product lines. Furthermore the Fine Chemicals development product backlog continues to grow. Development product sales this year have the opportunity to reach as much as 20% of sales. This will significantly strengthen our pipeline of products.

As we look into the future, we see that these development products offer several strong growth areas. Expansion into the controlled substance market continues to provide an excellent opportunity.

Our uniquely located facilities in Rancho Cordova California are ideal for this product. We have a long-term arrangement in place with a major company that specializes in controlled substance product. Plant improvements, including upgraded of a major production line to handle these controlled chemicals are basically complete. We now await approval by the Drug Enforcement Agency. In addition, we see our relationship with Codexis continuing to open certain markets for the production of anti-viral building blocks.

Chemicals for the Homeland Security Anti-terrorism activity and for the Department of Defense are also expansion opportunities for this segment. We are moving on to the Specialty Chemicals segment. The Utah team performed flawlessly in the face of the smallest perchlorate production volume in over 20 years. The ability to produce efficiently and cost effectively while at 15% capacity utilization or less is a significant achievement. This is essential for continued performance as we enter 2011 where the forecast perchlorate production levels continue to decline. Demand is down in 2011 as we forecast no NASA related production of sales of ammonium perchlorate.

As a result, in fiscal 2011, the Department of Defense will be the primary customer for Solid Rocket Motors and hence perchlorate because tactical and strategic missiles are totally dependent on Solid Rocket technology. DOD and their various military programs will maintain a rather consistent demand for many years to come in the future. Therefore, the ammonium perchlorate product line will continue to be a strong part of our corporation. NASA related recent budget news however is somewhat positive. Passage by Congress of the National Authorization Act just before Thanks Giving proposes to accelerate the heavy-lift vehicle with requirements for and direction to use Solid Rocket technology from prior programs. This will necessitate the use of perchlorate.

Information indicates that appropriations will be in line with the Authorization Act. We will be watching this legislation carefully and working with our folks in Washington, D.C. The sale of other chemicals in this segment such as Halotron continues to remain stable.

Let's now move to the Aerospace Equipment Segment. This segment also known as AMPAC In-Space Propulsion demonstrated 12% top-line growth in 2010 and is forecast to continue similar or slightly greater growth in 2011. Profit is expected to return to fiscal 2009 levels, as one time 2010 events should be behind us at this point. Bookings continue to meet or even exceed our expectations. Backlog is at record levels for this segment of our business. Furthermore, we continue to attract excellent engineering talent to keep up with our growth. Growing pains experienced in 2010 are subsiding somewhat, as more robust management processes are being put into place. Our European business also continues to grow. Therefore, the strategy for this business remains on track, win propulsion systems project by leveraging our component expertise, build a strong technical team and expand our presence in the European market.

In conclusion, we believe AMPAC has significant long-term growth opportunities. We are focusing on our cost structure and especially operational excellence to improve our profitability. The AMPAC team is committed to the growth of Fine Chemical and In-Space Propulsion while maintaining and preserving our core Specialty Chemicals business.

I would like now to introduce our CFO, Dana Kelley, who will discuss the financial aspects of the fiscal 2010 and our guidance for fiscal 2011.

Dana Kelley

Thank you, Joe. We completed fiscal year 2010 with revenues of $176 million, operating income of $6.7 million, and a net loss per diluted share of $0.44. Each of these measures represents a reduction from our prior fiscal year, exclusive of charges that we took for environment remediation in fiscal 2009. Our fiscal 2010 fourth-quarter was our most profitable of the fiscal year, because of the timing of sales in our Specialty Chemicals segment. Fine Chemicals segment revenues for fiscal 2010 were $70 million compared to $95 million for the prior year. This expected decline reflects lower volumes in each of our core therapeutic areas.

The revenue effect of these declines was magnified in our fiscal 2010 fourth-quarter, because much of the annual volume was completed in the earlier quarters of the year. In addition, we’ve idled several production lines in Q4 to facilitate upgrades and maintenance activities in response to comments from the FDA. As a result, Fine Chemicals reported revenues of $6.5 million for the fourth quarter. We anticipate that Fine Chemicals segment revenues will recover in fiscal 2011 and show at least a 25% increase over fiscal 2010. Our major Fine Chemical customers, typically order product based on the calendar year requirement.

We recently completed a new three-year supply agreement that will extend orders for an existing antiviral product through calendar 2013. The quantities in this agreement are consistent with our fiscal 2011 growth expectations. In addition, the CNS revenue declined in fiscal 2010, that were caused by customer deferrals of production until calendar 2011 should improve. We have received orders and anticipate shipment to commence after the first of the year. Since these and similar orders cover calendar year periods, we anticipate that the early quarters of fiscal 2011 and in particular Q1 will recover slowly with more significant increases in revenues occurring in the latter part of fiscal 2011.

Profitability of our Fine Chemical Segment is very sensitive to capacity utilization, due to the amount of fixed costs at the facility. The revenue decline had corresponding affects on the operating margin and as a result the Fine Chemical segment is reporting an operating loss of $7.6 million for fiscal 2010, with the vast majority of that loss occurring in the fourth quarter. Profits of the year were also affected by internal challenges as we experienced performance difficulties in process validation and certain development product orders. As Joe introduced, our Specialty Chemicals segment is reporting a very strong fiscal 2010 with revenues of $62.6 million and operating profits of $30.6 million. While annual revenues are stable, from a quarterly perspective the business has and should continue to show large revenue variances from quarter-to-quarter.

Our fiscal 2010 fourth-quarter is a good example of this trend with 44% of fiscal 2010 segment revenues occurring in the fourth quarter. Looking to fiscal 2011, we anticipate an approximately 10% decline in Specialty Chemicals segment revenues, which is consistent with our beliefs that this is a reasonably stable non-gross segment. However, our lower expected volumes for 2011 will magnify the anticipated variations in quarterly revenues for this segment. This occurred because the orders are less frequent but at higher prices.

Our Aerospace Equipment segment reported revenues of nearly $38 million, which continues the multi-year growth trend for this business. When we entered this market in fiscal 2005, we recorded revenues of $12 million. In-Space Propulsion engines, we are particularly strong in fiscal 2010 as sales from new products increased 57% from the prior year. Our planned and unplanned costs impacted this segment’s operating results for fiscal 2010 and as a result our Aerospace Equipment segment reported a small loss.

During fiscal 2010, we made investments for the long-term benefit of this business including increasing our research and development activities and adding substantial management infrastructure in Europe to target that market. In addition, we experienced significant cost over-runs on two systems contracts and quality issues with a supplier product. Our Aerospace Equipment segment ended fiscal 2010 with a record high in funding backlog of $61 million, which should provide the basis for this segment to continue to grow in fiscal 2011 at rates comparable to fiscal 2010.

Our cash flow for fiscal 2010 was strong, generating $21 million of cash flow from operations and ending the fiscal year with cash balances of $24 million. Our September 30, accounts receivable balances were unusually high, corresponding with the Specialty Chemicals fourth-quarter sales. Substantially, all of these balances have been collected. Our guidance for 2011 is revenue of at least $195 million, reflecting the factors covered in this segment review. We anticipate fiscal 2011 adjusted EBITDA of at least $29 million, reflecting improvements in both Fine Chemical and Aerospace Equipment margins offset by some decline in our Specialty Chemicals margins.

We anticipate capital expenditures for fiscal 2011of $16 million, which is somewhat higher than it has been historically. Our estimate includes two unique products or projects, namely; we anticipate spending approximately $5 million for additional Fine Chemical equipment that supports the new three-year agreement. In addition, Fine Chemicals will spend approximately $2 million to complete facility upgrades. That concludes our remarks. We wish you all happy holidays and we will be happy to get your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dennis O'Rourke with Regiment Capital. Please proceed.

Dennis O'Rourke – Regiment Capital

Yes, hi did you say, so you have collected most of the accounts receivables of the balance that was elevated at the end of the year?

Dana Kelley

Yes.

Dennis O'Rourke – Regiment Capital

What is your current cash balance?

Dana Kelley

Our current cash balances are more normalized at this point.

Dennis O'Rourke – Regiment Capital

Sure, so I guess what are your plans with – to do with some of the cash? It sounds like you have maybe $30 million to $40 million of cash on hand, any chance of buying back more bonds or acquisitions, or anything that you have an eye on?

Dana Kelley

At this point of time our cash usage is focused at the growth of our businesses.

Dennis O'Rourke – Regiment Capital

Okay. Great thank you.

Operator

There are no further questions in queue at this time.

Joe Carleone

Well, thank you very much for joining on our call. Our next call is planned for February. Have a Merry Christmas and Happy New Year!

Operator

Thank you for your participation in today’s conference. This concludes our presentation; you may now disconnect your line. Good day.

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