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American Pacific Corp. (NASDAQ:APFC)

Q1 2011 Earnings Call

February 7, 2011 4:30 PM ET

Executives

Linda Ferguson – Vice President, Administration

Joe Carleone – Chief Executive Officer

Dana Kelley – Chief Financial Officer

Analyst

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 American Pacific Corporation Earnings Conference Call. My name is [Anisia] and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

I would now like to turn the call over to Ms. Linda Ferguson. Please proceed.

Linda Ferguson

Good afternoon. Welcome to our review of our financial results for our fiscal year 2011 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 fact that they use words such as will, expect, anticipate, believe, and other words and 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. And also to our most recent quarterly report on form 10-Q 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

Thank you, Linda. Good afternoon, ladies and gentlemen, and thank you for joining our conference call. Our operating results for this first quarter, while not where we want them to be, are consistent with our expectations. Also, our expectations for the remainder of the year have not changed. We are therefore, reaffirming our guidance for fiscal 2011.

As indicated in our last call and substantiated in our first quarter bookings, our business opportunities continue to increase, especially in our Fine Chemicals and Aerospace segments. Also in the first quarter, our Fine Chemicals segment entered into a new, three-year supply agreement with Gilead. In the latter part of the year, we see performance levels that are more indicative of what AMPAC should be providing.

As described in our last call, 2010 was a year of repositioning our company. We now enter a year of transition, back to an improved profitability level by the end of the year. We are building upon our core products, which have comeback considerably from last year.

We are adding new products and customers, especially in our Fine Chemicals segment. These activities will strengthen our company and secure our growth profile for the future.

Let us now discuss each of the business segments beginning with our Fine Chemicals segment. While there is a continuing effect of the reduced production in 2010 penetrating into the first and second quarters of fiscal 2011, our Fine Chemicals segment is poised to return to profitability based on [military] orders for it’s core products.

Our major core products are now in full production at our California facility. We continue to expect our sales in this segment to exceed the fiscal 2010 sales by 25%. A good part of the sales increase is due to development products.

Development product sales for this first quarter have reached a record $7.7 million, with the year-end estimate approaching $20 million. Maturing and growing development products are responsible for this increase.

Our first major inspection by the Drug Enforcement Agency of our Controlled Substance facility went very well. We estimate the approval to become a certified manufacturer of these controlled pharmaceutical chemicals will take another six months or so.

Our other new product initiatives, including anti-viral building blocks and chemicals for anti-terrorism and the Department of Defense, are progressing well as represented by our forecasted growth and development product sales. We also made a major breakthrough in property taxes for our California facility. The Fine Chemicals team did a great job to reduce our taxes significantly going forward and negotiating a refund for previous years.

Now, moving on to the Specialty Chemicals segment. Our Specialty Chemicals segment performed well this quarter, despite lower production and sales volumes. The production team continues to adapt to lower demand in rocket-grade ammonium perchlorate. The NASA budget and direction continue to be a subject of debate.

Congress, both the House and Senate, are directing a heavy lift vehicle that will use large, shuttle like solid rockets. However, Congress also plans to cut overall budgets for NASA. It will take quite a while for this to be resolved. We are therefore forecasting no ammonium perchlorate for NASA applications in fiscal 2011.

While NASA is undecided, we continue to have a reliable user of rocket-grade perchlorate, the Department of Defense. DoD quantities have been lower then that used by NASA but they are consistent. Their strategic and tactical missiles must use solid rockets. The forecasted quantity of rocket-grade ammonium perchlorate for fiscal 2011 will be consumed by DoD products.

Our meetings with the DoD have been very, very positive. They strongly support the solid rocket motor industrial base in the U.S. and consider a strong domestic perchlorate capability as a definite requirement to our national defense. Our other perchlorate and Halotron remain stable product lines for our Utah operations.

Let’s now briefly discuss the Aerospace Equipment segment. This segment, also known as AMPAC in-space propulsion, continues to demonstrate top-line growth. From a sales perspective, this quarter reaches the highest achieved for this segment only once before.

Business opportunities continue to remain strong. We also see an improvement in operating margins as a result of filling out and expanding our team to match our growth profile, training new people and putting many of the growing pains associated with such rapid growth over the past two years behind us.

Our assistance programs are progressing well and we continue to penetrate the space market in Europe. All in all, this segment remains on track.

In concluding my remarks, I would like to mention that we have been receiving questions regarding the EPA’s decision to regulate the level of perchlorate in drinking water. This is a reversal of the decision EPA issued under the Bush administration.

At that time, the EPA determined there was no value in issuing the federal control limit on perchlorate, especially since the state seemed to have perchlorate regulations under control. This new directive will require a two-year-study period to determine the level of control and then an 18-month implementation period. And these are minimum periods. Many experts feel it will take much longer.

The Perchlorate Information Bureau, which is affiliated with the Perchlorate Study Group or PSG, issued a statement reinforcing the former Bush position. AMPAC has been a long time member of the PSG. That document will be posted on our website and we ask you to refer to it for more detailed information regarding this matter. Regardless of how this directive turns out, we do not see it impacting what we are doing at our remediation site in Henderson, Nevada.

I’d like now to introduce our CFO, Dana Kelley, who will discuss the financial aspects of the quarter and our guidance for the remainder of fiscal 2011. Dana?

Dana Kelley

Thank you, Joe. We completed fiscal year 2011 first quarter with consolidated revenues of $35 million, an operating loss of $3.5 million and a net loss per diluted share of $0.48. Beginning with our Fine Chemicals segment, revenues for the first quarter were nearly $14 million, compared to $9.5 million for the first quarter last year.

The increase in Fine Chemical revenue is largely associated with the strong development product sales, which increased to $7.7 million for the quarter. This growth was partially offset because Fine Chemical reported no revenues from its anti-viral product lines in the first quarter. Anti-viral production has resumed and should contribute to the AFC revenue growth as we complete this fiscal year.

Our Fine Chemical segment is reporting an operating loss of $3.6 million for the first quarter, driven by reduced gross margin, which was negative in the aggregate. Low production levels and capacity utilization in the second half of calendar 2010 resulted in high overhead rates, which in turn reduced margins and necessitated inventory valuation adjustments. This segment also experienced elevated costs from re-processing and process changes.

First quarter revenues for our Specialty Chemical segment were $9 million. Our outlook for this segment’s performance for the full fiscal 2011 year remains stable in comparison to last year. As such, the revenue variances you see and will continue to see on a quarter-by-quarter basis reflect timing only.

Segment operating profits of $3.6 million are also comparable to prior year performance. Both gross margins, measured as a percentage of revenue and general and administrative expenses, are consistent between the first quarter periods.

Our Aerospace Equipment segment is continuing its trend of top-line growth. Revenues of $11.5 million reflect 38% growth over last year’s first quarter. Particularly strong in the first quarter were revenues from our U.S. Operations Propulsion Systems contract.

Segment operating profit of $0.7 million reflected improved performance over the prior year first quarter. You will recall that last year this segment struggled with some cost growth on certain Propulsion Systems contracts. Substantial effort has been placed on improving operational performance, the benefits of which are beginning to show in the first quarter.

Our cash balances remain strong, ending the quarter with approximately $30 million. We just recently completed a new asset-based lending facility, which replaces the revolver we terminated in December. The ABL facility provides a $20 million commitment, with availability based on our balances for eligible accounts receivable and inventories.

This form of financing arrangement should be better in line with the nature of our business, which, as you know, can vary significantly from quarter to quarter. In addition, the financial covenants are better matched to our business needs, most of which only apply if we have borrowings outstanding on the line.

As Joe indicated, we are reaffirming our fiscal 2011 annual guidance of revenues of at least $195 million and adjusted EBITDA of at least $29 million. A substantial portion of our anticipated revenues for fiscal 2011 is currently in our backlog.

However, the timing of the customer product requirements should result in a much larger portion of our expected annual revenue for fiscal 2011 occurring towards the end of the fiscal year. Consequently, we continue to anticipate reporting a net loss through March 31, 2011.

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

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions at this time.

Joe Carleone

Well, thank you very much for joining our call. Our next call will be in May. We hope you join us at that time.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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