Attached files
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EX-31.1 - EX-31.1 - AMERICAN PACIFIC CORP | v59871exv31w1.htm |
EX-32.2 - EX-32.2 - AMERICAN PACIFIC CORP | v59871exv32w2.htm |
EX-32.1 - EX-32.1 - AMERICAN PACIFIC CORP | v59871exv32w1.htm |
EX-31.2 - EX-31.2 - AMERICAN PACIFIC CORP | v59871exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - AMERICAN PACIFIC CORP | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-08137
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
59-6490478 (I.R.S. Employer Identification No.) |
3883 Howard Hughes Parkway, Suite 700
Las Vegas, Nevada 89169
(Address of principal executive offices) (Zip Code)
Las Vegas, Nevada 89169
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares of the registrants common stock outstanding as of July 29, 2011 was 7,559,591.
AMERICAN PACIFIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited, Dollars in Thousands, Except per Share Amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 51,917 | $ | 37,247 | $ | 128,955 | $ | 130,706 | ||||||||
Cost of Revenues |
40,376 | 28,920 | 100,631 | 93,054 | ||||||||||||
Gross Profit |
11,541 | 8,327 | 28,324 | 37,652 | ||||||||||||
Operating Expenses |
9,811 | 11,946 | 33,054 | 35,697 | ||||||||||||
Environmental Remediation Charges |
6,000 | | 6,000 | | ||||||||||||
Other Operating Gains |
| | 2,929 | | ||||||||||||
Operating Income (Loss) |
(4,270 | ) | (3,619 | ) | (7,801 | ) | 1,955 | |||||||||
Interest Income and Other (Expense), Net |
63 | (291 | ) | 435 | (559 | ) | ||||||||||
Interest Expense |
2,642 | 2,671 | 7,927 | 8,102 | ||||||||||||
Loss before Income Tax |
(6,849 | ) | (6,581 | ) | (15,293 | ) | (6,706 | ) | ||||||||
Income Tax Benefit |
(685 | ) | (2,008 | ) | (4,297 | ) | (1,809 | ) | ||||||||
Net Loss |
$ | (6,164 | ) | $ | (4,573 | ) | $ | (10,996 | ) | $ | (4,897 | ) | ||||
Loss per Share: |
||||||||||||||||
Basic |
$ | (0.82 | ) | $ | (0.61 | ) | $ | (1.46 | ) | $ | (0.65 | ) | ||||
Diluted |
$ | (0.82 | ) | $ | (0.61 | ) | $ | (1.46 | ) | $ | (0.65 | ) | ||||
Weighted-Average Shares Outstanding: |
||||||||||||||||
Basic |
7,525,000 | 7,491,000 | 7,514,000 | 7,489,000 | ||||||||||||
Diluted |
7,525,000 | 7,491,000 | 7,514,000 | 7,489,000 |
See accompanying notes to condensed consolidated financial statements
- 1 -
Table of Contents
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands, Except per Share Amounts)
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and Cash Equivalents |
$ | 23,773 | $ | 23,985 | ||||
Accounts Receivable, Net |
43,056 | 51,900 | ||||||
Inventories |
43,727 | 36,126 | ||||||
Prepaid Expenses and Other Assets |
5,272 | 1,542 | ||||||
Income Taxes Receivable |
4,968 | 2,802 | ||||||
Deferred Income Taxes |
10,672 | 10,672 | ||||||
Total Current Assets |
131,468 | 127,027 | ||||||
Property, Plant and Equipment, Net |
113,905 | 113,873 | ||||||
Intangible Assets, Net |
684 | 1,420 | ||||||
Goodwill |
3,101 | 2,933 | ||||||
Deferred Income Taxes |
20,251 | 20,254 | ||||||
Other Assets |
10,290 | 10,236 | ||||||
TOTAL ASSETS |
$ | 279,699 | $ | 275,743 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts Payable |
$ | 12,199 | $ | 9,197 | ||||
Accrued Liabilities |
5,044 | 8,062 | ||||||
Accrued Interest |
3,952 | 1,575 | ||||||
Employee Related Liabilities |
7,216 | 6,472 | ||||||
Income Taxes Payable |
239 | 193 | ||||||
Deferred Revenues and Customer Deposits |
28,204 | 18,769 | ||||||
Current Portion of Environmental Remediation Reserves |
13,137 | 8,694 | ||||||
Current Portion of Long-Term Debt |
75 | 70 | ||||||
Total Current Liabilities |
70,066 | 53,032 | ||||||
Long-Term Debt |
105,049 | 105,102 | ||||||
Environmental Remediation Reserves |
13,522 | 15,176 | ||||||
Pension Obligations |
36,215 | 37,161 | ||||||
Other Long-Term Liabilities |
1,632 | 1,615 | ||||||
Total Liabilities |
226,484 | 212,086 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity: |
||||||||
Preferred Stock $1.00 par value; 3,000,000 authorized; none outstanding |
| | ||||||
Common Stock $0.10 par value; 20,000,000 shares authorized,
7,559,591 and 7,543,091 issued and outstanding |
756 | 754 | ||||||
Capital in Excess of Par Value |
73,405 | 73,091 | ||||||
Retained Earnings (Accumulated Deficit) |
(4,276 | ) | 6,720 | |||||
Accumulated Other Comprehensive Loss |
(16,670 | ) | (16,908 | ) | ||||
Total Shareholders Equity |
53,215 | 63,657 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 279,699 | $ | 275,743 | ||||
See accompanying notes to condensed consolidated financial statements
- 2 -
Table of Contents
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited, Dollars in Thousands)
Nine Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net Loss |
$ | (10,996 | ) | $ | (4,897 | ) | ||
Adjustments to Reconcile Net Loss
to Net Cash Provided by Operating Activities: |
||||||||
Depreciation and amortization |
11,080 | 11,980 | ||||||
Non-cash interest expense |
653 | 472 | ||||||
Share-based compensation |
250 | 635 | ||||||
Deferred income taxes |
(19 | ) | 136 | |||||
Loss on sale of assets |
5 | 12 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
8,936 | 12,917 | ||||||
Inventories |
(7,150 | ) | 711 | |||||
Prepaid expenses and other current assets |
(2,852 | ) | (127 | ) | ||||
Accounts payable |
2,488 | 756 | ||||||
Income taxes |
(2,115 | ) | (1,125 | ) | ||||
Accrued liabilities |
(3,027 | ) | (624 | ) | ||||
Accrued interest |
2,377 | 2,288 | ||||||
Employee related liabilities |
729 | (305 | ) | |||||
Deferred revenues and customer deposits |
9,425 | 539 | ||||||
Environmental remediation reserves |
2,789 | (1,528 | ) | |||||
Pension obligations, net |
(946 | ) | 1,451 | |||||
Other |
(856 | ) | (280 | ) | ||||
Net Cash Provided by Operating Activities |
10,771 | 23,011 | ||||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(10,195 | ) | (7,392 | ) | ||||
Other investing activities |
| 10 | ||||||
Net Cash Used by Investing Activities |
(10,195 | ) | (7,382 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Payments of long-term debt |
(52 | ) | (5,048 | ) | ||||
Debt issuance costs |
(878 | ) | | |||||
Issuances of common stock |
81 | 11 | ||||||
Net Cash Used by Financing Activities |
(849 | ) | (5,037 | ) | ||||
Effect of Changes in Currency Exchange Rates on Cash |
61 | (112 | ) | |||||
Net Change in Cash and Cash Equivalents |
(212 | ) | 10,480 | |||||
Cash and Cash Equivalents, Beginning of Period |
23,985 | 21,681 | ||||||
Cash and Cash Equivalents, End of Period |
$ | 23,773 | $ | 32,161 | ||||
Cash Paid (Received) For: |
||||||||
Interest |
$ | 4,897 | $ | 5,342 | ||||
Income taxes |
(2,181 | ) | (501 | ) | ||||
Non-Cash Investing and Financing Transactions: |
||||||||
Additions to Property,
Plant and Equipment not
yet paid |
1,114 | 1,525 | ||||||
Capital Leases Originated |
| 98 |
See accompanying notes to condensed consolidated financial statements
- 3 -
Table of Contents
AMERICAN PACIFIC CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited, Dollars in Thousands, Except per Share Amounts)
Notes to Condensed Consolidated Financial Statements
(Unaudited, Dollars in Thousands, Except per Share Amounts)
1. | INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES | |
Interim Basis of Presentation. The accompanying condensed consolidated financial statements of American Pacific Corporation and its subsidiaries (collectively, the Company, we, us, or our) are unaudited, but in the opinion of management, include all adjustments, which are of a normal recurring nature, necessary to a fair statement of the results for the interim periods presented. These statements should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2010. The operating results for the three-month and nine-month periods ended June 30, 2011 and cash flows for the nine-month period ended June 30, 2011 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods. | ||
Accounting Policies and Principles of Consolidation. A description of our significant accounting policies is included in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2010. Our consolidated financial statements include the accounts of American Pacific Corporation and our wholly-owned subsidiaries. All intercompany accounts have been eliminated. | ||
Fair Value Disclosure of Financial Instruments. The current authoritative guidance on fair value clarifies the definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements. The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy: | ||
Level 1 Quoted prices for identical instruments in active markets. | ||
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | ||
Level 3 Significant inputs to the valuation model are unobservable. | ||
We estimate the fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term nature. We estimate the fair value of our fixed-rate long-term debt as of June 30, 2011 to be approximately $104,738 based on level 2 data which was the trade date closest to June 30, 2011, which was March 23, 2011. We estimated the fair value of our fixed-rate long-term debt as of September 30, 2010 to be approximately $103,688 based on the trade date closest to that date, which was October 13, 2010. |
Depreciation and Amortization Expense. Depreciation and amortization expense is classified as follows in our statements of operations: |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Classified as cost of revenues |
||||||||||||||||
Depreciation |
$ | 3,341 | $ | 3,101 | $ | 9,887 | $ | 9,934 | ||||||||
Classified as operating expenses |
||||||||||||||||
Depreciation |
140 | 194 | 431 | 487 | ||||||||||||
Amortization |
188 | 509 | 762 | 1,559 | ||||||||||||
Total |
$ | 3,669 | $ | 3,804 | $ | 11,080 | $ | 11,980 | ||||||||
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Table of Contents
1. | INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued) | |
Bill and Hold Transactions. Some of our perchlorate and fine chemicals products customers have requested that we store materials purchased from us in our facilities (Bill and Hold arrangements). The sales value of inventory, subject to Bill and Hold arrangements, at our facilities was $20,451 and $19,606 as of June 30, 2011 and September 30, 2010, respectively. | ||
Recently Issued or Adopted Accounting Standards. In April 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-17, which provides guidance on defining a milestone under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Consideration that is contingent on achievement of a milestone in its entirety may be recognized as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. Milestones should be considered substantive in their entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive milestones that should be evaluated individually. This standard became effective for us beginning on October 1, 2010. The adoption of this standard did not have a material impact on our results of operations, financial position or cash flows. | ||
In December 2010, the FASB issued ASU No. 2010-28 that affects entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in the ASU modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This standard is effective for us beginning on October 1, 2011. The adoption of this standard is not expected to have a material impact on our results of operations, financial position or cash flows. | ||
In June 2011, the FASB issued ASU No. 2011-05 which amends Topic 220, Comprehensive Income. The amendment allows an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This standard is effective for us beginning on October 1, 2012. The adoption of this standard is not expected to have a material impact on our results of operations, financial position or cash flows. | ||
2. | SHARE-BASED COMPENSATION | |
We account for our share-based compensation arrangements under an accounting standard which requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The fair values of awards are recognized as additional compensation expense, which is classified as operating expenses, proportionately over the vesting period of the awards. | ||
Our share-based compensation arrangements are designed to advance the long-term interests of the Company, including by attracting and retaining employees and directors and aligning their interests with those of our stockholders. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under |
- 5 -
Table of Contents
2. | SHARE-BASED COMPENSATION (Continued) | |
our equity incentive plans. Depending on the form of the share-based award, new shares of our common stock may be issued upon grant, option exercise or vesting of the award. We maintain three share-based plans, each as discussed below. | ||
The American Pacific Corporation Amended and Restated 2001 Stock Option Plan (the 2001 Plan) permitted the granting of stock options to employees, officers, directors and consultants. Options granted under the 2001 Plan generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. Under the terms of the 2001 Plan, no options may be granted on or after January 16, 2011, but options previously granted, may extend beyond that date based on the terms of the relevant grant. This plan was approved by our stockholders. | ||
The American Pacific Corporation 2002 Directors Stock Option Plan, as amended and restated (the 2002 Directors Plan) compensates non-employee directors with stock options granted annually or upon other discretionary events. Options granted under the 2002 Directors Plan prior to September 30, 2007 generally vested 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire ten years from the date of grant. Options granted under the 2002 Directors Plan in November 2007 vested 50% one year from the date of grant and 50% two years from the date of grant, and expire ten years from the date of grant. As of June 30, 2011, there were no shares available for grant under the 2002 Directors Plan. This plan was approved by our stockholders. | ||
The American Pacific Corporation 2008 Stock Incentive Plan, as amended and restated (the 2008 Plan) permits the granting of stock options, restricted stock, restricted stock units and stock appreciation rights to employees, directors and consultants. A total of 800,000 shares of common stock are authorized for issuance under the 2008 Plan, provided that no more than 400,000 shares of common stock may be granted pursuant to awards of restricted stock and restricted stock units. Generally, awards granted under the 2008 Plan vest in three equal annual installments beginning on the first anniversary of the grant date, and in the case of option awards, expire ten years from the date of grant. As of June 30, 2011, there were 463,700 shares available for grant under the 2008 Plan. This plan was approved by our stockholders. | ||
A summary of our outstanding and non-vested stock option and restricted stock activity for the nine months ended June 30, 2011 is as follows: |
Stock Options | Restricted Stock | |||||||||||||||||||||||
Outstanding | Non-Vested | Outstanding and Non-Vested | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Fair | Fair | ||||||||||||||||||||||
Price | Value | Value | ||||||||||||||||||||||
Shares | Per Share | Shares | Per Share | Shares | Per Share | |||||||||||||||||||
Balance, September 30, 2010 |
658,176 | $ | 8.32 | 248,895 | $ | 4.41 | 50,664 | $ | 8.34 | |||||||||||||||
Granted |
| | | | | | ||||||||||||||||||
Vested |
| | (100,770 | ) | 4.51 | (19,336 | ) | 8.70 | ||||||||||||||||
Exercised |
(16,500 | ) | 4.87 | | | | | |||||||||||||||||
Expired / Cancelled |
(19,700 | ) | 6.50 | (299 | ) | 4.48 | | | ||||||||||||||||
Balance, June 30, 2011 |
621,976 | 8.47 | 147,826 | 4.35 | 31,328 | 8.11 | ||||||||||||||||||
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2. | SHARE-BASED COMPENSATION (Continued) | |
A summary of our exercisable stock options as of June 30, 2011 is as follows: |
Number of vested stock options |
474,150 | |||
Weighted-average exercise price per share |
$ | 8.47 | ||
Aggregate intrinsic value |
$ | 335 | ||
Weighted-average remaining contractual term in years |
4.8 |
We determine the fair value of stock option awards at their grant date, using a Black-Scholes Option-Pricing model applying the assumptions in the following table. We determine the fair value of restricted stock awards based on the fair market value of our common stock on the grant date. Actual compensation, if any, ultimately realized by optionees may differ significantly from the amount estimated using an option valuation model. |
Nine Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Weighted-average grant date fair value per share of options granted |
$ | | $ | 3.65 | ||||
Significant fair value assumptions: |
||||||||
Expected term in years |
| 6.00 | ||||||
Expected volatility |
| 51.3 | % | |||||
Expected dividends |
| 0.0 | % | |||||
Risk-free interest rates |
| 2.3 | % | |||||
Total intrinsic value of options exercised |
$ | 20 | $ | 4 | ||||
Aggregate cash received for option exercises |
$ | 81 | $ | 12 | ||||
Compensation cost (included in operating expenses) |
||||||||
Stock options |
$ | 187 | $ | 435 | ||||
Restricted stock |
63 | 200 | ||||||
Total |
250 | 635 | ||||||
Tax benefit recognized |
47 | 143 | ||||||
Net compensation cost |
$ | 203 | $ | 492 | ||||
As of period end date: |
||||||||
Total
compensation cost for non-vested awards not yet recognized: |
||||||||
Stock options |
$ | 109 | $ | 412 | ||||
Restricted stock |
$ | 25 | $ | 122 | ||||
Weighted-average years to be recognized |
||||||||
Stock options |
0.9 | 1.4 | ||||||
Restricted stock |
0.9 | 1.5 |
3. | SELECTED BALANCE SHEET DATA |
Inventories. Inventories consist of the following: |
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 7,110 | $ | 2,977 | ||||
Work-in-process |
21,528 | 18,318 | ||||||
Raw materials and supplies |
12,329 | 9,103 | ||||||
Deferred cost of revenues |
1,670 | 5,728 | ||||||
Under(over) applied manufacturing overhead costs |
1,090 | | ||||||
Total |
$ | 43,727 | $ | 36,126 | ||||
For our Specialty Chemicals segment, purchase price variances or volume or capacity cost variances associated with indirect manufacturing costs and that are planned and expected to be absorbed by goods produced through the end of our fiscal year are deferred at interim reporting dates as |
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3. | SELECTED BALANCE SHEET DATA (Continued) | |
under(over) applied manufacturing overhead costs. The effect of unplanned or unanticipated purchase price or volume variances are applied to goods produced in the period. | ||
Intangible Assets. Intangible assets consist of the following: |
June 30, | September 30, | |||||||||
2011 | 2010 | |||||||||
Customer relationships |
9,013 | 8,976 | ||||||||
Less accumulated amortization |
(8,329 | ) | (7,556 | ) | ||||||
684 | 1,420 | |||||||||
Backlog |
1,586 | 1,559 | ||||||||
Less accumulated amortization |
(1,586 | ) | (1,559 | ) | ||||||
Total |
$ | 684 | $ | 1,420 | ||||||
Customer relationships are assets of our Fine Chemicals and Aerospace Equipment segments and are subject to amortization. Amortization expense was $188 and $341 for the three months ended June 30, 2011 and 2010, respectively, and $762 and $1,032, for the nine months ended June 30, 2011 and 2010, respectively. Backlog is an asset of our Aerospace Equipment segment and is subject to amortization. Amortization expense was zero and $168 for the three months ended June 30, 2011 and 2010, respectively, and zero and $527 for the nine months ended June 30, 2011 and 2010, respectively. | ||
Goodwill. Goodwill is an asset of our Aerospace Equipment segment and is not expected to be deductible for tax purposes. Changes in the reported value for goodwill are a result of fluctuations in the underlying foreign currency translation rate. |
4. | COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS |
Comprehensive loss consists of the following: |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Loss |
$ | (6,164 | ) | $ | (4,573 | ) | $ | (10,996 | ) | $ | (4,897 | ) | ||||
Other
Comprehensive Income (Loss) - Foreign currency translation adjustment |
94 | (391 | ) | 238 | (773 | ) | ||||||||||
Comprehensive Loss |
$ | (6,070 | ) | $ | (4,964 | ) | $ | (10,758 | ) | $ | (5,670 | ) | ||||
The components of accumulated other comprehensive loss are as follows: |
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Cumulative currency translation adjustment |
$ | (223 | ) | $ | (461 | ) | ||
Unamortized benefit plan costs, net of tax of $10,964 |
(16,447 | ) | (16,447 | ) | ||||
Total |
$ | (16,670 | ) | $ | (16,908 | ) | ||
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5. | EARNINGS (LOSS) PER SHARE |
Shares used to compute loss per share are as follows: |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (6,164 | ) | $ | (4,573 | ) | $ | (10,996 | ) | $ | (4,897 | ) | ||||
Basic weighted-average shares |
7,525,000 | 7,491,000 | 7,514,000 | 7,489,000 | ||||||||||||
Diluted: |
||||||||||||||||
Weighted-average shares, basic |
7,525,000 | 7,491,000 | 7,514,000 | 7,489,000 | ||||||||||||
Dilutive effect of stock options |
| | | | ||||||||||||
Weighted-average shares, diluted |
7,525,000 | 7,491,000 | 7,514,000 | 7,489,000 | ||||||||||||
Basic loss per share |
$ | (0.82 | ) | $ | (0.61 | ) | $ | (1.46 | ) | $ | (0.65 | ) | ||||
Diluted loss per share |
$ | (0.82 | ) | $ | (0.61 | ) | $ | (1.46 | ) | $ | (0.65 | ) |
As of June 30, 2011 and 2010, we had an aggregate of 653,304 and 658,926 antidilutive options and unvested restricted shares outstanding, respectively. |
6. | DEBT |
Our outstanding debt balances consist of the following: |
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Senior Notes, 9%, due 2015 |
$ | 105,000 | $ | 105,000 | ||||
Capital Leases, due through 2014 |
124 | 172 | ||||||
Total Debt |
105,124 | 105,172 | ||||||
Less Current Portion |
(75 | ) | (70 | ) | ||||
Total Long-term Debt |
$ | 105,049 | $ | 105,102 | ||||
Senior Notes. In February 2007, we issued and sold $110,000 aggregate principal amount of 9.0% Senior Notes due February 1, 2015 (collectively, with the exchange notes issued in August 2007 as referenced below, the Senior Notes). Proceeds from the issuance of the Senior Notes were used to repay our former credit facilities. The Senior Notes accrue interest at an annual rate of 9.0%, payable semi-annually in February and August. The Senior Notes are guaranteed on a senior unsecured basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are: |
| ranked equally in right of payment with all of our existing and future senior indebtedness; | ||
| ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness; | ||
| effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and | ||
| structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes. |
The Senior Notes may be redeemed by the Company, in whole or in part, under the following circumstances: |
| at any time on or after February 1, 2011 at redemption prices beginning at 104.5% of the principal amount to be redeemed and reducing to 100% by February 1, 2013; and | ||
| under certain changes of control, we must offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest. |
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6. | DEBT (Continued) | |
The Senior Notes were issued pursuant to an indenture which contains certain customary events of default, including cross default provisions if we default under our existing and future debt agreements having, individually or in the aggregate, a principal or similar amount outstanding of at least $10,000, and certain other covenants limiting, subject to exceptions, carve-outs and qualifications, our ability to: |
| incur additional debt; | ||
| pay dividends or make other restricted payments; | ||
| create liens on assets to secure debt; | ||
| incur dividend or other payment restrictions with regard to restricted subsidiaries; | ||
| transfer or sell assets; | ||
| enter into transactions with affiliates; | ||
| enter into sale and leaseback transactions; | ||
| create an unrestricted subsidiary; | ||
| enter into certain business activities; or | ||
| effect a consolidation, merger or sale of all or substantially all of our assets. |
In connection with the closing of the sale of the Senior Notes, we entered into a registration rights agreement which required us to file a registration statement to offer to exchange the Senior Notes for notes that have substantially identical terms as the Senior Notes and are registered under the Securities Act of 1933, as amended. In July 2007, we filed a registration statement with the SEC with respect to an offer to exchange the Senior Notes as required by the registration rights agreement, which registration statement was declared effective by the SEC. In August 2007, we completed the exchange of 100% of the Senior Notes for substantially identical notes which are registered under the Securities Act of 1933, as amended. | ||
Senior Note Repurchase. In June 2010, we repurchased and cancelled $5,000 in principal amount of our Senior Notes for $4,900. As a result of this repurchase, we recorded an immaterial loss of $16 in other income (expense), net of deferred financing costs of $116. | ||
Revolving Credit Facility. In February 2007, we entered into an Amended and Restated Credit Agreement, as amended as of July 7, 2009 and September 17, 2010 (the Revolving Credit Facility), with Wachovia Bank, National Association (predecessor by merger to Wells Fargo Bank, National Association), and certain other lenders, which provided a secured revolving credit facility in an aggregate principal amount of up to $20,000. On December 31, 2010, we terminated the Revolving Credit Facility. | ||
ABL Credit Facility. On January 31, 2011, American Pacific Corporation, as borrower, entered into an asset based lending credit agreement (the ABL Credit Facility) with Wells Fargo Bank, National Association, as agent and as lender, and certain domestic subsidiaries of the Company, as guarantors, which provides a secured revolving credit facility in an aggregate principal amount of up to $20,000 at any time outstanding with an initial maturity to be the earlier of (i) January 31, 2015 and (ii) 90 days prior to the maturity date of the Senior Notes, which is February 1, 2015. The ABL Credit Facility also provides for the issuance of new letters of credit with a letter of credit sublimit of $5,000. The maximum borrowing availability under the ABL Credit Facility is based upon a percentage of our eligible account receivables and eligible inventories. We may prepay and terminate the ABL Credit Facility at any time, without premium or penalty. The ABL Credit Facility contains certain mandatory prepayment provisions. The annual interest rates applicable to loans under the ABL Credit Facility will be, at our option, either at a Base Rate or LIBOR Rate (each as defined in the ABL Credit Facility) plus, in each case, an applicable margin of 2.50 percentage points. In addition, we will pay commitment fees, other fees related to the issuance and maintenance of the letters of credit, and certain agency fees. |
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6. | DEBT (Continued) | |
The ABL Credit Facility is guaranteed by our current and future domestic subsidiaries and is secured by substantially all of our assets and the assets of our current and future domestic subsidiaries, subject to certain exceptions as set forth in the ABL Credit Facility. The ABL Credit Facility contains certain negative covenants, subject to customary exceptions and exclusions, restricting and limiting our ability to, among other things: |
| incur debt, incur contingent obligations and issue certain types of preferred stock, or prepay certain debt; | ||
| create liens; | ||
| pay dividends, distributions or make other specified restricted payments; | ||
| make certain investments and acquisitions; | ||
| enter into certain transactions with affiliates; | ||
| enter into sale and leaseback transactions; and | ||
| merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets. |
The ABL Credit Facility also contains financial covenants which are only triggered by utilization of the ABL Credit Facility and borrowing availability not exceeding a designated threshold amount. If the financial covenants are triggered, then we would be subject to the following financial covenants: |
| Minimum EBITDA. We would be required to achieve a minimum level of EBITDA for the twelve-month period then ended. This covenant may become applicable through September 30, 2011. | ||
| Fixed Charge Coverage Ratio. We would be required to maintain a minimum fixed charge coverage ratio on a rolling trailing twelve-month basis of at least 1.10:1.00. This covenant may become applicable beginning with the twelve-month period ending October 31, 2011 and through the remaining term of the ABL Credit Facility. | ||
| Maximum Capital Expenditures. The ABL Credit Facility limits our capital expenditures in any fiscal year to amounts set forth in the ABL Credit Facility. |
The ABL Credit Facility also contains usual and customary events of default (in some cases, subject to certain threshold amounts and grace periods), including cross-default provisions that include the Senior Notes. If an event of default occurs and is continuing, we may be required to repay the obligations under the ABL Credit Facility prior to the ABL Credit Facilitys stated maturity and the related commitments may be terminated. | ||
On June 30, 2011, under the ABL Credit Facility, we had no outstanding borrowings, had availability of $17,649, and were not subject to compliance with the financial covenants. | ||
Letters of Credit. As of June 30, 2011, we had $561 in outstanding standby letters of credit which mature through July 2015. These letters of credit principally secure performance of certain water treatment equipment sold by us. The letters of credit are collateralized by cash on deposit with the issuing bank in the amount of 105% of the outstanding letters of credit. Collateral deposits are classified as other assets on our consolidated balance sheets. |
7. | COMMITMENTS AND CONTINGENCIES |
Regulatory Review of Perchlorates. Our Specialty Chemicals segment manufactures and sells products that contain perchlorates. Federal and state regulators continue to review the effects of perchlorate, if any, on human health and the related allowable maximum level of contaminant from perchlorate. While the presence of regulatory review presents general business risk to the Company, we are currently unaware of any regulatory proposal that would have a material effect on our results of operations and financial position or that would cause us to significantly modify or curtail our business practices, including our remediation activities discussed below. |
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7. | COMMITMENTS AND CONTINGENCIES (Continued) | |
Perchlorate Remediation Project in Henderson, Nevada. We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (the AMPAC Henderson Site) from 1958 until the facility was destroyed in May 1988, after which we relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corporation (KMCC) also operated a perchlorate production facility in Henderson, Nevada (the KMCC Site) from 1967 to 1998. In addition, between 1956 and 1967, American Potash operated a perchlorate production facility and, for many years prior to 1956, other entities also manufactured perchlorate chemicals at the KMCC Site. As a result of a longer production history in Henderson, KMCC and its predecessor operations manufactured significantly greater amounts of perchlorate over time than we did at the AMPAC Henderson Site. | ||
In 1997, the Southern Nevada Water Authority (SNWA) detected trace amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada and areas of Southern California. The Las Vegas Wash flows into Lake Mead from the Las Vegas valley. | ||
In response to this discovery by SNWA, and at the request of the Nevada Division of Environmental Protection (NDEP), we engaged in an investigation of groundwater near the AMPAC Henderson Site and down gradient toward the Las Vegas Wash. The investigation and related characterization, which lasted more than six years, employed experts in the field of hydrogeology. This investigation concluded that although there is perchlorate in the groundwater in the vicinity of the AMPAC Henderson Site up to 700 parts per million, perchlorate from this site does not materially impact, if at all, water flowing in the Las Vegas Wash toward Lake Mead. It has been well established, however, by data generated by SNWA and NDEP, that perchlorate from the KMCC Site did impact the Las Vegas Wash and Lake Mead. The Nevada Environmental Response Trust (NERT), which is the entity responsible for completing environmental remediation work at the Henderson location as a result of the 2010 settlement of the 2009 bankruptcy of KMCCs successor, Tronox LLC, operates an above ground perchlorate groundwater remediation facility at their Henderson site. Tronox LLC is currently a tenant of NERT at the property. | ||
Notwithstanding these facts, and at the direction of NDEP and the U.S. Environmental Protection Agency (the EPA), we conducted an investigation of remediation technologies for perchlorate in groundwater with the intention of remediating groundwater near the AMPAC Henderson Site. The technology that was chosen was in situ bioremediation (ISB). ISB reduces perchlorate in the groundwater by precise addition of an appropriate carbon source to the groundwater itself while it is still in the ground (as opposed to an above ground, ex situ process). This induces naturally occurring organisms in the groundwater to destroy the perchlorate among other oxygen containing compounds. | ||
In 2002, we conducted a pilot test in the field of the ISB technology and it was successful. On the basis of the successful test and other evaluations, in the fiscal year ended September 30, 2005 (Fiscal 2005), we submitted a work plan to NDEP for the construction of a remediation facility near the AMPAC Henderson Site. The conditional approval of the work plan by NDEP in our third quarter of Fiscal 2005 allowed us to generate estimated costs for the installation and operation of the remediation facility to address perchlorate at the AMPAC Henderson Site. We commenced construction in July 2005. In December 2006, we began operations of the permanent facility. The location of this facility is several miles, in the direction of groundwater flow, from the AMPAC Henderson Site. | ||
At the request of NDEP since 1997, and most recently in the summer of 2009, we have held discussions with NDEP to formalize our remediation efforts in an agreement that, if executed, would provide more detailed regulatory guidance on environmental characterization and remedies at the AMPAC Henderson Site and vicinity. Typically, such agreements generally cover such matters as the scope of work plans, schedules, deliverables, remedies for non compliance, and reimbursement to the State of Nevada for past and future oversight costs. Discussions regarding a formal agreement are currently inactive. |
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7. | COMMITMENTS AND CONTINGENCIES (Continued) | |
Henderson Site Environmental Remediation Reserve. We accrue for anticipated costs associated with environmental remediation that are probable and estimable. On a quarterly basis, we review our estimates of future costs that could be incurred for remediation activities. In some cases, only a range of reasonably possible costs can be estimated. In establishing our reserves, the most probable estimate is used; otherwise, we accrue the minimum amount of the range. | ||
During Fiscal 2005 and the fiscal year ended September 30, 2006, we recorded aggregate charges for $26,000 representing our then estimates of the probable costs of our remediation efforts at the AMPAC Henderson Site, including the costs for capital equipment and on-going operating and maintenance (O&M). | ||
Late in the fiscal year ended September 30, 2009 (Fiscal 2009), we gained additional information from groundwater modeling that indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150 feet below ground surface) is moving toward our existing remediation facility at a much slower pace than previously estimated. Utilization of our existing facilities alone, at this lower groundwater pace, could, according to this groundwater model, extend the life of our remediation project to well in excess of fifty years. As a result of this additional data, related model interpretations and consultations with NDEP, we re-evaluated our remediation operations and determined that we should be able to improve the effectiveness of the treatment program and significantly reduce the total project time by expanding the then existing treatment system. The expansion includes installing additional groundwater extraction wells in the deeper, more concentrated areas, construction of a pipeline to move extracted groundwater to our treatment facility, and the addition of above-ground ex situ bioremediation treatment equipment (the Expansion Project) that will enhance, and in some cases replace, primary components of the existing ISB treatment system. In our Fiscal 2009 fourth quarter, we accrued $13,700 as our initial estimate of the capital cost of the Expansion Project and the related estimates of the effects of the enhanced operations on the on-going O&M costs and project life. | ||
Through June 2011, and in cooperation with NDEP, we worked to develop the formal design, engineering and permitting of the Expansion Project. Based on data obtained to date, which is largely comprised of firm quotations, we determined that significant modifications to our Fiscal 2009 assumptions were required. As a result, in June 2011, we accrued an additional $6,000 for the estimated increase in cost of the capital component of the Expansion Project, offset slightly by reductions in O&M cost estimates. The estimated capital costs of the Expansion Project increased by approximately $6,400. The increase reflects (i) an increase in the capacity of the above-ground treatment equipment to accommodate technical requirements based on the testing of new extraction wells in the fall of 2010, and (ii) higher than initially anticipated cost associated with the installation of the equipment and construction of the pipeline. Our estimate of total O&M costs was reduced by approximately $400. This change in estimate reflects (i) a reduction in the estimated life of the project by four years, offset by (ii) an increase in the estimated annual O&M cost to approximately $1,900 per year once the Expansion Project is placed in service. We anticipate that the Expansion Project will be placed in service during the spring of 2012. Due to uncertainties inherent in making estimates, our estimates of capital and O&M costs may later require significant revision as new facts become available and circumstances change. | ||
The estimated life of the project is a key assumption underlying the accrued estimated cost of our remediation activities. Groundwater modeling and other information regarding the characteristics of the surrounding land and demographics indicate that at our targeted processing rate of 450 gallons per minute for the new groundwater extraction wells (750 gallons per minute in the aggregate with existing wells), the life of the project could range from 5 to 18 years from the date that the Expansion Project is placed in service. Further, the data indicates that within that range, 7 to 14 years is the more likely range. In accordance with generally accepted accounting principles, if no point within the more likely range is considered more likely than another, then estimates should be based on the low end of the range. Accordingly, our accrued remediation cost includes estimated |
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7. | COMMITMENTS AND CONTINGENCIES (Continued) | |
O&M costs though 2019, which is the low end of the likely range of the project life. Groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted groundwater extraction rates will continue to be key factors considered when estimating the life of the project. If additional information becomes available in the future that lead to a different interpretation of the model, thereby dictating a change in equipment and operations, our estimate of the resulting project life could change significantly. | ||
The estimate of the annual O&M cost of the project is a key assumption in our computation of the estimated cost of our remediation activities. To estimate O&M costs, we consider, among other factors, the project scope and historical expense rates to develop assumptions regarding labor, utilities, repairs, maintenance supplies and professional services costs. If additional information becomes available in the future that is different than information currently available to us and thereby leads us to different conclusions, our estimate of O&M expenses could change significantly. | ||
In addition, certain remediation activities are conducted on public lands under operating permits. In general, these permits require us to return the land to its original condition at the end of the permit period. Estimated costs associated with removal of remediation equipment from the land are not material and are included in our range of estimated costs. | ||
As of June 30, 2011, the aggregate range of anticipated environmental remediation costs was from approximately $22,800 to approximately $47,300. This range represents a significant estimate and is based on the estimable elements of cost for capital and O&M costs, and an estimated remaining operating life of the project through a range from the years 2017 to 2030. As of June 30, 2011, the accrued amount was $26,659, based on an estimated remaining life of the project through the year 2019, or the low end of the more likely range of the expected life of the project. Cost estimates are based on our current assessments of the facility configuration. As we proceed with the project, we have, and may in the future, become aware of elements of the facility configuration that must be changed to meet the targeted operational requirements. Certain of these changes may result in corresponding cost increases. Costs associated with the changes are accrued when a reasonable alternative, or range of alternatives, is identified and the cost of such alternative is estimable. Our estimated reserve for environmental remediation is based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate. A summary of our environmental reserve activity for the nine months ended June 30, 2011 is shown below: |
Balance, September 30, 2010 |
$ | 23,870 | ||
Additions or adjustments |
6,000 | |||
Expenditures |
(3,211 | ) | ||
Balance, June 30, 2011 |
$ | 26,659 | ||
AFC Environmental Matters. The primary operations of our Fine Chemicals segment are located on land leased from Aerojet-General Corporation (Aerojet). The leased land is part of a tract of land owned by Aerojet designated as a Superfund site under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). The tract of land had been used by Aerojet and affiliated companies to manufacture and test rockets and related equipment since the 1950s. Although the chemicals identified as contaminants on the leased land were not used by Aerojet Fine Chemicals LLC (predecessor in interest to Ampac Fine Chemicals LLC) as part of its operations, CERCLA, among other things, provides for joint and severable liability for environmental liabilities including, for example, environmental remediation expenses. |
As part of the agreement by which we acquired our Fine Chemicals segment from GenCorp Inc. (GenCorp), an Environmental Indemnity Agreement was entered into whereby GenCorp agreed to indemnify us against any and all environmental costs and liabilities arising out of or resulting from |
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7. | COMMITMENTS AND CONTINGENCIES (Continued) | |
any violation of environmental law prior to the effective date of the sale, or any release of hazardous substances by Aerojet Fine Chemicals LLC, Aerojet or GenCorp on the subject premises or Aerojets Sacramento site prior to the effective date of the sale. | ||
On November 29, 2005, EPA Region IX provided us with a letter indicating that the EPA does not intend to pursue any clean up or enforcement actions under CERCLA against future lessees of the Aerojet property for existing contamination, provided that the lessees do not contribute to or do not exacerbate existing contamination on or under the Aerojet Superfund site. | ||
Other Matters. Although we are not currently party to any material pending legal proceedings, we are from time to time subject to claims and lawsuits related to our business operations. We accrue for loss contingencies when a loss is probable and the amount can be reasonably estimated. Legal fees, which can be material in any given period, are expensed as incurred. We believe that current claims or lawsuits against us, individually and in the aggregate, will not result in loss contingencies that will have a material adverse effect on our financial condition, cash flows or results of operations. | ||
8. | SEGMENT INFORMATION |
We report our business in four operating segments: Fine Chemicals, Specialty Chemicals, Aerospace Equipment and Other Businesses. These segments are based upon business units that offer distinct products and services, are operationally managed separately and produce products using different production methods. Segment operating income or loss includes all sales and expenses directly associated with each segment. Environmental remediation charges, corporate general and administrative costs, which consist primarily of executive, investor relations, accounting, human resources and information technology expenses, and interest, are not allocated to segment operating results. | ||
Fine Chemicals. Our Fine Chemicals segment includes the operating results of our wholly-owned subsidiaries Ampac Fine Chemicals LLC and AMPAC Fine Chemicals Texas, LLC (collectively, AFC). AFC is a custom manufacturer of active pharmaceutical ingredients and registered intermediates for commercial customers in the pharmaceutical industry. AFC operates in compliance with the U.S. Food and Drug Administrations current Good Manufacturing Practices and the requirements of certain other regulatory agencies such as the European Unions European Medicines Agency and Japans Pharmaceuticals and Medical Devices Agency. AFC has distinctive competencies and specialized engineering capabilities in performing chiral separations, manufacturing chemical compounds that require high containment and performing energetic chemistries at commercial scale. | ||
Specialty Chemicals. Our Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, principally ammonium perchlorate, 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, (ii) sodium azide, a chemical used in pharmaceutical manufacturing, and (iii) Halotronâ, a series of clean fire extinguishing agents used in fire extinguishing products ranging from portable fire extinguishers to total flooding systems. | ||
Aerospace Equipment. Our Aerospace Equipment segment includes the operating results of our wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries (collectively, AMPAC ISP). AMPAC ISP manufactures monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. In addition, AMPAC ISP designs, develops and manufactures liquid propulsion thrusters, high performance valves, pressure regulators, cold-gas propulsion systems, and precision structures for space applications, especially in the European space market. |
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8. | SEGMENT INFORMATION (Continued) | |
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. | ||
Our revenues are characterized by individually significant orders and relatively few customers. As a result, in any given reporting period, certain customers may account for more than ten percent of our consolidated revenues. The following table provides disclosure of the percentage of our consolidated revenues attributed to customers that exceed ten percent of the total in each of the given periods. |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Fine chemicals customer |
25 | % | 17 | % | 17 | % | 24 | % | ||||||||
Fine chemicals customer |
11 | % | ||||||||||||||
Fine chemicals customer |
11 | % | ||||||||||||||
Fine chemicals customer |
13 | % | ||||||||||||||
Specialty chemicals customer |
12 | % |
The following provides financial information about our segment operations: |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Fine Chemicals |
$ | 30,838 | $ | 19,951 | $ | 60,792 | $ | 63,128 | ||||||||
Specialty Chemicals |
10,931 | 8,168 | 30,800 | 35,057 | ||||||||||||
Aerospace Equipment |
10,105 | 8,647 | 35,929 | 27,140 | ||||||||||||
Other Businesses |
43 | 481 | 1,434 | 5,381 | ||||||||||||
Total Revenues |
$ | 51,917 | $ | 37,247 | $ | 128,955 | $ | 130,706 | ||||||||
Segment Operating Income (Loss): |
||||||||||||||||
Fine Chemicals |
$ | (452 | ) | $ | (2,458 | ) | $ | (4,923 | ) | $ | (698 | ) | ||||
Specialty Chemicals |
4,849 | 2,796 | 11,948 | 15,140 | ||||||||||||
Aerospace Equipment |
699 | (120 | ) | 2,784 | (457 | ) | ||||||||||
Other Businesses |
(539 | ) | (286 | ) | (1,041 | ) | (234 | ) | ||||||||
Total Segment Operating Income (Loss) |
4,557 | (68 | ) | 8,768 | 13,751 | |||||||||||
Corporate Expenses |
(2,827 | ) | (3,551 | ) | (10,569 | ) | (11,796 | ) | ||||||||
Environmental Remediation Charge |
(6,000 | ) | | (6,000 | ) | | ||||||||||
Operating Income (Loss) |
$ | (4,270 | ) | $ | (3,619 | ) | $ | (7,801 | ) | $ | 1,955 | |||||
Depreciation and Amortization: |
||||||||||||||||
Fine Chemicals |
$ | 3,114 | $ | 3,200 | $ | 9,391 | $ | 9,722 | ||||||||
Specialty Chemicals |
146 | 14 | 495 | 591 | ||||||||||||
Aerospace Equipment |
300 | 424 | 845 | 1,239 | ||||||||||||
Other Businesses |
4 | 4 | 13 | 12 | ||||||||||||
Corporate |
105 | 162 | 336 | 416 | ||||||||||||
Total Depreciation and Amortization |
$ | 3,669 | $ | 3,804 | $ | 11,080 | $ | 11,980 | ||||||||
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9. | INCOME TAXES |
We review our portfolio of uncertain tax positions and recorded liabilities based on the applicable recognition standards. In this regard, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We classify uncertain tax positions as non-current income tax liabilities unless expected to be settled within one year. | ||
As of both June 30, 2011 and September 30, 2010, our recorded liability for unrecognized tax benefits was $1,246, of which $386 would affect our effective tax rate if recognized. The remaining balance is related to deferred tax items which only impact the timing of tax payments. Due to the effects of filing tax carryback claims, we have no significant statutes of limitations that are anticipated to expire in the fiscal year ending September 30, 2011. As such, it is reasonably possible that none of the gross liability for unrecognized tax benefits will reverse during the fiscal year ending September 30, 2011. | ||
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2011 and September 30, 2010, we had accrued $601 and $584, respectively, for the payment of tax-related interest and penalties. For the nine months ended June 30, 2011 and 2010, income tax benefit includes an expense of $16 and a benefit of $140, respectively, for interest and penalties. | ||
We file income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions. With few exceptions, we are no longer subject to federal or state income tax examinations for years before 2002. |
10. | DEFINED BENEFIT PLANS |
Defined Benefit Plan Descriptions. We maintain three defined benefit pension plans which cover substantially all of our U.S. employees, excluding employees of our Aerospace Equipment segment: the Amended and Restated American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC Pension Plan for Salaried Employees, and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees, each as amended to date. Collectively, these three plans are referred to as the Pension Plans. Benefits are paid based on an average of earnings, retirement age, and length of service, among other factors. In May 2010, our board of directors approved amendments to our Pension Plans which effectively closed the Pension Plans to participation by any new employees. Retirement benefits for existing U.S. employees and retirees through June 30, 2010 are not affected by this change. Beginning July 1, 2010, new U.S. employees began participating solely in one of the Companys 401(k) plans. In addition, we maintain the American Pacific Corporation Supplemental Executive Retirement Plan (the SERP) that includes three executive officers and two former executive officers. We use a measurement date of September 30 to account for our Pension Plans and SERP. |
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10. DEFINED BENEFIT PLANS (Continued)
Net periodic pension cost consists of the following:
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pension Plans: |
||||||||||||||||
Service Cost |
$ | 592 | $ | 397 | $ | 1,824 | $ | 1,647 | ||||||||
Interest Cost |
900 | 864 | 2,656 | 2,460 | ||||||||||||
Expected Return on Plan Assets |
(720 | ) | (600 | ) | (2,164 | ) | (1,806 | ) | ||||||||
Recognized Actuarial Losses |
474 | 357 | 1,314 | 883 | ||||||||||||
Amortization of Prior Service Costs |
15 | 13 | 46 | 51 | ||||||||||||
Net Periodic Pension Cost |
$ | 1,261 | $ | 1,031 | $ | 3,676 | $ | 3,235 | ||||||||
Supplemental Executive Retirement Plan: |
||||||||||||||||
Service Cost |
$ | 81 | $ | 109 | $ | 243 | $ | 329 | ||||||||
Interest Cost |
89 | 94 | 267 | 281 | ||||||||||||
Expected Return on Plan Assets |
| | | | ||||||||||||
Recognized Actuarial Losses |
| | | | ||||||||||||
Amortization of Prior Service Costs |
105 | 105 | 315 | 315 | ||||||||||||
Net Periodic Pension Cost |
$ | 275 | $ | 308 | $ | 825 | $ | 925 | ||||||||
Defined Contribution Plan Descriptions. We maintain two 401(k) plans in which participating employees may make contributions. One covers substantially all U.S. employees except bargaining unit employees of our Fine Chemicals segment and the other covers those bargaining unit employees. We make matching contributions for Fine Chemicals segment employees and U.S. employees of our Aerospace Equipment segment. In addition, we make a profit sharing contribution for U.S. employees of our Aerospace Equipment segment who were employed by us prior to June 30, 2010. Beginning July 1, 2010, for all eligible new U.S. employees we began making matching contributions. | ||
Contributions and Benefit Payments. For the nine months ended June 30, 2011, we contributed $5,052 to the Pension Plans to fund benefit payments and anticipate making approximately $772 in additional contributions through September 30, 2011. For the nine months ended June 30, 2011, we contributed $396 to the SERP to fund benefit payments and anticipate making approximately $131 in additional contributions through September 30, 2011. |
11. | GAIN CONTINGENCIES OTHER OPERATING GAINS |
We recognize gain contingencies in our consolidated statement of operations when all contingencies have been resolved, which generally coincides with the receipt of cash, if applicable. During the nine months ended June 30, 2011, our Fine Chemicals segment reported other operating gains of $2,929 that resulted from the resolution of gain contingencies. The total reported gain is comprised of the following two matters. | ||
We made a series of filings with the County of Sacramento, California, to appeal the assessed values in prior years of our real and personal property located at our Fine Chemicals segments Rancho Cordova, California facility. During the nine months ended June 30, 2011, we received $2,671 for cash property tax refunds resulting from our appeals and the related favorable reassessment of historical property values. | ||
Our Fine Chemicals segment is undertaking several mandatory capital projects. Certain of the capital activities are complete and others are anticipated to be completed during the calendar year 2011. In connection with these projects, our Fine Chemicals segment held, and continues to hold, negotiations with the former owner of the facilities. During the nine months ended June 30, 2011, we received from the former owner cash consideration in the amount of $258 for a limited release of liability of the former owner with respect to one of the completed projects. |
- 18 -
Table of Contents
12. | GUARANTOR SUBSIDIARIES |
As discussed in Note 6, in February 2007, American Pacific Corporation, a Delaware corporation (Parent) issued and sold $110,000 aggregate principal amount of Senior Notes. In connection with the issuance of the Senior Notes, the Parents material U.S. subsidiaries (Guarantor Subsidiaries) jointly, fully, severally, and unconditionally guaranteed the Senior Notes. The Parents foreign subsidiaries (Non-Guarantor Subsidiaries) are not guarantors of the Senior Notes. Each of the Parents subsidiaries is 100% owned. The Parent has no independent assets or operations. The following presents condensed consolidating financial information separately for the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. | ||
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2011 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 49,143 | $ | 2,870 | $ | (96 | ) | $ | 51,917 | |||||||||
Cost of Revenues |
| 38,358 | 2,114 | (96 | ) | 40,376 | ||||||||||||||
Gross Profit |
| 10,785 | 756 | | 11,541 | |||||||||||||||
Operating Expenses, Net |
| 9,348 | 463 | | 9,811 | |||||||||||||||
Environmental Remediation Charges |
| 6,000 | | | 6,000 | |||||||||||||||
Operating Income (Loss) |
| (4,563 | ) | 293 | | (4,270 | ) | |||||||||||||
Interest and Other Income |
2,633 | 58 | 5 | (2,633 | ) | 63 | ||||||||||||||
Interest Expense |
2,633 | 2,641 | 1 | (2,633 | ) | 2,642 | ||||||||||||||
Income (Loss) Loss before Income Tax and
Equity Account for Subsidiaries |
| (7,146 | ) | 297 | | (6,849 | ) | |||||||||||||
Income Tax Benefit |
| (653 | ) | (32 | ) | | (685 | ) | ||||||||||||
Income
(Loss) before Equity Account for Subsidiaries |
| (6,493 | ) | 329 | | (6,164 | ) | |||||||||||||
Equity Account for Subsidiaries |
(6,164 | ) | 329 | | 5,835 | | ||||||||||||||
Net Income (Loss) |
$ | (6,164 | ) | $ | (6,164 | ) | $ | 329 | $ | 5,835 | $ | (6,164 | ) | |||||||
Condensed Consolidating Statement of Operations Nine Months Ended June 30, 2011 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 121,194 | $ | 8,099 | $ | (338 | ) | $ | 128,955 | |||||||||
Cost of Revenues |
| 95,394 | 5,575 | (338 | ) | 100,631 | ||||||||||||||
Gross Profit |
| 25,800 | 2,524 | | 28,324 | |||||||||||||||
Operating Expenses, Net |
| 30,705 | 2,349 | | 33,054 | |||||||||||||||
Environmental Remediation Charges |
| 6,000 | | | 6,000 | |||||||||||||||
Other Operating Gains |
| 2,929 | | | 2,929 | |||||||||||||||
Operating Income (Loss) |
| (7,976 | ) | 175 | | (7,801 | ) | |||||||||||||
Interest and Other Income |
7,872 | 407 | 28 | (7,872 | ) | 435 | ||||||||||||||
Interest Expense |
7,872 | 7,923 | 4 | (7,872 | ) | 7,927 | ||||||||||||||
Income
(Loss) Loss before Income Tax and Equity Account for Subsidiaries |
| (15,492 | ) | 199 | | (15,293 | ) | |||||||||||||
Income Tax Benefit |
| (4,329 | ) | 32 | | (4,297 | ) | |||||||||||||
Income
(Loss) before Equity Account for Subsidiaries |
| (11,163 | ) | 167 | | (10,996 | ) | |||||||||||||
Equity Account for Subsidiaries |
(10,996 | ) | 167 | | 10,829 | | ||||||||||||||
Net Income (Loss) |
$ | (10,996 | ) | $ | (10,996 | ) | $ | 167 | $ | 10,829 | $ | (10,996 | ) | |||||||
- 19 -
Table of Contents
12. | GUARANTOR SUBSIDIARIES (Continued) | |
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2010 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 35,076 | $ | 2,171 | $ | | $ | 37,247 | ||||||||||
Cost of Revenues |
| 27,571 | 1,349 | | 28,920 | |||||||||||||||
Gross Profit |
| 7,505 | 822 | | 8,327 | |||||||||||||||
Operating Expenses |
| 10,963 | 983 | | 11,946 | |||||||||||||||
Operating Loss |
| (3,458 | ) | (161 | ) | | (3,619 | ) | ||||||||||||
Interest and Other Income |
2,649 | 10 | (301 | ) | (2,649 | ) | (291 | ) | ||||||||||||
Interest Expense |
2,649 | 2,669 | 2 | (2,649 | ) | 2,671 | ||||||||||||||
Loss before
Income Tax and Equity Account for Subsidiaries |
| (6,117 | ) | (464 | ) | | (6,581 | ) | ||||||||||||
Income Tax Benefit |
| (1,877 | ) | (131 | ) | | (2,008 | ) | ||||||||||||
Loss before
Income Tax and Equity Account for Subsidiaries |
| (4,240 | ) | (333 | ) | | (4,573 | ) | ||||||||||||
Equity Account for Subsidiaries |
(4,573 | ) | (333 | ) | | 4,906 | | |||||||||||||
Net Loss |
$ | (4,573 | ) | $ | (4,573 | ) | $ | (333 | ) | $ | 4,906 | $ | (4,573 | ) | ||||||
Condensed Consolidating Statement of Operations Nine Months Ended June 30, 2010 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | | $ | 123,452 | $ | 7,271 | $ | (17 | ) | $ | 130,706 | |||||||||
Cost of Revenues |
| 87,942 | 5,129 | (17 | ) | 93,054 | ||||||||||||||
Gross Profit |
| 35,510 | 2,142 | | 37,652 | |||||||||||||||
Operating Expenses |
| 32,659 | 3,038 | | 35,697 | |||||||||||||||
Operating Income (Loss) |
| 2,851 | (896 | ) | | 1,955 | ||||||||||||||
Interest and Other Income |
7,982 | 86 | (582 | ) | (8,045 | ) | (559 | ) | ||||||||||||
Interest Expense |
7,982 | 8,097 | 68 | (8,045 | ) | 8,102 | ||||||||||||||
Loss before
Income Tax and Equity Account for Subsidiaries |
| (5,160 | ) | (1,546 | ) | | (6,706 | ) | ||||||||||||
Income Tax Benefit |
| (1,699 | ) | (110 | ) | | (1,809 | ) | ||||||||||||
Loss before Equity Account for Subsidiaries |
| (3,461 | ) | (1,436 | ) | | (4,897 | ) | ||||||||||||
Equity Account for Subsidiaries |
(4,897 | ) | (1,436 | ) | | 6,333 | | |||||||||||||
Net Loss |
$ | (4,897 | ) | $ | (4,897 | ) | $ | (1,436 | ) | $ | 6,333 | $ | (4,897 | ) | ||||||
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12. | GUARANTOR SUBSIDIARIES (Continued) | |
Condensed Consolidating Balance Sheet June 30, 2011 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and Cash Equivalents |
$ | | $ | 23,334 | $ | 439 | $ | | $ | 23,773 | ||||||||||
Accounts Receivable, Net |
| 37,921 | 5,953 | (818 | ) | 43,056 | ||||||||||||||
Inventories |
| 42,569 | 1,158 | | 43,727 | |||||||||||||||
Prepaid Expenses and Other Assets |
| 5,031 | 241 | | 5,272 | |||||||||||||||
Income Taxes Receivable and Deferred Income Taxes |
| 15,640 | | | 15,640 | |||||||||||||||
Total Current Assets |
| 124,495 | 7,791 | (818 | ) | 131,468 | ||||||||||||||
Property, Plant and Equipment, Net |
| 111,669 | 2,236 | | 113,905 | |||||||||||||||
Intangible Assets, Net |
| | 684 | | 684 | |||||||||||||||
Goodwill |
| | 3,101 | | 3,101 | |||||||||||||||
Deferred Income Taxes |
| 20,207 | 44 | | 20,251 | |||||||||||||||
Other Assets |
| 9,618 | 672 | | 10,290 | |||||||||||||||
Intercompany Advances |
73,973 | 5,179 | | (79,152 | ) | | ||||||||||||||
Investment in Subsidiaries, Net |
84,242 | 5,221 | | (89,463 | ) | | ||||||||||||||
Total Assets |
$ | 158,215 | $ | 276,389 | $ | 14,528 | $ | (169,433 | ) | $ | 279,699 | |||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||
Accounts Payable and Other Current Liabilities |
$ | | $ | 26,986 | $ | 2,482 | $ | (818 | ) | $ | 28,650 | |||||||||
Environmental Remediation Reserves |
| 13,137 | | | 13,137 | |||||||||||||||
Deferred Revenues and Customer Deposits |
| 26,619 | 1,585 | | 28,204 | |||||||||||||||
Current Portion of Long-Term Debt |
| 23 | 52 | | 75 | |||||||||||||||
Intercompany Advances |
| 73,973 | 5,179 | (79,152 | ) | | ||||||||||||||
Total Current Liabilities |
| 140,738 | 9,298 | (79,970 | ) | 70,066 | ||||||||||||||
Long-Term Debt |
105,000 | 40 | 9 | | 105,049 | |||||||||||||||
Environmental Remediation Reserves |
| 13,522 | | | 13,522 | |||||||||||||||
Pension Obligations and Other Long-Term Liabilities |
| 37,847 | | | 37,847 | |||||||||||||||
Total Liabilities |
105,000 | 192,147 | 9,307 | (79,970 | ) | 226,484 | ||||||||||||||
Total Shareholders Equity |
53,215 | 84,242 | 5,221 | (89,463 | ) | 53,215 | ||||||||||||||
Total Liabilities and Shareholders Equity |
$ | 158,215 | $ | 276,389 | $ | 14,528 | $ | (169,433 | ) | $ | 279,699 | |||||||||
Condensed Consolidating Statement of Cash Flows Nine Months Ended June 30, 2011 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net Cash Provided (Used) by Operating Activities |
$ | | $ | 11,154 | $ | (383 | ) | $ | | $ | 10,771 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||||||||||
Capital expenditures |
| (9,717 | ) | (478 | ) | | (10,195 | ) | ||||||||||||
Net Cash Used in Investing Activities |
| (9,717 | ) | (478 | ) | | (10,195 | ) | ||||||||||||
Cash Flows from Financing Activities: |
||||||||||||||||||||
Payments of long-term debt |
| (15 | ) | (37 | ) | | (52 | ) | ||||||||||||
Debt Issuance costs |
(878 | ) | (878 | ) | ||||||||||||||||
Issuances of common stock |
81 | |||||||||||||||||||
Intercompany advances, net |
797 | (1,079 | ) | 282 | | | ||||||||||||||
Net Cash Provided (Used) by Financing Activities |
| (1,094 | ) | 245 | | (849 | ) | |||||||||||||
Effect of Changes in Currency Exchange Rates |
| | 61 | 61 | ||||||||||||||||
Net Change in Cash and Cash Equivalents |
| 343 | (555 | ) | | (212 | ) | |||||||||||||
Cash and Cash Equivalents, Beginning of Period |
| 22,991 | 994 | | 23,985 | |||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | | $ | 23,334 | $ | 439 | $ | | $ | 23,773 | ||||||||||
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12. | GUARANTOR SUBSIDIARIES (continued) | |
Condensed Consolidating Balance Sheet September 30, 2010 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and Cash Equivalents |
$ | | $ | 22,991 | $ | 994 | $ | | $ | 23,985 | ||||||||||
Accounts Receivable, Net |
| 48,194 | 6,054 | (2,348 | ) | 51,900 | ||||||||||||||
Inventories |
| 34,968 | 1,158 | | 36,126 | |||||||||||||||
Prepaid Expenses and Other Assets |
| 1,249 | 293 | | 1,542 | |||||||||||||||
Income Taxes Receivable and
Deferred Income Taxes |
| 13,474 | | | 13,474 | |||||||||||||||
Total Current Assets |
| 120,876 | 8,499 | (2,348 | ) | 127,027 | ||||||||||||||
Property, Plant and Equipment, Net |
| 111,946 | 1,927 | | 113,873 | |||||||||||||||
Intangible Assets, Net |
| 537 | 883 | | 1,420 | |||||||||||||||
Goodwill |
| | 2,933 | | 2,933 | |||||||||||||||
Deferred Income Taxes |
| 20,222 | 32 | | 20,254 | |||||||||||||||
Other Assets |
| 9,945 | 291 | | 10,236 | |||||||||||||||
Intercompany Advances |
91,545 | 4,896 | | (96,441 | ) | | ||||||||||||||
Investment in Subsidiaries, Net |
77,112 | 4,817 | | (81,929 | ) | | ||||||||||||||
Total Assets |
$ | 168,657 | $ | 273,239 | $ | 14,565 | $ | (180,718 | ) | $ | 275,743 | |||||||||
Liabilitites and Stockholders Equity: |
||||||||||||||||||||
Accounts Payable and Other
Current Liabilities |
$ | | $ | 23,931 | $ | 3,916 | $ | (2,348 | ) | $ | 25,499 | |||||||||
Environmental Remediation Reserves |
| 8,694 | | | 8,694 | |||||||||||||||
Deferred Revenues and Customer
Deposits |
| 17,927 | 842 | | 18,769 | |||||||||||||||
Current Portion of Long-Term Debt |
| 21 | 49 | | 70 | |||||||||||||||
Intercompany Advances |
| 91,545 | 4,896 | (96,441 | ) | | ||||||||||||||
Total Current Liabilities |
| 142,118 | 9,703 | (98,789 | ) | 53,032 | ||||||||||||||
Long-Term Debt |
105,000 | 57 | 45 | | 105,102 | |||||||||||||||
Environmental Remediation Reserves |
| 15,176 | | | 15,176 | |||||||||||||||
Pension Obligations and Other
Long-Term Liabilities |
| 38,776 | | | 38,776 | |||||||||||||||
Total Liabilities |
105,000 | 196,127 | 9,748 | (98,789 | ) | 212,086 | ||||||||||||||
Total Shareholders Equity |
63,657 | 77,112 | 4,817 | (81,929 | ) | 63,657 | ||||||||||||||
Total Liabilities and
Shareholders Equity |
$ | 168,657 | $ | 273,239 | $ | 14,565 | $ | (180,718 | ) | $ | 275,743 | |||||||||
Condensed Consolidating Statement of Cash Flows Nine Months Ended June 30, 2010 |
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net Cash Provided (Used) by Operating Activities |
$ | | $ | 24,775 | $ | (1,764 | ) | $ | | $ | 23,011 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||||||||||
Capital expenditures |
| (6,762 | ) | (630 | ) | | (7,392 | ) | ||||||||||||
Other investing activities |
| 10 | | | 10 | |||||||||||||||
Net Cash Used in Investing Activities |
| (6,752 | ) | (630 | ) | | (7,382 | ) | ||||||||||||
Cash Flows from Financing Activities: |
||||||||||||||||||||
Payments of long-term debt |
| (5,014 | ) | (34 | ) | | (5,048 | ) | ||||||||||||
Issuances of common stock |
11 | | | | 11 | |||||||||||||||
Intercompany advances, net |
(11 | ) | (1,412 | ) | 1,423 | | | |||||||||||||
Net Cash Provided (Used) by
Financing Activities |
| (6,426 | ) | 1,389 | | (5,037 | ) | |||||||||||||
Effect of Changes in Currency Exchange Rates |
| | (112 | ) | | (112 | ) | |||||||||||||
Net Change in Cash and Cash Equivalents |
| 11,597 | (1,117 | ) | | 10,480 | ||||||||||||||
Cash and Cash Equivalents, Beginning of Period |
| 20,046 | 1,635 | | 21,681 | |||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | | $ | 31,643 | $ | 518 | $ | | $ | 32,161 | ||||||||||
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Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 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 and debt will be adequate for the foreseeable future to satisfy the needs of
our operations and that existing circumstances will not materially affect our ability to meet
future liquidity requirements, 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 one of the significant factors that will affect comparisons of our consolidated gross
margins in the future, our statement regarding the timing of improvements on production throughput
and efficiencies on a significant core product of our Fine Chemicals segment, our expectations with
respect to revenues from development products, our expectations with respect to the substantial
fulfillment of existing backlog within the next twelve months, our statement regarding anticipated
capital activities for calendar 2011, our belief regarding pharmaceutical controlled substances as
an area of expansion for us, statements regarding the potential impact of future changes in
critical accounting policies and accounting standards and judgments, estimates and assumptions
relating thereto, 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. 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 fiscal quarter and nine-month period of the year
ending September 30, 2011 (Fiscal 2011) as compared to the third fiscal quarter and nine-month
period of the year ended September 30, 2010 (Fiscal 2010). The discussion should be read in
conjunction with our Annual Report on Form 10-K for Fiscal 2010 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 2010.
- 23 -
Table of Contents
OUR COMPANY
We are a leading custom manufacturer of fine chemicals, specialty chemicals and propulsion
products within our focused markets. Our fine chemicals products represent the active
pharmaceutical ingredient (API) or registered intermediate in certain anti-viral, oncology and
central nervous system drugs. Our specialty chemicals and aerospace equipment products are utilized
in national defense programs and provide access to, and movement in, space, via solid propellant
and propulsion thrusters. 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. We work collaboratively with our customers to develop customized solutions that meet
rigorous federal and international regulatory standards. We generally sell our products through
long-term contracts under which we are the sole-source or limited-source supplier.
We are the only North American producer of ammonium perchlorate, or 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. In order to
diversify our business and leverage our strong technical and manufacturing capabilities, we have
made three strategic acquisitions in recent years. Each of these acquisitions provided long-term
customer relationships with sole-source and limited-source contracts and leadership positions in
growing markets. On October 1, 2004, we acquired the former Atlantic Research Corporations liquid
in-space propulsion business from Aerojet-General Corporation, which became our Aerospace Equipment
segment. Effective October 1, 2008, we further expanded our Aerospace Equipment segment with the
acquisition of Marotta Holdings Limited (subsequently renamed Ampac ISP Holdings Limited) and its
wholly-owned subsidiaries (collectively AMPAC ISP Holdings). Our U.S.-based Aerospace Equipment
operation is one of two major North American manufacturers of monopropellant and bipropellant
liquid propulsion systems and thrusters for satellites, launch vehicles, and interceptors. AMPAC
ISP Holdings designs, develops and manufactures high performance valves, pressure regulators,
cold-gas propulsion systems, and precision structures for space applications, especially in the
European space market. On November 30, 2005, we acquired GenCorp Inc.s fine chemicals business,
through our wholly-owned subsidiary Ampac Fine Chemicals LLC, which is now our Fine Chemicals
segment. Our Fine Chemicals segment is a leading custom manufacturer of certain APIs and registered
intermediates for pharmaceutical and biotechnology companies.
OUR BUSINESS SEGMENTS
Our operations comprise four reportable business segments: Fine Chemicals, Specialty
Chemicals, Aerospace Equipment and Other Businesses. The following table reflects the revenue
contribution percentage from our business segments and each of their major product lines:
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Fine Chemicals |
59 | % | 54 | % | 47 | % | 48 | % | ||||||||
Specialty Chemicals: |
||||||||||||||||
Perchlorates |
17 | % | 18 | % | 20 | % | 23 | % | ||||||||
Sodium Azide |
2 | % | 1 | % | 2 | % | 1 | % | ||||||||
Halotron |
2 | % | 3 | % | 2 | % | 3 | % | ||||||||
Total Specialty Chemicals |
21 | % | 22 | % | 24 | % | 27 | % | ||||||||
Aerospace Equipment |
20 | % | 23 | % | 28 | % | 21 | % | ||||||||
Other Businesses: |
||||||||||||||||
Real Estate |
0 | %* | 0 | %* | 0 | %* | 0 | %* | ||||||||
Water Treatment Equipment |
0 | %* | 1 | % | 1 | % | 4 | % | ||||||||
Total Other Businesses |
0 | % | 1 | % | 1 | % | 4 | % | ||||||||
Total Revenues |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
* | less than 1% |
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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 commercial customers in the pharmaceutical
industry. The products we manufacture are used by our customers in drugs with indications in three
primary areas: anti-viral, oncology, and central nervous system. We generate nearly all of our Fine
Chemicals segment sales from manufacturing chemical compounds that are proprietary to our
customers. We operate in compliance with the U.S. Food and Drug Administrations (the FDA)
current Good Manufacturing Practices (cGMP) and the requirements of certain other regulatory
agencies such as the European Unions European Medicines Agency and Japans Pharmaceuticals and
Medical Devices Agency. Our Fine Chemicals segments 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 allegiances and limited competition. In addition, our unique
location in Rancho Cordova, California provides us with advantages for the production of chemicals
for pharmaceutical controlled substances. We believe that this will be an area of expansion for
us.
We have distinctive competencies and specialized engineering capabilities in performing chiral
separations, manufacturing chemical compounds that require high containment and performing
energetic chemistries at commercial scale. We have invested significant resources in our facilities
and technology base. We believe we are the U.S. leader in performing chiral separations using
commercial-scale simulated moving bed, or SMB, technology and own and operate two large-scale SMB
machines, both of which are among the largest in the world operating under cGMP. 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 specially 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, sole-source and limited-source contracts, which help provide us with
earnings stability and visibility. In addition, 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, including the following:
| Alternative Supply May Not Be Readily Available. We are currently the sole-source supplier on several of our fine chemicals products. | |
| Regulatory Approval. 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. | |
| Significant Financial Costs. 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. |
SPECIALTY CHEMICALS. Our Specialty Chemicals segment is principally engaged in the production of
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. 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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We have supplied AP for use in space and defense programs for over 50 years and we have been the
only AP supplier in North America since 1998, when we acquired the AP business of our principal
competitor, Kerr-McGee Chemical Corporation. A significant number of existing and planned space
launch vehicles use solid propellant and thus depend, in part, upon our AP. Many of the rockets and
missiles used in national defense programs are also powered by solid propellant.
Alliant Techsystems Inc. or ATK is a significant AP customer. We sell Grade I AP to ATK under a
long-term contract that requires us to maintain a ready and qualified capacity for Grade I AP and
that requires ATK to purchase its Grade I AP requirements from us, subject to certain terms and
conditions. The contract, which expires in 2013, provides fixed pricing in the form of a price
volume matrix for annual Grade I AP volumes ranging from 3 million to 20 million pounds. Pricing
varies inversely to volume and includes annual escalations.
AEROSPACE EQUIPMENT. Our Aerospace Equipment segment reflects the operating results of our
wholly-owned subsidiary Ampac-ISP Corp. and its wholly-owned subsidiaries.
Our U.S.-based Aerospace Equipment operation is one of two major North American manufacturers of
monopropellant and bipropellant liquid propulsion systems and thrusters for satellites, launch
vehicles, and interceptors. Our products are utilized on various satellite and launch vehicle
programs such as Space Systems/Lorals 1300 series geostationary satellites.
Our European-based Aerospace Equipment operation designs, develops and manufactures liquid
propulsion thrusters, high performance valves, pressure regulators, cold-gas propulsion systems,
and precision structures for space applications, especially in the European space market. These
products are used on various satellites and spacecraft, as well as on the Ariane 5 launch vehicle.
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.
RESULTS OF OPERATIONS
REVENUES
June 30, | Increase | Percentage | ||||||||||||||
2011 | 2010 | (Decrease) | Change | |||||||||||||
Three Months Ended: |
||||||||||||||||
Fine Chemicals |
$ | 30,838 | $ | 19,951 | $ | 10,887 | 55 | % | ||||||||
Specialty Chemicals |
10,931 | 8,168 | 2,763 | 34 | % | |||||||||||
Aerospace Equipment |
10,105 | 8,647 | 1,458 | 17 | % | |||||||||||
Other Businesses |
43 | 481 | (438 | ) | (91 | %) | ||||||||||
Total Revenues |
$ | 51,917 | $ | 37,247 | $ | 14,670 | 39 | % | ||||||||
Nine Months Ended: |
||||||||||||||||
Fine Chemicals |
$ | 60,792 | $ | 63,128 | $ | (2,336 | ) | (4 | %) | |||||||
Specialty Chemicals |
30,800 | 35,057 | (4,257 | ) | (12 | %) | ||||||||||
Aerospace Equipment |
35,929 | 27,140 | 8,789 | 32 | % | |||||||||||
Other Businesses |
1,434 | 5,381 | (3,947 | ) | (73 | %) | ||||||||||
Total Revenues |
$ | 128,955 | $ | 130,706 | $ | (1,751 | ) | (1 | %) | |||||||
Fine Chemicals. Fine Chemicals segment revenues increased substantially in the Fiscal 2011
third quarter as compared to the Fiscal 2010 third quarter reflecting increases in revenues from
core products in each of our key therapeutic areas. In particular, revenues from anti-viral
products increased 139% as
we began substantial deliveries under a recently renewed three-year supply agreement for a key core
product.
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For the Fiscal 2011 nine-month period as compared to the Fiscal 2010 nine-month period, Fine
Chemicals revenues declined slightly. The significant lag in anti-viral product revenues during
the first six months of Fiscal 2011 is the primary contributor to the decline. The 58% decline in
anti-viral product revenues for the Fiscal 2011 nine-month period was substantially offset by
proportionate increases in revenues from our oncology and development products. The increase in
oncology revenues is largely due to timing shifts from Fiscal 2010 into the Fiscal 2011 nine-month
period, driven by customer inventory levels and production line availability. Revenues from
development products continue to become an increasing component of Fine Chemicals segment revenues.
Growth in this area has resulted from an intensified focus on core technologies and
diversification of products and customers.
Specialty Chemicals. Specialty Chemicals segment revenues include the operating results from our
perchlorate, sodium azide and Halotron product lines, with our perchlorate product lines comprising
82% and 87% of Specialty Chemicals segment revenues in the Fiscal 2011 and Fiscal 2010 nine-month
periods, respectively. The variance in Specialty Chemicals segment revenues reflects the following
factors:
| A 60% increase in perchlorate volume and a 15% decrease in the related average price per pound for the Fiscal 2011 third quarter compared to the prior fiscal year third quarter. | |
| A 12% decrease in perchlorate volume and a 6% decrease in the related average price per pound for the Fiscal 2011 nine-month period compared to the prior fiscal year nine-month period. | |
| Sodium azide revenues increased by $489 for the Fiscal 2011 third quarter and $697 for the Fiscal 2011 nine-month period. | |
| Halotron revenues decreased $101 for the Fiscal 2011 third quarter and increased $118 for the Fiscal 2011 nine-month period. |
The decrease in total perchlorate volume for the Fiscal 2011 nine-month period is primarily due to
limited demand for Grade I AP for usage on space programs. Tactical and strategic missile program
demand continues to be stable and accounts for the largest component of Grade I AP volume in the
Fiscal 2011 periods. The Ares program was the largest component of volume in the Fiscal 2010
periods. The decline in Grade I AP demand is offset by an increase in volume for our other
perchlorate products, which was approximately 44% higher in the Fiscal 2011 nine-month period than
in the comparable Fiscal 2010 period.
The increase in perchlorate volume for the Fiscal 2011 third quarter was due to a 131% increase in
sales volume of our non-Grade I AP products.
The decrease in the average price per pound of perchlorates between the Fiscal 2011 and Fiscal 2010
periods reflects two offsetting factors.
| Revenues from our other lower-value perchlorate products, such as sodium perchlorate and potassium perchlorate, accounted for a substantially greater percentage of all perchlorate product volume in the Fiscal 2011 periods. This has the effect of reducing the average unit price for perchlorates. | |
| The decrease was partially offset by an increase in the average price per pound of Grade I AP which increased approximately proportionate and inverse to the decrease in Grade I AP volume consistent with the contractual Grade I AP price-volume matrix, under which price and volume move inversely, and comparable catalog pricing. |
Aerospace Equipment. Revenue growth of 17% and 32% for the Aerospace Equipment segment during the
Fiscal 2011 third quarter and nine-month period, respectively, as compared to the prior fiscal year
periods, was generated primarily by increases in revenues from space propulsion systems contracts
from the segments U.S. operations, which continue to be successful in penetrating this market.
Increases in
revenues from in-space propulsion engines also contributed to the revenue growth in the Fiscal 2011
periods.
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COST OF REVENUES AND GROSS MARGIN
June 30, | Increase | Percentage | ||||||||||||||
2011 | 2010 | (Decrease) | Change | |||||||||||||
Three Months Ended: |
||||||||||||||||
Revenues |
$ | 51,917 | $ | 37,247 | $ | 14,670 | 39 | % | ||||||||
Cost of Revenues |
40,376 | 28,920 | 11,456 | 40 | % | |||||||||||
Gross Margin |
11,541 | 8,327 | 3,214 | 39 | % | |||||||||||
Gross Margin Percentage |
22 | % | 22 | % | ||||||||||||
Nine Months Ended: |
||||||||||||||||
Revenues |
$ | 128,955 | $ | 130,706 | $ | (1,751 | ) | (1 | %) | |||||||
Cost of Revenues |
100,631 | 93,054 | 7,577 | 8 | % | |||||||||||
Gross Margin |
28,324 | 37,652 | (9,328 | ) | (25 | %) | ||||||||||
Gross Margin Percentage |
22 | % | 29 | % |
In addition to the factors detailed below, one of the most significant factors that affects,
and should continue to affect, the comparison of our consolidated gross margins from period to
period is the change in revenue mix between our segments.
Fine Chemicals. The Fine Chemicals segment gross margin as a percentage of segment revenues
declined twelve points for the Fiscal 2011 nine-month period as compared to the Fiscal 2010
nine-month period. Several factors have contributed to the decline in the gross margin percentage,
including:
| Customer pricing on a significant core product was based on targeted production throughput and efficiencies. These targets have not yet been achieved and as a consequence this product is incurring a loss and, because of its size, negatively affecting overall segment performance. We anticipate that it will take at least another quarter for this situation to improve. | |
| During the first six months of Fiscal 2011, low capacity utilization resulted in reduced absorption of fixed manufacturing overhead costs and a corresponding reduction in gross margin. The low utilization was largely due to the lag in production of our core anti-viral product and downtime associated with facility maintenance and upgrades. |
For the Fiscal 2011 third quarter, the Fine Chemicals segment gross margin as a percentage of
segment revenues, for the Fiscal 2011 third quarter as compared to the Fiscal 2010 third quarter,
improved by three points but has not yet reached targeted levels.
Specialty Chemicals. Specialty Chemicals segment gross margin as a percentage of segment revenues
for the Fiscal 2011 third quarter and nine-month period, as compared to the corresponding Fiscal
2010 periods, declined one point and four points, respectively, each compared to the Fiscal 2010
periods. The primary reason for the declines in gross margin is the reduction in Grade I AP volume
in the Fiscal 2011 periods and the corresponding effects of the volume decline on profits. These
effects include increases in manufacturing cost per pound from reduced absorption of fixed
manufacturing overhead.
Aerospace Equipment. The Aerospace Equipment segment gross margin percentage for the Fiscal 2011
nine-month period improved three points compared to the Fiscal 2010 nine-month period. The
improvement in gross margin is primarily due to process improvement actions implemented for space
propulsion systems contracts.
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OPERATING EXPENSES
June 30, | Increase | Percentage | ||||||||||||||
2011 | 2010 | (Decrease) | Change | |||||||||||||
Three Months Ended: |
||||||||||||||||
Operating Expenses |
$ | 9,811 | $ | 11,946 | $ | (2,135 | ) | (18 | %) | |||||||
Percentage of Revenues |
19 | % | 32 | % | ||||||||||||
Nine Months Ended: |
||||||||||||||||
Operating Expenses |
$ | 33,054 | $ | 35,697 | $ | (2,643 | ) | (7 | %) | |||||||
Percentage of Revenues |
26 | % | 27 | % |
For our Fiscal 2011 nine-month period, operating expenses decreased $2,643 to $33,054 from
$35,697 for the prior fiscal year nine-month period as a result of our company-wide cost savings
initiatives.
| Corporate operating expenses were reduced by approximately $1,227. Cost reduction activities generated savings of approximately $1,700 which were offset somewhat by increases in board of directors and other strategic expenses. | |
| Fine Chemicals segment operating expenses were reduced by approximately $513, reflecting property tax and insurance savings. | |
| Specialty Chemicals segment operating-expense reductions of approximately $602 reflect lower personnel costs. | |
| Aerospace Equipment segment operating expenses reflect an approximately $374 reduction in intangible amortization expense. |
For our Fiscal 2011 third quarter, operating expenses decreased $2,135 to $9,811 from $11,946 for
the prior fiscal year third quarter. The quarterly variance is largely due to the timing of the
above-mentioned cost reductions.
ENVIRONMENTAL REMEDIATION CHARGES
Late in the fiscal year ended September 30, 2009 (Fiscal 2009), we expanded the planned scope of
our remediation efforts in Henderson, Nevada to include installation of additional groundwater
extraction wells, construction of a pipeline to move extracted groundwater to our treatment
facility, and the addition of above-ground ex situ bioremediation treatment equipment (the
Expansion Project). Through June 2011, and in cooperation with the Nevada Division of
Environmental Protection (NDEP), we worked to develop the formal design, engineering and
permitting of the Expansion Project. Based on data obtained to date, which is largely comprised of
firm quotations, we determined that significant modifications to our Fiscal 2009 assumptions were
required. As a result, in June 2011, we accrued an additional $6,000 for the estimated increase in
cost of the capital component of the Expansion Project, offset slightly by reductions in operating
and maintenance (O&M) cost estimates. The estimated capital costs of the Expansion Project
increased by approximately $6,400. The increase reflects (i) an increase in the capacity of the
above-ground treatment equipment to accommodate technical requirements based on the testing of new
extraction wells in the fall of 2010, and (ii) higher than initially anticipated cost associated
with the installation of the equipment and construction of the pipeline. Our estimate of total O&M
costs was reduced by approximately $400. This change in estimate reflects (i) a reduction in the
estimated life of the project by four years, offset by (ii) an increase in the estimated annual O&M
cost to approximately $1,900 per year once the Expansion Project is placed in service. We
anticipate that the Expansion Project will be placed in service during the spring of 2012. Due to
uncertainties inherent in making estimates, our estimates of capital and O&M costs may later
require significant revision as new facts become available and circumstances change.
Including this $6,000 increase in our accruals, our total estimated cost of the Henderson, Nevada
remediation activities is $45,700, of which, approximately $19,000 was spent from September 2005
through June 2011. We anticipate that the project will take at least eight years to complete. See
further discussion below under the heading Environmental Remediation AMPAC Henderson Site.
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OTHER OPERATING GAINS
During our Fiscal 2011 nine-month period, our Fine Chemicals segment reported other operating gains
of $2,929 that resulted from the resolution of gain contingencies. The total reported gain is
comprised of the following two matters.
We made a series of filings with the County of Sacramento, California, to appeal the assessed
values in prior years of our real and personal property located at our Fine Chemicals segments
Rancho Cordova, California facility. During the nine months ended June 30, 2011, we received
$2,671 for cash property tax refunds resulting from our appeals and the related favorable
reassessment of historical property values.
Our Fine Chemicals segment is undertaking several mandatory capital projects. Certain of the
capital activities are complete and others are anticipated to be completed during the calendar year
2011. In connection with these projects, our Fine Chemicals segment held, and continues to hold,
negotiations with the former owner of the facilities. During the nine months ended June 30, 2011,
we received from the former owner cash consideration in the amount of $258 for a limited release of
liability of the former owner with respect to one of the completed projects.
SEGMENT OPERATING INCOME (LOSS)
June 30, | Favorable | Percentage | ||||||||||||||
2011 | 2010 | (Unfavorable) | Change | |||||||||||||
Three Months Ended: |
||||||||||||||||
Fine Chemicals |
$ | (452 | ) | $ | (2,458 | ) | $ | 2,006 | (82 | %) | ||||||
Specialty Chemicals |
4,849 | 2,796 | 2,053 | 73 | % | |||||||||||
Aerospace Equipment |
699 | (120 | ) | 819 | NM | |||||||||||
Other Businesses |
(539 | ) | (286 | ) | (253 | ) | 88 | % | ||||||||
Segment Operating Income |
4,557 | (68 | ) | 4,625 | NM | |||||||||||
Corporate Expenses |
(2,827 | ) | (3,551 | ) | 724 | 20 | % | |||||||||
Environmental Remediation Charges |
(6,000 | ) | | (6,000 | ) | 100 | % | |||||||||
Operating Income (Loss) |
$ | (4,270 | ) | $ | (3,619 | ) | $ | (651 | ) | 18 | % | |||||
Nine Months Ended: |
||||||||||||||||
Fine Chemicals |
$ | (4,923 | ) | $ | (698 | ) | $ | (4,225 | ) | 605 | % | |||||
Specialty Chemicals |
11,948 | 15,140 | (3,192 | ) | (21 | %) | ||||||||||
Aerospace Equipment |
2,784 | (457 | ) | 3,241 | NM | |||||||||||
Other Businesses |
(1,041 | ) | (234 | ) | (807 | ) | 345 | % | ||||||||
Segment Operating Income |
8,768 | 13,751 | (4,983 | ) | (36 | %) | ||||||||||
Corporate Expenses |
(10,569 | ) | (11,796 | ) | 1,227 | (10 | %) | |||||||||
Environmental Remediation Charges |
(6,000 | ) | | (6,000 | ) | 100 | % | |||||||||
Operating Income (Loss) |
$ | (7,801 | ) | $ | 1,955 | $ | (9,756 | ) | NM | |||||||
NM=Not meaningful |
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. Fluctuations in segment operating income or loss
are driven by changes in segment revenues, gross margins and operating expenses. Each significant
fluctuation in these items is discussed in greater detail above.
BACKLOG
Agreements with our Fine Chemicals segment customers typically include multi-year supply
agreements. These agreements may contain provisional order volumes, minimum order quantities,
take-or-pay provisions, termination fees and other customary terms and conditions, which we do not
include in our computation of backlog. Fine Chemicals segment backlog includes unfulfilled firm
purchase orders received from a customer, including both purchase orders which are issued against a
related supply agreement and stand-alone purchase orders. Fine Chemicals segment backlog was
$63,800 and
$49,700 as of June 30, 2011 and September 30, 2010, respectively. We anticipate order backlog as
of June 30, 2011 to be substantially filled during the next twelve months.
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Our Aerospace Equipment segment is a government contractor, and accordingly, total backlog includes
both funded backlog (contracts, or portions of contracts, for which funding is contractually
obligated by the customer) and unfunded backlog (contracts, or portions of contracts, for which
funding is not currently contractually obligated by the customer). We compute Aerospace Equipment
segment total and funded backlog as the total contract value less revenues that have been
recognized under the percentage-of-completion method of accounting. Aerospace Equipment segment
total backlog and funded backlog were approximately $52,700 and $50,800 as of June 30, 2011 and
$67,900 and $61,100 as of September 30, 2010, respectively. We anticipate the majority of funded
backlog as of June 30, 2011 to be completed during the next twelve months, with any remainder to be
completed in the fiscal year ending September 30, 2012.
Backlog is not a meaningful measure for our other business lines.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Nine Months Ended June 30, | Percentage | |||||||||||||||
2011 | 2010 | Change | Change | |||||||||||||
Cash Provided (Used) By: |
||||||||||||||||
Operating activities |
$ | 10,771 | $ | 23,011 | $ | (12,240 | ) | (53 | %) | |||||||
Investing activities |
(10,195 | ) | (7,382 | ) | (2,813 | ) | 38 | % | ||||||||
Financing activities |
(849 | ) | (5,037 | ) | 4,188 | (83 | %) | |||||||||
Effect of changes in exchange rates on cash |
61 | (112 | ) | 173 | NM | |||||||||||
Net change in cash for period |
$ | (212 | ) | $ | 10,480 | $ | (10,692 | ) | NM | |||||||
NM=Not meaningful |
Operating Cash Flows Operating activities provided cash of $10,771 for the Fiscal 2011
nine-month period compared to $23,011 for the prior fiscal year nine-month period, a decrease of
$12,240.
Significant components of the change in cash flow from operating activities include:
| A decrease in cash due to a decline in the cash profits provided by our operations. | |
| A decrease in cash provided by working capital accounts of $5,318, excluding the effects of interest and income taxes. | |
| An increase in cash income taxes refunded of $1,680. | |
| A decrease in cash interest payments of $445. | |
| An increase in cash used for environmental remediation of $1,683. | |
| An increase in cash used to fund pension obligations of $2,397. | |
| Other decreases in cash provided by operating activities of $920. |
Cash provided by working capital during the Fiscal 2011 nine-month period decreased due to
additional working capital requirements for growth in inventory levels and Aerospace Equipment
segment systems contracts.
We consider the working capital changes to be routine and within the normal production cycle of our
products. The production of most fine chemical products requires a length of time that exceeds one
quarter. In addition, the timing of Aerospace Equipment segment revenues recognized under the
percentage-of-completion method differs from the timing of the related billings to customers.
Therefore, in any given quarter, accounts receivable, work-in-progress inventory or deferred
revenues and customer deposits can increase or decrease significantly. We expect that our working
capital may vary normally by as much as $10,000 from quarter to quarter.
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The increase in cash income taxes refunded is a result of federal income tax carryback claims that
were filed and collected in the Fiscal 2011 first quarter.
The increase in cash used for environmental remediation relates to expenditures for the
above-mentioned Expansion Project.
Cash used to fund pension obligations increased because the return on pension plan assets alone was
not sufficient to maintain the minimum funding requirements.
Investing Cash Flows Capital expenditures of $10,195 for the Fiscal 2011 nine-month period
reflect an increase of $2,803 from capital expenditures of $7,392 in the Fiscal 2010 nine-month
period. The increase in capital expenditures relates to our Fine Chemicals segment, and in
particular, to additional equipment to support a new three-year core product agreement for the
supply of anti-viral products and facilities improvements to enhance quality compliance.
Financing Cash Flows Cash used for financing activities for the Fiscal 2011 nine-month period
relates primarily to costs associated with the establishing of our asset based lending facility in
January 2011. Cash used for financing activities for the Fiscal 2010 nine-month period relates to
our repurchase and cancellation of $5,000 in principal amount of our 9.0% Senior Notes (described
below).
LIQUIDITY AND CAPITAL RESOURCES. As of June 30, 2011, we had cash of $23,773. Our primary source
of working capital is cash flows from operations. In addition, as of June 30, 2011, we had
availability of approximately $17,649 under our asset based lending credit facility which provides
for a committed revolving credit line, up to a maximum of $20,000, based on our eligible accounts
receivable and inventories. For further discussion of this facility, see below under the heading
ABL Credit Facility. We believe that changes in cash flow from operations during our fiscal
periods reflect short-term timing and as such do not represent significant changes in our sources
and uses of cash. Because our revenues, and related customer invoices and collections, are
characterized by relatively few individually significant transactions, our working capital balances
can vary normally by as much as $10,000 from period to period.
We may incur additional debt to fund capital projects, strategic initiatives or for other general
corporate purposes, subject to our existing leverage, the value of our unencumbered assets and
borrowing limitations imposed by our lenders. The availability of our cash inflows is affected by
the timing, pricing and magnitude of orders for our products. From time to time, we may explore
options to refinance our borrowings.
The timing of our cash outflows is affected by payments and expenses related to the manufacture of
our products, capital projects, pension funding, interest on our debt obligations and environmental
remediation or other contingencies, which may place demands on our short-term liquidity. Although
we are not currently party to any material pending legal proceedings, we are from time to time
subject to claims and lawsuits related to our business operations and we have incurred legal and
other costs as a result of litigation and other contingencies. We may incur material legal and
other costs associated with the resolution of litigation and contingencies in future periods, and,
to the extent not covered by insurance, they may adversely affect our liquidity.
In contemplating the adequacy of our liquidity and available capital, we consider factors such as:
| current results of operations, cash flows and backlog; | |
| anticipated changes in operating trends, including anticipated changes in revenues and margins; | |
| cash requirements related to our debt agreements and pension plans; and | |
| cash requirements related to our remediation activities, including amounts that we expect to spend through spring 2012 for the capital component of the remediation expansion project and amounts we expect to spend annually thereafter for operating and maintenance. See further discussion under the heading Environmental Remediation AMPAC Henderson Site below. |
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We do not currently anticipate that the factors noted above will have material effects on our
ability to meet our future liquidity requirements. We anticipate
funding the capital component of the remediation expansion project with
cash on hand or equipment financing. We continue to believe that our cash flows from operations, existing cash balances
and existing or future debt arrangements will be adequate for the foreseeable future to satisfy the
needs of our operations on both a short-term and long-term basis.
LONG TERM DEBT AND CREDIT FACILITIES
Senior Notes. In February 2007, we issued and sold $110,000 aggregate principal amount of 9.0%
Senior Notes due February 1, 2015 (collectively, with the exchange notes issued in August 2007 as
referenced below, the Senior Notes). Proceeds from the issuance of the Senior Notes were used to
repay our former credit facilities. The Senior Notes accrue interest at an annual rate of 9.0%,
payable semi-annually in February and August. The Senior Notes are guaranteed on a senior
unsecured basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are:
| ranked equally in right of payment with all of our existing and future senior indebtedness; | |
| ranked senior in right of payment to all of our existing and future senior subordinated and subordinated indebtedness; | |
| effectively junior to our existing and future secured debt to the extent of the value of the assets securing such debt; and | |
| structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Senior Notes. |
The Senior Notes may be redeemed by us, in whole or in part, under the following circumstances:
| at any time on or after February 1, 2011 at redemption prices beginning at 104.5% of the principal amount to be redeemed and reducing to 100% by February 1, 2013; and | |
| under certain changes of control, we must offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest. |
The Senior Notes were issued pursuant to an indenture which contains certain customary events of
default, including cross-default provisions if we default under our existing and future debt
agreements having, individually or in the aggregate, a principal or similar amount outstanding of
at least $10,000, and certain other covenants limiting, subject to exceptions, carve-outs and
qualifications, our ability to:
| incur additional debt; | |
| pay dividends or make other restricted payments; | |
| create liens on assets to secure debt; | |
| incur dividend or other payment restrictions with regard to restricted subsidiaries; | |
| transfer or sell assets; | |
| enter into transactions with affiliates; | |
| enter into sale and leaseback transactions; | |
| create an unrestricted subsidiary; | |
| enter into certain business activities; or | |
| effect a consolidation, merger or sale of all or substantially all of our assets. |
In connection with the closing of the sale of the Senior Notes, we entered into a registration
rights agreement which required us to file a registration statement to offer to exchange the Senior
Notes for notes that have substantially identical terms as the Senior Notes and are registered
under the Securities Act of 1933, as amended. In July 2007, we filed a registration statement with
the SEC with respect to an offer to exchange the Senior Notes as required by the registration
rights agreement, which registration statement was declared effective by the SEC. In August 2007,
we completed the exchange of 100% of the Senior Notes for substantially identical notes which are
registered under the Securities Act of 1933, as amended.
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ABL Credit Facility. On January 31, 2011, American Pacific Corporation, as borrower, entered into
an asset based lending credit agreement (the ABL Credit Facility) with Wells Fargo Bank, National
Association, as agent and as lender, and certain domestic subsidiaries of the Company, as
guarantors, which provides a secured revolving credit facility in an aggregate principal amount of
up to $20,000 at any time outstanding with an initial maturity to be the earlier of (i) January 31,
2015 and (ii) 90 days prior to the maturity date of the Senior Notes, which is February 1, 2015.
The ABL Credit Facility also provides for the issuance of new letters of credit with a letter of
credit sublimit of $5,000. The maximum borrowing availability under the ABL Credit Facility is
based upon a percentage of our eligible account receivables and eligible inventories. We may prepay
and terminate the ABL Credit Facility at any time, without premium or penalty. The ABL Credit
Facility contains certain mandatory prepayment provisions. The annual interest rates applicable to
loans under the ABL Credit Facility will be, at our option, either at a Base Rate or LIBOR Rate
(each as defined in the ABL Credit Facility) plus, in each case, an applicable margin of 2.50
percentage points. In addition, we will pay commitment fees, other fees related to the issuance and
maintenance of the letters of credit, and certain agency fees.
The ABL Credit Facility is guaranteed by our current and future domestic subsidiaries and is
secured by substantially all of our assets and the assets of our current and future domestic
subsidiaries, subject to certain exceptions as set forth in the ABL Credit Facility. The ABL Credit
Facility contains certain negative covenants, subject to customary exceptions and exclusions,
restricting and limiting our ability to, among other things:
| incur debt, incur contingent obligations and issue certain types of preferred stock, or prepay certain debt; | |
| create liens; | |
| pay dividends, distributions or make other specified restricted payments; | |
| make certain investments and acquisitions; | |
| enter into certain transactions with affiliates; | |
| enter into sale and leaseback transactions; and | |
| merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets. |
The ABL Credit Facility also contains financial covenants which are only triggered by utilization
of the ABL Credit Facility and borrowing availability not exceeding a designated threshold amount.
If the financial covenants are triggered, then we would be subject to the following financial
covenants:
| Minimum EBITDA. We would be required to achieve a minimum level of EBITDA for the twelve-month period then ended. This covenant may become applicable through September 30, 2011. | |
| Fixed Charge Coverage Ratio. We would be required to maintain a minimum fixed charge coverage ratio on a rolling trailing twelve-month basis of at least 1.10:1.00. This covenant may become applicable beginning with the twelve-month period ending October 31, 2011 and through the remaining term of the ABL Credit Facility. | |
| Maximum Capital Expenditures. The ABL Credit Facility limits our capital expenditures in any fiscal year to amounts set forth in the ABL Credit Facility. |
The ABL Credit Facility also contains usual and customary events of default (in some cases, subject
to certain threshold amounts and grace periods), including cross-default provisions that include
the Senior Notes. If an event of default occurs and is continuing, we may be required to repay the
obligations under the ABL Credit Facility prior to the ABL Credit Facilitys stated maturity and
the related commitments may be terminated.
On June 30, 2011, under the ABL Credit Facility, we had no outstanding borrowings, had availability
of $17,649, and were not subject to compliance with the financial covenants.
Letters of Credit. As of June 30, 2011, we had $561 in outstanding standby letters of credit which
mature through July 2015. These letters of credit principally secure performance of certain water
treatment equipment sold by us. The letters of credit are collateralized by cash on deposit with
the issuing bank in the amount of 105% of the outstanding letters of credit. Collateral deposits
are classified as other assets on our consolidated balance sheets.
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PENSION BENEFITS. We maintain three defined benefit pension plans which cover substantially all of
our U.S. employees, excluding employees of our Aerospace Equipment segment: the Amended and
Restated American Pacific Corporation Defined Benefit Pension Plan, the Ampac Fine Chemicals LLC
Pension Plan for Salaried Employees, and the Ampac Fine Chemicals LLC Pension Plan for Bargaining
Unit Employees, each as amended to date. Collectively, these three plans are referred to as the
Pension Plans. In May 2010, our board of directors approved amendments to our Pension Plans which
effectively closed the Pension Plans to participation by any new employees. Retirement benefits
for existing U.S. employees and retirees through June 30, 2010 are not affected by this change.
Beginning July 1, 2010, new U.S. employees began participating solely in one of the Companys
401(k) plans. Pension Plan benefits are paid based on an average of earnings, retirement age, and
length of service, among other factors.
Benefit obligations are measured annually as of September 30. As of September 30, 2010, the
Pension Plans had an unfunded benefit obligation of $30,005. For Fiscal 2010, we made
contributions to the Pension Plans in the amount of $3,300. We anticipate making Pension Plan
contributions in the amount of $5,824 during Fiscal 2011. We are required to make minimum
contributions to our Pension Plans pursuant to the minimum funding requirements of the Internal
Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974, as
amended. In accordance with federal requirements, our minimum funding obligations are determined
annually based on a measurement date of October 1. The fair value of Pension Plan assets is a key
factor in determining our minimum funding obligations. Holding all other variables constant, a 10%
decline in asset value as of September 30, 2010 would increase our minimum funding obligations for
Fiscal 2011 by approximately $200.
In addition, we maintain the American Pacific Corporation Supplemental Executive Retirement Plan,
as amended and restated (the SERP) that includes five participants comprised of active and former
executive officers. The SERP is an unfunded plan and as of September 30, 2010, the SERP obligation
was $7,683. For Fiscal 2010, we paid SERP retirement benefits of $427. We anticipate contributing
the amount of $527 to the SERP during Fiscal 2011 for the payment of retirement benefits. Payments
for retirement benefits should increase in future years when each of the three current active
participants retires. The future increase in such retirement benefits will be determined based on
certain variables including each participating individuals actual retirement date, rate of
compensation and years of service.
During Fiscal 2010, our aggregate Pension Plans and SERP liability increased significantly
primarily due to changes in actuarial assumption such as the discount rate. The change was
recorded as an increase in Pension Obligations and a corresponding decrease in Shareholders Equity
(Accumulated Other Comprehensive Loss). The effect of the change in the discount rate increased
our anticipated Fiscal 2011 funding requirements by approximately $2,800.
ENVIRONMENTAL REMEDIATION AMPAC HENDERSON SITE. During the fiscal years ended
September 30, 2005 and 2006, we recorded aggregate charges for $26,000 representing our then
estimates of the probable costs of our remediation efforts at our former perchlorate chemicals
manufacturing facility in Henderson, Nevada (the AMPAC Henderson Site), including the costs for
capital equipment and on-going O&M.
Late in Fiscal 2009, we gained additional information from groundwater modeling that indicates
groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones (more than 150
feet below ground surface) is moving toward our existing remediation facility at a much slower pace
than previously estimated. Utilization of our existing facilities alone, at this lower groundwater
pace, could, according to this groundwater model, extend the life of our remediation project to
well in excess of fifty years. As a result of this additional data, related model interpretations
and consultations with NDEP, we re-evaluated our remediation operations and determined that we
should be able to improve the effectiveness of the treatment program and significantly reduce the
total project time by expanding the
then existing treatment system. The Expansion Project consists of
installing additional groundwater
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extraction wells in the deeper, more concentrated areas, construction of a pipeline to
move extracted groundwater to our treatment facility, and the addition of above-ground ex situ
bioremediation treatment equipment that will enhance, and in some cases replace, primary components
of the existing in situ bioremediation treatment system. In our Fiscal 2009 fourth quarter, we
accrued $13,700 as our initial estimate of the capital cost of the Expansion Project and the
related estimates of the effects of the enhanced operations on the on-going O&M costs and project
life.
Through June 2011, and in cooperation with NDEP, we worked to develop the formal design,
engineering and permitting of the Expansion Project. Based on data obtained to date, which is
largely comprised of firm quotations, we determined that significant modifications to our Fiscal
2009 assumptions were required. As a result, in June 2011, we accrued an additional $6,000 for the
estimated increase in cost of the capital component of the Expansion Project, offset slightly by
reductions in O&M cost estimates. The estimated capital costs of the Expansion Project increased
by approximately $6,400. The increase reflects (i) an increase in the capacity of the above-ground
treatment equipment to accommodate technical requirements based on the testing of new extraction
wells in the fall of 2010, and (ii) higher than initially anticipated cost associated with the
installation of the equipment and construction of the pipeline. Our estimate of total O&M costs
was reduced by approximately $400. This change in estimate reflects (i) a reduction in the
estimated life of the project by four years, offset by (ii) an increase in the estimated annual O&M
cost to approximately $1,900 per year once the Expansion Project is placed in service. We
anticipate that the Expansion Project will be placed in service during the spring of 2012. Due to
uncertainties inherent in making estimates, our estimates of capital and O&M costs may later
require significant revision as new facts become available and circumstances change.
The estimated life of the project is a key assumption underlying the accrued estimated cost of our
remediation activities. Groundwater modeling and other information regarding the characteristics
of the surrounding land and demographics indicate that at our targeted processing rate of 450
gallons per minute for the new groundwater extraction wells (750 gallons per minute in the
aggregate with existing wells), the life of the project could range from 5 to 18 years from the
date that the Expansion Project is placed in service. Further, the data indicates that within that
range, 7 to 14 years is the more likely range. In accordance with generally accepted accounting
principles, if no point within the more likely range is considered more likely than another, then
estimates should be based on the low end of the range. Accordingly, our accrued remediation cost
includes estimated O&M costs though 2019, which is the low end of the likely range of the project
life. Groundwater speed, perchlorate concentrations, aquifer characteristics and forecasted
groundwater extraction rates will continue to be key factors considered when estimating the life of
the project. If additional information becomes available in the future that lead to a different
interpretation of the model, thereby dictating a change in equipment and operations, our estimate
of the resulting project life could change significantly.
The estimate of the annual O&M cost of the project is a key assumption in our computation of the
estimated cost of our remediation activities. To estimate O&M costs, we consider, among other
factors, the project scope and historical expense rates to develop assumptions regarding labor,
utilities, repairs, maintenance supplies and professional services costs. If additional
information becomes available in the future that is different than information currently available
to us and thereby leads us to different conclusions, our estimate of O&M expenses could change
significantly.
In addition, certain remediation activities are conducted on public lands under operating permits.
In general, these permits require us to return the land to its original condition at the end of the
permit period. Estimated costs associated with removal of remediation equipment from the land are
not material and are included in our range of estimated costs.
As of June 30, 2011, the aggregate range of anticipated environmental remediation costs was from
approximately $22,800 to approximately $47,300. This range represents a significant estimate and
is based on the estimable elements of cost for capital and O&M costs, and an estimated remaining
operating life of the project through a range from the years 2017 to 2030. As of June 30, 2011,
the accrued amount was $26,659, based on an estimated remaining life of the project through the
year 2019,
or the low end of the more likely range of the expected life of the project. Cost estimates are
based on our
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current assessments of the facility configuration. As we proceed with the project, we
have, and may in the future, become aware of elements of the facility configuration that must be
changed to meet the targeted operational requirements. Certain of these changes may result in
corresponding cost increases. Costs associated with the changes are accrued when a reasonable
alternative, or range of alternatives, is identified and the cost of such alternative is estimable.
Our estimated reserve for environmental remediation is based on information currently available to
us and may be subject to material adjustment upward or downward in future periods as new facts or
circumstances may indicate.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires that we adopt accounting policies and make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenue and expenses.
Application of the critical accounting policies discussed below requires significant judgment,
often as the result of the need to make estimates of matters that are inherently uncertain. If
actual results were to differ materially from the estimates made, the reported results could be
materially affected. However, we are not currently aware of any reasonably likely events or
circumstances that would result in materially different results.
SALES AND REVENUE RECOGNITION. Revenues from our Specialty Chemicals segment, Fine Chemicals
segment, and Other Businesses segment are recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, title passes, the price is fixed or
determinable and collectability is reasonably assured. Almost all products sold by our Fine
Chemicals segment are subject to customer acceptance periods. Specifically, these customers have
contractually negotiated acceptance periods from the time they receive certificates of analysis and
compliance (Certificates) to reject the material based on issues with the quality of the product,
as defined in the applicable agreement. At times we receive payment in advance of customer
acceptance. If we receive payment in advance of customer acceptance, we record deferred revenues
and deferred costs of revenue upon delivery of the product and recognize revenues in the period
when the acceptance period lapses or the customers acceptance has occurred.
Some of our perchlorate and fine chemicals products customers have requested that we store
materials purchased from us in our facilities (Bill and Hold transactions or arrangements). We
recognize revenue prior to shipment of these Bill and Hold transactions when we have satisfied the
applicable revenue recognition criteria, which include the point at which title and risk of
ownership transfer to our customers. These customers have specifically requested in writing,
pursuant to a contract, that we invoice for the finished product and hold the finished product
until a later date. For our Bill and Hold arrangements that contain customer acceptance periods,
we record deferred revenues and deferred costs of revenues when such products are available for
delivery and Certificates have been delivered to the customers. We recognize revenue on our Bill
and Hold transactions in the period when the acceptance period lapses or the customers acceptance
has occurred. The sales value of inventory, subject to Bill and Hold arrangements, at our
facilities was $20,451 and $19,606 as of June 30, 2011 and September 30, 2010, respectively.
Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for
using the percentage-of-completion method and measure progress on a cost-to-cost basis. Contract
revenues include change orders and claims when approved by the customer. The
percentage-of-completion method recognizes revenue as work on a contract progresses. Revenues are
calculated based on the percentage of total costs incurred in relation to total estimated costs at
completion of the contract. For fixed-price and fixed-price-incentive contracts, if at any time
expected costs exceed the value of the contract, the loss is recognized immediately. We do not
incur material pre-contract costs.
DEPRECIABLE OR AMORTIZABLE LIVES OF LONG-LIVED ASSETS. Our depreciable or amortizable long-lived
assets include property, plant and equipment and intangible assets, which are recorded at cost.
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Depreciation or amortization is recorded using the straight-line method over the shorter of the
assets estimated economic useful life or the lease term, if the asset is subject to a capital
lease. Economic useful life is the duration of time that we expect the asset to be productively
employed by us, which may be less than its physical life. Significant assumptions that affect the
determination of estimated economic useful life include: wear and tear, obsolescence, technical
standards, contract life, and changes in market demand for products.
The estimated economic useful life of an asset is monitored to determine its appropriateness,
especially in light of changed business circumstances. For example, changes in technological
advances, changes in the estimated future demand for products, or excessive wear and tear may
result in a shorter estimated useful life than originally anticipated. In these cases, we would
depreciate the remaining net book value over the new estimated remaining life, thereby increasing
depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is
increased, the adjustment to the useful life decreases depreciation expense per year on a
prospective basis.
IMPAIRMENT OF LONG-LIVED ASSETS. We test our property, plant and equipment and amortizable
intangible assets for recoverability when events or changes in circumstances indicate that their
carrying amounts may not be recoverable. Examples of such circumstances include, but are not
limited to, operating or cash flow losses from the use of such assets or changes in our intended
uses of such assets. To test for recovery, we group assets (an Asset Group) in a manner that
represents the lowest level for which identifiable cash flows are largely independent of the cash
flows of other groups of assets and liabilities. Our Asset Groups are typically identified by
facility because each facility has a unique cost overhead and general and administrative expense
structure that is supported by cash flows from products produced at the facility. The carrying
amount of an Asset Group is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the Asset Group.
If we determine that an Asset Group is not recoverable, then we would record an impairment charge
if the carrying value of the Asset Group exceeds its fair value. Fair value is based on estimated
discounted future cash flows expected to be generated by the Asset Group. The assumptions
underlying cash flow projections would represent managements best estimates at the time of the
impairment review. Some of the factors that management would consider or estimate include: industry
and market conditions, sales volume and prices, costs to produce and inflation. Changes in key
assumptions or actual conditions which differ from estimates could result in an impairment charge.
We would use reasonable and supportable assumptions when performing impairment reviews but cannot
predict the occurrence of future events and circumstances that could result in impairment charges.
When we review Asset Groups for recoverability, we also consider depreciation estimates and methods
or the amortization period, in each case as required by applicable accounting standards. Any
revision to the remaining useful life of a long-lived asset resulting from that review also is
considered in developing estimates of future cash flows used to test the Asset Group for
recoverability.
GOODWILL. Goodwill is not amortized. We test goodwill for impairment at the reporting unit level
on an annual basis, as of September 30, or more frequently if an event occurs or circumstances
change that indicate that the fair value of a reporting unit could be below its carrying amount.
The impairment test consists of comparing the fair value of a reporting unit with its carrying
amount including goodwill, and, if the carrying amount of the reporting unit exceeds its fair
value, comparing the implied fair value of goodwill with its carrying amount. An impairment loss
would be recognized for the carrying amount of goodwill in excess of its implied fair value.
ENVIRONMENTAL COSTS. We are subject to environmental regulations that relate to our past and
current operations. We record liabilities for environmental remediation costs when our assessments
indicate that remediation efforts are probable and the costs can be reasonably estimated. On a
quarterly basis, we review our estimates of future costs that could be incurred for remediation
activities. In some
cases, only a range of reasonably possible costs can be estimated. In establishing our reserves,
the most probable estimate is used; otherwise, we accrue the minimum amount of the range.
Estimates of
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liabilities are based on currently available facts, existing technologies and
presently enacted laws and regulations. These estimates are subject to revision in future periods
based on actual costs or new circumstances. Accrued environmental remediation costs include the
undiscounted cost of equipment, operating and maintenance costs, and fees to outside law firms and
consultants, for the estimated duration of the remediation activity. Estimating environmental cost
requires us to exercise substantial judgment regarding the cost, effectiveness and duration of our
remediation activities. Actual future expenditures could differ materially from our current
estimates.
We evaluate potential claims for recoveries from other parties separately from our estimated
liabilities. We record an asset for expected recoveries when recoveries of the amounts are
probable.
INCOME TAXES. We account for income taxes under the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured, separately for each tax-paying entity in each tax
jurisdiction, using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that includes the
enactment date.
When measuring deferred tax assets, we assess whether a valuation allowance should be established
by evaluating both positive and negative factors. This evaluation requires that we exercise
judgment in determining the relative significance of each factor. A valuation allowance is
established if, based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The assessment of valuation
allowance requirements, if any, involves significant estimates regarding the timing and amount of
reversal of taxable temporary differences, future taxable income and the implementation of tax
planning strategies. We rely on deferred tax liabilities in our assessment of the realizability of
deferred tax assets if the temporary timing difference is anticipated to reverse in the same period
and jurisdiction and the deferred tax liabilities are of the same character as the temporary
differences giving rise to the deferred tax assets. We weigh both positive and negative evidence in
determining whether it is more likely than not that a valuation allowance is required.
As of September 30, 2010, recovery of our U.S. jurisdiction deferred tax assets, net of applicable
deferred tax liabilities, required that we generate approximately $75,000 in taxable income in
periods ranging from one to at least 12 years in the future. To determine whether a valuation
allowance is required, we project our future taxable income. The projections require us to make
assumptions regarding our product revenues, gross margins and operating expenses.
For our U.S. tax jurisdictions, negative evidence includes, but is not limited to, our reported
book losses before income taxes in recent periods. In contemplating this evidence we have taken
into consideration that a significant portion of such losses occur from environmental remediation
charges. Significant positive evidence includes, but is not limited to, our historical longer-term
trend of profitable operations, our forecast of future taxable income, the very long term nature of
our significant deferred tax assets which are primarily associated with inventory, pension and
remediation deductions, the lack of significant net operating loss carryforwards, and the lack of
reliance on success in implementing tax planning strategies, utilization of short carry-back
periods or appreciated asset values. Further, we do not have a history of tax credits expiring
unused. For foreign tax jurisdictions, the most compelling negative evidence is a history of
unprofitable operations. Accordingly, we have fully reserved our foreign deferred tax assets.
We account for uncertain tax positions in accordance with an accounting standard which creates a
single model to address uncertainty in income tax positions and prescribes the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
The standard also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
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Under this standard, we may recognize tax benefits from an uncertain position only if it is more
likely than not that the position will be sustained upon examination by taxing authorities based on
the technical merits of the issue. The amount recognized is the largest benefit that we believe has
greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary
from estimates depending upon changes in income tax laws, actual results of operations, and the
final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax
returns have been filed.
PENSION BENEFITS. We sponsor four defined benefit pension plans in various forms for employees who
meet eligibility requirements. Applicable accounting standards require that we make assumptions
and use statistical variables in actuarial models to calculate our pension obligations and the
related periodic pension expense. The most significant assumptions are the discount rate and the
expected rate of return on plan assets. Additional assumptions include the future rate of
compensation increases, which is based on historical plan data and assumptions on demographic
factors such as retirement, mortality and turnover. Depending on the assumptions selected, pension
expense could vary significantly and could have a material effect on reported earnings. The
assumptions used can also materially affect the measurement of benefit obligations.
The discount rate is used to estimate the present value of projected future pension payments to all
participants. The discount rate is generally based on the yield on AAA/AA-rated corporate
long-term bonds. At September 30 of each year, the discount rate is determined using bond yield
curve models matched with the timing of expected retirement plan payments. Our discount rate
assumption was 5.80 percent as of September 30, 2010. Holding all other assumptions constant, a
hypothetical increase or decrease of 25 basis points in the discount rate assumption would
increase or decrease annual pension expense by approximately $400.
The expected long-term rate of return on plan assets represents the average rate of earnings
expected on the plan funds invested in a specific target asset allocation. The expected long-term
rate of return assumption on pension plan assets was 8.00 percent in Fiscal 2010. Holding all other
assumptions constant, a hypothetical 25 basis point increase or decrease in the assumed long-term
rate of return would increase or decrease annual pension expense by approximately $100.
RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS. In April 2010, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (ASU) No. 2010-17, which provides guidance on
defining a milestone under Topic 605 and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development transactions. Consideration
that is contingent on achievement of a milestone in its entirety may be recognized as revenue in
the period in which the milestone is achieved only if the milestone is judged to meet certain
criteria to be considered substantive. Milestones should be considered substantive in their
entirety and may not be bifurcated. An arrangement may contain both substantive and nonsubstantive
milestones that should be evaluated individually. This standard became effective for us beginning
on October 1, 2010. The adoption of this standard did not have a material impact on our results of
operations, financial position or cash flows.
In December 2010, the FASB issued ASU No. 2010-28 that affects entities that have recognized
goodwill and have one or more reporting units whose carrying amount for purposes of performing Step
1 of the goodwill impairment test is zero or negative. The amendments in the ASU modify Step 1 so
that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment
test if it is more likely than not that a goodwill impairment exists. In determining whether it is
more likely than not that a goodwill impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment may exist. The qualitative factors
are consistent with existing guidance, which requires that goodwill of a reporting unit be tested
for impairment between annual tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. This standard
is effective for us beginning on October 1, 2011. The adoption of this standard is not expected to
have a material impact on our results of operations, financial position or cash flows.
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In June 2011, the FASB issued ASU No. 2011-05 which amends Topic 220, Comprehensive Income. The
amendment allows an entity to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements, and eliminates the option to
present the components of other comprehensive income as part of the statement of changes in
stockholders equity. The amendments do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net
income. This standard is effective for us beginning on October 1, 2012. The adoption of this
standard is not expected to have a material impact on our results of operations, financial position
or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of June 30, 2011, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of such date to ensure
that information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
There were no changes in our internal control over financial reporting that occurred during our
last fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although we are not currently party to any material pending legal proceedings, we are from time to
time subject to claims and lawsuits related to our business operations. Any such claims and
lawsuits could be costly and time consuming and could divert our management and key personnel from
our business operations. In connection with any such claims and lawsuits, we may be subject to
significant damages or equitable remedies relating to the operation of our business. Any such
claims and lawsuits may materially harm our business, results of operations and financial
condition.
ITEM 1A. RISK FACTORS (Dollars in Thousands)
This description includes any material changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report
on Form 10-K for the year ended September 30, 2010 (Fiscal 2010) and Part II, Item 1A of our
Quarterly Report on Form 10-Q for the quarters ended December 31, 2010 and March 31, 2011.
We depend on a limited number of customers for most of our sales in our Specialty Chemicals,
Aerospace Equipment and Fine Chemicals segments and the loss of one or more of these customers
could have a material adverse effect on our financial position, results of operations and cash
flows.
Most of the perchlorate chemicals we produce, which accounted for 90% of our total revenues in the
Specialty Chemicals segment for Fiscal 2010 and approximately 32% of our total revenues for Fiscal
2010, are purchased by two customers. Should our relationship with one or more of our major
Specialty Chemicals or Aerospace Equipment customers change adversely, the resulting loss of
business could have a material adverse effect on our financial position, results of operations and
cash flows. In addition, if one or more of our major Specialty Chemicals or Aerospace Equipment
customers substantially reduced their volume of purchases from us or otherwise delayed some or all
of their purchases from us, it could have a material adverse effect on our financial position,
results of operations and cash flows. Should one of our major Specialty Chemicals or Aerospace
Equipment customers encounter financial difficulties, the exposure on uncollectible receivables and
unusable inventory could have a material adverse effect on our financial position, results of
operations and cash flows.
Furthermore, our Fine Chemicals segments success is largely dependent upon the manufacturing by
Ampac Fine Chemicals LLC (AFC) of a limited number of registered intermediates and active
pharmaceutical ingredients for a limited number of key customers. One customer of AFC accounted for
18% of our consolidated revenue and the top four customers of AFC accounted for approximately 85%
of its revenues, and 34% of our consolidated revenues, in Fiscal 2010. Negative development in
these customer relationships or in the customers business, or failure to renew or extend certain
contracts, may have a material adverse effect on the results of operations of AFC. Moreover, from
time to time key customers have reduced their orders, and one or more of these customers might
reduce their orders in the future, or one or more of them may attempt to renegotiate prices, any of
which could have a similar negative effect on the results of operations of AFC. For example, in
Fiscal 2010, Fine Chemicals segment revenues declined as compared to the fiscal year ended
September 30, 2009 (Fiscal 2009), in part due to reductions in orders from certain primary
customers for our core products. In addition, if the pharmaceutical products that AFCs customers
produce using its compounds experience any problems, including problems related to their safety or
efficacy, delays in filing with or approval by the U.S. Food and Drug Administration, or FDA,
failures in achieving success in the market, expiration or loss of patent/regulatory protection, or
competition, including competition from generic drugs, these customers may substantially reduce or
cease to purchase AFCs compounds, which could have a material adverse effect on the revenues and
results of operations of AFC.
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The inherent limitations of our fixed-price or similar contracts may impact our profitability.
A substantial portion of our revenues are derived from our fixed-price or similar contracts. When
we enter into fixed-price contracts, we agree to perform the scope of work specified in the
contract for a predetermined price. Many of our fixed-price or similar contracts require us to
provide a customized product over a long period at a pre-established price or prices for such
product. For example, when AFC is initially engaged to manufacture a product, we often agree to set
the price for such product, and any time-based increases to such price, at the beginning of the
contracting period and prior to fully testing and beginning the customized manufacturing process.
Depending on the fixed price negotiated, these contracts may provide us with an opportunity to
achieve higher profits based on the relationship between our total estimated contract costs and the
contracts fixed price. However, we bear the risk that increased or unexpected costs, or external
factors that may impact contract costs, fixed prices or profit yields, such as fluctuations in
international currency exchange rates, may reduce our profit or cause us to incur a loss on the
contract, which could reduce our net sales and net earnings. Ultimately, fixed-price contracts and
similar types of contracts present the inherent risk of un-reimbursed cost overruns and
unanticipated external factors that negatively impact contract costs, fixed prices or profit
yields, any of which could have a material adverse effect on our operating results, financial
condition, or cash flows. Moreover, to the extent that we do not anticipate the increase in cost or
the effect of external factors over time on the production or pricing of the products which are the
subject of our fixed-price contracts, our profitability could be adversely affected.
The numerous and often complex laws and regulations and regulatory oversight to which our
operations and properties are subject, the cost of compliance, and the effect of any failure to
comply could reduce our profitability and liquidity.
The nature of our operations subject us to extensive and often complex and frequently changing
federal, state, local and foreign laws and regulations and regulatory oversight, including with
respect to emissions to air, discharges to water and waste management as well as with respect to
the sale and, in certain cases, export of controlled products. For example, in our Fine Chemicals
segment, modifications, enhancements or changes in manufacturing sites of approved products are
subject to complex regulations of the FDA, and, in many circumstances, such actions may require the
express approval of the FDA, which in turn may require a lengthy application process and,
ultimately, may not be obtainable. The facilities of AFC are periodically subject to scheduled and
unscheduled inspection by the FDA and other governmental agencies. Operations at these facilities
could be interrupted or halted if such inspections are unsatisfactory and we could experience fines
and/or other regulatory actions if we are found not to be in regulatory compliance. AFCs customers
face similarly high regulatory requirements. Before marketing most drug products, AFCs customers
generally are required to obtain approval from the FDA based upon pre-clinical testing, clinical
trials showing safety and efficacy, chemistry and manufacturing control data, and other data and
information. The generation of these required data is regulated by the FDA and can be
time-consuming and expensive, and the results might not justify approval. Even if AFCs customers
are successful in obtaining all required pre-marketing approvals, post-marketing requirements and
any failure on either AFCs or its customers part to comply with other regulations could result in
suspension or limitation of approvals or commercial activities pertaining to affected products.
Because we operate in highly regulated industries, we may be affected significantly by legislative
and other regulatory actions and developments concerning or impacting various aspects of our
operations and products or our customers. To meet changing licensing and regulatory standards, we
may be required to make additional significant site or operational modifications, potentially
involving substantial expenditures or the reduction or suspension of certain operations. For
example, in our Fine Chemicals segment, any regulatory changes could impose on AFC or its customers
changes to manufacturing methods or facilities, pharmaceutical importation, expanded or different
labeling, new approvals, the recall, replacement or discontinuance of certain products, additional
record keeping, testing, price or purchase controls or limitations, and expanded documentation of
the properties of certain products and scientific substantiation. AFCs failure to comply with
governmental regulations, in particular those of the FDA, can
result in fines, unanticipated compliance expenditures, recall or seizure of products, delays in,
or total or
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partial suspension or withdrawal of, approval of production or distribution, suspension
of the FDAs review of relevant product applications, termination of ongoing research,
disqualification of data for submission to regulatory authorities, enforcement actions, injunctions
and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke
previously granted drug approvals. Although we have instituted internal compliance programs, if
regulations or the standards by which they are enforced change and/or compliance is deficient in
any significant way, such as a failure to materially comply with the FDAs current Good
Manufacturing Practices or cGMP guidelines, or if a regulatory authority asserts publically or
otherwise such a deficiency or takes action against us whether or not the underlying asserted
deficiency is ultimately found to be sustainable, it could have a material adverse effect on us. In
our Specialty Chemicals and Fine Chemicals segments, changes in environmental regulations could
result in requirements to add or modify emissions control, water treatment, or waste handling
equipment, processes or arrangements, which could impose significant additional costs for equipment
at and operation of our facilities.
Moreover, in other areas of our business, we, like other government and military contractors and
subcontractors, are subject directly or indirectly in many cases to government contracting
regulations and the additional costs, burdens and risks associated with meeting these heightened
contracting requirements. Failure to comply with government contracting regulations may result in
contract termination, the potential for substantial civil and criminal penalties, and, under
certain circumstances, our suspension and debarment from future U.S. government contracts for a
period of time. For example, these consequences could be imposed for failing to follow procurement
integrity and bidding rules, employing improper billing practices or otherwise failing to follow
cost accounting standards, receiving or paying kickbacks or filing false claims. In addition, the
U.S. government and its principal prime contractors periodically investigate the U.S. governments
contractors and subcontractors, including with respect to financial viability, as part of the U.S.
governments risk assessment process associated with the award of new contracts. Consequently, for
example, if the U.S. government or one or more prime contractors were to determine that we were not
financially viable, our ability to continue to act as a government contractor or subcontractor
would be impaired. Further, a portion of our business involves the sale of controlled products
overseas, such as supplying ammonium perchlorate, or AP, to various foreign defense programs and
commercial space programs. Foreign sales subject us to numerous additional complex U.S. and foreign
laws and regulations, including laws and regulations governing import-export controls applicable to
the sale and export of munitions and other controlled products and commodities, repatriation of
earnings, exchange controls, the Foreign Corrupt Practices Act, and the anti-boycott provisions of
the U.S. Export Administration Act. The costs of complying with the various and often complex and
frequently changing laws and regulations and regulatory oversight applicable to us and the
businesses in which we engage, and the consequences should we fail to comply, even inadvertently,
with such requirements, could be significant and could reduce our profitability and liquidity.
In addition, we are subject to numerous federal laws and regulations due to our status as a
publicly traded company, as well as rules and regulations of The NASDAQ Stock Market LLC. Any
changes in these legal and regulatory requirements could increase our compliance costs and
negatively affect our results of operations.
A significant portion of our business depends on contracts with the government or its prime
contractors or subcontractors and these contracts are impacted by governmental priorities and are
subject to potential fluctuations in funding or early termination, including for convenience, any
of which could have a material adverse effect on our operating results, financial condition or cash
flows.
Sales to the U.S. government and its prime contractors and subcontractors represent a significant
portion of our business. In Fiscal 2010, our Specialty Chemicals segment generated approximately
29% of consolidated revenues, primarily sales of Grade I AP, and our Aerospace Equipment segment
generated approximately 5% of consolidated revenues, each from sales to the U.S. government, its
prime contractors and subcontractors. One significant use of Grade I AP historically has been in
NASAs Space
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Shuttle program. Consequently, with the recent retirement of the Space Shuttle fleet, the long-term
demand for Grade I AP may be driven by the timing of the development of next-generation space
exploration vehicles, including the development and testing of a new heavy launch vehicle used to
transport materials and supplies to the International Space Station, and potentially elsewhere, and
the number of space exploration launches. Accordingly, demand for AP remains subject to potential
changes in space exploration program direction and budgetary restrictions, which may result in
changes in next-generation space exploration vehicles and the timing associated with their
development. If the use of AP as the oxidizing agent for solid propellant rockets or the use of
solid propellant rockets in NASAs space exploration programs are discontinued or significantly
reduced, it could have a material adverse effect on our operating results, financial condition, or
cash flows.
The funding of U.S. governmental programs is generally subject to annual congressional
appropriations, and congressional priorities are subject to change. In the case of major programs,
U.S. government contracts are usually incrementally funded. In addition, U.S. government
expenditures for defense and NASA programs may fluctuate from year to year and specific programs,
in connection with which we may receive significant revenue, may be terminated or curtailed. Recent
economic crises, and the U.S. governments corresponding actions, may result in cutbacks in major
government programs. A decline in government expenditures or any failure by Congress to appropriate
additional funds to any program in which we or our customers participate, or any contract
modification as a result of funding changes, could materially delay or terminate the program for us
or for our customers. Moreover, the U.S. government may terminate its contracts with its suppliers
either for its convenience or in the event of a default by the supplier. Since a significant
portion of our customer base is either the U.S. government or U.S. government contractors or
subcontractors, we may have limited ability to collect fully on our contracts when the U.S.
government terminates its contracts. If a contract is terminated by the U.S. government for
convenience, recovery of costs typically would be limited to amounts already incurred or committed,
and our profit would be limited to work completed prior to termination. Moreover, in such
situations where we are a subcontractor, the U.S. government contractor may cease purchasing our
products if its contracts are terminated. We may have resources applied to specific
government-related contracts and, if any of those contracts were terminated, we may incur
substantial costs redeploying these resources. Given the significance to our business of U.S.
government contracts or contracts based on U.S. government contracts, fluctuations or reductions in
governmental funding for particular governmental programs and/or termination of existing
governmental programs and related contracts may have a material adverse effect on our operating
results, financial condition or cash flows.
We may be subject to potentially material costs and liabilities in connection with environmental or
health matters.
Some of our operations may create risks of adverse environmental and health effects, any of which
might not be covered by insurance. In the past, we have been required to take remedial action to
address particular environmental and health concerns identified by governmental agencies in
connection with the production of perchlorate. It is possible that we may be required to take
further remedial action in the future in connection with our production of perchlorate, whether at
our former facility in Henderson, Nevada, or at our current production facility in Iron County,
Utah, or we may enter voluntary agreements with governmental agencies to take such actions.
Moreover, in connection with other operations, we may become obligated in the future for
environmental liabilities if we fail to abide by limitations placed on us by governmental agencies.
There can be no assurance that material costs or liabilities will not be incurred or restrictions
will not be placed upon us in order to rectify any past or future occurrences related to
environmental or health matters. Such material costs or liabilities, or increases in, or charges
associated with, existing environmental or health-related liabilities, also may have a material
adverse effect on our operating results, earnings or financial condition.
Review of Perchlorate Toxicity by the EPA. Currently, perchlorate is on the EPAs Contaminant
Candidate List 3. In February 2011, the EPA announced that it had determined to move forward with
the development of a regulation for perchlorates in drinking water, reversing its October 2008
preliminary determination not to promulgate such a regulation. Accordingly, the EPA announced its
intention to begin to evaluate the feasibility and affordability of treatment technologies to
remove perchlorate and to
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examine the costs and benefits of potential standards. The EPA stated that its intention is to
publish a proposed regulation and analyses for public review and comment within 24 months, and, if
a regulation is adopted, to promulgate a final regulation within 18 months after publication of its
proposal. Regulatory review and anticipated regulatory actions present general business risk to the
Company, but no regulatory proposal of the EPA or any state in which we operate, to date, has been
publicly announced that we believe would have a material effect on our results of operations and
financial position or that would cause us to significantly modify or curtail our business
practices, including our remediation activities discussed below. However, the outcome of the
federal EPA action, as well as any similar state regulatory action, will influence the number, if
any, of potential sites that may be subject to remediation action, which could, in turn, cause us
to incur material costs. It is possible that federal and, potentially, one or more state or local
regulatory agencies may change existing, or establish new, standards for perchlorate, which could
lead to additional expenditures for environmental remediation in the future, and/or additional,
potentially material costs to defend against new claims resulting from such regulatory agency
actions.
Perchlorate Remediation Project in Henderson, Nevada. We commercially manufactured perchlorate
chemicals at a facility in Henderson, Nevada, or the AMPAC Henderson Site, until May 1988. In
1997, the Southern Nevada Water Authority, or SNWA, detected trace amounts of the perchlorate anion
in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada
and areas of Southern California. The Las Vegas Wash flows into Lake Mead from the Las Vegas
valley. In response to this discovery by SNWA, and at the request of the Nevada Division of
Environmental Protection, or NDEP, we engaged in an investigation of groundwater near the AMPAC
Henderson Site and down gradient toward the Las Vegas Wash. At the direction of NDEP and the EPA,
we conducted an investigation of remediation technologies for perchlorate in groundwater with the
intention of remediating groundwater near the AMPAC Henderson Site. In the fiscal year ended
September 30, 2005 (Fiscal 2005), we submitted a work plan to NDEP for the construction of a
remediation facility near the AMPAC Henderson Site. The permanent plant began operation in December
2006. Late in Fiscal 2009, we gained additional information from groundwater modeling that
indicates groundwater emanating from the AMPAC Henderson Site in certain areas in deeper zones
(more than 150 feet below ground surface) is moving toward our existing remediation facility at a
much slower pace than previously estimated. As a result of this additional data, related model
interpretations and consultations with NDEP, we re-evaluated our remediation operations and
determined that we should be able to improve the effectiveness of the treatment program and
significantly reduce the total project time by expanding the then existing treatment system. The
expansion includes installing additional groundwater extraction wells in the deeper, more
concentrated areas, construction of a pipeline to move extracted groundwater to our treatment
facility, and the addition of above-ground ex situ bioremediation treatment equipment (the
Expansion Project). We currently anticipate that the Expansion Project will be placed into
service during the spring of 2012.
Henderson Site Environmental Remediation Reserve. During Fiscal 2005 and the fiscal year ended
September 30, 2006, we recorded aggregate charges for $26,000 representing our then estimates of
the probable costs of our remediation efforts at the AMPAC Henderson Site, including the costs for
capital equipment and on-going operating and maintenance (O&M). Following the receipt of new data
regarding groundwater movement late in Fiscal 2009, we added the Expansion Project to the planned
scope of our remediation operations. As a result, we increased our accruals by approximately
$13,700.
Through June 2011, and in cooperation with NDEP, we worked to develop the formal design,
engineering and permitting of the Expansion Project. Based on data obtained to date, which is
largely comprised of firm quotations, we determined that significant modifications to our Fiscal
2009 assumptions were required. As a result, in June 2011, we accrued an additional $6,000 for the
estimated increase in cost of the capital component of the Expansion Project, offset slightly by
reductions in O&M cost estimates. The estimated capital costs of the Expansion Project increased
by approximately $6,400. The increase reflects (i) an increase in the capacity of the above-ground
treatment equipment to accommodate technical requirements based on the testing of new extraction
wells in the fall of 2010, and (ii) higher than initially anticipated cost associated with the
installation of the equipment and construction of the pipeline. Our estimate
of total O&M costs was reduced by approximately $400. This change in estimate reflects (i) a
reduction in the estimated life of the project by four years, offset by (ii) an increase in the
estimated
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annual O&M cost to approximately $1,900 per year once the Expansion Project is placed in service. As
noted above, we currently anticipate that the Expansion Project will be placed in service during
the spring of 2012. Due to uncertainties inherent in making estimates, our estimates of capital
and O&M costs may later require significant revision as new facts become available and
circumstances change.
As of June 30, 2011, the aggregate range of anticipated environmental remediation costs was from
approximately $22,800 to approximately $47,300. This range represents a significant estimate and
is based on the estimable elements of cost for capital and O&M costs, and an estimated remaining
operating life of the project through a range from the years 2017 to 2030. As of June 30, 2011,
the accrued amount was $26,659, based on an estimated remaining life of the project through the
year 2019, or the low end of the more likely range of the expected life of the project. Cost
estimates are based on our current assessments of the facility configuration. As we proceed with
the project, we have, and may in the future, become aware of elements of the facility configuration
that must be changed to meet the targeted operational requirements. Certain of these changes may
result in corresponding cost increases. Costs associated with the changes are accrued when a
reasonable alternative, or range of alternatives, is identified and the cost of such alternative is
estimable. Our estimated reserve for environmental remediation is based on information currently
available to us and may be subject to material adjustment upward or downward in future periods as
new facts or circumstances may indicate.
Other Environmental Matters. As part of our acquisition of the fine chemicals business of GenCorp
Inc., AFC leased approximately 240 acres of land on a Superfund site in Rancho Cordova, California,
owned by Aerojet-General Corporation, a wholly-owned subsidiary of GenCorp Inc. The Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, has very strict joint
and several liability provisions that make any owner or operator of a Superfund site a
potentially responsible party for remediation activities. AFC could be considered an operator
for purposes of CERCLA and, in theory, could be a potentially responsible party for purposes of
contribution to the site remediation, although we received a letter from the EPA in November 2005
indicating that the EPA does not intend to pursue any clean up or enforcement actions under CERCLA
against future lessees of the Aerojet property for existing contamination, provided that the
lessees do not contribute to or do not exacerbate existing contamination on or under the Superfund
site. Additionally, pursuant to the EPA consent order governing remediation for this site, AFC will
have to abide by certain limitations regarding construction and development of the site which may
restrict AFCs operational flexibility and require additional substantial capital expenditures that
could negatively affect the results of operations for AFC.
Although we have established an environmental reserve for remediation activities in Henderson,
Nevada, given the many uncertainties involved in assessing environmental liabilities, our
environmental-related risks may from time to time exceed any related reserves.
As of June 30, 2011, we had established reserves in connection with the AMPAC Henderson Site of
approximately $26,659, which we believe to be sufficient to cover our estimated environmental
liabilities for that site as of such time. However, as of such date, we had not established any
other environmental-related reserves. Given the many uncertainties involved in assessing
environmental liabilities, our environmental-related risks may, from time to time, exceed any
related reserves, as we may not have established reserves with respect to such environmental
liabilities, or any reserves we have established may prove to be insufficient. We continually
evaluate the adequacy of our reserves on a quarterly basis, and they could change. For example,
during the quarter ended June 30, 2011, we increased our environmental reserves in connection with
the AMPAC Henderson Site by approximately $6,000 as a result of an increase in anticipated costs
associated with remediation efforts at the site. In addition, reserves with respect to
environmental matters are based only on known sites and the known contamination at those sites. It
is possible that additional remediation sites will be identified in the future or that unknown
contamination, or further contamination beyond that which is currently known, at previously
identified sites will be discovered. The discovery of additional environmental exposures at sites
that we currently own or operate or at which we formerly operated, or at sites to which we have
sent hazardous substances or wastes for treatment, recycling or disposal, could lead us to have
additional expenditures for environmental remediation in the future and, given the many
uncertainties involved in
assessing environmental liabilities, we may not have adequately reserved for such liabilities or
any reserves we have established may prove to be insufficient.
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For each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments, most
production is conducted in a single facility and any significant disruption or delay at a
particular facility could have a material adverse effect on our business, financial position and
results of operations.
Most of our Specialty Chemicals segment products are produced at our Iron County, Utah facility.
Most of our Fine Chemicals segment products are produced at our Rancho Cordova, California facility
and most of our Aerospace Equipment segment products are produced at our Niagara Falls, New York
facility. Our Aerospace Equipment segment also has small manufacturing facilities in Ireland and
the U.K. Any of these facilities could be disrupted or damaged by fire, floods, earthquakes, power
loss, systems failures or similar events. Although we have contingency plans in effect for natural
disasters or other catastrophic events, these events could still disrupt our operations. Even
though we carry business interruption insurance, we may suffer losses as a result of business
interruptions that exceed the coverage available under our insurance policies. A significant
disruption at one of our facilities, even on a short-term basis, could impair our ability to
produce and ship the particular business segments products to market on a timely basis, which
could have a material adverse effect on our business, financial position and results of operations.
The release or explosion of dangerous materials used in our business could disrupt our operations
and cause us to incur additional costs and liabilities.
Our operations involve the handling, production, storage, and disposal of potentially explosive or
hazardous materials and other dangerous chemicals, including materials used in rocket propulsion.
Despite our use of specialized facilities to handle dangerous materials and intensive employee
training programs, the handling and production of hazardous materials could result in incidents
that shut down (on a short-term basis or for longer periods) or otherwise disrupt our manufacturing
operations and could cause production delays. Our manufacturing operations could also be the
subject of an external or internal event, such as a terrorist attack or external or internal
accident, that, despite our security, safety and other precautions, results in a disruption or
delay in our operations. It is possible that a release of hazardous materials or other dangerous
chemicals from one of our facilities or an explosion could result in death or significant injuries
to employees and others. Material property damage to us and third parties could also occur. For
example, on May 4, 1988, our former manufacturing and office facilities in Henderson, Nevada were
destroyed by a series of massive explosions and associated fires. Extensive property damage
occurred both at our facilities and in immediately adjacent areas, the principal damage occurring
within a three-mile radius. Production of AP ceased for a 15-month period. Significant
interruptions were also experienced in our other businesses, which occupied the same or adjacent
sites. There can be no assurance that another incident would not interrupt some or all of the
activities carried on at our current AP manufacturing site. The use of our products in applications
by our customers could also result in liability if an explosion, fire or other similarly disruptive
event were to occur. Any release or explosion could expose us to adverse publicity or liability for
damages or cause production delays, any of which could have a material adverse effect on our
reputation and profitability and could cause us to incur additional costs and liabilities.
Disruptions in the supply of key raw materials and difficulties in the supplier qualification
process, as well as increases in prices of raw materials, could adversely impact our operations.
Key raw materials used in our operations include sodium chlorate, graphite, ammonia, sodium metal,
nitrous oxide, HCFC-123, and hydrochloric acid. We closely monitor sources of supply to assure that
adequate raw materials and other supplies and components needed in our manufacturing processes are
available. In addition, as a U.S. government contractor or subcontractor, we are frequently limited
to procuring
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materials and components from sources of supply that can meet rigorous government and/or customer
specifications. If a supplier provides to us raw materials or other supplies or components that are
deficient or defective or if a supplier fails to provide to us such materials, supplies or
components in a timely manner or at all, we may have limited ability to find appropriate
substitutes or otherwise meet required specifications and deadlines. In addition, as business
conditions, the U.S. defense budget, and congressional allocations change, suppliers of specialty
chemicals and materials sometimes consider dropping or in fact drop low volume items from their
product lines, which may require, as it has in the past, qualification of new suppliers for raw
materials on key programs. The qualification process may impact our profitability or ability to
meet contract deliveries and/or delivery timelines. Moreover, we could experience inventory
shortages if we are required to use an alternative supplier on short notice, which also could lead
to raw materials being purchased on less favorable terms than we have with our regular suppliers.
We are further impacted by the cost of raw materials used in production on fixed-price contracts.
The increased cost of natural gas and electricity also has a significant impact on the cost of
operating our Specialty Chemicals segment facility.
AFC uses substantial amounts of raw materials in its production processes, in particular chemicals,
including specialty and bulk chemicals, which include petroleum-based solvents. Increases in the
prices of raw materials which AFC purchases from third party suppliers could adversely impact
operating results. In certain cases, the customer provides some of the raw materials which are used
by AFC to produce or manufacture the customers products. Failure to receive raw materials in a
timely manner, whether from a third party supplier or a customer, could cause AFC to fail to meet
production schedules and adversely impact revenues and operating results. Certain key raw materials
are obtained from sources from outside the U.S. Factors that can cause delays in the arrival of raw
materials include weather or other natural events, political unrest in countries from which raw
materials are sourced or through which they are delivered, terrorist attacks or related events in
such countries or in the U.S., and work stoppages by suppliers or shippers. A delay in the arrival
of the shipment of raw materials from a third party supplier could have a significant impact on
AFCs ability to meet its contractual commitments to customers.
Prolonged disruptions in the supply of any of our key raw materials, difficulty completing
qualification of new sources of supply, implementing use of replacement materials or new sources of
supply, or a continuing increase in the prices of raw materials and energy could have a material
adverse effect on our operating results, financial condition or cash flows.
Each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments may be unable to
comply with customer specifications and manufacturing instructions or may experience delays or
other problems with existing or new products, which could result in increased costs, losses of
sales and potential breach of customer contracts.
Each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments produces products
that are highly customized, require high levels of precision to manufacture and are subject to
exacting customer and other requirements, including strict timing and delivery requirements. For
example, our Fine Chemicals segment produces chemical compounds that are difficult to manufacture,
including highly energetic and highly toxic materials. These chemical compounds are manufactured to
exacting specifications of our customers filings with the FDA and other regulatory authorities
worldwide. The production of these chemicals requires a high degree of precision and strict
adherence to safety and quality standards. Regulatory agencies, such as the FDA and the European
Medicines Agency, or EMEA, have regulatory oversight over the production process for many of the
products that AFC manufactures for its customers. AFC employs sophisticated and rigorous
manufacturing and testing practices to ensure compliance with the FDAs cGMP guidelines and the
International Conference on Harmonization Q7A. Because the chemical compounds produced by AFC are
so highly customized, they are also subject to customer acceptance requirements, including strict
timing and delivery requirements. If AFC is unable to adhere to the standards required or fails to
meet the customers timing and delivery requirements, the customer may reject the chemical
compounds. In such instances, AFC may also be in breach of its customers contract.
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Like our Fine Chemicals segment, our Specialty Chemicals and Aerospace Equipment segments face
similar production demands and requirements. In each case, a significant failure or inability to
comply with customer specifications and manufacturing requirements or delays or other problems with
existing or new products could result in increased costs, losses of sales and potential breaches of
customer contracts, which could affect our operating results and revenues.
Successful commercialization of pharmaceutical products and product line extensions is very
difficult and subject to many uncertainties. If a customer is not able to successfully
commercialize its products for which AFC produces compounds or if a product is subsequently
recalled, then the operating results of AFC may be negatively impacted.
Successful commercialization of pharmaceutical products and product line extensions requires
accurate anticipation of market and customer acceptance of particular products, customers needs,
the sale of competitive products, and emerging technological trends, among other things.
Additionally, for successful product development, our customers must complete many complex
formulation and analytical testing requirements and timely obtain regulatory approvals from the FDA
and other regulatory agencies. When developed, new or reformulated drugs may not exhibit desired
characteristics or may not be accepted by the marketplace. Complications can also arise during
production scale-up. In addition, a customers product that includes ingredients that are
manufactured by AFC may be subsequently recalled or withdrawn from the market by the customer. The
recall or withdrawal may be for reasons beyond the control of AFC. Moreover, products may encounter
unexpected, irresolvable patent conflicts or may not have enforceable intellectual property rights.
If the customer is not able to successfully commercialize a product for which AFC produces
compounds, or if there is a subsequent recall or withdrawal of a product manufactured by AFC or
that includes ingredients manufactured by AFC for its customers, it could have an adverse impact on
AFCs operating results, including its forecasted or actual revenues.
A strike or other work stoppage, or the inability to renew collective bargaining agreements on
favorable terms, could have a material adverse effect on the cost structure and operational
capabilities of AFC.
As of September 30, 2010, AFC had approximately 118 employees that were covered by collective
bargaining or similar agreements. We consider our relationships with our unionized employees to be
satisfactory. In July 2010, AFCs collective bargaining and similar agreements were renegotiated
and extended to June 2013. If we are unable to negotiate acceptable new agreements with the union
representing these employees upon expiration of the existing contracts, we could experience strikes
or work stoppages. Even if AFC is successful in negotiating new agreements, the new agreements
could call for higher wages or benefits paid to union members, which would increase AFCs operating
costs and could adversely affect its profitability. If the unionized workers were to engage in a
strike or other work stoppage, or other non-unionized operations were to become unionized, AFC
could experience a significant disruption of operations at its facilities or higher ongoing labor
costs. A strike or other work stoppage in the facilities of any of its major customers or suppliers
could also have similar effects on AFC.
The pharmaceutical fine chemicals industry is a capital-intensive industry and if AFC does not have
sufficient financial resources to finance the necessary capital expenditures, its business and
results of operations may be harmed.
The pharmaceutical fine chemicals industry is a capital-intensive industry. Consequently, AFCs
capital expenditures consume cash from our Fine Chemicals segment and our other operations and may
also consume cash from borrowings. Increases in capital expenditures may result in low levels of
working capital or require us to finance working capital deficits, which may be potentially costly
or even unavailable given on-going conditions of the credit markets in the U.S. Changes in the
availability, terms and costs of capital or a reduction in credit rating or outlook could cause our
cost of doing business to increase and place us at a competitive disadvantage. These factors could
substantially constrain AFCs growth, increase AFCs costs and negatively impact its operating
results.
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We may be subject to potential liability claims for our products or services that could affect our
earnings and financial condition and harm our reputation.
We may face potential liability claims based on our products or services in our several lines of
business under certain circumstances, and any such claims could result in significant expenses,
disrupt sales and affect our reputation and that of our products. For example, a customers product
may include ingredients that are manufactured by AFC. Although such ingredients are generally made
pursuant to specific instructions from our customer and tested using techniques provided by our
customer, the customers product may, nevertheless, be subsequently recalled or withdrawn from the
market by the customer, and the recall or withdrawal may be due in part or wholly to product
failures or inadequacies that may or may not be related to the ingredients we manufactured for the
customer. In such a case, the recall or withdrawal may result in claims being made against us.
Although we seek to reduce our potential liability through measures such as contractual
indemnification provisions with customers, we cannot assure you that such measures will be enforced
or effective. We could be materially and adversely affected if we were required to pay damages or
incur defense costs in connection with a claim that is outside the scope of the indemnification
agreements, if the indemnity, although legally enforceable, is not applicable in accordance with
its terms or if our liability exceeds the amount of the applicable indemnification, or if the
amount of the indemnification exceeds the financial capacity of our customer. In certain instances,
we may have in place product liability insurance coverage, which is generally available in the
market, but which may be limited in scope and amount. In other instances, we may have self-insured
the risk for any such potential claim. There can be no assurance that our insurance coverage, if
available, will be adequate or that insurance coverage will continue to be available on terms
acceptable to us. Given the current economic environment, it is also possible that our insurers may
not be able to pay on any claims we might bring. Unexpected results could cause us to have
financial exposure in these matters in excess of insurance coverage and recorded reserves,
requiring us to provide additional reserves to address these liabilities, impacting profits.
Moreover, any claim brought against us, even if ultimately found to be insignificant or without
merit, could damage our reputation, which, in turn, may impact our business prospects and future
results.
Technology innovations in the markets that we serve may create alternatives to our products and
result in reduced sales.
Technology innovations to which our current and potential customers might have access could reduce
or eliminate their need for our products, which could negatively impact the sale of those products.
Our customers constantly attempt to reduce their manufacturing costs and improve product quality,
such as by seeking out producers using the latest manufacturing techniques or by producing
component products themselves, if outsourcing is perceived to be not cost effective. To continue to
succeed, we will need to manufacture and deliver products, and develop better and more efficient
means of manufacturing and delivering products, that address evolving customer needs and changes in
the market on a timely and cost-effective basis, using the latest and/or most efficient technology
available. We may be unable to respond on a timely basis to any or all of the changing needs of our
customer base. Separately, our competitors may develop technologies that render our existing
technology and products obsolete or uncompetitive. Our competitors may also implement new
technologies before we are able to do so, allowing them to provide products at more competitive
prices. Technology developed by others in the future could, among other things, require us to
write-down obsolete facilities, equipment and technology or require us to make significant capital
expenditures in order to stay competitive. Our failure to develop, introduce or enhance products
and technologies able to compete with new products and technologies in a timely manner could have
an adverse effect on our business, results of operations and financial condition.
We are subject to strong competition in certain industries in which we participate and therefore
may not be able to compete successfully.
Other than the sale of AP, for which we are the only North American provider, we face competition
in all of the other industries in which we participate. Many of our competitors have financial,
technical, production, marketing, research and development and other resources substantially
greater than ours. As
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a result, they may be better able to withstand the effects of periodic economic or business segment
downturns. Moreover, barriers to entry, other than capital availability, are low in some of the
product segments of our business. Consequently, we may encounter intense bidding for contracts.
Capacity additions or technological advances by existing or future competitors may also create
greater competition, particularly in pricing. Further, the pharmaceutical fine chemicals market is
fragmented and competitive. Pharmaceutical fine chemicals manufacturers generally compete based on
their breadth of technology base, research and development and chemical expertise, flexibility and
scheduling of manufacturing capabilities, safety record, regulatory compliance history and price.
AFC faces increasing competition from pharmaceutical contract manufacturers, in particular
competitors located in the Peoples Republic of China and India, where facilities, construction and
operating costs are significantly less. If AFC is unable to compete successfully, its results of
operations may be materially adversely impacted. Furthermore, there is a worldwide over-capacity of
the ability to produce sodium azide, which creates significant price competition for that product.
Maintaining and improving our competitive position will require continued investment in our
existing and potential future customer relationships as well as in our technical, production, and
marketing operations. We may be unable to compete successfully with our competitors and our
inability to do so could result in a decrease in revenues that we historically have generated from
the sale of our products.
Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating
results to fluctuate.
Our quarterly and annual sales are affected by a variety of factors that could lead to significant
variability in our operating results, including as a result of the actual placement, timing and
delivery of orders for new and/or existing products. In our Specialty Chemicals segment, the need
for our products is generally based on contractually defined milestones that our customers are
bound by and these milestones may fluctuate from quarter to quarter resulting in corresponding
sales fluctuations. In our Fine Chemicals segment, some of our products require multiple steps of
chemistry, the production of which can span multiple quarterly periods. Revenue is typically
recognized after the final step and when the product has been delivered and accepted by the
customer. As a result of this multi-quarter process, revenues and related profits can vary from
quarter to quarter. Consequently, due to factors inherent in the process by which we sell our
products, changes in our operating results may fluctuate from quarter to quarter and could result
in volatility in our common stock price.
The inherent volatility of the chemical industry affects our capacity utilization and causes
fluctuations in our results of operations.
Our Specialty Chemicals and Fine Chemicals segments are subject to volatility that characterizes
the chemical industry generally. Thus, the operating rates at our facilities will impact the
comparison of period-to-period results. Different facilities may have differing operating rates
from period to period depending on many factors, such as transportation costs and supply and demand
for the product produced at the facility during that period. As a result, individual facilities may
be operated below or above rated capacities in any period. We may idle a facility for an extended
period of time because an oversupply of a certain product or a lack of demand for that product
makes production uneconomical. The expenses of the shutdown and restart of facilities may adversely
affect quarterly results when these events occur. In addition, a temporary shutdown may become
permanent, resulting in a write-down or write-off of the related assets. Moreover, workforce
reductions in connection with any short-term or long-term shutdowns, or related cost-cutting
measures, could result in an erosion of morale, affect the focus and productivity of our remaining
employees, including those directly responsible for revenue generation, and impair our ability to
retain and recruit talent, all of which in turn may adversely affect our future results of
operations.
A loss of key personnel or highly skilled employees, or the inability to attract and retain such
personnel, could disrupt our operations or impede our growth.
Our executive officers are critical to the management and direction of our businesses. Our future
success depends, in large part, on our ability to retain these officers and other capable
management personnel.
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From time to time we have entered into employment or similar agreements with
our executive officers and we may do so in the future, as competitive needs require. These
agreements typically allow the officer to terminate employment with certain levels of severance
under particular circumstances, such as a change of control affecting our company. In addition,
these agreements generally provide an officer with severance benefits if we terminate the officer
without cause. Although we believe that we will be able to attract and retain talented personnel
and replace key personnel should the need arise, our inability to do so or to do so in a timely
fashion could disrupt the operations of the segment affected or our overall operations.
Furthermore, our business is very technical and the technological and creative skills of our
personnel are essential to establishing and maintaining our competitive advantage. For example,
customers often turn to AFC because very few companies have the specialized experience and
capabilities and associated personnel required for energetic chemistries and projects that require
high containment. Our future growth and profitability in part depends upon the knowledge and
efforts of our highly skilled employees, including their ability to keep pace with technological
changes in the fine chemicals, specialty chemicals and aerospace equipment industries, as
applicable. We compete vigorously with various other firms to recruit these highly skilled
employees. Our operations could be disrupted by a shortage of available skilled employees or if we
are unable to attract and retain these highly skilled and experienced employees.
We may continue to expand our operations through acquisitions, but the acquisitions could divert
managements attention and expose us to unanticipated liabilities and costs. We may experience
difficulties integrating the acquired operations, and we may incur costs relating to acquisitions
that are never consummated.
Our business strategy includes growth through future possible acquisitions, in particular in
connection with our Fine Chemicals segment. Our future growth is likely to depend, in significant
part, on our ability to successfully implement this acquisition strategy. However, our ability to
consummate and integrate effectively any future acquisitions on terms that are favorable to us may
be limited by the number of attractive and suitable acquisition targets, internal demands on our
resources and our ability to obtain or otherwise facilitate cost-effective financing, especially
during difficult and unsettled economic times in the credit market. Any future acquisitions would
currently challenge our existing resources. To the extent that we were to implement a new
acquisition, if we did not properly meet the increasing expenses and demands on our resources
resulting from such future growth, our results could be adversely affected. Our success in
integrating newly acquired businesses will depend upon our ability to retain key personnel, avoid
diversion of managements attention from operational matters, integrate general and administrative
services and key information processing systems and, where necessary, requalify our customer
programs. In addition, future acquisitions could result in the incurrence of additional debt, costs
and contingent liabilities. We may also incur costs and divert managements attention to
acquisitions that are never consummated. Integration of acquired operations may take longer, or be
more costly or disruptive to our business, than originally anticipated. It is also possible that
expected synergies from past or future acquisitions may not materialize.
Although we undertake a diligence investigation of each acquisition target that we pursue, there
may be liabilities of the acquired companies or assets that we fail to or are unable to discover
during the diligence investigation and for which we, as a successor owner, may be responsible. In
connection with acquisitions, we generally seek to minimize the impact of these types of potential
liabilities through indemnities and warranties from the seller, which may in some instances be
supported by deferring payment of a portion of the purchase price. However, these indemnities and
warranties, if obtained, may not fully cover the ultimate actual liabilities due to limitations in
scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.
We have a substantial amount of debt, and the cost of servicing that debt could adversely affect
our ability to take actions, our liquidity or our financial condition.
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As of June 30, 2011, we had outstanding debt totaling $105,124, for which we are required to make
interest payments. Subject to the limits contained in some of the agreements governing our
outstanding debt, we may incur additional debt in the future or we may refinance some or all of
this debt. Our level of debt places significant demands on our cash resources, which could:
| make it more difficult for us to satisfy any other outstanding debt obligations; | |
| require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the amount of our cash flow available for working capital, capital expenditures, acquisitions, developing our real estate assets and other general corporate purposes; | |
| limit our flexibility in planning for, or reacting to, changes in the industries in which we compete; | |
| place us at a competitive disadvantage compared to our competitors, some of which have lower debt service obligations and greater financial resources than we do; | |
| limit our ability to borrow additional funds; or | |
| increase our vulnerability to general adverse economic and industry conditions. |
We are obligated to comply with various ongoing covenants in our debt, which could restrict our
operations, and if we should fail to satisfy any of these covenants, the payment under our debt
could be accelerated, which would negatively impact our liquidity.
We are obligated to comply with various ongoing covenants in our debt, including in certain cases
financial covenants, that could restrict our operating activities, and the failure to comply could
result in defaults that accelerate the payment under our debt. Our outstanding debt generally
contains various restrictive covenants. These covenants include provisions restricting our ability
to, among other things:
| incur additional debt; | |
| pay dividends or make other restricted payments; | |
| create liens on assets to secure debt; | |
| incur dividend or other payment restrictions with regard to restricted subsidiaries; | |
| transfer or sell assets; | |
| enter into transactions with affiliates; | |
| enter into sale and leaseback transactions; | |
| create an unrestricted subsidiary; | |
| enter into certain business activities; or | |
| effect a consolidation, merger or sale of all or substantially all of our assets. |
Any of the covenants described above may restrict our operations and our ability to pursue
potentially advantageous business opportunities. Our failure to comply with these covenants could
also result in an event of default that, if not cured or waived, could result in the acceleration
of all or a substantial portion of our debt, which would negatively impact our liquidity. In light
of our recent financial performance, continued working capital requirements, and challenging market
conditions, there is a risk that we may be unable to continue to comply with one or more of our
debt covenants in the future. Such noncompliance could require us to re-negotiate new terms with
our lenders which, in all likelihood, would lead to the incurrence of transaction costs and
potentially other less favorable terms and conditions being placed upon us, thereby further
negatively impacting our liquidity and results of operations.
Significant changes in discount rates, rates of return on pension assets, mortality tables and
other factors could affect our estimates of pension obligations, which in turn could affect future
funding requirements and related costs and impact our future earnings.
As of June 30, 2011, we had unfunded pension obligations, including the current and non-current
portions, of $36,742. Pension obligations, periodic pension expense, and funding requirements are
determined using actuarial valuations that involve several assumptions. The most critical
assumptions are
the discount rate and the expected long-term rate of return on plan assets. Other assumptions
include the future rate of compensation increases and retirement age, mortality and turnover. Some
of these assumptions, such as the discount rate and return on plan assets, are largely outside of
our control.
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Changes in these assumptions could affect our estimates of pension obligations, which in turn could
affect future funding requirements and related costs and impact our future earnings. Moreover,
pension obligations can also be affected by changes in legislation and other governmental
regulatory actions.
Our suspended shareholder rights plan, Restated Certificate of Incorporation, as amended, and
Amended and Restated By-laws discourage unsolicited takeover proposals and could prevent
stockholders from realizing a premium on their common stock.
We have a shareholder rights plan that, although currently suspended, may have the effect of
discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan
would cause substantial dilution to a person or group which attempts to acquire us on terms not
approved in advance by our board of directors. In addition, our Restated Certificate of
Incorporation, as amended, and Amended and Restated By-laws contain provisions that may discourage
unsolicited takeover proposals that stockholders may consider to be in their best interests. These
provisions include:
| a classified board of directors; | |
| the ability of our board of directors to designate the terms of and issue new series of preferred stock; | |
| advance notice requirements for nominations for election to our board of directors; and | |
| special voting requirements for the amendment, in certain cases, of our Restated Certificate of Incorporation, as amended, and our Amended and Restated By-laws. |
We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a
change of control. Together, our charter provisions, Delaware law and the shareholder rights plan
may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our common stock.
Our proprietary and intellectual property rights may be violated, compromised, circumvented or
invalidated, which could damage our operations.
We have numerous patents, patent applications, exclusive and non-exclusive licenses to patents, and
unpatented trade secret technologies in the U.S. and certain foreign countries. There can be no
assurance that the steps taken by us to protect our proprietary and intellectual property rights
will be adequate to deter misappropriation of these rights. In addition, independent third parties
may develop competitive or superior technologies that could circumvent the future need to use our
intellectual property, thereby reducing its value. They may also attempt to invalidate patent
rights that we own directly or that we are entitled to exploit through a license. If we are unable
to adequately protect and utilize our intellectual property or proprietary rights, our results of
operations may be adversely affected.
Our common stock price may fluctuate substantially, and a stockholders investment could decline in
value.
The market price of our common stock has been highly volatile during the past several years. For
example, during the 12 months ended September 30, 2010, the highest sale price for our common stock
was $9.15 and the lowest sale price for our common stock was $3.84. The realization of any of the
risks described in these Risk Factors or other unforeseen risks could have a dramatic and adverse
effect on the market price of our common stock. Moreover, the market price of our common stock may
fluctuate substantially due to many factors, including:
| actual or anticipated fluctuations in our results of operations; | |
| events or concerns related to our products or operations or those of our competitors, including public health, environmental and safety concerns related to products and operations; | |
| material public announcements by us or our competitors; | |
| changes in government regulations or policies, such as new legislation, laws or regulatory decisions that are adverse to us and/or our products; | |
| changes in key members of management; |
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| developments in our industries; | |
| changes in investors acceptable levels of risk; | |
| trading volume of our common stock; and | |
| general economic conditions. |
In addition, the stock market in general has experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to companies operating performance. In addition, the
global economic environment and potential uncertainty have created significant additional
volatility in the United States capital markets. Broad market and industry factors may materially
harm the market price of our common stock, regardless of our operating performance. In the past,
following periods of volatility in the market price of a companys securities, stockholder
derivative lawsuits and/or securities class action litigation has often been instituted against
that company. Such litigation, if instituted against us, and whether with or without merit, could
result in substantial costs and divert managements attention and resources, which could harm our
business and financial condition, as well as the market price of our common stock. Additionally,
volatility or a lack of positive performance in our stock price may adversely affect our ability to
retain key employees or to use our stock to acquire other companies at a time when use of cash or
financing for such acquisitions may not be available or in the best interests of our stockholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION None.
ITEM 6. EXHIBITS See attached exhibit index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN PACIFIC CORPORATION |
||||
Date: August 12, 2011 | /s/ JOSEPH CARLEONE | |||
Joseph Carleone | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
/s/ DANA M. KELLEY | ||||
Dana M. Kelley | ||||
Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
EXHIBIT NO. DOCUMENT DESCRIPTION
3.1
|
Restated Certificate of Incorporation, as amended, of American Pacific Corporation (incorporated by reference to Exhibit 4.(a) to the registrants Registration Statement on Form S-3 (File No. 33-15674)) | |
3.2
|
Articles of Amendment to the Restated Certificate of Incorporation of American Pacific Corporation, as filed with the Secretary of State, State of Delaware, on October 7, 1991 (incorporated by reference to Exhibit 4.3 to the registrants Registration Statement on Form S-3 (File No. 33-52196)) | |
3.3
|
Articles of Amendment to the Restated Certificate of Incorporation of American Pacific Corporation, as filed with the Secretary of State, State of Delaware, on April 21, 1992 (incorporated by reference to Exhibit 4.4 to the registrants Registration Statement on Form S-3 (File No. 33-52196)) | |
3.4
|
Certificate of Amendment of Restated Certificate of Incorporation of American Pacific Corporation, as filed with the Secretary of State, State of Delaware, on March 8, 2011 (incorporated by reference to Exhibit 3.1 to the registrants Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on March 11, 2011) | |
3.5
|
American Pacific Corporation Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the registrants Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on March 11, 2011) | |
3.6
|
Rights Agreement, dated as of August 3, 1999, between American Pacific Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 1 to the registrants Registration Statement on Form 8-A (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on August 6, 1999) | |
3.7
|
Form of Letter to Stockholders that accompanied copies of the Summary of Rights to Purchase Preferred Shares (incorporated by reference to Exhibit 2 to the registrants Registration Statement on Form 8-A (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on August 6, 1999) | |
3.8
|
Amendment, dated as of July 11, 2008, between American Pacific Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on July 11, 2008) | |
3.9
|
Amendment No. 2 to Rights Agreement, dated as of September 14, 2010, between American Pacific Corporation and American Stock Transfer & Trust Company (incorporated by reference to Exhibit 4.1 to the registrants Current Report on Form 8-K (File No. 001-08137) filed by the registrant with the Securities and Exchange Commission on September 20, 2010) | |
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1*
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2*
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101
|
The following materials from the registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes (furnished herewith) |
* | Exhibits 32.1 and 32.2 are furnished to accompany this Quarterly Report on Form 10-Q but shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
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