Reuters: Mergers News: TEXT-S&P revises American Pacific Corp outlook to positive

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TEXT-S&P revises American Pacific Corp outlook to positive Jun 8th 2012, 18:07 Fri Jun 8, 2012 2:07pm EDT Overview -- Las Vegas-based American Pacific Corp. announced it has reached an agreement to divest its Aerospace Equipment segment for gross proceeds of approximately $46 million. -- We are revising our outlook on American Pacific to positive from stable. -- At the same time, we are affirming our ratings, including the 'B' corporate credit rating, on the company. -- The positive outlook reflects our opinion that improving operating performance over the next year and the likely use of a majority of the divestiture proceeds for debt reduction could support credit metrics in line with slightly higher ratings. Rating Action On June 8, 2012, Standard & Poor's Ratings Services revised its outlook on American Pacific Corp. to positive from stable. At the same time, we affirmed all our ratings, including the 'B' corporate credit rating, on the company. Rationale The outlook revision follows the company's recent announcement that it has reached an agreement to sell its Aerospace Equipment segment to Moog Inc. (BB/Stable/--) for gross proceeds of $46 million. We view the transaction as neutral to the business risk profile because this segment offered lower growth, generated somewhat lower EBITDA margins than that of the overall company, and served the same end markets as the specialty chemicals segment. However, we expect the company to use the majority of the proceeds to reduce debt given its focus on strengthening its balance sheet, thus enhancing the financial risk profile. The outlook revision also reflects our expectation that American Pacific will sustain the recent improvement in its operating performance and credit metrics. Total debt (adjusted for capitalized operating leases, environmental liabilities, and unfunded pension and other postretirement obligations) to EBITDA improved significantly to 3.3x as of March 31, 2012, from a trough of 10.6x for the same period the prior year. Based on our scenario forecasts, the company will likely maintain leverage between 3x and 4x over the next year, given our expectations for moderate debt reduction, which the loss of about $5 million in EBITDA from the divested segment partially offsets. The ratings on American Pacific reflect the company's business position as a niche provider of ammonium perchlorate (AP) and active pharmaceutical ingredients. The ratings also reflect a narrow customer and product base, demand that is somewhat dependent on governmental appropriations in the AP business, and the continued success of a few key drugs in the active pharmaceutical ingredients business. Partially offsetting these risks are the company's positions as a sole- and dual-source supplier in markets that represent a significant portion of its revenues. We characterize the company's business profile as "weak" and financial profile as "aggressive". American Pacific generated approximately $239 million in revenues for the 12 months ended March 31, 2012. The company's fine chemicals business consists of the production of active pharmaceutical ingredients for pharmaceutical customers. High switching costs--once a drug receives Food and Drug Administration (FDA) approval--and limited pricing pressure from the customer base mitigate the high customer concentration risk for this business. (The company derives about 86% of this segment's sales from four customers.) However, it's still exposed to risks associated with FDA approvals of new products, newer drugs that compete with current drug offerings, and, to a lesser extent, generic drug competition as patents expire. The loss of a key customer as a result of one or more of these factors could significantly affect profitability and cash flows. The company, through its more-profitable specialty chemicals segment, is the sole U.S. domestic supplier of AP, a chemical used as an oxidizing agent in composite solid fuels for rockets and booster motors. A relatively small number of U.S. Department of Defense (DoD) and NASA contractors generate demand in this market. Risks inherent in government contracts and dependence on Congressional appropriations, particularly in an election year, make the outlook for long-term demand uncertain. Moreover, the company's single operating facility for AP is subject to hazards associated with chemical manufacturing and other potential disruptions that could limit production. The dual lines of production that the company has in place at this facility mitigate only some of this risk. Although AP customer volume requirements vary substantially from quarter to quarter, the company conducts a meaningful portion of its business through contracts that provide some protection against volume and margin deterioration. The continued uncertainty in demand for AP over the next few years reflects the potential that programs related to NASA and ongoing requirements from the DoD could affect the level and timing of profits. In fiscal 2011, the company generated the bulk of earnings in the fourth quarter, primarily as a result of the timing of orders for AP. However, we expect increased sales and profitability from a mix of new and existing products in its fine chemicals segment to somewhat offset the potential for irregular profitability within its specialty chemicals segment. Earlier this year, the Drug Enforcement Agency (DEA) approved American Pacific as a bulk manufacturer of schedule II controlled substances, and the company signed a long-term contract with a large pharmaceutical customer. We believe the company's penetration into this area represents a modest revenue growth opportunity. American Pacific's financial risk profile is aggressive. The key ratio of funds from operations (FFO) to total debt was 16% as of March 31, 2012, in line with the 10% to 15% range that we consider appropriate for the rating. The company's sizeable environmental liabilities relate to the perchlorate contamination in groundwater near its former Henderson, Nev., site, with about $23 million reserved for future remediation efforts as of March 31, 2012. Although we expect this liability to be manageable given its current liquidity position, remediation may be more challenging or expensive than we expect. Liquidity We expect liquidity to remain "adequate" with cash sources that will more than cover needs over the next 18 to 24 months. As of March 31, 2012, American Pacific had about $21 million in cash and no borrowings under $20 million asset-based lending (ABL) facility. Based on our scenario forecast, we do not expect the company will need to use this facility in fiscal-year 2012. Instead, we expect it to fund its near-term liquidity needs through its cash flows and existing cash balances. Based on our scenario forecast, we expect free cash flow to be neutral in the fiscal year ending September 2012, with about $13 million in capital expenditures and about $12 million in remediation spending, mostly related to its former Henderson site. Debt maturities are manageable, with no significant scheduled maturities until November 2014 when the ABL facility would come due if the senior notes are not refinanced. There are no maintenance financial covenants in the credit agreement. However, the ABL facility has springing financial covenants that apply when the company uses the facility and if availability falls below $5 million. The springing financial covenants include a 1.1x fixed-charge covenant and an annual capital expenditure limit of $21.5 million. Based on our scenario forecasts, we do not expect the company will use its ABL facility and, therefore, it should not be subject to the springing covenants in the next few quarters. Relevant aspects of our assessment of the company's liquidity profile include: -- We expect the company's sources of liquidity to exceed its uses by 1.2x or more over the next 12 to 24 months; -- Net sources would be positive even with a 15% drop in EBITDA; and -- American Pacific would likely be able to absorb low-probability shocks based on available liquidity. Recovery analysis For the complete recovery analysis, see our recovery report on American Pacific, published Feb. 24, 2012, on RatingsDirect. Outlook The positive outlook reflects our expectation that the company will use the divestiture proceeds to moderately reduce debt, thus improving its financial risk profile. The outlook also reflects our belief that the company's improved operating performance is sustainable over at least the next year, given its new product development and increased backlog in the fine chemicals segment. We could raise the ratings by one notch if the company moderately reduces debt as we expect, and it is able to increase EBITDA margins by 100 basis points or more above our expectations. In this scenario, we would expect FFO to total adjusted debt to approach 20% and that free cash flow would be modestly positive. We would also need to be more comfortable with the stability and visibility of American Pacific's future revenue streams. However, there could be some volatility in quarterly results because of the uncertainty regarding the timing of profits, particularly in the specialty chemicals segment. We could consider a downgrade if the company cannot sustain recent improvements in operating profitability because of unexpected business challenges, such as the loss of a key customer. Based on our scenario forecasts, we could lower the rating if organic revenues decline by 15% or more from our expectations, coupled with a 300-basis point decline in EBITDA margins. In this scenario, we would expect FFO to total adjusted debt to decrease below 10%. We would also consider a downgrade if the remediation of its environmental liabilities proves to be more challenging than we expect, with the potential for larger cash outlays. Related Criteria And Research -- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008 Ratings List Ratings Affirmed; Outlook Action To From American Pacific Corp. Corporate Credit Rating B/Positive/-- B/Stable/-- Ratings Affirmed American Pacific Corp. Senior Unsecured B Recovery Rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Link this Share this Digg this Email Reprints

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