SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2002
Commission file number 0-4217
ACETO CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-1720520
- --------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Hollow Lane, Lake Success, NY 11042
- --------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 627-6000
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per Share
--------------------------------------
(Title of Class)
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 |X| No |_|
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the close of the period covered by this report. Shares of
Common Stock - 6,526,773
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheets - March 31, 2002 and
June 30, 2001.................................................... 3-4
Consolidated Statements of Income - Nine Months
Ended March 31, 2002 and 2001.................................... 5
Consolidated Statements of Income - Three Months
Ended March 31, 2002 and 2001.................................... 6
Consolidated Statements of Cash Flows - Nine Months
Ended March 31, 2002 and 2001.................................... 7
Notes to Consolidated Financial Statements....................... 8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 16-29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................................... 29-30
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 31
Signatures........................................................ 32
Page 2 of 32
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, June 30,
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 12,698 $ 7,310
Short-term investments 1,367 988
Receivables:
Trade, less allowance for doubtful accounts:
(March, $585; June, $316) 42,281 38,285
Other 3,840 3,215
-------- --------
46,121 41,500
Inventory 34,175 37,818
Prepaid expenses 779 686
Deferred income tax benefit, net 1,773 1,773
Property held for sale 483 483
-------- --------
Total current assets 97,396 90,558
Long-term investments -- 369
Long-term notes receivable 741 794
Property and equipment:
Machinery and equipment 974 953
Leasehold improvements 1,143 1,093
Computer equipment 1,487 1,378
Furniture and fixtures 582 983
Automobiles 314 264
-------- --------
4,500 4,671
Less accumulated depreciation and amortization 2,106 2,132
-------- --------
2,394 2,539
Goodwill, less accumulated amortization 9,969 10,367
(March, $967; June, $544)
Other assets 955 546
-------- --------
Total assets $111,455 $105,173
======== ========
See accompanying notes to consolidated financial statements.
Page 3 of 32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
March 31, June 30,
2002 2001
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 2,990 $ 1,533
Short term bank loans 7,283 8,864
Notes payable - acquisition -- 2,313
Current installments on long-term
liabilities 272 397
Accounts payable 10,939 10,529
Accrued merchandise purchases 2,681 1,626
Accrued compensation 3,328 2,913
Accrued environmental remediation 1,284 1,292
Accrued income taxes 1,375 519
Other accrued expenses 9,545 5,313
--------- ---------
Total current liabilities 39,697 35,299
Long-term liabilities, excluding current
installments 62 671
Shareholders' equity:
Common stock,$.01 par value per share;
Authorized 20,000,000 shares;
Issued: 9,001,290 shares;
Outstanding: March, 6,526,773 shares;
June, 6,503,707 shares 90 90
Capital in excess of par value 56,484 56,416
Retained earnings 40,265 38,006
Treasury stock, at cost:
March, 2,474,517 shares
June, 2,497,583 shares (24,319) (24,545)
Accumulated other comprehensive loss (824) (764)
--------- ---------
Total shareholders' equity 71,696 69,203
--------- ---------
Commitments and contingencies
Total liabilities and shareholders'
equity $ 111,455 $ 105,173
========= =========
See accompanying notes to consolidated financial statements.
Page 4 of 32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Nine Months Ended
March 31
--------------------------
2002 2001
--------- ---------
Net sales $ 164,600 $ 122,118
Cost of sales 138,130 102,490
--------- ---------
Gross profit 26,470 19,628
Selling, general and administrative
expenses 21,809 14,136
--------- ---------
Operating profit 4,661 5,492
Other income (expense):
Interest expense (301) (2)
Interest and other income 351 883
--------- ---------
50 881
--------- ---------
Income before income taxes 4,711 6,373
Provision for income taxes 1,410 2,350
--------- ---------
Net income $ 3,301 $ 4,023
========= =========
Net income per common share:
Basic $ 0.51 $ 0.67
Diluted 0.50 0.67
Weighted average shares outstanding:
Basic 6,516 5,992
Diluted 6,546 6,021
See accompanying notes to consolidated financial statements.
Page 5 of 32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31
------------------------
2002 2001
-------- --------
Net sales $ 61,594 $ 43,317
Cost of sales 51,837 35,881
-------- --------
Gross profit 9,757 7,436
Selling, general and administrative
expenses 7,679 4,663
-------- --------
Operating profit 2,078 2,773
Other income (expense):
Interest expense (92) --
Interest and other income 12 275
-------- --------
(80) 275
-------- --------
Income before income taxes 1,998 3,048
Provision for income taxes 475 1,095
-------- --------
Net income $ 1,523 $ 1,953
======== ========
Net income per common share:
Basic $ 0.23 $ 0.33
Diluted 0.23 0.33
Weighted average shares outstanding:
Basic 6,526 5,966
Diluted 6,562 5,980
See accompanying notes to consolidated financial statements.
Page 6 of 32
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
March 31
---------------------
2002 2001
-------- --------
Operating activities:
Net income $ 3,301 $ 4,023
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,187 648
Provision (recovery) for doubtful accounts 284 (33)
Foreign currency translation adjustment (60) --
Income tax benefit on exercise of stock options 10 --
Deferred tax provision -- 145
Changes in assets and liabilities:
Investments - trading securities (10) (41)
Trade accounts receivable (4,280) (2,757)
Other receivables (651) 1,341
Inventory 1,959 3,727
Prepaid expenses (93) (12)
Other assets (45) 32
Drafts and acceptances payable 1,457 127
Accounts payable 410 144
Accrued merchandise purchases 1,055 (3,757)
Accrued compensation 415 35
Accrued environmental remediation (8) (15)
Accrued income taxes 856 4
Other accrued expenses and long
term liabilities 4,286 312
-------- --------
Net cash provided by operating activities 10,073 3,923
Investing activities:
Purchases of investments - held-to-maturity -- (36)
Proceeds from investments - held to maturity -- 8,077
Payments received on notes receivable 79 66
Purchases of property and equipment (386) (637)
Acquisition of business, net of cash acquired (563) 2,611
Payments received from Schweizerhall Holding AG -- 7,162
Proceeds from settlement of certain acquired
accounts receivable balances recorded in goodwill 1,571 --
-------- --------
Net cash provided by investing activities 701 17,243
Financing activities:
Payments of long-term liabilities (734) (166)
Proceeds from exercise of stock options 239 182
Payments for purchases of treasury stock (84) (1,332)
Issuance of treasury stock to employees 129 92
Payments of bank loans (1,581) --
Payments of notes payable - acquisition (2,313) --
Payments of cash dividends (1,042) (890)
-------- --------
Net cash used in financing activities (5,386) (2,114)
Net increase in cash and cash equivalents 5,388 19,052
Cash and cash equivalents at beginning of period 7,310 2,811
-------- --------
Cash and cash equivalents at end of period $ 12,698 $ 21,863
======== ========
See accompanying notes to consolidated financial statements.
Page 7 of 32
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of Aceto Corporation and its subsidiaries
included herein have been prepared by the Company and reflect all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented. Interim results are not necessarily indicative of results which may
be achieved for the full year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America.
Accordingly, these statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in the Company's
Form 10-K for the year ended June 30, 2001.
NOTE 2: BUSINESS ACQUISITIONS
On March 26, 2001, the Company acquired (i)the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG, a Switzerland
corporation and (ii) certain assets relating to the Pharmaceutical Ingredients
business of Schweizerhall, Inc., a New Jersey corporation, and a wholly owned
subsidiary of Schweizerhall Holding AG (collectively, "Schweizerhall Pharma").
Schweizerhall Pharma's distribution business is an international pharmaceutical
distribution business with offices located in: Hamburg, Germany; Wormerveer, The
Netherlands (a suburb of Amsterdam); Paris, France; Piscataway, New Jersey;
Singapore; Mumbai, India; and Hong Kong. Its principal activities are the supply
of Active Pharmaceutical Ingredients and Advanced Intermediates.
The total purchase price for the Schweizerhall Pharma acquisition was $23,331.
This amount consisted of 600 restricted shares of the Company's Common Stock,
the assumption of $8,966 of Schweizerhall Holding AG debt, $3,324 in cash, the
issuance of notes of $4,626 and acquisition costs of $1,240. The quoted market
price of the Company's common stock on March 26, 2001, of $8.625 per share, was
used to approximate the fair value of the 600 shares issued, which amounted to
$5,175. The shares may not be sold unless registered or unless an exemption from
registration is available. In connection with the closing of the acquisition the
Company assumed certain debt of Schweizerhall Holding AG in excess of the amount
of the purchase price. As a result, at closing Schweizerhall Holding AG paid
$7,162 to the Company. Subsequent to March 31, 2001 the Company paid
Schweizerhall Holding AG $8,987 and was released from a portion of the debt
assumed at closing.
The notes payable of $4,626 issued at closing bear interest at 3%. Principal and
interest are payable monthly. Monthly principal payments are determined by the
lesser of the outstanding principal balance or the book value of certain
inventory (as defined in the note agreement) sold in the preceding month. Any
unpaid amounts are due in full on March 31, 2002. Amounts outstanding under the
notes were $2,313 as of June 30, 2001. These notes were paid in full during the
quarter ended September 30, 2001.
Page 8 of 32
The acquisition was accounted for as a purchase and, accordingly, the cost of
the acquisition was allocated to the assets acquired, based upon their fair
values at the date of acquisition. During the quarter ended September 30, 2001,
the Company received $1,571 from the previous owners of Schweizerhall Pharma in
settlement of certain accounts receivable balances.
The excess of cost over the fair value of assets acquired (goodwill) amounted to
$6,547. The goodwill is being amortized on a straight-line basis over a period
of twenty years. Amortization of goodwill amounted to $243 for the nine months
ended March 31, 2002. The non-competition agreements are valued at $300 and are
being amortized over three years, the term of the non-competition agreements. An
intangible asset related to customer contracts is valued at $600 and is being
amortized over five years. The allocation of the purchase price has been
completed.
The purchase agreement provides for two additional payments pertaining to
inventory and tax savings. An additional payment for $2,639 was made in May 2002
in connection with inventory which will be allocated to the additional inventory
purchased. Any payments made in connection with the tax savings adjustment will
be recorded as additional goodwill.
Pro forma results of operations for the quarter and nine months ended March 31,
2001 were not provided as the information needed to prepare such pro forma
information was not available.
In connection with the March 26, 2001 Schweizerhall Pharma acquisition, the
Company recorded liabilities (included in "other accrued expenses") for employee
severance and for operating lease payments as a result of exit plans formulated
as of the acquisition date. The severance accrual relates to involuntary
termination of administration and middle management personnel from the acquired
operations. During fiscal 2002, the Company refined its estimation of severance
to include certain additional administrative and middle management employees.
The Company does not anticipate that additional provisions will be required, as
the Company has finalized its exit plans. The operating lease payment relates to
equipment and facilities leases assumed by the Company. Amounts accrued
represent management's estimate of the cost to exit the equipment and facilities
leases, including lease payments and termination costs, net of recoverable
amounts.
The changes in exit plan liabilities during the nine months ended March 31, 2002
are as follows:
Severance Lease
Liability Liability Total
--------- --------- -----
Balance July 1, 2001 $ 106 $ 39 $ 145
Reserve established in fiscal 2002 413 5 418
Utilized in fiscal 2002 (paid) (519) (44) (563)
----- ----- -----
Balance March 31, 2002 $ -- $ -- $ --
===== ===== =====
Page 9 of 32
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the nine months ended March 31,
2002 and 2001 was as follows:
2002 2001
---- ----
Interest paid $329 $ 1
Income taxes paid 902 2,190
During the nine months ended March 31, 2002 the Company recorded additional exit
plan liabilities of $418, which have been reflected as a component of other
accrued expenses and goodwill on the accompanying consolidated balance sheet.
NOTE 4: SEGMENT INFORMATION
The Company has six reportable segments which are organized by products: (1)
Agrochemicals, whose products include herbicides, fungicides and insecticides,
as well as a sprout inhibitor for potatoes, (2) Industrial Chemicals, whose
products include a variety of specialty chemicals used in adhesives, coatings,
food, fragrance, cosmetics and many other areas, (3) Organic Intermediates and
Colorants, whose products include dye and pigment intermediates used in the
color-producing industries like textiles, inks, paper and coatings, as well as
intermediates used in production of agrochemicals, (4) Pharmaceuticals,
Biochemicals & Nutritionals products, which include the active ingredients for
generic pharmaceuticals, vitamins and nutritional supplements, (5)
Pharmaceutical Intermediates and Custom Manufacturing products, used in
preparation of pharmaceuticals, primarily by major ethical drug companies and
(6) Institutional Sanitary Supplies and Other, whose products include cleaning
solutions, fragrances and deodorants used by commercial and industrial
establishments. The Company does not allocate assets by segments. The Company's
chief decision maker evaluates performance of the segments based on gross
profit. Summarized financial information for each of the segments for the nine
and three months ended March 31, 2002 and 2001 follows:
Page 10 of 32
Nine Months Ended March 31, 2002 and 2001
Institutional
Organic Pharmaceuticals, Pharmaceutical Sanitary
Agro- Industrial Intermediates Biochemicals & Intermediates & Supplies & Consolidated
Chemicals Chemicals & Colorants Nutritionals Custom Mfg. Other Totals
2002
Net sales $ 9,922 35,693 28,949 69,510 16,740 3,786 $164,600
Gross profit $ 2,869 5,394 3,698 13,103 2,523 1,613 29,200
Unallocated cost
of sales (1) 2,730
--------
Net gross profit $ 26,470
========
2001
Net sales $ 10,230 38,479 35,650 26,440 7,293 4,026 $122,118
Gross profit $ 3,761 6,997 4,738 5,443 1,164 1,540 $ 23,643
Unallocated cost
of sales (1) 4,015
--------
Net gross profit $ 19,628
========
Three Months Ended March 31, 2002 and 2001
Institutional
Organic Pharmaceuticals, Pharmaceutical Sanitary
Agro- Industrial Intermediates Biochemicals & Intermediates & Supplies & Consolidated
Chemicals Chemicals & Colorants Nutritionals Custom Mfg. Other Totals
2002
Net sales $ 3,540 13,625 10,856 26,135 6,117 1,321 $ 61,594
Gross profit $ 1,070 1,903 1,297 4,956 824 629 10,679
Unallocated cost
of sales (1) 922
--------
Net gross profit $ 9,757
========
2001
Net sales $ 4,805 13,895 12,505 8,588 2,042 1,482 $ 43,317
Gross profit $ 1,460 2,341 1,674 2,000 729 642 $ 8,846
Unallocated cost
of sales (1) 1,410
--------
Net gross profit $ 7,436
========
(1) Represents freight and storage costs that are not allocated to a segment.
Page 11 of 32
Foreign segment disclosures that became applicable as a result of the recent
acquisition of Schweizerhall Pharma are presented below.
Net Sales Gross Profit
---------------------- ----------------------
Nine Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
-------- -------- -------- --------
United States $116,528 $122,118 $ 18,184 $ 19,628
Germany 19,139 -- 3,511 --
The Netherlands 4,571 -- 1,136 --
France 9,617 -- 1,053 --
Asia-Pacific 14,745 -- 2,586 --
-------- -------- -------- --------
Total $164,600 $122,118 $ 26,470 $ 19,628
======== ======== ======== ========
Long-Lived Assets, net
---------------------------
March 31, June 30,
2002 2001
--------- --------
United States $1,833 $1,986
Germany 319 318
The Netherlands 121 126
France 88 71
Asia-Pacific 33 38
------ ------
Total $2,394 $2,539
====== ======
NOTE 5: INVENTORY
Inventory consists of the following:
March 31, June 30,
2002 2001
--------- --------
Finished goods $33,725 $37,287
Work in process 173 180
Raw materials 277 351
------- -------
Total $34,175 $37,818
======= =======
Page 12 of 32
NOTE 6: NET INCOME PER COMMON SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income per share computation for net income follows:
Nine Months Ended Three Months Ended
March 31, March 31,
2002 2001 2002 2001
------ ------ ------ ------
Net income available for common
shareholders $3,301 $4,023 $1,523 $1,953
====== ====== ====== ======
Weighted average common shares
(basic) 6,516 5,992 6,526 5,966
Effect of dilutive securities:
Stock options 30 29 36 14
------ ------ ------ ------
Weighted average common and
potential common shares
outstanding (diluted) 6,546 6,021 6,562 5,980
====== ====== ====== ======
Basic income per share $ 0.51 $ 0.67 $ 0.23 $ 0.33
Diluted income per share 0.50 0.67 0.23 0.33
For the three months ended March 31, 2002, December 31, 2001, September 30,
2001, March 31, 2001, December 31, 2000 and September 30, 2000, employee stock
options of 191, 312, 247, 550, 287 and 233 shares, respectively, were not
included in the diluted net income per share calculation because their effect
would have been anti-dilutive.
NOTE 7: COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
Nine Months Ended Three Months Ended
March 31, March 31,
2002 2001 2002 2001
------- ------- ------- -------
Comprehensive income:
Net income $ 3,301 $ 4,023 $ 1,523 $ 1,953
Foreign currency
translation adjustment (60) -- (104) --
------- ------- ------- -------
Total $ 3,241 $ 4,023 $ 1,419 $ 1,953
======= ======= ======= =======
NOTE 8: RECLASSIFICATIONS
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
In fiscal 2001, the Company adopted the provisions of the Financial Accounting
Standards Board's Emerging Issue Task Force (EITF) Issue No. 00-10, "Accounting
for Shipping and Handling Fees and Costs," which requires the Company to report
all amounts billed to a customer related to shipping and handling as revenue.
The Company includes all costs incurred for shipping and handling as cost of
sales. The Company has reclassified such billed amounts,
Page 13 of 32
which were previously netted in cost of sales, to net sales. As a result of this
reclassification, net sales and cost of goods sold were increased by $112 and
$353, respectively for the quarter and nine months ended March 31, 2001.
NOTE 9: IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
(a) In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141
requires that the purchase method of accounting be used for all future business
combinations and specifies criteria intangible assets acquired in a business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. Amortization expense relating to
goodwill was $423 and $255 for the nine months ended March 31, 2002 and 2001,
respectively. SFAS 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives, and
reviewed for impairment in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company will adopt the provisions of SFAS 141 and SFAS 142 effective July 1,
2002.
Upon adoption the Company will evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and make
any necessary reclassifications in order to conform with the new criteria in
SFAS 141 for recognition apart from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments. In addition, the Company
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset for
impairment in accordance with SFAS 142. Any impairment loss will be measured as
of the date of adoption and recognized as the cumulative effect of a change in
accounting principle. As of March 31, 2002, the Company had unamortized goodwill
in the amount of $9,969 and unamortized identifiable intangible assets in the
amount of $764.
Because of the extensive effort needed to comply with adopting SFAS 141 and 142,
it is not practicable to reasonably estimate the impact of adopting these
statements on the Company's consolidated financial statements as of the date of
this report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.
(b) In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning
after June 15, 2002, and establishes an accounting standard requiring the
recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The Company does not
expect the adoption of SFAS 143 to have a significant effect on its results of
operations or its financial position.
(c) In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets". SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. However, SFAS 144 retains the
Page 14 of 32
fundamental provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 supersedes the accounting
and reporting provisions of APB Opinion 30, REPORTING THE RESULTS OF
OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
the disposal of a segment of a business. However, SFAS 144 retains the
requirement of Opinion 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, by abandonment, or in distribution to
owners) or is classified as held for sale. SFAS 144 also amends ARB No. 51,
CONSOLIDATED FINANCIAL STATEMENTS, to eliminate the exception to consolidation
for a temporarily controlled subsidiary. The Company is required to adopt SFAS
144 effective July 1, 2002. The Company does not expect the adoption of SFAS 144
for long-lived assets held for sale to have a material impact on the
consolidated financial statements because the impairment assessment under SFAS
144 is largely unchanged from SFAS 121. The provisions of this statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities and
therefore, will depend on future actions initiated by management. As a result,
the Company cannot determine the potential effects that adoption of SFAS 144
will have on the consolidated financial statements with respect to future
disposal decisions, if any.
NOTE 10: SUBSEQUENT EVENTS
In May 2002, the Company entered into a $15,000 revolving credit agreement with
a major financial institution which expires June 30, 2004. Under the credit
agreement, the Company may obtain credit through direct borrowings and letters
of credit. The obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and is secured by sixty-five
percent of the capital of certain non-domestic subsidiaries which the Company
owns. There is no borrowing base on the credit agreement. Interest under the
credit agreement is at LIBOR plus 1.50%. The credit agreement contains several
covenants requiring, among other things, minimum levels of debt service and
tangible net worth.
Page 15 of 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in thousands, except per share amounts)
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
THIS QUARTERLY REPORT ON FORM 10-Q AND THE INFORMATION INCORPORATED BY REFERENCE
MAY INCLUDE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY INTENDS THE
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY'S EXPECTED
FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING
PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT ESTIMATES AND PROJECTIONS ABOUT
OUR INDUSTRY AND OUR BUSINESS. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," OR VARIATIONS OF SUCH
WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS INCLUDE,
BUT ARE NOT LIMITED TO: THE INABILITY TO MANAGE OUR RECENT RAPID GROWTH,
UNFORESEEN ENVIRONMENTAL LIABILITIES AND THE UNCERTAIN MILITARY, POLITICAL AND
ECONOMIC CONDITIONS IN THE WORLD. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
PUBLICLY THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS MAY BE REQUIRED BY LAW.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations is based on its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company evaluates its estimates on a regular basis,
including those related to bad debts, inventories, goodwill and intangible
assets, and environmental contingencies. The Company bases its estimates on
various factors including historical experience, consultation and advice from
third party subject matter experts and on various assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and circumstances.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Page 16 of 32
The Company recognizes revenue from product sales at the time of shipment and
passage of title to the customer. Such revenues do not involve difficult,
subjective, or complex judgments. The Company does not offer product warranties
to its customers.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Allowances for doubtful accounts are based on historical experience and known
factors regarding specific customers and industries in which the customers
operate. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.
The Company writes down its inventories for estimated slow moving and obsolete
goods equal to the difference between the carrying cost of the inventory and the
estimated market value based upon assumptions about future demand and market
conditions. A significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. Additionally, the Company's
estimates of future product demand may prove to be inaccurate, in which case the
Company may have understated or overstated the write-down required for excess
and obsolete inventory. In the future, if the Company's inventory is determined
to be overvalued, it would be required to recognize such costs in its cost of
goods sold at the time of such determination. Likewise, if the Company does not
properly estimate the lower of cost or market of its inventory and it is
therefore determined to be undervalued, it may have over-reported its cost of
goods sold in previous periods and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand could have a significant
impact on the value of the Company's inventory and its reported operating
results.
Goodwill and other intangible assets consist of assets arising from acquisitions
which are being amortized on a straight-line basis. The realizability and period
of benefit of goodwill is evaluated periodically to assess recoverability and,
if necessary, impairment or adjustment of the period benefited would be
recognized. Aceto is required to adopt SFAS No. 142, Goodwill and Other
Intangible Assets, effective July 1, 2002. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
at least annually for impairment. In assessing the recoverability of the
Company's goodwill and other intangible assets, the Company must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or their related
assumptions change in the future, the Company may be required to record
impairment charges for these assets not previously recorded.
Page 17 of 32
The Company establishes reserves for environmental matters and other
contingencies when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. If the contingency is resolved
for an amount greater or less than has been accrued, or the Company's share of
the contingency increases or decreases, or other assumptions relevant to the
development of the estimate were to change, we would recognize an additional
expense or benefit in income in the period such determination was made.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
Net Sales By Segment
Nine Months Ended March 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $ 9,922 6.0% $ 10,230 8.4%
Industrial Chemicals 35,693 21.7 38,479 31.5
Organic Intermediates &
Colorants 28,949 17.6 35,650 29.1
Pharmaceuticals,
Biochemicals & Nutritionals 69,510 42.2 26,440 21.7
Pharmaceutical
Intermediates & Custom Mfg 16,740 10.2 7,293 6.0
Institutional Sanitary
Supplies & Other 3,786 2.3 4,026 3.3
-------- ----- -------- -----
TOTAL NET SALES $164,600 100.0% $122,118 100.0%
======== ===== ======== =====
Page 18 of 32
Gross Profit By Segment
Nine Months Ended March 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $ 2,869 9.8% $ 3,761 15.9%
Industrial Chemicals 5,394 18.5 6,997 29.6
Organic Intermediates &
Colorants 3,698 12.7 4,738 20.0
Pharmaceuticals,
Biochemicals & Nutritionals 13,103 44.9 5,443 23.0
Pharmaceutical
Intermediates & Custom Mfg 2,523 8.6 1,164 4.9
Institutional Sanitary
Supplies & Other 1,613 5.5 1,540 6.6
------- ----- ------- -----
TOTAL GROSS PROFIT BEFORE
FREIGHT AND STORAGE COSTS $29,200 100.0% $23,643 100.0%
===== =====
Unallocated Cost of Sales 2,730 4,015
------- -------
NET GROSS PROFIT $26,470 $19,628
======= =======
SALES AND GROSS PROFIT:
Net sales for the nine months ended March 31, 2002 compared with the same period
ended March 31, 2001 increased $42,482 to $164,600, an increase of 35%. Sales
attributable to the acquisition of Schweizerhall Pharma, which closed on March
26, 2001, were $47,087, accounting for more than the entire increase in sales.
Sales excluding the Schweizerhall Pharma business were $117,513, a decrease of
$4,605, or 4%.
Page 19 of 32
Sales in the Pharmaceuticals, Biochemicals and Nutritionals segment showed the
largest increase in the amount of $43,070, from $26,440 to $69,510, an increase
of 163%. 74% of the sales derived from the Schweizerhall Pharma acquisition or
$34,757, were included in this segment. Included in this segment, as well, were
sales of a new generic drug to an Australian customer totaling $2,589. Domestic
sales increased 22% or $5,724, to $32,164. This increase in domestic sales was
primarily caused by significant sales of one generic pharmaceutical product,
which was slightly offset by softer demand in nutritional supplements.
The balance of the sales related to the Schweizerhall Pharma acquisition,
$12,330, were in the Pharmaceutical Intermediates and Custom Manufacturing
segment. This segment showed an overall increase of $9,447, from $7,293 to
$16,740, or 130%, compared with the same period in fiscal 2001. Excluding the
sales attributed to the Schweizerhall Pharma acquisition, the segment decreased
$2,883, attributable mainly to lost sales from this segment's former primary
supplier. This supplier terminated a supply arrangement in October 2000.
Agrochemical sales decreased 3%, to $9,922, from $10,230. A restructuring of the
Company's arrangement with a third party resulted in additional sales of $2,487
during the period ended March 31, 2002. Excluding this, sales decreased $2,795
or 27%. The primary cause was a reduction of sales to one large customer, along
with a general decline in demand.
Sales in the Industrial Chemical segment fell $2,786 or 7% to $35,693 from last
year. The decrease in sales are a reflection of the downturn in the entire
industrial chemical market.
The Organic Intermediates and Colorants segment has also been adversely affected
by the economic slow down, especially in the dyestuff and pigment sectors. Sales
in the segment declined from $35,650 to $28,949 for a decrease of $6,701 or 19%.
Sales of the remaining segment, Institutional Sanitary Supplies and Other, were
6% lower, also attributable to general economic conditions in the U.S. economy.
This segment was especially disrupted by the terrorist attacks of September 11,
2001. Over 30% of this segment's customer base is in the New York metropolitan
area.
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased 24%, from $23,643 to $29,200. The inclusion of
Schweizerhall Pharma in fiscal 2002, again in the Pharmaceuticals, Biochemicals
and Nutritionals segment, and to a lesser extent, the Pharmaceutical
Intermediates and Custom Manufacturing segment, accounted for $6,891. Gross
profit on our continuing domestic and certain foreign sales declined 6%, from
$23,643 to $22,309, comparable to the 4% decline in those sales.
The gross margins resulting from the Schweizerhall Pharma business in the
Pharmaceuticals, Biochemicals and Nutritionals segment amounted to $4,762, or
13.7% versus 24.0% for the rest of this segment's business.
Page 20 of 32
The gross margins realized from the Schweizerhall Pharma business in this
segment are generally lower than the margins earned by our traditional business
due to a different pricing and product mix.
The reverse is true in the Pharmaceutical Intermediates and Custom Manufacturing
segment. The gross margins attributable to the Schweizerhall Pharma business
amounted to $2,129 and is at substantially higher gross margins than our
traditional business, causing the higher overall percentage increase in gross
margins. Gross margins in 2002 are 15% compared to 9% last year if we adjust for
the terminated supply agreement commission.
The Agrochemicals segment showed a decline in gross margins of 24%, which was
much larger than the 3% decline in sales. The restructuring of the Company's
arrangement referred to earlier led to an increase in sales, but the same gross
profit contribution. This is the primary cause of this discrepancy between sales
and gross profit percentages for the period.
The Industrial Chemicals segment's gross profit declined 23%, which was
significantly higher than the 7% decline in sales. Continued erosion of margins
in many areas, particularly printing inks and electronic chemicals, caused this
higher percentage decrease in margins than sales.
Margins in the Organic Intermediates and Colorants segment decreased 22%, which
was slightly more than the 19% decrease in sales. The mix of products sold
during the period accounted for this small discrepancy.
Finally, gross margins in the remaining segment, Institutional Sanitary Supplies
and Other, increased 5% as opposed to a 6% decrease in sales. The increased
gross margins are a direct result of changes from a pricing review and product
mix.
Unallocated domestic cost of sales declined significantly, from $4,015 to
$2,730, or 32%. The results were achieved by lower amounts of inventory in
warehouses, lower quantity sold and a negotiated reduction of storage rates paid
as part of a corporate initiative.
Selling, general and administrative ("SG&A") expenses as a percentage of sales
were 13.2% in the first nine months of fiscal 2002 versus 11.6% for the
comparable period in fiscal 2001. Selling, general and administrative costs
increased due primarily to the acquisition of the distribution business of
Schweizerhall Pharma in March 2001. Other factors contributing to the increase
were: rising employee health insurance costs, additional professional fees
related to the Company's tax strategy and global restructuring projects, higher
office rental costs due to additional space taken, a higher bad debt provision
and higher personnel costs due to the creation of new positions and overall wage
increases.
For the nine months ended March 31, 2002 the operating profit was $4,661
compared to $5,492 in the comparable period last year. This decrease was
primarily due to lower net sales and margins in the domestic U.S.
Page 21 of 32
business in addition to higher SG&A expenses. These were offset in a positive
way by the nine months of operating profit generated by the distribution
business acquired from Schweizerhall Pharma in March 2001.
Interest and other income decreased to $351 for the nine months ended March 31,
2002 from $883 for the same period last year. The reduction in income of $532
was mainly attributable to a reduction in interest on investments of $339 due to
the holding of long-term investments during last year's period of over $6,000
which were subsequently sold in the second half of fiscal 2001.
Interest expense for the nine months ended March 31, 2002 was $301 versus $2 in
the prior year. This was entirely attributable to the short-term bank loans and
acquisition related debt arising from the Schweizerhall Pharma acquisition. The
total balance of this debt was reduced from $11,177 at June 30, 2001 to $7,283
at March 31, 2002 through debt payments totaling $3,894.
The effective tax rate for the nine months ended March 31, 2002 was 29.9%
compared to last year's 36.9%. The decrease in the effective tax rate is
primarily a reflection of earnings in lower tax jurisdictions due to the
Schweizerhall Pharma acquisition.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net Sales By Segment
Three Months Ended March 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $ 3,540 5.8% $ 4,805 11.1%
Industrial Chemicals 13,625 22.1 13,895 32.1
Organic Intermediates &
Colorants 10,856 17.6 12,505 28.9
Pharmaceuticals,
Biochemicals & Nutritionals 26,135 42.4 8,588 19.8
Pharmaceutical
Intermediates & Custom Mfg 6,117 9.9 2,042 4.7
Institutional Sanitary
Supplies & Other 1,321 2.2 1,482 3.4
--------- ------ ------- -----
TOTAL NET SALES $ 61,594 100.0% $43,317 100.0%
========= ====== ======= =====
Page 22 of 32
Gross Profit By Segment
Three Months Ended March 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $ 1,070 10.0% $ 1,460 16.5%
Industrial Chemicals 1,903 17.8 2,341 26.5
Organic Intermediates &
Colorants 1,297 12.2 1,674 18.9
Pharmaceuticals,Biochemicals
& Nutritionals 4,956 46.4 2,000 22.6
Pharmaceutical
Intermediates & Custom Mfg 824 7.7 729 8.2
Institutional Sanitary
Supplies & Other 629 5.9 642 7.3
------- ----- ------- -----
TOTAL GROSS PROFIT BEFORE
FREIGHT AND STORAGE COSTS $10,679 100.0% $ 8,846 100.0%
===== =====
Unallocated Cost of Sales 922 1,410
------- -------
NET GROSS PROFIT $ 9,757 $ 7,436
======= =======
SALES AND GROSS PROFIT:
Sales for the three months ended March 31, 2002 increased $18,277 or 42% to
$61,594 from $43,317 for the comparable period in 2001. Sales attributable to
the acquisition of Schweizerhall Pharma, which closed on March 26, 2001 were
$15,368, accounting for 84% of the sales increase. The balance of the increase
came from the strong showing in the Pharmaceticals, Biochemicals and
Nutritionals segment.
Sales in the Pharmaceuticals, Biochemicals and Nutritionals segment showed the
largest increase, 204%, from $8,588 to $26,135, including 71%, or $10,841, of
the sales from the Schweizerhall Pharma acquisition. Also included were sales of
a new generic drug sold to an Australian customer in the amount of $1,981.
Domestically, sales increased 55%,
Page 23 of 32
from $8,588 to $13,313. This was caused primarily by significantly higher sales
of one generic pharmaceutical product, offset slightly by continued weakness of
nutritional supplements sales.
The balance of the sales relating to the Schweizerhall Pharma acquisition were
in the Pharmaceutical Intermediates and Custom Manufacturing segment, which
totaled $4,527 for the three months ended March 31, 2002. This resulted in this
segment showing an overall increase of $4,075, or 200% over the same period last
year. Excluding these sales, the segment showed a decrease of $452, or 10%,
primarily due to the inclusion in 2001 of $518 relating to a sales commission
earned as a result of the termination of a supply agreement with a major
supplier.
Agrochemicals sales decreased 26%, from $4,805 to $3,540, despite additional
sales totaling $671 from a restructuring of the Company's arrangement with a
third party. Excluding this restructuring, sales decreased $1,936 or 40%
primarily relating to the loss of a large customer and decreased demand for
certain products caused by unfavorable weather conditions.
Sales in the Industrial Chemicals were off 2%, from $13,895 to $13,625 compared
to the previous year. The downturn is reflective of the softness in the overall
chemical market.
Sales in the Organic Intermediates and Colorants segment fell from $12,505 to
$10,856, a drop of 13%, due to general weak economic conditions, especially in
printing inks and electronic chemicals.
Sales of Institutional Sanitary Supplies and Other segment fell 11%, from $1,482
to $1,321, because of general economic conditions. This segment was especially
disrupted by the terrorist attacks of September 11, 2001. Over 30% of this
segments customer base is in the New York metropolitan area.
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) increased $1,833 or 21%, from $8,846 to $10,679. The
inclusion of Schweizerhall Pharma in fiscal 2002, again in the Pharmaceuticals,
Biochemicals and Nutritionals and, to a lesser extent, in the Pharmaceutical
Intermediates and Custom Manufacturing segments amounted to $1,878, virtually
the entire Company's increase. Gross profit dollars excluding the effects of
Schweizerhall Pharma were basically flat despite a 7% increase in comparable
sales. Included in the gross profit for fiscal 2001 was $904 relating to the
sales commission from a major supplier previously mentioned.
The gross margins resulting from the Schweizerhall Pharma business in the
Pharmaceuticals, Biochemicals and Nutritionals segment amounted to $1,124, or
10.4% versus 25.1% on all other sales in this segment. The gross margins
realized from the Schweizerhall Pharma business are lower than the margins
earned by our traditional business due to a different pricing and product mix.
Page 24 of 32
The reverse is true in the Pharmaceutical Intermediates and Custom Manufacturing
segment. The gross margins attributable to the Schweizerhall Pharma business in
2002 were $754 or 16.7%, at substantially higher gross margin than our
traditional business which achieved a 4% margin in the current quarter. Last
year's third quarter was positively impacted by the $518 related to the sales
commission previously mentioned. The exclusion of this commission resulted in a
14% gross margin in last year's third quarter.
Gross margins for the Agrochemicals segment were consistent at 30% during the
three months ended March 31, 2002 as compared to last year. However, gross
margin dollars decreased $390 or 27%. The decline was attributable to decreased
demand for certain products due to unfavorable weather conditions during this
year's period.
The Industrial Chemicals segment showed a decline in gross margins from $2,341
to $1,903 or 19% compared with a 2% decline in sales. This decline was caused by
competitive pressure on prices in many of its product lines, especially printing
inks and electronic chemicals, as well as the mix of products sold during the
quarter.
Similarly, the gross margins of the Organic Intermediates and Colorants segment
declined from $1,674 to $1,297 or 23%, considerably more than the reduction in
sales of 13%. The margin pressure caused by reducing inventory in the weakening
dyestuff and pigment sectors were the main cause of this disparity.
Conversely, the Institutional Sanitary Supplies and Other segment showed
improvement in gross margin percentages from 43.3% to 47.6% in spite of a slight
decrease in gross margin dollars of 2% compared with an 11% decline in sales.
Changes resulting from a review of pricing and a shift in product mix caused
this improvement.
Unallocated domestic cost of sales declined significantly, from $1,410 to $922
or 35%, primarily because of lower sales volume and a continuing corporate
initiative to reduce these costs, achieved by lower inventory levels in
warehouses and a negotiated reduction of storage rates paid.
Selling, general and administrative expenses as a percentage of sales were 12.5%
for the three months ended March 31, 2002, up from 10.8% in the third quarter of
fiscal 2001. The third quarter of fiscal 2002 included the added operating costs
totaling of the Schweizerhall Pharma distribution business acquired on March 26,
2001. The current period also had increased personnel and employee health
insurance costs, a higher bad debt provision and additional professional fees
related to our global restructuring and tax strategy projects.
The operating profit for the three months ended March 31, 2002 was $2,078, a
reduction of $695 compared to $2,773 in the quarter ended March 31, 2001. The
reduction in operating profit was attributable to the inclusion in last year's
third quarter of a $904 sales commission earned as a result of the termination
of a supply agreement with a major
Page 25 of 32
supplier. The operating profit generated in the current quarter by the
Schweizerhall Pharma business acquired in March 2001, helped to offset an
overall increase in the SG&A expenses and amortization expense related to the
acquisition.
Interest and other income of $12 for the three months ended March 31, 2002 was
lower by $263 versus $275 in the comparable quarter last year. This was
attributable to a much lower level of short-term investments and lower interest
rates during this year's period which resulted in interest and dividends to be
down by $182.
Interest expense for the quarter ended March 31, 2002 was $92 versus $0 in the
prior year. This was fully attributable to the short-term bank loans arising as
a result of the Schweizerhall Pharma acquisition.
The effective tax rate for the three months ended March 31, 2002 was 23.8%
compared to last year's 35.9%. The decrease in the effective tax rate is
primarily a reflection of earnings in lower tax jurisdictions due to the
Schweizerhall Pharma acquisition.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 2002, the Company had $12,698 in cash, $1,367 in short-term
investments and $7,283 of short term bank loans. Working capital was $57,699 at
March 31, 2002 versus $55,259 at June 30, 2001.
The Company's cash position at March 31, 2002 increased $5,388 from the June 30,
2001 level. Operating activities provided cash of $10,073, primarily from
increases in other accrued expenses and long term liabilities, accounts payable,
drafts and acceptances payable and accrued merchandise purchases totaling
$7,208. Investing activities provided cash of $701, primarily from the
settlement of certain acquired accounts receivable balances of $1,571, partially
offset by additional acquisition costs related to the Schweizerhall Pharma
acquisition of $563 and capital expenditures of $386. Financing activities used
cash of $5,386, primarily a result of payments of long-term liabilities, bank
loans and notes payable related to the Schweizerhall Pharma acquisition totaling
$4,628 as well as cash dividends of $1,042.
On March 26, 2001 the Company acquired the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG. To date, the Company
has invested $23,331, which included 600 shares of restricted common stock from
treasury valued at $5,175, $4,626 in notes, $3,324 in cash, the assumption of
debt for $8,966 and acquisition costs of $1,240. The purchase agreement provided
for an additional payment pertaining to inventory which was made in May 2002 in
the amount of $2,639. In connection with this acquisition the Company liquidated
certain of its investments. The acquired companies had existing credit
facilities with European financial institutions. These facilities provide the
Company with a line of credit of 14,500 Euros (approximately $12,800) of which
$7,283 was utilized as of March 31, 2002. Additionally, the Company maintains a
credit facility with a domestic institution of $3,000, none of which was
outstanding at March 31, 2002. The Company has $8,517 of available credit under
all its financing arrangements as of March 31,
Page 26 of 32
2002. There are no borrowing requirements, expiration dates, or financial
covenants on any of the credit facilities referred to above. In May 2002, the
Company entered into a $15,000 credit agreement with a major financial
institution with a 25 month term.
The Company has no material financial commitments other than those under
operating lease agreements, letters of credit and unconditional purchase
obligations. The Company continually evaluates possible acquisitions of or
investments in businesses that are complementary to those of the Company, which
transactions may require the use of cash. The Company believes that its cash,
other liquid assets, operating cash flows and access to the equity capital
markets, taken together, provide adequate resources to fund ongoing operating
expenditures. Further, the Company may obtain additional credit facilities to
enhance its liquidity.
The Company has certain contractual cash obligations and other commercial
commitments which will impact its short and long-term liquidity. At March 31,
2002, the Company has no significant obligations for capital expenditures. At
March 31, 2002, contractual cash obligations and other commercial commitments
are as follows:
Payments Due and/or
Amount of Commitment
Expiration Per Period
Less Than 1-3 4-5 After
Total 1 Year Years Years 5 Years
----- ------ ----- ----- -------
Long-term liabilities/
bank loans $ 7,617 $ 7,555 $ 62 $ -- $ --
Operating leases 11,767 1,220 3,257 2,177 5,113
Commercial letters of credit 1,058 1,058 -- -- --
Standby letters of credit 56 -- 30 26 --
Unconditional purchase
obligations 16,523 8,745 7,778 -- --
------- ------- ------- ------- -------
Total $37,021 $18,578 $11,127 $ 2,203 $ 5,113
======= ======= ======= ======= =======
Page 27 of 32
RECENT ACCOUNTING PRONOUNCEMENTS
(a) In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141
requires that the purchase method of accounting be used for all future business
combinations and specifies criteria intangible assets acquired in a business
combination must meet to be recognized and reported apart from goodwill. SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. Amortization expense relating to
goodwill was $423 and $255 for the nine months ended March 31, 2002 and 2001,
respectively. SFAS 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives, and
reviewed for impairment in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company will adopt the provisions of SFAS 141 and SFAS 142 effective July 1,
2002.
Upon adoption the Company will evaluate its existing intangible assets and
goodwill that were acquired in prior purchase business combinations, and make
any necessary reclassifications in order to conform with the new criteria in
SFAS 141 for recognition apart from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments. In addition, the Company
will be required to test goodwill and, to the extent an intangible asset is
identified as having an indefinite useful life, the intangible asset for
impairment in accordance with SFAS 142. Any impairment loss will be measured as
of the date of adoption and recognized as the cumulative effect of a change in
accounting principle. As of March 31, 2002 the Company had unamortized goodwill
in the amount of $9,969 and unamortized identifiable intangible assets in the
amount of $764.
Because of the extensive effort needed to comply with adopting SFAS 141 and 142,
it is not practicable to reasonably estimate the impact of adopting these
statements on the Company's consolidated financial statements as of the date of
this report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.
(b) In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning
after June 15, 2002, and establishes an accounting standard requiring the
recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. The Company does not
expect the adoption of SFAS 143 to have a significant effect on its results of
operations or its financial position.
(c) In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets". SFAS 144 addresses financial
Page 28 of 32
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. However, SFAS 144 retains the
fundamental provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 supersedes the accounting
and reporting provisions of APB Opinion 30, REPORTING THE RESULTS OF
OPERATIONS-REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for
the disposal of a segment of a business. However, SFAS 144 retains the
requirement of Opinion 30 to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, by abandonment, or in distribution to
owners) or is classified as held for sale. SFAS 144 also amends ARB No. 51,
CONSOLIDATED FINANCIAL STATEMENTS, to eliminate the exception to consolidation
for a temporarily controlled subsidiary. The Company is required to adopt SFAS
144 effective July 1, 2002. The Company does not expect the adoption of SFAS 144
for long-lived assets held for sale to have a material impact on the
consolidated financial statements because the impairment assessment under SFAS
144 is largely unchanged from SFAS 121. The provisions of this statement for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities and
therefore, will depend on future actions initiated by management. As a result,
the Company cannot determine the potential effects that adoption of SFAS 144
will have on the consolidated financial statements with respect to future
disposal decisions, if any.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Sensitive Instruments
The market risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in foreign currency
exchange rates and interest rates.
Foreign Currency Exchange Risk
In order to reduce the risk of foreign currency exchange rate fluctuations, the
Company hedges some of its transactions denominated in a currency other than the
functional currencies applicable to each of its various entities. The
instruments used for hedging are short term foreign currency contracts
(futures). The changes in market value of such contracts have a high correlation
to price changes in the currency of the related hedged transactions. At March
31, 2002, the Company had foreign currency contracts outstanding. The difference
between the fair market value of the foreign currency contracts and the related
commitments at inception and the fair market value of the contracts and the
related commitments at March 31, 2002 was not material. Intercompany
transactions with foreign subsidiaries are typically not hedged.
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The Company is subject to risk from changes in foreign exchange rates for its
subsidiaries that use a foreign currency as their functional currency and are
translated into U.S. dollars. These changes result in cumulative translation
adjustments which are included in accumulated other comprehensive income (loss).
On March 31, 2002, the Company had translation exposure to various foreign
currencies with the most significant being the Euro and Singapore Dollars.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest rates
based upon its financing, investing and cash management activities. The Company
utilizes a balanced mix of debt maturities along with both fixed-rate and
variable-rate debt to manage its exposure to changes in interest rates. The
Company does not expect changes in interest rates to have a material adverse
effect on its income or its cash flows in fiscal 2002. However, there can be no
assurances that interest rates will not significantly affect its results of
operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report are listed below.
No exhibits are filed as part of this report.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended March
31, 2002.
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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.
ACETO CORPORATION
DATE May 14, 2002 BY /s/ Douglas Roth
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Douglas Roth, Chief Financial Officer
DATE May 14, 2002 BY /s/ Leonard S. Schwartz
------------------------------ -------------------------------------
Leonard S. Schwartz, Chairman,
President And Chief Executive Officer
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