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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 quarterly period ended SEPTEMBER 30, 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)
Name of each exchange on which registered: The Nasdaq National Market.
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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
The Registrant has 6,543,418 shares of common stock outstanding as of November
8, 2002.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2002 and June 30, 2002
Consolidated Statements of Income - Three Months Ended
September 30, 2002 and 2001
Consolidated Statements of Cash Flows - Three Months Ended
September 30, 2002 and 2001
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sept. 30, June 30,
2002 2002
---- ----
ASSETS
- ------
Current assets:
Cash $ 14,713 $ 14,255
Short-term investments 1,123 1,320
Receivables:
Trade, less allowance for doubtful accounts:
(Sept., $580; June, $657) 40,090 42,417
Other 4,046 4,266
-------- --------
44,136 46,683
Inventory 38,191 36,271
Prepaid expenses and other current assets 1,147 1,191
Deferred income tax benefit, net 521 521
Property held for sale 326 483
-------- --------
Total current assets 100,157 100,724
Long-term notes receivable 1,099 691
Property and equipment:
Machinery and equipment 1,064 1,069
Leasehold improvements 1,143 1,143
Computer equipment & software 2,084 1,680
Furniture and fixtures 589 593
Automobiles 291 293
-------- --------
5,171 4,778
Less accumulated depreciation and amortization 2,733 2,346
-------- --------
2,438 2,432
Goodwill 9,821 9,821
Deferred income tax benefit, net 1,083 1,083
Other assets 779 952
-------- --------
Total assets $115,377 $115,703
======== ========
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Sept. 30, June 30,
2002 2002
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Drafts and acceptances payable $ 1,183 $ 4,073
Short term bank loans 6,832 7,336
Current installments on long-term liabilities 167 272
Accounts payable 15,629 14,326
Accrued merchandise purchases 3,607 4,196
Accrued compensation 2,488 2,799
Accrued environmental remediation 1,284 1,284
Accrued income taxes 2,053 1,582
Other accrued expenses 6,585 6,545
--------- ---------
Total current liabilities 39,828 42,413
--------- ---------
Shareholders' equity:
Common stock,$.01 par value per share;
Authorized 20,000,000 shares;
Issued: 9,001,290 shares;
Outstanding: Sept., 6,535,918 shares;
June, 6,533,969 shares 90 90
Capital in excess of par value 56,515 56,494
Retained earnings 43,186 40,863
Treasury stock, at cost:
Sept., 2,465,372 shares
June, 2,467,321 shares (24,235) (24,252)
Accumulated other comprehensive income (loss) (7) 95
--------- ---------
Total shareholders' equity 75,549 73,290
--------- ---------
Commitments and contingencies -- --
Total liabilities and shareholders'
equity $ 115,377 $ 115,703
========= =========
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
Sept. 30
--------
2002 2001
---- ----
Net sales $ 68,022 $ 47,641
Cost of sales 56,777 40,395
-------- --------
Gross profit 11,245 7,246
Selling, general and administrative
expenses 7,661 6,321
-------- --------
Operating profit 3,584 925
Other income (expense):
Interest expense (78) (253)
Interest and other income (expense) (116) 165
-------- --------
(194) (88)
-------- --------
Income before income taxes 3,390 837
Provision for income taxes 1,067 302
-------- --------
Net income $ 2,323 $ 535
======== ========
Net income per common share:
Basic $ 0.36 $ 0.08
Diluted 0.35 0.08
Weighted average shares outstanding:
Basic 6,534 6,508
Diluted 6,570 6,536
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
Sept. 30
--------
2002 2001
Operating activities:
Net income $ 2,323 $ 535
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 248 369
Provision for doubtful accounts 224 144
Foreign currency translation adjustment (102) 323
Gain on sale of assets (291) --
Changes in assets and liabilities:
Investments - trading securities 197 81
Trade accounts receivable 2,103 5,938
Other receivables 202 (740)
Inventory (1,920) 2,070
Prepaid expenses 44 (71)
Other assets 60 10
Drafts and acceptances payable (2,890) 434
Accounts payable 1,303 (3 218)
Accrued merchandise purchases (589) 1,846
Accrued compensation (311) 150
Accrued environmental remediation -- (8)
Accrued income taxes 471 492
Other accrued expenses and long
term liabilities (92) 610
-------- --------
Net cash provided by operating activities 980 8,965
-------- --------
Investing activities:
Payments received on notes receivable 22 13
Proceeds from sale of property held for resale 200 --
Payments of closing costs related to sale of property (27) --
Purchases of property and equipment (141) (252)
Proceeds from settlement of certain acquired
accounts receivable balances recorded in goodwill -- 1,571
-------- --------
Net cash provided by investing activities 54 1,332
-------- --------
Financing activities:
Payments of long-term liabilities -- (636)
Payments of current installments of long-term
liabilities (105) --
Proceeds from exercise of stock options 16 44
Payments for purchases of treasury stock (39) (47)
Issuance of treasury stock to employees 56 77
Payments of short-term bank loans (504) (1,297)
Payments of notes payable - acquisition -- (2,313)
-------- --------
Net cash used in financing activities (576) (4,172)
-------- --------
Net increase in cash 458 6,125
Cash at beginning of period 14,255 7,310
-------- --------
Cash at end of period $ 14,713 $ 13,435
======== ========
See accompanying notes to consolidated financial statements
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, 2002.
NOTE 2: BUSINESS ACQUISITIONS
(a) 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 $25,980.
This amount consisted of 600 restricted shares of the Company's Common Stock,
the assumption of $8,966 of Schweizerhall Holding AG debt, $5,973 in cash, the
issuance of notes of $4,626 and acquisition costs of $1,240. The quoted market
price of the 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.
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. These
notes were paid in full as of the quarter ended September 30, 2001.
The acquisition was accounted for as a purchase and, accordingly, the cost of
the acquisition was allocated to the assets acquired, based upon their estimated
fair values at the date of acquisition. The results of operations of
Schweizerhall Pharma have been included in the accompanying consolidated
statement of income from 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,
which was recorded as a reduction to goodwill.
The excess of cost over the fair value of assets acquired (goodwill) amounted to
$6,558. Prior to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) (Note 9)
effective July 1, 2002, goodwill was amortized on a straight-line basis over a
period of twenty years. Amortization of goodwill related to the Schweizerhall
Pharma acquisition amounted to $90 for the quarter ended September 30, 2001. In
accordance with SFAS 142, there was no amortization of goodwill for the quarter
ended September 30, 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 has been allocated to the additional
inventory purchased and which has been included in the cash paid of $5,973. Any
payments made in connection with the tax savings adjustment will be recorded as
additional goodwill.
In connection with the March 26, 2001 Schweizerhall Pharma acquisition, the
Company recorded liabilities 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 the quarter
ended December 31, 2001, the Company refined its estimation of severance to
include certain additional administrative and middle management employees. The
operating lease payment relates to equipment and facilities leases assumed by
the Company. Additional goodwill recorded by the Company amounted to $519 and
$44 for employee severance and operating lease payments, respectively, as a
result of the Company's exit plans. Amounts accrued represent management's best
estimate of the cost to exit the equipment and facilities leases, including
lease payments and termination costs, net of recoverable amounts. All exit plan
liabilities were paid during fiscal 2002.
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the three months ended September
30, 2002 and 2001 was as follows:
2002 2001
---- ----
Interest paid $ 80 $ 205
Income taxes paid 574 70
Non-cash transactions:
During the quarter ended September 30, 2002 the Company entered into a mortgage
note in the amount of $412 for the sale of property held for sale.
NOTE 4: SEGMENT INFORMATION
The Company, prior to fiscal 2002, was organized into six reportable segments,
organized by product. Effective for the fiscal year ended June 30, 2002, the two
segments formerly known as Industrial Chemicals and Organic Intermediates &
Colorants have been combined into a segment called Chemicals and Colorants. The
amounts previously reported for the two former segments have been combined and
reported as Chemicals and Colorants. Therefore, the Company's five reportable
segments, organized by product are as follows:
(1) Agrochemicals, whose products include herbicides, fungicides and
insecticides, as well as a sprout inhibitor for potatoes, (2) Chemicals and
Colorants, whose products include a variety of specialty chemicals used in
adhesives, coatings, food, fragrance, cosmetics and many other areas in addition
to dye and pigment intermediates used in the color-producing industries like
textiles, inks, paper and coatings, as well as intermediates used in the
production of agrochemicals; (3) Pharmaceuticals, Biochemicals & Nutritionals
products, which include the active ingredients for generic pharmaceuticals,
vitamins and nutritional supplements; (4) Pharmaceutical Intermediates & Custom
Manufacturing products, used in preparation of pharmaceuticals, primarily by
major ethical drug companies and (5) Institutional Sanitary Supplies & Other,
whose products include cleaning solutions, fragrances and deodorants used by
commercial and industrial establishments. The Company does not allocate assets
by segment. The Company's chief decision maker evaluates performance of the
segments based on gross profit.
Three Months Ended September 30, 2002 and 2001
Pharmaceuticals, Pharmaceutical Institutional Consolidated
Agro- Chemicals & Biochemicals & Intermediates & Sanitary Supplies & Totals
Chemicals Colorants Nutritionals Custom Mfg. Other
2002
Net sales $1,610 22,029 36,449 6,464 1,470 $ 68,022
Gross profit 324 3,316 6,766 938 660 12,004
Less: unallocated
cost of sales (1) 759
-------
Net gross profit $ 11,245
========
2001
Net sales $1,198 21,489 18,744 4,826 1,384 $ 47,641
Gross profit 308 3,213 3,371 783 563 8,238
Less: unallocated
cost of sales (1) 992
--------
Net gross profit $ 7,246
========
(1) Represents freight and storage costs that are not allocated to a segment.
Net sales, gross profit and long-lived assets by location as of and for the
three months ended September 30, 2002 and 2001 were as follows:
Net Sales Gross Profit
--------- ------------
Three Months Ended Three Months Ended
Sept. 30, Sept. 30,
2002 2001 2002 2001
---- ---- ---- ----
United States $44,273 $33,246 $ 7,053 $ 5,081
Germany 7,505 6,602 1,200 1,368
The Netherlands 2,227 1,274 495 307
France 2,430 2,248 437 139
Asia-Pacific 11,587 4,271 2,060 351
------- ------- ------- -------
Total $68,022 $47,641 $11,245 $ 7,246
======= ======= ======= =======
Long-lived Assets, net
----------------------
Sept. 30, June 30,
2002 2002
---- ----
United States $1,730 $1,731
Germany 459 445
The Netherlands 121 130
France 92 91
Asia-Pacific 36 35
------ ------
Total $2,438 $2,432
====== ======
NOTE 5: INVENTORY
Inventory consists of the following:
Sept. 30, June 30,
2002 2002
-------- --------
Finished goods $37,769 $35,897
Work in process 168 134
Raw materials 254 240
------- -------
Total $38,191 $36,271
======= =======
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:
Three Months Ended
Sept. 30,
2002 2001
---- ----
Net income available for common
shareholders $2,323 $ 535
====== ======
Weighted average common shares
(basic) 6,534 6,508
Effect of dilutive securities:
Stock options 36 28
------ ------
Weighted average common and
potential common shares
outstanding (diluted) 6,570 6,536
====== ======
Basic income per common share $ 0.36 $ 0.08
Diluted income per common share 0.35 0.08
For the three months ended September 30, 2002 and 2001, employee stock options
of 191 and 247 shares, respectively, were not included in the diluted net income
per common share calculation because their effect would have been anti-dilutive.
NOTE 7: COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
Three Months Ended
Sept. 30,
2002 2001
Comprehensive income:
Net income $ 2,323 $ 535
Foreign currency
translation adjustment (102) 323
------- -------
Total $ 2,221 $ 858
======= =======
NOTE 8: RECLASSIFICATIONS
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
NOTE 9: BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144.
The Company has adopted the provisions of SFAS Nos. 141 and 142 as of July 1,
2002. The Company has evaluated its existing goodwill that was acquired in prior
purchase business combinations and has determined that no adjustment or
reclassification to intangible assets at July 1, 2002 is required in order to
conform to the new criteria in SFAS 141 for recognition apart from goodwill.
As of September 30, 2002 and June 30, 2002, the Company had intangible assets
subject to amortization of $1,020 and $1,287, respectively, and related
accumulated amortization of $432 and $586, respectively, which pertained to
customer lists and covenants not to compete and have been included in other
assets on the accompanying consolidated balance sheets. Amortization expense for
intangible assets subject to amortization amounted to $65 and $45 for the three
months ended September 30, 2002 and 2001, respectively. The estimated aggregate
amortization expense for intangible assets subject to amortization for each of
the succeeding years ended September 30, 2003 through September 30, 2007 are as
follows: 2003: $231; 2004: $177; 2005: $120; 2006: $60; 2007: $0.
As of September 30, 2002 and June 30, 2002, the Company had unamortized goodwill
in the amount of $9,821. Accordingly, there was no goodwill acquired or
impairment losses of goodwill recognized during the quarter ended September 30,
2002. The Company will be required to test goodwill for impairment in accordance
with the provisions of SFAS No. 142 by December 31, 2002. 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 July 1, 2002. Because of the
extensive effort needed to comply with adopting SFAS No. 142, it is not
practicable to reasonably estimate whether the Company will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle.
Goodwill amortization for the three months ended September 30, 2001 was $144.
The following table shows the results of operations as if SFAS No. 142 was
applied to prior periods:
For the three months ended
September 30,
2002 2001
---- ----
Net income as reported $ 2,323 $ 535
Add back: Goodwill amortization,
net of tax -- 92
--------- -------
Adjusted net income 2,323 $ 627
========= =======
Net income per common share-Basic
Net income, as reported $ 0.36 $ 0.08
Goodwill amortization,
net of tax -- 0.02
--------- -------
Adjusted net income per
common share - basic $ 0.36 $ 0.10
========= =======
Net income per common share-Diluted
Net income, as reported $ 0.35 $ 0.08
Goodwill amortization,
net of tax -- 0.02
--------- -------
Adjusted net income per
common share - diluted $ 0.35 $ 0.10
========= =======
NOTE 10: IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 will spread out the reporting of
expenses related to restructurings initiated after 2002, because commitment to a
plan to exit an activity or dispose of long-lived assets will no longer be
enough to record a liability for the anticipated costs. Instead, companies will
record exit and disposal costs when they are "incurred" and can be measured at
fair value, and they will subsequently adjust the recorded liability for changes
in estimated cash flows. The Company is required to adopt the provisions of SFAS
146 as of January 1, 2003. The Company does not believe that the adoption of
this statement will have any impact on the Company's consolidated financial
statements as no planned restructuring charges currently exist.
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," 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 of America. 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, environmental contingencies, and valuation allowances on deferred tax
assets. 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, which could have a significant impact on the
consolidated financial statements.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
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. The Company will perform goodwill impairment tests on an annual
basis and between annual tests in certain circumstances. In assessing the
recoverability of the Company's goodwill, the Company must make various
assumptions regarding estimated future cash flows and other factors in
determining the fair values 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 in future periods. Any such resulting
impairment charges could be material to the Company's results of operations.
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.
The Company determines a need for a valuation allowance to reduce its deferred
tax assets to the amount that it believes is more likely than not to be
realized. While the Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event the Company were to determine that it would
not be able to realize all or a part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in
the period such determination was made.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net Sales By Segment
Three Months Ended September 30
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
--------- ----- ---------- -----
Agrochemicals $ 1,610 2.4% $ 1,198 2.5%
Chemicals &
Colorants 22,029 32.4 21,489 45.1
Pharmaceuticals,
Biochemicals & Nutritionals 36,449 53.6 18,744 39.4
Pharmaceutical
Intermediates & Custom Mfg 6,464 9.5 4,826 10.1
Institutional Sanitary
Supplies & Other 1,470 2.1 1,384 2.9
--------- ----- --------- ------
TOTAL NET SALES $ 68,022 100.0% $ 47,641 100.0%
========= ===== ========= ======
Gross Profit By Segment
Three Months Ended September 30
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
--------- ----- ---------- -----
Agrochemicals $ 324 2.7% $ 308 3.8%
Chemicals &
Colorants 3,316 27.6 3,213 39.0
Pharmaceuticals,
Biochemicals & Nutritionals 6,766 56.4 3,371 40.9
Pharmaceutical
Intermediates & Custom Mfg 938 7.8 783 9.5
Institutional Sanitary
Supplies & Other 660 5.5 563 6.8
-------- ----- --------- ------
TOTAL GROSS PROFIT BEFORE
FREIGHT AND STORAGE COSTS $ 12,004 100.0% $ 8,238 100.0%
=======
Less:
unallocated
cost of sales 759 992
-------- ---------
NET GROSS PROFIT $ 11,245 $ 7,246
======== =========
SALES AND GROSS PROFIT:
Net sales for the three months ended September 30, 2002 increased $20,381 or
42.8%, to $68,022 compared with $47,641 for the same period last year. The
Company reported particularly strong sales and gross profit for the current
quarter from its Pharmaceuticals, Biochemicals and Nutritionals segment as
explained below. In addition, sales in last year's first quarter were adversely
affected by the tragic events of September 11, 2001 due to delayed shipments of
products and other economic ramifications which resulted from the events.
The Pharmaceuticals, Biochemicals and Nutritionals segment reported a
significant increase in sales and accounted for 86.9% of the overall increase.
This segment's sales were $36,449 in the current quarter versus $18,744 last
year, an increase of $17,705 or 94.5%. During the current three months, a
majority of the increase resulted from the initial and follow up shipments of
several generic pharmaceutical products which are sold to companies who have
been developing these products for several years and have received recent
approval to market these products. The nutritionals and biochemicals business
showed a 15.9% increase in volume this year as the economy has improved and
demand has increased for products such as nutritional supplements.
The Chemicals & Colorants segment achieved an increase in sales of $540 or 2.5%,
to $22,029 in the current quarter as compared to $21,489 last year. The increase
is attributable to an increase in volume with one large customer and some
improved pricing in one product group which was somewhat offset by lost sales
from a former customer and continuing declines in products related to the
pigment and dyestuff industries.
Pharmaceutical Intermediates & Custom Manufacturing reported sales of $6,464 for
the first quarter versus $4,826 last year, an increase of $1,638 or 33.9%. The
increase is mainly attributable to increased sales volume from the introduction
of new products.
Agrochemicals sales were $1,610 in the current quarter compared to $1,198 last
year, an increase of $412 or 34.4%. A restructuring of the Company's arrangement
with a third party, effective October 1, 2001, resulted in additional sales of
$739 during the quarter ended September 30, 2002. Excluding this, sales
decreased by $327 or 27.3%. The primary cause was a one-time sale of offgrade
material to one customer recorded in last year's quarter.
Institutional Sanitary Supplies & Other sales were $1,470 versus $1,384 last
year, an increase of $86 or 6.2%. The improved sales were attributable to
identifying better sources of supply that have improved our competitive position
regarding pricing. During the end of last year's first quarter, this segment was
also specifically disrupted by the after effects on the economy from 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 $3,766 or 45.7% to $12,004 from $8,238. The
Pharmaceuticals, Biochemicals and Nutritionals segment showed a significant
increase in gross profit this year as compared to last year since it accounted
for $3,395 or 90.1% of the overall increase.
The gross profit resulting from the Pharmaceuticals, Biochemicals and
Nutritionals segment amounted to $6,766 or 18.6% this year versus $3,371 or
18.0% in the prior year's quarter. Gross profit improvement was mainly
attributable to the sales of several products as described above in the sales
comments. These products provided substantial increases in gross profit dollars
and at a slightly higher gross margin rate. In addition, nutritionals &
biochemicals also saw gross profit increases
this year in both dollars and rates as the improved economic climate allowed for
increased demand.
The Chemicals & Colorants segment's gross profit of $3,316 increased $103 or
3.2% over last year's $3,213 which is in line with the 2.5% sales increase.
Gross profit, as a percentage of sales, was flat at 15.1% this year versus
15.0%. Overall, the gross profit dollars in this segment showed slight
improvement as various components showed offsetting increases and decreases with
no major factors to be identified.
In the Pharmaceutical Intermediates and Custom Manufacturing segment, the gross
profit amounted to $938 or 14.5% this year versus $783 or 16.2% last year. Gross
profits realized on some new products yielded higher dollars this year but at a
lower margin rate.
The Agrochemicals segment reported an increase in gross profit of $16 or 5.2% to
$324 in the quarter ended September 30, 2002 versus $308 last year. Gross profit
dollars increased due to product mix and the inclusion in last year's results of
a one-time sale of offgrade material at no margin. Gross profit, as a percentage
of sales, declined to 20.1% for the current quarter versus 25.7% last year
mainly due to the restructuring of the Company's arrangement with a third party
referred to above.
Institutional Sanitary Supplies and Other gross profit was $660 or 44.9% this
quarter versus $563 or 40.7% last year. The increased gross margins are a result
of lower costs received from new sources of raw materials and product mix. Last
year's first quarter included a higher proportion of lower margin products as
compared to this year's product sales mix.
Unallocated cost of sales declined to $759 from $992, or 23.5%. The results were
mainly achieved by more direct shipments to customers and lower amounts of
inventory in warehouses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A")increased $1,340 or 21.2%
to $7,661 for the quarter ended September 30, 2002 from $6,321 in last year's
first quarter. As a percentage of sales, SG&A decreased to 11.3% in the first
three months of fiscal 2003 versus 13.3% for the comparable period in fiscal
2002. SG&A increased primarily due to rising business insurance costs, increased
professional fees, a higher provision for bad debts, and overall increases in
employee wages and benefit costs. The Company sold property held for sale in
July 2002 and realized a net gain on the sale of $291. This gain reduced the
overall SG&A expenses and lowered its SG&A as a percentage of sales. SG&A, as a
percentage of sales, excluding this transaction would have been 11.7% versus
13.3% last year.
OPERATING PROFIT
For the quarter ended September 30, 2002 the operating profit was $3,584
compared to $925, an increase of $2,659 or 287.5%. This increase was primarily
due to the contribution to operating profits from the Pharmaceuticals,
Biochemicals and Nutritionals segment which was partially offset by higher SG&A
expenses.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)
Interest expense for the current quarter was $78 versus $253 in the prior year.
The decrease of $175 or 69.2% was entirely attributable to the lower levels of
short-term bank loans and acquisition debt arising from the Schweizerhall Pharma
acquisition. This year the aggregate of short-term bank loans and acquisition
debt were $7,336 at June 30, 2002 and $6,832 at September 30, 2002. During last
year's quarter, the total balance of this debt was reduced from $11,177 at June
30, 2001 to $7,567 at September 30, 2002 through debt payments totaling $3,610.
Interest and other income is reflected as an expense of $116 for the quarter
ended September 30, 2002 as compared to income of $165 last year. The overall
reduction in income of $281 is mainly attributable to a loss on marketable
securities of $197 this year compared to a loss of $81 during the same period
last year. Last year's first quarter included over $100 of non-recurring other
income which was not realized in the current quarter.
PROVISION FOR INCOME TAXES
The effective tax rate decreased to 31.5% for the three months ended September
30, 2002 from 36.1% for the same period last year. The decrease in the effective
tax rate is a reflection of earnings in lower tax jurisdictions due to the
Schweizerhall Pharma acquisition.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 2002, the Company had $14,713 in cash, $1,123 in short-term
investments and $6,832 of short-term bank loans. Working capital was $60,329 at
September 30, 2002 versus $58,311 at June 30, 2002.
The Company's cash position at September 30, 2002 increased $458 from the June
30, 2002 level. Operating activities provided cash of $980, primarily from net
income of $2,323, a reduction in accounts receivable of $2,103 and an increase
in accounts payable of $1,303 partially offset by an increase in inventory of
$1,920 and a decrease in drafts and acceptances payable of $2,890.
Investing activities provided cash of $54, primarily from $200 of cash proceeds
from the sale of property offset by capital expenditures of $141. Financing
activities used cash of $576 primarily as a result of payments of current
installments of long-term liabilities of $105 and short-term bank loans of $504.
In connection with the acquisition of Schweizerhall Pharma in March 2001, the
acquired companies had existing credit facilities with two European financial
institutions. These facilities provide the Company with a line of credit of
14,500 Euros (approximately $14,227) of which $6,832 was utilized as of
September 30, 2002. The Company is not subject to any financial covenants under
these arrangements.
Additionally, in May 2002, the Company entered into a $15,000 revolving credit
agreement with a financial institution, which expires June 30, 2004. At
September 30, 2002, the Company utilized $1,242 in letters of credit leaving an
unused facility of $13,758. 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. The Company was
in compliance with all covenants at September 30, 2002.
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, borrowing capacity and access to the
equity capital markets, taken together, provide adequate resources to fund
ongoing operating expenditures and the anticipated continuation of semi-annual
cash dividends. 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 September 30, 2002, the Company has no significant obligations for
capital expenditures. At September 30, 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 $ 6,999 $ 6,999 $ - $ - $ -
Operating leases 10,172 1,412 2,687 2,247 3,826
Commercial letters of credit 1,262 1,262 - - -
Standby letters of credit 104 104 - - -
Unconditional purchase
obligations 19,323 11,693 7,630 - -
------- ------- ------- ------ ------
Total $37,860 $21,470 $10,317 $2,247 $3,826
======= ======= ======= ====== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 will spread out the reporting of
expenses related to restructurings initiated after 2002, because commitment to a
plan to exit an activity or dispose of long-lived assets will no longer be
enough to record a liability for the anticipated costs. Instead, companies will
record exit and disposal costs when they are "incurred" and can be measured at
fair value, and they will subsequently adjust the recorded liability for changes
in estimated cash flows. The Company is required to adopt the provisions of SFAS
146 as of January 1, 2003. The Company does not believe that the adoption of
this statement will have any impact on the Company's consolidated financial
statements as no planned restructuring charges currently exist.
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 market price,
foreign currency exchange rates and interest rates.
Market Price Risk
Short-term investments at September 30, 2002, of which $754 consists of
corporate securities and are recorded at fair value, have exposure to price
risk. This risk is estimated as the potential loss in fair value resulting from
a hypothetical 10% adverse change in prices quoted by stock exchanges and
amounts to $75 as of September 30, 2002. Actual results may differ.
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
September 30, 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 September 30, 2002 was $97. Intercompany
transactions with foreign subsidiaries are typically not hedged. Therefore, the
potential loss in fair value for a net currency position resulting from a 10%
adverse change in quoted foreign currency exchange rates as of September 30,
2002 is not applicable.
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 September 30, 2002, the Company had translation exposure to various foreign
currencies with the most significant being the Euro, Chinese Yuan Renminbi and
Singapore Dollars. The potential loss resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates, as of September 30, 2002,
amounts to $1,457. Actual results may differ.
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's financial instrument holdings at year-end were analyzed to determine
their sensitivity to interest rate changes. In this sensitivity analysis, the
Company used the same change in interest rate for all maturities. All other
factors were held constant. If there were an adverse change in interest rates of
10%, the expected effect on net income related to our financial instruments
would be immaterial. However, there can be no assurances that interest rates
will not significantly affect its results of operations.
ITEM 4. CONTROLS AND PROCEDURES
As required by SEC rules, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days of the filing
of this quarterly report. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer. Based on this evaluation, these
officers have concluded that the design and operation of our disclosure controls
and procedures are effective. There were no significant changes to our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
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.
a. Certification by CEO Leonard S. Schwartz pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
b. Certification by CFO Douglas Roth pursuant to U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2002.