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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 0-4217
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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
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Registrant's website address: www.aceto.com
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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 had 9,880,312 shares (adjusted for 3-for-2 split of the common
stock) of common stock outstanding as of January 31, 2003.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2002 and
June 30, 2002
Consolidated Statements of Income - Six Months Ended
December 31, 2002 and 2001
Consolidated Statements of Income - Three Months Ended
December 31, 2002 and 2001
Consolidated Statements of Cash Flows - Six Months Ended
December 31, 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 4. Matters Submitted to a Vote of Securities Holders
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)
Dec. 31, June 30,
2002 2002
---- ----
ASSETS
- ------
Current assets:
Cash $ 14,899 $ 14,255
Short-term investments 1,172 1,320
Receivables:
Trade, less allowance for doubtful accounts:
(Dec., $847; June, $657) 43,014 42,417
Other 1,779 4,266
-------- --------
44,793 46,683
Inventory 42,414 36,271
Prepaid expenses and other current assets 1,265 1,191
Deferred income tax benefit, net 521 521
Property held for sale 326 483
-------- --------
Total current assets 105,390 100,724
Long-term notes receivable 1,072 691
Property and equipment:
Machinery and equipment 1,103 1,069
Leasehold improvements 1,143 1,143
Computer equipment & software 2,252 1,680
Furniture and fixtures 597 593
Automobiles 302 293
-------- --------
5,397 4,778
Less accumulated depreciation and amortization 2,976 2,346
-------- --------
2,421 2,432
Goodwill 7,948 9,821
Deferred income tax benefit, net 1,083 1,083
Other assets 714 952
-------- --------
Total assets $118,628 $115,703
======== ========
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Dec. 31, June 30,
2002 2002
---- ----
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Drafts and acceptances payable $ 1,856 $ 4,073
Short-term bank loans 6,165 7,336
Current installments on long-term liabilities -- 272
Accounts payable 14,147 14,326
Accrued merchandise purchases 4,339 4,196
Accrued compensation 3,249 2,799
Accrued environmental remediation 1,284 1,284
Accrued income taxes 1,974 1,582
Other accrued expenses 9,611 6,545
--------- ---------
Total current liabilities 42,625 42,413
Shareholders' equity:
Common stock,$.01 par value;
Authorized 20,000,000 shares;
Issued Dec., 12,292,684 shares;
June, 9,001,290 shares;
Outstanding:
Dec., 9,874,612 shares;
June, 6,533,969 shares 123 90
Capital in excess of par value 56,664 56,494
Retained earnings 42,470 40,863
Treasury stock, at cost:
Dec., 2,418,072 shares
June, 2,467,321 shares (23,769) (24,252)
Accumulated other comprehensive income 515 95
--------- ---------
Total shareholders' equity 76,003 73,290
--------- ---------
Commitments and contingencies
Total liabilities and shareholders' equity $ 118,628 $ 115,703
========= =========
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended
Dec. 31,
--------
2002 2001
---- ----
Net sales $ 132,655 $ 103,006
Cost of sales 110,404 86,294
--------- ---------
Gross profit 22,251 16,712
Selling, general and administrative
expenses 15,316 14,129
--------- ---------
Operating income 6,935 2,583
Other income (expense):
Interest expense (142) (209)
Interest and other income (expense) (3) 339
--------- ---------
(145) 130
--------- ---------
Income before income taxes 6,790 2,713
Provision for income taxes 2,139 935
--------- ---------
Income before cumulative effect of
accounting change 4,651 1,778
Cumulative effect of accounting change 1,873 --
--------- ---------
Net income $ 2,778 $ 1,778
========= =========
Basic income per common share (a):
Net income before accounting change $ 0.47 $ 0.18
Cumulative effect of accounting change 0.19 --
--------- ---------
Net income $ 0.28 $ 0.18
========= =========
Diluted income per common share (a):
Net income before accounting change $ 0.47 $ 0.18
Cumulative effect of accounting change 0.19 --
--------- ---------
Net income $ 0.28 $ 0.18
========= =========
Weighted average shares outstanding (a):
Basic 9,819 9,766
========= =========
Diluted 9,904 9,807
========= =========
(a) Share and per share information have been adjusted for a 3-for-2 split of
the common stock, paid January 2, 2003.
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
Dec. 31,
--------
2002 2001
---- ----
Net sales $ 64,633 $ 55,365
Cost of sales 53,627 45,899
-------- --------
Gross profit 11,006 9,466
Selling, general and administrative
expenses 7,655 7,808
-------- --------
Operating income 3,351 1,658
Other income (expense):
Interest expense (64) (93)
Interest and other income 113 311
-------- --------
49 218
-------- --------
Income before income taxes 3,400 1,876
Provision for income taxes 1,072 633
-------- --------
Net income $ 2,328 $ 1,243
======== ========
Income per common share (a):
Basic $ 0.24 $ 0.13
======== ========
Diluted 0.23 0.13
======== ========
Weighted average shares outstanding (a):
Basic 9,837 9,770
======== ========
Diluted 9,954 9,810
======== ========
(a) Share and per share information have been adjusted for a 3-for-2 split of
the common stock, paid January 2, 2003.
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
Dec. 31,
2002 2001
---- ----
Operating activities:
Net income $ 2,778 $ 1,778
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change 1,873 --
Depreciation and amortization 500 712
Provision for doubtful accounts 299 207
Foreign currency translation adjustment 420 44
Gain on sale of assets (291) --
Income tax benefit on exercise of stock options 65 12
Changes in assets and liabilities:
Investments - trading securities 148 74
Trade accounts receivable (896) (208)
Other receivables 2,474 (469)
Inventory (6,143) (175)
Prepaid expenses and other current assets (74) (31)
Other assets 60 (72)
Drafts and acceptances payable (2,217) 1,448
Accounts payable (179) (2,746)
Accrued merchandise purchases 143 1,711
Accrued compensation 450 25
Accrued environmental remediation -- (8)
Accrued income taxes 392 847
Other accrued expenses and long
term liabilities 1,791 3,991
-------- --------
Net cash provided by operating activities 1,593 7,140
-------- --------
Investing activities:
Payments received on notes receivable 44 71
Proceeds from sale of property held for resale,
net of closing costs related to sale of property 173 --
Purchases of property and equipment (311) (297)
Acquisition of business, net of cash acquired -- (213)
Proceeds from settlement of certain acquired
accounts receivable balances recorded in goodwill -- 1,571
-------- --------
Net cash (used in) provided by investing activities (94) 1,132
-------- --------
Financing activities:
Payments of short-term bank loans (1,171) (758)
Payments of current installments on long-term
liabilities (272) --
Payments of long-term liabilities -- (636)
Payments of notes payable - acquisition -- (2,313)
Proceeds from exercise of stock options 565 238
Payments for purchases of treasury stock (39) (84)
Issuance of treasury stock to employees 62 80
-------- --------
Net cash used in financing activities (855) (3,473)
-------- --------
Net increase in cash 644 4,799
Cash at beginning of period 14,255 7,310
-------- --------
Cash at end of period $ 14,899 $ 12,109
======== ========
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 ("the Company") 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: COMMON STOCK SPLIT
On December 5, 2002, the Board of Directors of the Company declared a 3-for-2
split of the common stock in the form of a 50 percent common stock dividend that
was paid January 2, 2003, to shareholders of record on December 18, 2002.
With respect to the Consolidated Balance Sheets, the effect of the split has
been recorded as of December 31, 2002. The Balance Sheet at June 30, 2002 has
not been restated.
With respect to the Consolidated Statements of Income, the net income per common
share amounts for each of the periods presented are based on the weighted
average number of common shares outstanding, adjusted to reflect the 3-for-2
common stock split.
NOTE 3: 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 $170 for the six months ended December 31, 2001.
In accordance with SFAS 142, there was no amortization of goodwill for the six
months ended December 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 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 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. Summarized financial information for each of the
segments for the six and three months ended December 31, 2002 and 2001 follows:
Six Months Ended December 31, 2002 and 2001
Institutional
Pharmaceuticals, Pharmaceutical Sanitary
Agro- Chemicals & Biochemicals & Intermediates & Supplies & Consolidated
Chemicals Colorants Nutritionals Custom Mfg. Other Totals
2002
Net sales $ 5,878 45,141 68,121 10,828 2,687 $132,655
Gross profit 1,662 6,778 12,999 1,629 1,105 24,173
Less: unallocated
cost of sales (1) 1,922
--------
Net gross profit $ 22,251
========
2001
Net sales $ 6,381 40,651 43,770 9,739 2,465 $103,006
Gross profit 1,803 6,144 8,292 1,303 983 18,525
Less: unallocated
cost of sales (1) 1,813
--------
Net gross profit $ 16,712
========
Three Months Ended December 31, 2002 and 2001
Institutional
Pharmaceuticals, Pharmaceutical Sanitary
Agro- Chemicals & Biochemicals & Intermediates & Supplies & Consolidated
Chemicals Colorants Nutritionals Custom Mfg. Other Totals
2002
Net sales $ 4,269 22,822 31,510 4,815 1,217 $ 64,633
Gross profit 1,339 3,461 6,234 690 445 12,169
Less: unallocated
cost of sales (1) 1,163
--------
Net gross profit $ 11,006
========
2001
Net sales $ 5,206 19,123 25,049 4,906 1,081 $ 55,365
Gross profit 1,496 2,932 5,111 434 420 10,393
Less: unallocated
cost of sales (1) 927
--------
Net gross profit $ 9,466
========
(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 six
months ended December 31, 2002 and 2001 were as follows:
Net Sales Gross Profit
--------- ------------
Six Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
United States $ 87,957 $ 71,634 $ 14,554 $ 11,531
Germany 14,655 13,368 2,479 2,642
The Netherlands 4,659 2,895 1,084 560
France 5,033 6,339 845 660
Asia-Pacific 20,351 8,770 3,289 1,319
-------- -------- -------- --------
Total $132,655 $103,006 $ 22,251 $ 16,712
======== ======== ======== ========
Long-lived Assets, net
----------------------
December 31, June 30,
2002 2002
---- ----
United States $1,643 $1,731
Germany 496 445
The Netherlands 132 130
France 74 91
Asia-Pacific 76 35
------ ------
Total $2,421 $2,432
====== ======
NOTE 5: INVENTORY
Inventory consists of the following:
Dec. 31, June 30,
2002 2002
--------- ---------
Finished goods $42,029 $35,897
Work in process 145 134
Raw materials 240 240
------- -------
Total $42,414 $36,271
======= =======
NOTE 6: INCOME PER COMMON SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income per share computation for net income follows:
Six Months Ended Three Months Ended
Dec. 31, Dec. 31,
2002 2001 2002 2001
---- ---- ---- ----
Income before cumulative effect
of a change in accounting
principle $ 4,651 $1,778 $ 2,328 $1,243
Cumulative effect of accounting
change 1,873 -- -- --
--------- ------ --------- ------
Net income available for common
shareholders $ 2,778 $1,778 $ 2,328 $1,243
========= ====== ========= ======
Weighted average common shares
(basic)(a) 9,819 9,766 9,837 9,770
Effect of dilutive securities:
Stock options (a) 85 41 117 40
--------- ------ --------- ------
Weighted average common and
potential common shares
outstanding (diluted)(a) 9,904 9,807 9,954 9,810
========= ====== ========= ======
Basic income per common share $ 0.47 $ 0.18 $ 0.24 $ 0.13
Cumulative effect of accounting
change 0.19 -- -- --
--------- ------ --------- ------
Net income $ 0.28 $ 0.18 $ 0.24 $ 0.13
========= ====== ========= ======
Diluted income per common share $ 0.47 $ 0.18 $ 0.23 $ 0.13
Cumulative effect of accounting
change 0.19 -- -- --
--------- ------ --------- ------
Net income $ 0.28 $ 0.18 $ 0.23 $ 0.13
========= ====== ========= ======
(a) Share and per share information have been adjusted for a 3-for-2 split of
the common stock, paid January 2, 2003.
Employee stock options of 480 and 673 for the six and three months ended
December 31, 2002, respectively, were not included in the net income per common
share calculation because their effect would have been anti-dilutive. Employee
stock options of 420 and 469 for the six and three months ended December 31,
2001, respectively, were not included in the net income per common share
calculation because their effect would have been anti-dilutive.
At the annual meeting of shareholders of the Company held December 5, 2002, the
shareholders approved the Aceto Corporation 2002 Stock Option Plan (the "Plan")
under which options to purchase up to 750 shares of the Company's common stock
may be granted by the Company to officers, directors, employees and agents of
the Company. The exercise price per share shall be not less than the fair market
value of Aceto common stock on the date of grant and each option may not become
exercisable less than six months from the date it is granted.
In December 2002, the Company granted 470 options to employees and directors
under the Plan at an exercise price of $9.63 which was equal to the fair market
value of the common stock on the date of grant. The options granted provide for
vesting on the first anniversary of the date of grant and when the common stock
price exceeds certain predetermined levels subsequent to the one year
anniversary. The options expire no later than ten years from the date of grant.
The share, option and per share information above have been adjusted for a
3-for-2 split of the common stock, paid January 2, 2003.
NOTE 7: COMPREHENSIVE INCOME
The components of comprehensive income were as follows:
Six Months Ended Three Months Ended
Dec. 31, Dec. 31,
2002 2001 2002 2001
---- ---- ---- ----
Comprehensive income:
Net income $ 2,778 $ 1,778 $ 2,328 $ 1,243
Foreign currency
translation adjustment 420 44 522 (279)
------- ------- ------- -------
Total $ 3,198 $ 1,822 $ 2,850 $ 964
======= ======= ======= =======
NOTE 8: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the six months ended December 31,
2002 and 2001 was as follows:
2002 2001
---- ----
Interest paid $ 150 $ 516
Income taxes paid 1,605 357
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 9: RECLASSIFICATIONS
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
NOTE 10: 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 December 31, 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 $497 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 $131 and $89 for the six
months ended December 31, 2002 and 2001, respectively. The estimated aggregate
amortization expense for intangible assets subject to amortization for each of
the succeeding years ended December 31, 2003 through December 31, 2007 are as
follows: 2003: $222; 2004: $151; 2005: $120; 2006: $30; 2007: $0.
In accordance with SFAS 142, goodwill and intangible assets with indefinite
lives will no longer be amortized but instead will be measured for impairment at
least annually, or when events indicate that an impairment exists. Intangible
assets that are determined to have definite lives will continue to be amortized
over their useful lives.
As required by SFAS 142, the Company performed impairment tests on goodwill as
of July 1, 2002. As a result of the impairment tests, the Company recorded a
goodwill impairment charge of $1,873 which has been included as a cumulative
effect of an accounting change in the accompanying consolidated statement of
income for the six months ended December 31, 2002. Under SFAS 142, goodwill
impairment exists if the net book value of a reporting unit exceeds its
estimated fair value. The Company estimated the fair value of its reporting
units by using a combination of discounted cash flow analyses and comparisons
with the market values of similar publicly-traded companies.
The Company's $1,873 impairment charge was related to the impairment of the
goodwill associated with CDC Products Corp. ("CDC"). CDC was acquired by the
Company during fiscal 1999. Due to an increase in competition from local
sanitary supply companies in the markets CDC operates in, recent operating
profits and cash flows were lower than expected. Based on that trend, the
earnings forecast for the next five years was revised. During the six months
ended December 31, 2002, a goodwill impairment charge of $1,873 was recognized
in the CDC reporting unit. The fair value of that reporting unit was determined
by using a combination of discounted cash flow analyses and comparisons with the
market values of similar publicly-traded companies.
The following table displays a roll forward of the carrying amount of goodwill
for the six months ended December 31, 2002, by business segment:
Institutional
Pharmaceuticals, Pharmaceutical Sanitary
Biochemicals & Intermediates & Supplies & Consolidated
Nutritionals Custom Mfg. Other Totals
------------ ----------- ----- ------
Balance at
6/30/02
$5,611 $1,392 $2,818 $9,821
Impairment
losses - - (1,873) (1,873)
------ ------ ------- -------
Balance at
12/31/02 $5,611 $1,392 $ 945 $7,948
====== ====== ======= ======
Goodwill amortization for the six and three months ended December 31, 2001 was
$279 and $135, respectively. The following table shows the results of operations
as if SFAS No. 142 was applied to prior periods:
For the six months ended For quarter ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Income before a cumulative effect
of a change in accounting
principle, as reported $ 4,651 $ 1,778 $ 2,328 $ 1,243
Add back: Goodwill amortization,
net of tax -- 201 -- 99
--------- --------- --------- ---------
Adjusted income before a cumulative
effect of a change in accounting
principle 4,651 $ 1,979 2,328 $ 1,342
========= ========= ========= =========
Basic income per common share:
Income before a cumulative effect
of a change in accounting
principle, as reported $ 0.47 $ 0.18 $ 0.24 $ 0.13
Goodwill amortization,
net of tax -- 0.02 -- 0.01
--------- --------- --------- ---------
Adjusted income before a cumulative
effect of a change in accounting
principle $ 0.47 $ 0.20 $ 0.24 $ 0.14
========= ========= ========= =========
Diluted income per common share:
Income before a cumulative effect
of a change in accounting
principle, as reported $ 0.47 $ 0.18 $ 0.23 $ 0.13
Goodwill amortization,
net of tax -- 0.02 -- 0.01
--------- --------- --------- ---------
Adjusted income before a cumulative
effect of a change in accounting
principle $ 0.47 $ 0.20 $ 0.23 $ 0.14
========= ========= ========= =========
NOTE 11: IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued 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 the Company has
no current plans to restructure any of its business.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123" ("SFAS 148").
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements to SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition and annual disclosure provisions
of SFAS 148 are effective for interim periods beginning after December 15, 2002.
Accordingly, the Company will adopt the disclosure requirements of SFAS 148 for
the quarter ended March 31, 2003.
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
SIX MONTHS ENDED DECEMBER 31, 2002 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2001
Net Sales By Segment
Six Months Ended December 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $5,878 4.4% $ 6,381 6.2%
Chemicals &
Colorants 45,141 34.0 40,651 39.5
Pharmaceuticals,
Biochemicals &
Nutritionals 68,121 51.4 43,770 42.5
Pharmaceutical
Intermediates &
Custom Mfg. 10,828 8.2 9,739 9.4
Institutional
Sanitary
Supplies & Other 2,687 2.0 2,465 2.4
------ ---- ------ ----
TOTAL NET SALES $132,655 100.0% $103,006 100.0%
======== ====== ======== ======
Net Sales By Segment
Six Months Ended December 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $1,662 6.9% $1,803 9.7%
Chemicals &
Colorants 6,778 28.1 6,144 33.2
Pharmaceuticals,
Biochemicals &
Nutritionals 12,999 53.8 8,292 44.8
Pharmaceutical
Intermediates &
Custom Mfg. 1,629 6.7 1,303 7.0
Institutional
Sanitary
Supplies & Other 1,105 4.5 983 5.3
----- --- --- ---
TOTAL GROSS
PROFIT BEFORE
FREIGHT AND
STORAGE COSTS $24,173 100.0% $18,525 100.0%
===== =====
Unallocated Cost
of Sales 1,922 1,813
----- -----
NET GROSS PROFIT
$22,251 $16,712
======= =======
SALES AND GROSS PROFIT:
Net sales for the six months ended December 31, 2002 increased $29,649 or 28.8%,
to $132,655 compared with $103,006 for the same period last year. The Company
reported particularly strong sales and gross profit for the six months from its
Pharmaceuticals, Biochemicals and Nutritionals segment as explained below. In
addition, net sales for the six months ended December 31, 2001 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 82.1% of the overall increase.
This segment's sales were $68,121 in the six month period versus $43,770 last
year, an increase of $24,351 or 55.6%. 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 19.0% 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 $4,490 or
11.0%, to $45,141 in the first half as compared to $40,651 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 $10,828
for the six months versus $9,739 last year, an increase of $1,089 or 11.2%. The
increase is mainly attributable to increased sales volume from the introduction
of new products.
Agrochemicals sales were $5,878 in the first half compared to $6,381 last year,
a decrease of $503 or 7.9%. 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
$1,242 or 19.5%. The primary causes were a one-time sale of offgrade material to
one customer recorded in last year's first quarter and a decrease in volume for
several of the segment's main products in the second quarter.
Institutional Sanitary Supplies & Other sales were $2,687 versus $2,465 last
year, an increase of $222 or 9.0%. 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 and throughout
the second 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 $5,648 or 30.5% to $24,173 from $18,525. The
Pharmaceuticals, Biochemicals and Nutritionals segment showed a significant
increase in gross profit for the first six months of this year as compared to
last year since it accounted for $4,707 or 83.3% of the overall increase.
The gross profit resulting from the Pharmaceuticals, Biochemicals and
Nutritionals segment amounted to $12,999 or 19.1% this year versus $8,291 or
18.9% in the prior year's first half. 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
at a slightly higher gross margin rate. In addition, nutritionals & biochemicals
also saw gross profit increases this year in dollars and at similar rates as a
result of increased demand.
The Chemicals & Colorants segment's gross profit of $6,778 increased $634 or
10.3% over last year's $6,144. Gross profit, as a percentage of sales, was flat
at 15.0% this year versus 15.1%. The current year's gross profit includes the
net of a negotiated settlement for lost gross margin regarding non-performance
of a sales contract and an estimate of a loss on the related purchase contract
in the amount of $450. The increase in gross profit excluding this favorable
settlement would have been only $184 or 3.0%. The gross profit rate for this
year would have been 14.0% excluding the settlement which is lower than the
gross profit rate in the prior year of 15.1%. The decrease in gross margin and
the increase in gross profit dollars, is a result of increased sales volume from
one large customer at lower gross margins than usual for this segment.
In the Pharmaceutical Intermediates and Custom Manufacturing segment, the gross
profit amounted to $1,629 or 15.0% this year versus $1,303 or 13.4% last year.
Gross profits realized on some new products yielded higher dollars at higher
margin rates this year.
The Agrochemicals segment reported a decrease in gross profit of $141 or 7.8% to
$1,662 in the six months ended December 31, 2002 versus $1,803 last year. Gross
profit dollars decreased due to a 19.5% decrease in sales as described above and
overall product mix. Gross margin was unchanged at 28.3% for both periods.
Institutional Sanitary Supplies and Other gross profit was $1,105 or 41.1% for
the six months versus $983 or 39.9% last year. The increased
gross margins are a result of a 9.0% increase in sales, lower costs received
from new sources of raw materials and product mix. Last year's first half
included a higher proportion of lower margin products as compared to this year's
product sales mix.
Unallocated cost of sales increased to $1,922 from $1,813, or 6.0%. The higher
costs were mainly a result of increased sales and shipments to customers and
higher amounts of inventory in warehouses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A")increased $1,187 or 8.4% to
$15,316 for the six months ended December 31, 2002 from $14,129 in last year's
first half. As a percentage of sales, SG&A decreased to 11.5% in the first six
months of fiscal 2003 versus 13.7% 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 11.8% versus
13.7% last year. SG&A grew at a slower rate (8.4%) than sales (28.8%) over the
current year's six months which is a reflection of the decrease as a percentage
of sales.
OPERATING INCOME
For the six months ended December 31, 2002 the operating income was $6,935
compared to $2,583, an increase of $4,352 or 168.5%. This increase was primarily
due to the overall increase in gross profit of $5,539, with the main
contribution of $4,707 coming 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 first half was $142 versus $209 in the prior year. The
decrease of $67 or 32.1% was attributable to the lower levels of short-term bank
loans and acquisition debt arising from the Schweizerhall Pharma acquisition and
lower average interest rates. This year the aggregate of short-term bank loans
and acquisition debt were $7,336 at June 30, 2002 and $6,165 at December 31,
2002. During last year's first half, the total balance of this debt was reduced
from $11,177 at June 30, 2001 to $8,106 at December 31, 2001 through debt
payments totaling $3,071.
Interest and other income is reflected as an expense of $3 for the six months
ended December 31, 2002 as compared to income of $339 last year. The overall
reduction in income of $342 is partly attributable to a loss on marketable
securities of $148 this year compared to a loss of $74 during the same period
last year. Also, last year's first half included over $160 of non-recurring
other income which was not realized in the current year.
PROVISION FOR INCOME TAXES
The effective tax rate decreased to 31.5% for the six months ended
December 31, 2002 from 34.5% for the same period last year. The
decrease in the effective tax rate is a reflection of increased earnings in
lower tax jurisdictions than in the prior year due to the Schweizerhall Pharma
acquisition.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The six month period ended December 31, 2002 includes a one-time charge of
$1,873, or $0.19 per diluted share, attributable to the cumulative effect of
adopting SFAS No. 142, "Goodwill and Other Intangible Assets". The Company's
$1,873 one-time charge was related to the impairment of the goodwill associated
with CDC Products Corp. ("CDC").The one-time charge for CDC was primarily due to
recent operating profits and cash flows being lower than expected due to
increased competition from local sanitary supply companies in the markets CDC
operates.
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
Net Sales By Segment
Three Months Ended December 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $ 4,269 6.6% $ 5,206 9.4%
Chemicals &
Colorants 22,822 35.3 19,123 34.5
Pharmaceuticals,
Biochemicals &
Nutritionals 31,510 48.8 25,049 45.2
Pharmaceutical
Intermediates &
Custom Mfg. 4,815 7.4 4,906 8.9
Institutional
Sanitary
Supplies & Other
1,217 1.9 1,081 2.0
------ ----- ----- -----
TOTAL NET SALES $64,633 100.0% $ 55,365 100.0%
======= ====== ======== ======
Net Sales By Segment
Three Months Ended December 31
Segment 2002 2001
---- ----
% of % of
$ thousand total $ thousand total
---------- ----- ---------- -----
Agrochemicals $1,339 11.0% $1,496 14.4%
Chemicals &
Colorants 3,461 28.4 2,932 28.2
Pharmaceuticals,
Biochemicals &
Nutritionals 6,234 51.2 5,111 49.2
Pharmaceutical
Intermediates &
Custom Mfg. 690 5.7 434 4.2
Institutional
Sanitary
Supplies & Other 445 3.7 420 4.0
---- ---- ---- ----
TOTAL GROSS
PROFIT BEFORE
FREIGHT AND
STORAGE COSTS $12,169 100.0% $10,393 100.0%
====== ======
Unallocated Cost
of Sales 1,163 927
----- ----
NET GROSS PROFIT $11,006 $ 9,466
======= =======
SALES AND GROSS PROFIT:
Net sales for the three months ended December 31, 2002 increased $9,268 or
16.7%, to $64,633 compared with $55,365 for the same period last year. The
Company reported particularly strong sales for the current quarter from its
Pharmaceuticals, Biochemicals and Nutritionals segment as explained below. In
addition, sales in last year's first half 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 strong
increase in sales and accounted for 69.7% of the overall increase. This
segment's sales were $31,510 in the current quarter versus $25,049 last year, an
increase of $6,461 or 25.8%. 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 22.2%
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 $3,699 or
19.3%, to $22,822 in the current quarter as compared to $19,123 last year. The
increase is mainly 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 $4,815 for
the second quarter versus $4,906 last year, a decrease of $91 or 1.9%. The
decrease is mainly attributable to a decrease in sales volume pertaining to the
timing and extent of the introduction of new products.
Agrochemicals sales were $4,269 in the current quarter compared to $5,206 last
year, a decrease of $937 or 18.0%. The primary cause was a reduction in sales
volume of certain products.
Institutional Sanitary Supplies & Other sales were $1,217 versus $1,081 last
year, an increase of $136 or 12.6%. The improved sales were
attributable to identifying better sources of supply that have improved our
competitive position regarding pricing. During last year's second 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 $1,776 or 17.1% to $12,169 from $10,393. The
Pharmaceuticals, Biochemicals and Nutritionals segment showed a strong increase
in gross profit in this year's second quarter as compared to last year since it
accounted for $1,123 or 63.2% of the overall increase.
The gross profit resulting from the Pharmaceuticals, Biochemicals and
Nutritionals segment increased $1,123 or 22% which amounted to $6,234 or 19.8%
this year versus $5,111 or 20.4% 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 at a slightly lower gross margin rate. In
addition, nutritionals & biochemicals also saw gross profit increases this year
in both dollars and rates as a result of increased demand.
The Chemicals & Colorants segment's gross profit of $3,461 increased $529 or
18.0% over last year's $2,932. Gross margin, as a percentage of sales, was flat
at 15.2% this year versus 15.3% last year. The increase in gross profit was
mainly attributable to the net of a negotiated settlement for lost gross margin
related to the non-performance of a sales contract and an estimate of a loss on
the related purchase contract in the amount of $450. Excluding this favorable
settlement, gross profit increased only $79 or 2.7% and the gross profit rate
would have been 13.7% which is lower than the gross profit in the prior year of
15.3%. The increase in gross profit dollars and the reduction in gross margin
from 15.3% last year to the adjusted 13.7% this year is mainly due to the
increased volume in the three months ended December 31, 2002 from one large
customer at rates lower than usual for this segment.
In the Pharmaceutical Intermediates and Custom Manufacturing segment, the gross
profit amounted to $690 or 14.3% this year versus $434 or 8.8% last year. Gross
profits realized on some new products yielded higher dollars this year at a
higher margin rate.
The Agrochemicals segment reported a decrease in gross profit of $157 or 10.5%
to $1,339 in the quarter ended December 31, 2002 versus $1,496 last year. Gross
profit dollars decreased due to product mix and the lower sales volume. Gross
margin increased to 31.4% for the current quarter versus 28.7% last year mainly
due to changes in product mix.
Institutional Sanitary Supplies and Other gross profit increased by 6.0% to $445
or 36.6% this quarter versus $420 or 38.9% last year. This year's second quarter
included a higher proportion of lower margin products as compared to last year's
product sales mix.
Unallocated cost of sales increased to $1,163 from $927, or 25.5%. The higher
costs were mainly attributable to increased sales and shipments to customers and
higher levels of inventory in warehouses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A")decreased $153 or 2.0% to
$7,655 for the quarter ended December 31, 2002 from $7,808 in last year's second
quarter. As a percentage of sales, SG&A decreased to 11.8% in the second quarter
of fiscal 2003 versus 14.1% for the comparable period in fiscal 2002. SG&A
decreased primarily due to decreased professional fees and a lower provision for
bad debts which
was somewhat offset by higher insurance costs and increased selling expenses.
OPERATING INCOME
For the quarter ended December 31, 2002 the operating income was $3,351 compared
to $1,658, an increase of $1,693 or 102.1%. This increase was primarily due to
an increase in gross profit of $1,540 mainly due to the contribution from the
Pharmaceuticals, Biochemicals and Nutritionals segment in addition to lower SG&A
expenses.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)
Interest expense for the current quarter was $64 versus $93 in the prior year.
The decrease of $29 or 31.2% was entirely attributable to the lower levels of
short-term bank loans and acquisition debt arising from the Schweizerhall Pharma
acquisition.
Interest and other income was $113 for the quarter ended December 31, 2002 as
compared to $311 last year. The overall reduction in income of $198 is mainly
attributable to last year's second quarter including over $200 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
December 31, 2002 from 33.7% for the same period last year. The
decrease in the effective tax rate is a reflection of increased earnings in
lower tax jurisdictions compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 2002, the Company had $14,899 in cash, $1,172 in short-term
investments and $6,165 of short-term bank loans. Working capital was $62,765 at
December 31, 2002 versus $58,311 at June 30, 2002.
The Company's cash position at December 31, 2002 increased $644 from the June
30, 2002 level. Operating activities provided cash of $1,593, primarily from net
income of $2,778, a reduction in other receivables of $2,474 and an increase in
other accrued expenses of $1,791 partially offset by an increase in inventory of
$6,143 and a decrease in drafts and acceptances payable of $2,217. Included in
operating activities was also a one-time charge of $1,873 attributable to the
cumulative effect of adopting SFAS No. 142, "Goodwill and Other Intangible
Assets".
Investing activities used cash of $94, primarily from capital expenditures of
$311, partially offset by $173 of net cash proceeds from the sale of property.
Financing activities used cash of $855 primarily as a result of payments of
current installments of long-term liabilities of $272 and short-term bank loans
of $1,171, partially offset by proceeds from the exercise of stock options of
$565.
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 ($15,200) of which $6,165 was utilized as of December 31, 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 December
31, 2002, the Company utilized $1,113 in letters of credit leaving an unused
facility of $13,887. 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 December 31, 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 December 31,
2002, the Company has no significant obligations for capital expenditures. At
December 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 $ 6,165 $6,165 $ - $ - $ -
Operating leases 9,821 1,412 2,639 2,190 3,580
Commercial letters of credit 1,113 1,113 - - -
Standby letters of credit 111 111 - - -
Unconditional purchase
obligations 19,135 11,505 7,630 - -
------- ------- ------- ------ ------
Total $36,345 $20,306 $10,269 $2,190 $3,580
======= ======= ======= ====== ======
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 the Company has no current plans to
restructure any of its business.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123" ("SFAS 148").
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements to SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition and annual disclosure provisions
of SFAS 148 are effective for interim periods beginning after December 15, 2002.
Accordingly, the Company will adopt the disclosure requirements of SFAS 148 for
the quarter ended March 31, 2003.
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 December 31, 2002, of which $803 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 $80 as of December 31, 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 December
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 December 31, 2002 was $6. Intercompany transactions with
foreign subsidiaries are typically not hedged.
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 December 31, 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 December 31, 2002,
amounts to $1,664. 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.
The Company is working closely with its corporate and securities lawyers to
ensure that it maintains compliance with the Sarbanes-Oxley Act of 2002, the SEC
regulations promulgated pursuant to that Act, and any related NASDAQ Stock
Market rules.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
(1) The Company held an annual meeting of its shareholders on December 5, 2002
(the "Annual Meeting")
(2) Three matters were voted on at the Annual Meeting, as follows:
(a) The election of nominees Leonard S. Schwartz, Samuel I. Hendler,
Robert A. Wiesen, Stanley H. Fischer, Albert L. Eilender, Ira S.
Kallem and Hans C. Noetzli, as Directors of the Company until the next
annual meeting.
The votes were cast for this matter as follows:
FOR WITHHELD/ABSTAIN
Leonard S. Schwartz 4,552,903 1,274,781
Samuel I. Hendler 5,314,308 513,376
Robert A. Wiesen 5,314,524 513,160
Stanley H. Fischer 5,314,224 513,460
Albert L. Eilender 5,326,109 501,575
Ira S. Kallem 5,317,800 509,884
Hans C. Noetzli 5,337,091 490,593
Each nominee was elected a Director of the Company.
(b) Ratifying the adoption of the Company's 2002 Stock Option Plan.
The votes were cast for this matter as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
3,194,072 1,151,387 154,861 1,327,364
The adoption of the Company's 2002 Stock Option Plan was ratified.
(c) Ratification of the selection of KPMG LLP as the Company's independent
auditors for the current fiscal year.
The votes were cast for this matter as follows:
BROKER
FOR AGAINST ABSTAIN NON-VOTES
5,281,192 385,358 161,134 -
The selection of KPMG LLP as the Company's independent auditors was ratified.
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 a Form 8-K on December 5, 2002 in order to disclose
its 3-for-2 stock split, 8% increase in its annual cash dividend
payable on its common stock, and publicly announced earnings guidance.
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 February 14, 2003 BY (signed) / by Douglas Roth
------------------------------ ----------------------------------------
Douglas Roth, Chief Financial
Officer
DATE February 14, 2003 BY (signed) / by Leonard S. Schwartz
------------------------------ ----------------------------------
Leonard S. Schwartz, Chairman,
President And Chief Executive
Officer