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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 MARCH 31, 2004
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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
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Registrant's website address: www.aceto.com
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Not Applicable
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(Former name, former address and former
fiscal year, if changed since last report)
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 X No
--- ---
The Registrant has 15,954,194 shares of common stock, par value $.01,
outstanding as of May 6, 2004.
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - As of March 31, 2004
(unaudited) and June 30, 2003
Consolidated Statements of Income (unaudited) - For the Nine
Months Ended March 31, 2004 and 2003
Consolidated Statements of Income (unaudited) - For the Three
Months Ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows (unaudited) - For the
Nine Months Ended March 31, 2004 and 2003
Notes to Consolidated Financial Statements (unaudited)
Independent Accountants' Review Report
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
Certifications
Index to Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, June 30,
2004 2003
---- ----
ASSETS (Unaudited)
- ------
Current assets:
Cash and cash equivalents $ 30,771 $ 20,263
Short-term investments 953 877
Receivables:
Trade, less allowance for doubtful accounts:
March, $847; June, $939 54,558 43,841
Other 1,705 1,320
------- -------
56,263 45,161
Inventory 37,763 41,696
Prepaid expenses and other current assets 1,139 1,015
Income taxes receivable - 939
Deferred income tax benefit, net 301 301
------- -------
Total current assets 127,190 110,252
Long-term notes receivable 770 1,017
Property and equipment 6,803 6,282
Less accumulated depreciation and amortization 4,218 3,681
------- -------
2,585 2,601
Goodwill 7,949 7,783
Intangible assets, net 3,870 412
Deferred income tax benefit 1,107 1,107
Other assets 1,542 347
------- -------
Total assets $145,013 $123,519
======= =======
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, June 30,
2004 2003
---- ----
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Drafts and acceptances payable $ 4,541 $ 1,315
Short-term bank loans 1,299 3,286
Accounts payable 15,758 17,372
Accrued merchandise purchases 9,595 4,048
Accrued compensation 4,153 4,117
Accrued environmental remediation 1,550 1,550
Accrued income taxes 736 -
Other accrued expenses 9,789 7,262
------- -------
Total current liabilities 47,421 38,950
Shareholders' equity:
Common stock,$.01 par value:
Authorized: March, 40,000,000 shares
June, 20,000,000 shares
Issued: March, 17,570,579 shares
June, 17,570,579 shares
Outstanding: March, 15,948,516 shares
June, 15,564,070 shares 176 176
Capital in excess of par value 57,124 57,047
Retained earnings 54,577 46,142
Treasury stock, at cost:
March, 1,622,063 shares
June, 2,006,509 shares (16,088) (19,836)
Accumulated other comprehensive income 1,803 1,040
------- -------
Total shareholders' equity 97,592 84,569
------- -------
Commitments and contingencies
Total liabilities and shareholders' equity $145,013 $123,519
======= =======
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Nine Months Ended
March 31,
---------
(Unaudited)
2004 2003
---- ----
Net sales $221,229 $203,216
Cost of sales 181,371 169,760
------- -------
Gross profit 39,858 33,456
Selling, general and administrative
expenses 27,162 23,140
------- -------
Operating income 12,696 10,316
Other income (expense):
Interest expense (98) (222)
Interest and other income, net 1,116 226
------- -------
1,018 4
------- -------
Income before income taxes and cumulative
effect of accounting change 13,714 10,320
Provision for income taxes 3,922 3,258
------- -------
Income before cumulative effect of
accounting change 9,792 7,062
Cumulative effect of accounting change (a) - 1,873
------- -------
Net income $ 9,792 $ 5,189
======= =======
Basic income per common share (b):
Income before accounting change $ 0.62 $ 0.48
Cumulative effect of accounting change (a) - 0.13
------- -------
Net income $ 0.62 $ 0.35
======= =======
Diluted income per common share (b):
Income before accounting change $ 0.60 $ 0.47
Cumulative effect of accounting change (a) - 0.12
------- -------
Net income $ 0.60 $ 0.35
======= =======
Weighted average shares outstanding (b):
Basic 15,790 14,784
Diluted 16,203 15,006
(a) SFAS 142 impairment loss recognized as a cumulative effect of an
accounting change in the first interim reporting period (note 10).
(b)The number of shares outstanding and the per share information have been
adjusted for a 3-for-2 stock dividend, paid January 2, 2004 (note 4).
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
March 31,
------------------------
(Unaudited)
2004 2003
---- ----
Net sales $ 79,690 $ 70,561
Cost of sales 64,711 58,974
------- -------
Gross profit 14,979 11,587
Selling, general and administrative
expenses 10,093 8,206
------- -------
Operating income 4,886 3,381
Other income (expense):
Interest expense (30) (80)
Interest and other income, net 228 229
------- -------
198 149
------- -------
Income before income taxes 5,084 3,530
Provision for income taxes 1,374 1,119
------- -------
Net income $ 3,710 $ 2,411
======= =======
Income per common share (a):
Basic $ 0.23 $ 0.16
======= =======
Diluted $ 0.23 $ 0.16
======= =======
Weighted average shares outstanding (a):
Basic 15,896 14,841
Diluted 16,306 15,252
(a) The number of shares outstanding and the per share information have
been adjusted for a 3-for-2 stock dividend, paid January 2, 2004 (note
4).
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
---------
2004 2003
---- ----
(Unaudited)
Operating activities:
Net income $ 9,792 $ 5,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of accounting change - 1,873
Depreciation and amortization 811 760
Provision for doubtful accounts 231 403
Gain on sale of assets - (291)
Income tax benefit on exercise of stock options 1,095 46
Non-cash stock compensation 190 106
Changes in assets and liabilities:
Investments - trading securities (76) 214
Trade accounts receivable (9,197) (1,930)
Other receivables (79) 2,425
Inventory 6,171 (6,763)
Prepaid expenses and other current assets (217) 123
Other assets (548) 60
Drafts and acceptances payable 3,169 (2,863)
Accounts payable (1,718) 2,014
Accrued merchandise purchases 5,294 355
Accrued compensation (166) 964
Accrued income taxes 1,265 124
Other accrued expenses (429) 888
------ ------
Net cash provided by operating activities 15,588 3,697
------ ------
Investing activities:
Acquisition of Pharma Waldhof, net of cash acquired (4,408) -
Payments received on notes receivable 253 70
Proceeds from sale of property, net of closing costs - 173
Purchases of property and equipment (461) (357)
Proceeds from maturation of held-to-maturity investments - 369
------ ------
Net cash provided by (used in) investing activities (4,616) 255
------ ------
Financing activities:
Payments of short-term bank loans (2,134) (1,747)
Payments of current installments of long-term liabilities - (272)
Payments of cash dividends (1,357) (1,138)
Proceeds from exercise of stock options 2,538 864
Payments for purchases of treasury stock - (39)
Issuance of treasury stock to employees 192 117
------ ------
Net cash used in financing activities (761) (2,215)
------ ------
Effect of exchange rate changes on cash 297 172
------ ------
Net increase in cash 10,508 1,909
Cash at beginning of period 20,263 14,255
------ ------
Cash at end of period $30,771 $16,164
====== ======
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 subsidiaries
("Aceto" or the "Company") 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.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates and assumptions. The Company's most critical
accounting policies relate to revenue recognition; allowance for doubtful
accounts; inventory; goodwill and other intangible assets; environmental
matters; income taxes; and other contingencies.
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/A for the year ended June 30, 2003.
NOTE 2: EMPLOYEE STOCK-BASED COMPENSATION
Prior to fiscal 2004, the Company had established a number of share incentive
programs as discussed in more detail in the Company's annual report on Form
10-K/A for the year ended June 30, 2003. The Company applies the intrinsic value
method as outlined in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
stock options and share units granted under these programs. Under the intrinsic
value method, no compensation expense is recognized if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant. Since the Company has issued all stock grants at
market value, no compensation cost has been recognized. Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
requires that the Company provide pro forma information regarding net income and
net income per common share as if compensation cost for the Company's stock
option programs had been determined in accordance with the fair value method
prescribed therein. The Company adopted during fiscal 2003 the disclosure
portion of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" requiring quarterly SFAS No. 123 pro forma disclosure. The
following table illustrates the effect on net income and income per common share
as if the Company had measured the compensation cost for the Company's stock
option programs under the fair value method in each period presented:
Nine Months Ended Three Months Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported $9,792 $5,189 $3,710 $2,411
Deduct: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects (832) (550) (298) (184)
----- ----- ----- -----
Net income - pro forma $8,960 $4,639 $3,412 $2,227
===== ===== ===== =====
Income per common share:
Basic - as reported $ 0.62 $ 0.35 $ 0.23 $ 0.16
Basic - pro forma $ 0.57 $ 0.31 $ 0.21 $ 0.15
Diluted - as reported $ 0.60 $ 0.35 $ 0.23 $ 0.16
Diluted - pro forma $ 0.55 $ 0.31 $ 0.21 $ 0.15
NOTE 3: BUSINESS ACQUISITIONS
PHARMA WALDHOF
On December 31, 2003, the Company, through its wholly owned subsidiary Aceto
Holding GmbH ("Aceto Holding"), acquired from Corange Deutschland Holding GmbH,
a corporation formed under the laws of Germany (the "Seller"), all of the
capital stock of Pharma Waldhof Beteiligungs GmbH ("Pharma Waldhof"), and all of
the partnership interest of Pharma Waldhof GmbH & Co. KG. Pharma Waldhof is the
general partner of Pharma Waldhof GmbH & Co. KG.
Based in Dusseldorf, Germany, Pharma Waldhof GmbH & Co. KG distributes
biologically and chemically derived active pharmaceutical ingredients (APIs)
currently used in therapeutic and diagnostic products. It is a worldwide
provider of a patent-protected, biologically derived API used for a widely used
diagnostic and therapeutic heart medication. Its primary customers include
worldwide ethical and generic pharmaceutical companies.
The purchase price for the capital stock of Pharma Waldhof was $30. The purchase
price for the partnership interest of Pharma Waldhof GmbH & Co. KG was $2,970.
Additionally, the share purchase agreement states that the Company is to pay the
seller an amount equal to certain acquired assets less certain acquired
liabilities. This additional payment was originally estimated by the Company to
be $321. Interpretations of this clause in the agreement were discussed and
negotiated with the Seller in April 2004 resulting in the Company agreeing to
pay approximately $1,844 for the acquisition of these certain assets net of
certain liabilities. The liability for this additional payment has been included
in other accrued expenses on the accompanying consolidated balance sheet as of
March 31, 2004.
The Company has accounted for the transaction under the purchase method of
accounting for business combinations. The purchase price was allocated to the
acquired assets and assumed liabilities based on the fair values as of the date
of the acquisition. The excess of the purchase price paid over the fair value of
the net identifiable assets acquired represented goodwill of approximately $832.
The amount allocated to goodwill is preliminary, principally pending the
completion of management's determination of whether previously unrecognized
deferred tax benefits should be recognized as a result of the Pharma Waldhof
acquisition.
The purchase price was preliminarily allocated as follows:
Goodwill ................................................... $ 765
Accounts receivable ........................................ 937
Inventory................................................... 1,961
Identifiable intangible assets.............................. 3,847
Cash........................................................ 387
Other receivables........................................... 308
Fixed assets................................................ 11
-----
Total assets................................................ 8,216
Less liabilities assumed.................................... (3,238)
-----
Purchase price, including acquisition costs................. $ 4,978
=====
The following unaudited pro forma financial information presents a summary of
the Company's consolidated results of operations for the three and nine month
periods ended March 31, 2004 and 2003, assuming the Pharma Waldhof acquisition
had taken place as of July 1, 2003 and 2002, respectively, and January 1, 2004
and 2003, respectively:
Nine Months Ended Three Months Ended
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Revenues $225,783 $210,211 $79,690 $73,470
Income before cumulative
effect of accounting change $ 11,223 $ 8,256 $ 3,710 $ 3,114
Net income $ 11,223 $ 6,383 $ 3,710 $ 3,114
Basic income per common share:
Income before accounting
change $ 0.71 $ 0.56 $ 0.23 $ 0.21
Cumulative effect of
accounting change $ - 0.13 - -
------- ------- ------ ------
Net income $ 0.71 $ 0.43 $ 0.23 $ 0.21
======= ======= ====== ======
Diluted income per common share:
Income before accounting $ 0.69 $ 0.55 $ 0.23 $ 0.20
change
Cumulative effect of
accounting change $ - 0.12 - -
------- ------- ------ ------
Net income $ 0.69 $ 0.43 $ 0.23 $ 0.20
======= ======= ====== ======
The unaudited condensed pro forma financial information has been prepared for
comparative purposes only and reflects the historical unaudited results of
Pharma Waldhof. The pro forma financial information includes adjustments to the
Company's historical results to reflect reduced interest income generated from
cash that was used for the acquisition, depreciation and amortization expenses
and related income tax adjustments. The pro forma information does not purport
to be indicative of operating results that would have been achieved had the
acquisition taken place on the dates indicated or the results that may be
obtained in the future.
SCHWEIZERHALL PHARMA
On March 26, 2001, the Company acquired (i) the distribution business of the
Schweizerhall Pharma division of Schweizerhall Holding AG ("SP Seller"), 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").
The Schweizerhall Pharma purchase agreement detailed two possible additional
payments to be made to the SP Seller. The first additional payment was to be
made if the Company sold acquired inventory (within one year of the closing
date) above 60% of Schweizerhall's stated book value of such inventory as of the
closing date. The inventory was sold by the Company above the 60% book value and
the resulting additional $2,639 payment was made to the Seller in May 2002.
Accordingly, the Company recorded this payment as an additional cost of the
acquisition. Such additional cost was allocated to the acquired inventory as
such amounts were indicative of a more accurate estimate of the fair value of
the acquired inventory.
The second additional payment is to be made if the Company realizes any tax
savings due to the utilization of any tax benefits (e.g., net operating losses
or credits) of the SP Seller. Such payment would be 50% of the tax benefit
received by the Company and would be recorded as additional goodwill (note 10).
The acquisition of Pharma Waldhof could result in the Company realizing certain
tax benefits acquired from Schweizerhall Pharma that were previously
unrecognized by the Company. The Company is in the process of determining
whether it is more likely than not that such tax benefits will be realized. The
recognition of these tax benefits would result in a reduction of Schweizerhall
Pharma goodwill and a liability to Schweizerhall Pharma for 50% of the tax
benefits, as such benefits are realized.
NOTE 4: COMMON STOCK
On December 4, 2003, the Board of Directors of the Company declared a 3-for-2
stock dividend that was paid January 2, 2004, to shareholders of record on
December 17, 2003. The Company transferred $53 to common stock from capital in
excess of par value, representing the aggregate par value of the shares issued.
All references to the number of common shares and the per common share amounts
have been restated to give retroactive effect to the above stock dividend for
all periods presented.
On December 4, 2003, the shareholders of the Company approved an increase in the
Company's authorized common stock to 40,000 shares.
NOTE 5: SEGMENT INFORMATION
The Company, prior to fiscal 2004, was organized into five reportable segments,
organized by product. Effective for the fiscal year ended June 30, 2003, the two
segments formerly known as Pharmaceuticals, Biochemicals & Nutritionals and
Pharmaceutical Intermediates & Custom Manufacturing were combined into a segment
called Health Sciences. The amounts previously reported for the former segments
have been combined accordingly.
Therefore, the Company's four 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 plastics, resins, adhesives, coatings, food, flavor,
fragrance, cosmetics, metal finishing, electronics 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) Health Sciences, which includes the active ingredients for generic
pharmaceuticals, vitamins and nutritional supplements, as well as
products used in preparation of pharmaceuticals, primarily by major
innovative drug companies,
(4) Institutional Sanitary Supplies & Other, whose products include
cleaning solutions, fragrances and deodorants used by commercial and
industrial establishments.
Certain freight and storage costs are not allocated to the segments as such
costs are managed on an entity-wide basis, and the information to
reasonably allocate such costs is not readily available.
The Company does not allocate assets by segment. The Company's chief
operating decision maker evaluates performance of the segments based on net
sales and gross profit. The Company does not allocate assets by segment
because the chief operating decision maker does not review the assets by
segment to assess the segments' performance, as the assets are managed on
an entity-wide basis.
Nine Months Ended March 31, 2004 and 2003
Institutional
Sanitary
Agro- Chemicals & Health Supplies & Consolidated
Chemicals Colorants Sciences Other Totals
--------- --------- -------- ------------- ------------
2004
- ----
Net sales $12,443 67,731 136,980 4,075 $221,229
Gross profit 4,073 10,909 26,268 1,500 42,750
Unallocated
Cost of sales (1) 2,892
-------
Net gross profit $ 39,858
=======
2003
- ----
Net sales $9,775 69,738 119,752 3,951 $203,216
Gross profit 2,691 10,293 21,642 1,664 36,290
Unallocated
Cost of sales (1) 2,834
-------
Net gross profit $ 33,456
=======
Three Months Ended March 31, 2004 and 2003
Institutional
Sanitary
Agro- Chemicals & Health Supplies & Consolidated
Chemicals Colorants Sciences Other Totals
--------- --------- -------- ------------- ------------
2004
- ----
Net sales $4,817 23,543 49,903 1,427 $ 79,690
Gross profit 1,498 3,733 10,214 525 15,970
Unallocated
cost of sales (1) 991
-------
Net gross profit $ 14,979
=======
2003
- ----
Net sales 3,901 24,594 40,802 1,264 $ 70,561
Gross profit 1,029 3,514 7,397 559 12,499
Unallocated
Cost of sales (1) 912
-------
Net gross profit $ 11,587
=======
(1) Represents freight and storage costs that are not allocated to a segment.
Net sales and gross profit of each location for the nine months ended March 31,
2004 and 2003 and long-lived assets of each location as of March 31, 2004 and
June 30, 2003 were as follows:
Net Sales Gross Profit
--------- ------------
Nine Months Ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
United States $126,552 $136,492 $ 23,574 $ 22,947
Germany 37,766 25,048 8,363 3,798
The Netherlands 7,054 6,272 899 1,500
France 8,062 7,684 1,102 1,066
Asia-Pacific 41,795 27,720 5,920 4,145
------- ------- ------- -------
Total $221,229 $203,216 $ 39,858 $ 33,456
======= ======= ======= =======
Long-Lived Assets, net
(excluding intangible assests)
------------------------------
March 31, June 30,
2004 2003
---- ----
United States $1,687 $1,783
Germany 560 556
The Netherlands 135 113
France 126 61
Asia-Pacific 77 88
----- -----
Total $2,585 $2,601
===== =====
NOTE 6: INVENTORY
Inventory consists of the following:
March 31, June 30,
2004 2003
------- -------
Finished goods $37,278 $41,221
Work in process 150 157
Raw materials 335 318
------ ------
Total $37,763 $41,696
====== ======
NOTE 7: NET INCOME PER COMMON SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income per common share computation for net income follows:
Nine Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Income before cumulative effect
of accounting change $9,792 $7,062 $3,710 $2,411
Cumulative effect of accounting
change - 1,873 - -
----- ----- ----- -----
Net income available for common
shareholders $9,792 $5,189 $3,710 $2,411
===== ===== ===== =====
Weighted average common shares
(basic)(a) 15,790 14,784 15,896 14,841
Effect of dilutive securities:
Stock options (a) 413 222 410 411
----- ----- ----- -----
Weighted average common and
potential common shares
outstanding (diluted)(a) 16,203 15,006 16,306 15,252
====== ====== ====== ======
Basic income per common share(a):
Income before cumulative effect
of accounting change $ 0.62 $ 0.48 $ 0.23 $ 0.16
Cumulative effect of accounting
change (b) - 0.13 - -
----- ----- ----- -----
Net income $ 0.62 $ 0.35 $ 0.23 $ 0.16
===== ===== ===== =====
Diluted income per common share(a):
Income before cumulative effect
of accounting change $ 0.60 $ 0.47 $ 0.23 $ 0.16
Cumulative effect of accounting
change (b) - 0.12 - -
----- ----- ----- -----
Net income $ 0.60 $ 0.35 $ 0.23 $ 0.16
===== ===== ===== =====
(a) The number of shares outstanding and the per share information have
been adjusted for a 3-for-2 stock dividend, paid January 2, 2004 (note
4).
(b) SFAS 142 impairment loss recognized as a cumulative effect of an
accounting change in the first interim reporting period of fiscal 2003
(note 10).
Employee stock options of 5 and 0 for the nine and three months ended March 31,
2004, respectively, were not included in the diluted income per common share
calculation because their effect would have been anti-dilutive. Employee stock
options of 480 and 0 for the nine and three months ended March 31, 2003,
respectively, were not included in the diluted income per common share
calculation because their effect would have been anti-dilutive.
In February 2004, the Board of Directors approved that the vesting of certain
stock options granted to the Chairman, President and Chief Executive Officer in
1997 to purchase 135,000 shares of the Company's common stock with vesting dates
of January 2005 and January 2006 be modified so as to vest such stock options as
of February 11, 2004, provided, however, that the underlying stock issued upon
exercise of any or all of such stock options may not be sold until the earlier
of the original date of vesting or death.
NOTE 8: COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, are
excluded from net income. The components of comprehensive income were as
follows:
Nine Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Comprehensive income:
Net income $ 9,792 $ 5,189 $3,710 $2,411
Foreign currency
translation adjustment 1,081 172 (205) 41
Change in fair value of
cross currency interest
rate swap (318) -- 76 --
------ ------ ----- -----
Total $10,555 $ 5,361 $3,581 $2,452
====== ====== ===== =====
The components of accumulated other comprehensive income as of March 31, 2004
and June 30, 2003 are as follows:
March 31, June 30,
2004 2003
--------- --------
Cumulative foreign currency translation adjustments $ 2,238 $ 1,157
Fair value of cross currency interest rate swap (435) (117)
------ ------
$ 1,803 $ 1,040
====== ======
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. New exchange gains or
losses resulting from the translation of financial statements of foreign
operations are accumulated in other comprehensive income. The currency
translation adjustments are not adjusted for income taxes as they relate to
indefinite investments in non-US subsidiaries.
NOTE 9: RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current presentation.
NOTE 10: GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of SFAS 141 and 142 as of July 1, 2002. The
Company had evaluated its existing goodwill that was acquired in prior purchase
business combinations and 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 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 nine months ended March 31, 2003 includes a one-time charge of $1,873, or
$0.12 per diluted share, attributable to the cumulative effect of adopting SFAS
142. The Company's $1,873 one-time charge was related to the impairment of the
goodwill associated with CDC Products Corp. ("CDC"), which is part of our
Institutional Sanitary Supplies and Other segment. The one-time charge for CDC
was due to the change in methodologies used to evaluate the recoverability of
goodwill as required under SFAS 142.
Intangible assets subject to amortization as of March 31, 2004 and June 30, 2003
were as follows:
March 31, 2004
Gross Carrying Accumulated Net Book
Value Amortization Value
------------ ----------- ---------
Customer relationships $ 2,673 $ 96 $ 2,577
Customer lists 600 360 240
Non-compete agreements 643 425 218
------------ ----------- ---------
$ 3,916 $ 881 $ 3,035
============ =========== =========
June 30, 2003
Gross Carrying Accumulated Net Book
Value Amortization Value
------------ ----------- ---------
Customer relationships $ - $ - $ -
Customer lists 600 270 330
Non-compete agreements 420 338 82
------------ ----------- ---------
$ 1,020 $ 608 $ 412
============ =========== =========
As of March 31, 2004 and June 30, 2003, the Company also had $835 and $0,
respectively, of intangible assets pertaining to trademarks which are not
subject to amortization. Amortization expense for intangible assets subject to
amortization amounted to $273 and $186 for the nine months ended March 31, 2004
and 2003, respectively. The estimated aggregate amortization expense for
intangible assets subject to amortization for each of the succeeding years ended
June 30, 2004 through June 30, 2008 are as follows: 2004: $143; 2005: $548;
2006: $518; 2007: $428; 2008: $428.
The balances of goodwill by segment as of June 30, 2003 and March 31, 2004 and
changes therein for the nine months ended March 31, 2004 are as follows:
Institutional
Sanitary Supplies Consolidated
Health Sciences & Other Totals
--------------- --------- --------
Balance at 6/30/03
$6,838 $945 $7,783
Acquisition of
Pharma Waldhof 765 - 765
Foreign currency
translation
adjustments 67 - 67
Recognition of
acquired tax
benefits, net of
payments to
Schweizerhall Pharma (666) - (666)
----- --- -----
Balance at 3/31/04 $7,004 $945 $7,949
===== === =====
NOTE 11: SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during the nine months ended March 31,
2004 and 2003 was as follows:
2004 2003
---- ----
Interest paid $ 71 $ 209
Income taxes paid 2,148 3,029
Non-cash transactions:
During the nine months ended March 31, 2003, the Company entered into a mortgage
note in the amount of $412 for the sale of property.
NOTE 12: PURCHASE COMMITMENTS
As of March 31, 2004, the Company has outstanding purchase obligations totaling
$11,537 with suppliers of the Germany, Netherlands and Singapore operations to
acquire certain products for resale to third party customers. Such purchase
obligations are based on anticipated sales to certain customers through December
31, 2004.
NOTE 13: DEFERRED COMPENSATION
Effective December 2003, the Company modified its non-qualified Supplemental
Executive Retirement Plan ("the Plan"). The Plan is a deferred compensation plan
intended to provide certain qualified executives with supplemental retirement
benefits beyond the Company's 401(k) Plan, as well as to permit additional
deferral of a portion of their compensation. All compensation deferred under the
Plan is held by the Company in a grantor trust, which is considered an asset of
the Company. The funds held by the grantor trust are in life insurance policies.
As of March 31, 2004, the Company has recorded an asset (included in other
assets) of $1,212 primarily representing the cash surrender value of policies
owned by the Company.
NOTE 14: IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board ("FASB") issued an exposure draft
entitled "Share-Based Payment, an amendment of FASB Statements No. 123 and 95."
This exposure draft would require stock-based compensation to employees to be
recognized as a cost in the financial statements and that such cost be measured
according to the fair value of the stock options. In the absence of an
observable market price for the stock awards, the fair value of the stock
options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk-free interest rate. The proposed requirements in
the exposure draft would be effective for the first fiscal year beginning after
December 15, 2004. The FASB intends to issue a final Statement in late 2004. The
Company will continue to monitor communications on this subject from the FASB in
order to determine the impact on the Company's consolidated financial
statements.
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46R
clarifies some of the provisions of FIN 46 and exempts certain entities from its
requirements. Generally, FIN 46R is effective at the end of the first interim
period ending after March 15, 2004. The adoption of FIN 46R did not have any
impact to the consolidated financial statements.
Independent Accountants' Review Report
The Board of Directors and Shareholders
Aceto Corporation
We have reviewed the consolidated balance sheet of Aceto Corporation and
subsidiaries as of March 31, 2004, the related consolidated statements of income
for the three-month and nine-month periods ended March 31, 2004 and 2003, and
the related consolidated statements of cash flows for the nine-month periods
ended March 31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 10 to the consolidated financial statements, Aceto
Corporation and subsidiaries adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" as of July 1, 2002.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Aceto Corporation and subsidiaries as of June 30, 2003, and the related
consolidated statements of income, shareholders' equity and comprehensive income
(loss), and cash flows for the year then ended (not presented herein); and in
our report dated August 26, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of June 30, 2003, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ KPMG LLP
Melville, New York
May 6, 2004
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
INCLUDES "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 EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT OUR INDUSTRY AND OUR BUSINESS. WORDS SUCH AS "ANTICIPATES,"
"EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," OR VARIATIONS
OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, UNFORSEEN ENVIRONMENTAL LIABILITIES, UNCERTAIN
MILITARY, POLITICAL AND ECONOMIC CONDITIONS IN THE WORLD, THE MIX OF PRODUCTS
SOLD AND THE PROFIT MARGINS THEREON, ORDER CANCELLATION OR A REDUCTION IN ORDERS
FROM CUSTOMERS, COMPETITIVE PRODUCT OFFERINGS AND PRICING ACTIONS, THE
AVAILABILITY AND PRICING OF KEY RAW MATERIALS, DEPENDENCE ON KEY MEMBERS OF
MANAGEMENT, RISKS OF ENTERING INTO NEW EUROPEAN MARKETS, CONTINUED SUCCESSFUL
INTEGRATION OF ACQUISITIONS AND ECONOMIC AND POLITIAL CONDITIONS IN THE UNITED
STATES AND ABROAD. 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.
EXECUTIVE SUMMARY
Aceto is reporting net sales of $79,690 for the third fiscal quarter ended March
31, 2004 which represents a 12.9% increase over the $70,561 reported in the
third quarter of fiscal 2003. The gross profit margin of 18.8% for the quarter,
represents the highest quarterly gross profit margin ever recorded by the
Company. The strong sales and gross profit margin caused our net income to
increase to $3,710 or $0.23 per diluted share which is 53.9% higher than last
year's third fiscal quarter. For the nine months we are reporting net sales of
$221,229 resulting in net income of $9,792 compared to the same period last
year's net sales of $203,216 and net income of $5,189.
Our financial position, as of March 31, 2004, remains strong as we had cash of
$30,771, working capital of $79,769, no long-term debt and shareholders' equity
of $97,592.
Aceto Corporation is a global distributor of pharmaceutical and specialty
chemicals. The Company's offices in China, Germany, France, The Netherlands,
Singapore, India, Poland, Hong Kong, the United Kingdom and the United States,
along with warehouses worldwide, enable us to respond quickly to customer
demands, assuring that a consistent, high quality supply of pharmaceutical and
specialty chemicals is never far away. Aceto is able to offer its customers very
competitive pricing, continuity of supply, quality control and pricing. Our 57
years of experience, reputation for reliability and longevity, and long-term
relationships with its suppliers has fostered loyalty among our customers.
We are confident about Aceto's short- and long-term business prospects. In the
short-term, we anticipate continued organic growth, including our launching of a
minimum of four new Active Pharmaceutical Ingredients (APIs) per year, entering
the developing biopharmaceutical market, the globalization of our Chemicals &
Colorants
business, continued enhancement of our sourcing operations in China and India,
and steady improvement of our regulatory capabilities.
We believe new product launches and product introductions demonstrate that Aceto
has come to be recognized by the worldwide generic pharmaceutical industry as an
important supplier. Our long-term plans involve seeking strategic and accretive
acquisitions, forming alliances with partners that will add to our capabilities,
and establishing significant business operations in Eastern Europe. We believe
Eastern Europe has great potential in the API business due to entry of Eastern
European countries into the European Union and compliance with strict
pharmaceutical regulations.
Aceto's business is separated into four principal segments: Health Sciences,
Chemicals and Colorants, Agrochemicals and Institutional Sanitary Supplies and
Other.
The Health Sciences segment is Aceto's largest and fastest growing segment both
in sales and gross profits. This segment is comprised of APIs, Pharmaceutical
Intermediates, Diagnostic chemicals and Nutritionals. APIs make up about 70% of
this segment's revenues. Aceto typically partners with both customers and
suppliers years in advance of a drug coming off patent to provide the generic
equivalent.
Aceto has an extensive pipeline of new generic products poised to reach
commercial levels over the coming years as the patents on existing drugs expire,
both in the United States and Europe and expects to launch a minimum of four
each year. In addition, as new members join the European Union, primarily from
Eastern Europe, they become subject to the same regulatory standards as their
Western Europe counterparts. With the opening of an Aceto office in Poland in
January 2004, Aceto is well positioned to take advantage of that opportunity.
The Chemicals & Colorants segment supplies chemicals used in the color-producing
industries like textiles, ink, paper and coatings, as well as chemicals used in
the production of agrochemicals. Our sales are predominantly in the U.S. and
purchases primarily from China and Western Europe.
The Agrochemicals segment, while relatively small in terms of sales, is Aceto's
most profitable in terms of gross margin percentages. Our revenues are derived
from sales of herbicides, pesticides, etc., primarily in the U.S. and Western
Europe. Our joint venture with Nufarm, which will market Butoxone to increase
our market share of the peanut, soybean and alfalfa herbicide commenced
operations in April 2004. We believe this will have a marginally positive effect
on the gross margins contribution in this segment.
Value Added/Core Competencies
Aceto's main strengths are sourcing, regulatory support and quality control. We
are currently the largest buyer of pharmaceutical and specialty chemicals for
export from China, purchasing from over 400 different factories.
Among Aceto's greatest strengths are our people and the ability they have to
meet the individual needs of customers. Eighty-five of Aceto's approximately 250
employees have technical degrees and Aceto has eighteen employees whose
exclusive responsibility is regulatory compliance. This enables Aceto to
dispatch highly skilled professionals whenever they might be needed.
In this discussion and analysis, we explain the general financial condition and
the results of operations for Aceto, including the following:
- factors that affect our business
- our earnings and costs in the periods presented
- changes in earnings and costs between periods
- sources of earnings
- the impact of these factors on our overall financial condition
As you read this discussion and analysis, refer to the accompanying consolidated
statements of income, which present the results of our operations for the
three-month periods and nine-month periods ended March 31, 2004 and 2003. We
analyze and explain the differences between periods in the specific line items
of the consolidated statements of income.
SIGNIFICANT TRANSACTIONS IN FISCAL 2004
The Company has completed two significant transactions in fiscal 2004. These
transactions are consistent with our strategy of seeking strategic and accretive
acquisitions and forming alliances with partners that will add to our
capabilities.
On December 31, 2003, the Company, through its wholly owned subsidiary Aceto
Holding GmbH ("Aceto Holding"), acquired from Corange Deutschland Holding GmbH,
a corporation formed under the laws of Germany (the "Seller"), all of the
capital stock of Pharma Waldhof Beteiligungs GmbH ("Pharma Waldhof"), and all of
the partnership interest of Pharma Waldhof GmbH & Co. KG. Pharma Waldhof is the
general partner of Pharma Waldhof GmbH & Co. KG.
Based in Dusseldorf, Germany, Pharma Waldhof GmbH & Co. KG distributes
biologically and chemically derived APIs currently used in therapeutic and
diagnostic products. It is a worldwide provider of a patent-protected,
biologically derived API used for a widely used diagnostic and therapeutic heart
medication. Its primary customers include worldwide ethical and generic
pharmaceutical companies.
The acquisition of Pharma Waldhof adds value for Aceto on several levels by:
(1) being immediately accretive to Aceto's earnings;
(2) spearheading Aceto's entry into the biopharmaceuticals market;
(3) broadening the Company's product offerings in chemically- derived
APIs;
(4) strengthening the Company's stance as an early participant in the
developing generic biopharmaceutical business; and
(5) fostering a continuing relationship between Aceto and Roche, whereby
Roche will continue to manufacture the principal biopharmaceutical
APIs that Pharma Waldhof distributes and provide certain other
services.
The purchase price for the capital stock of Pharma Waldhof was $30. The purchase
price for the partnership interest of Pharma Waldhof GmbH & Co. KG was $2,970.
Additionally, the share purchase agreement states that the Company is to pay the
seller an amount equal to certain acquired assets less certain acquired
liabilities. This additional paymmet was originally estimated by the Company to
be $321. Interpretations of this clause in the agreement were discussed and
negotiated with the Seller in April 2004 resulting in the Company agreeing to
pay approximately $1,844 for the acquisition of these certain assets net of
certain liabilities. The liability for this additional payment has been included
in other accrued expenses on the accompanying consolidated balance sheet as of
March 31, 2004.
Aceto continued the business of Pharma Waldhof and successfully integrated that
business into Aceto's business during the third quarter.
On November 25, 2003, Aceto Agricultural Chemicals Company ("Aceto
Agricultural"), a wholly-owned subsidiary of the Company, formed a joint venture
with Nufarm Americas Inc. ("Nufarm"), a subsidiary of Australia-based Nufarm
Limited. The joint venture entity is named S.R.F.A., LLC. Aceto Agricultural and
Nufarm have acquired an EPA label for Butoxone, an herbicide used on peanuts,
soybeans and alfalfa.
Aceto Agricultural previously marketed this herbicide under a different label
(2,4DB). Going forward, Aceto Agricultural and Nufarm intend to market the
herbicide in the United States solely under the Butoxone label, which has
greater market
penetration than 2,4DB. Nufarm will continue to formulate the product. S.R.F.A.,
LLC was still in the process of formulation as of March 31, 2004 and has not
recorded any business activity as of that date. Business activity commenced in
April 2004. This joint venture should have little effect on our working capital
requirements as we previously sold this product under a different EPA label.
This joint venture reflects Aceto's strategy for expanding its agrochemical
business, which is to partner with large agrochemical manufacturers and
distributors to capitalize on the rapid consolidation of the industry. Due to
this consolidation, there remain a limited number of significant manufacturers
of crop-protection products. The Company believes this consolidation trend will
continue forcing the large distributors to find alternative sources. Aceto will
look to Asian producers to meet its needs in this area.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations is based on its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. The Company evaluates its estimates on a regular basis,
including those related to bad debts, inventories, goodwill and intangible
assets, environmental contingencies and income taxes. The Company bases its
estimates on various factors, including historical experience, consultation and
advice from third-party subject matter experts and on various assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions and circumstances.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and
passage of title and risk of loss to the customer. The Company's revenue
recognition policy does not require the Company to make difficult, subjective,
or complex judgments. The Company does not offer product warranties to its
customers.
Sales are recorded net of returns of damaged goods from customers, which
historically have been immaterial, and sales incentives offered to customers.
The Company's sales incentives consist primarily of volume incentive rebates.
The Company records such volume incentive rebates as the underlying revenue
transactions that result in progress by the customer in earning the rebate are
recorded, in accordance with Emerging Issues Task Force (EITF) 01-09,
"ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER (INCLUDING A
RESELLER OF THE VENDOR'S PRODUCTS)".
ALLOWANCE FOR DOUBTFUL ACCOUNTS
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.
INVENTORY
The Company writes down its inventories for estimated slow moving and obsolete
goods by an amount 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. 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
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other intangible assets principally
consist of purchased customer lists and covenants not to compete. Goodwill and
other intangible assets that have an indefinite life are not amortized.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), effective July 1, 2002. As
required by SFAS 142, the Company upon adoption 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 nine months ended March 31, 2003. Also required by
SFAS 142, on an annual basis, the Company tests goodwill and other intangible
assets for impairment. To determine the fair value of these intangible assets,
there are many assumptions and estimates used that directly impact the results
of the testing. In making these assumptions and estimates, the Company uses
industry accepted valuation models and set criteria that are reviewed and
approved by various levels of management. Additionally, the Company utilizes the
assistance of a third-party valuation firm, as necessary, to help evaluate
recorded goodwill. If the estimates or their related assumptions used by the
Company change in the future, the Company may be required to record impairment
charges for these assets.
The recoverability of long-lived assets aggregating $1,674 (including goodwill
of $945) in the Institutional Sanitary Supplies & Other segment is predicated on
the market acceptance of the launch of new products. If the actual revenue and
profit results of these product launches are less than anticipated, the Company
may be required to record an impairment on the goodwill and/or other long-lived
assets of this segment.
ENVIRONMENTAL AND OTHER CONTINGENCIES
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, the Company would recognize an
additional expense or benefit in income in the period such determination was
made.
TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This Statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting of income
taxes.
As of March 31, 2004, the Company has current net deferred tax assets of $301
and non-current net deferred tax assets of $1,107. These net deferred tax assets
have been recorded based on the Company having sufficient future earnings in
order to realize these assets, and the net deferred tax assets have been
provided for at currently enacted income tax rates. If the Company determines
that a deferred tax asset will not be realizable, an adjustment to the deferred
tax asset will result in a reduction of earnings at that time.
The acquisition of Pharma Waldhof could result in the Company realizing certain
tax benefits acquired from Schweizerhall Pharma that were previously
unrecognized by the Company. The Company is in the process of determining
whether it is more likely than not that such tax benefits will be realized. The
recognition of these tax benefits would result in a reduction of Schweizerhall
Pharma goodwill and a liability to Schweizerhall Pharma for 50% of the tax
benefits, as such benefits are realized.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in foreign operations. A deferred tax liability will be
recognized when the Company expects that it will recover those undistributed
earnings in a taxable manner, such as through receipt of dividends or sale of
the investments.
Furthermore, the Company provides reserves for Federal, state and international
tax exposures relating to audits, planning initiatives, and compliance
responsibilities. The development of these reserves requires judgments about tax
issues, potential outcomes and timing, and is a subjective critical estimate.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2004 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003
Net Sales By Segment
Nine Months Ended March 31,
(Dollars in thousands)
Comparison 2004
2004 2003 Over/(Under) 2003
---- ---- -----------------
% of % of
Segment $ Total $ Total $ %
- ------- - ----- - ----- - -
Agrochemicals $ 12,443 5.6% $ 9,775 4.8% 2,668 27.3
Chemicals &
Colorants 67,731 30.6 69,738 34.3 (2,007) (2.9)
Health Sciences 136,980 61.9 119,752 58.9 17,228 14.4
Institutional
Sanitary
Supplies & Other 4,075 1.9 3,951 2.0 124 3.1
------- ----- ------- ----- ------
TOTAL NET SALES $221,229 100.0% $203,216 100.0% $18,013 8.9%
======= ===== ======= ===== ======
Gross Profit By Segment
Nine Months Ended March 31,
(Dollars in thousands)
Comparison 2004
2004 2003 Over/(Under) 2003
---- ---- -----------------
% of % of
Segment $ Total $ Total $ %
- ------- - ----- - ----- - -
Agrochemicals $ 4,073 9.5% $ 2,691 7.4% 1,382 51.4
Chemicals &
Colorants 10,909 25.5 10,293 28.4 616 6.0
Health Sciences 26,268 61.5 21,642 59.6 4,626 21.4
Institutional
Sanitary
Supplies & Other 1,500 3.5 1,664 4.6 (164) (9.9)
------- ----- ------- ----- ------
TOTAL GROSS
PROFIT BY
SEGMENT $ 42,750 100.0% $ 36,290 100.0% $ 6,460 17.8%
===== ===== ======
UNALLOCATED
COST OF
SALES (1) 2,892 2,834
------- -------
NET GROSS PROFIT $ 39,858 $ 33,456
======= =======
(1) Represents freight and storage costs that are not allocated to a segment.
NET SALES
HEALTH SCIENCES
The primary reason for the improvement in revenue was an increase of $16,171
attributable to follow-up shipments of several generic pharmaceutical products
which were launched in fiscal 2003 and sold to companies who had received
approval to market these products. Additionally, the Company launched two new
APIs during the third fiscal quarter. However, some of these increases were
offset by a decrease in sales volume of one generic pharmaceutical product,
which had sales of $5,482 for the nine months ended March 31, 2004 versus
$19,761 for the same period last year. This represents an example of the life
cycle of a generic pharmaceutical product: the product launch period can be
followed by a reduction in volume once the initial distribution channels are
filled. The increase was also attributable to increased sales volume of $13,215
in our European operations attributable to the acquisition of Pharma Waldhof,
the effect of foreign currency exchange rate changes due to the strengthening of
the Euro, an expanded distribution agreement with a major supplier, which
expansion permits the Company to sell additional products into new markets,
sales from new products and improved market penetration. Sales of nutritional
products were up $3,102 or 22.2%, mainly on the strength of two products whose
volume increased significantly. We believe the sales volume for these two
products for the balance of fiscal 2004 should continue ahead of last year's
reported sales.
CHEMICALS & COLORANTS
The decrease in revenue in the Chemicals & Colorants segment is partly
attributable to the inclusion of $900 in last year's sales from a negotiated
settlement for lost gross margin regarding non-performance of a sales contract.
Sales were down 1.6% at $67,731 versus $68,838 when this transaction is excluded
from last year's sales. The decline in sales performance is a direct result of
lower sales volume of $2,865 from one large customer combined with a decline of
$4,701 in our color pigments and pigment intermediates business due to increased
competition and competitive pricing pressures. These decreases were partially
offset by increased sales of $5,047 in other product categories such as
coatings, food & beverages, agricultural intermediates, miscellaneous
intermediates, dyes, and foundry and metals and the increased sales volume of
certain products in our European and Asian markets, which totaled $1,326.
AGROCHEMICALS
The increase in revenue in the Agrochemicals segment was mainly attributable to
significantly higher volume for one product of $591, additional sales this year
in several products due to weather conditions, a price increase totaling $150 on
another product and sales of $804 from several new products in this year's
period.
GROSS PROFIT
HEALTH SCIENCES
Gross profit improvement was partly attributable to the sales of several generic
pharmaceutical products which provided a $618 or 9.9% increase in gross profit
dollars at normal gross margin rates. These increases in gross profit were
substantially offset by the lower sales and gross profit ($592 decrease)
attributable
to the Company's highest sales volume product during last year's nine-month
period. Gross profit improvement of $5,146 in our European operations was
attributable to the increased volume of new and existing products, improved
market penetration in European and Asian markets in addition to an expanded
distribution agreement with a major supplier for new products in both existing
and new markets in Europe. Gross margin rates for the segment were higher at
19.2% this year versus 18.1% last year. Gross profit for nutritionals was $327
or 10.6% higher than the same period last year, and at lower margins as a result
of the Company's product mix.
CHEMICALS & COLORANTS
This segment's gross profit of $10,909 increased $616 or 6.0% over last year's
$10,293. The increased sales of $5,047 in the categories mentioned above
accounted for additional gross profit of $623. Sales volume increases in our
European markets contributed an additional $305 of gross profit this year. These
increases were offset by a reduction in gross profit of $260 from one large
customer. Gross profit, as a percentage of sales, increased to 16.1% this year
versus 14.8%. Gross profit rates increased due to a $2,865 decrease in sales to
one major customer whose sales have generated lower than usual margins, along
with an improvement in margins across other categories due to changes in product
mix and improved product pricing, in some cases.
AGROCHEMICALS
For the Agrochemicals segment, the gross margin for the nine months ended March
31, 2004 was 32.7% versus 27.5% for the same period the previous year. This
increase was due to gross profit contributions from an increase in sales of
several products, a price increase on another product and sales from several new
products. We believe we will continue to report a higher gross margin percentage
during the balance of fiscal 2004 when compared to fiscal 2003. Another factor
was the recovery of costs on the sale of previously marked-down inventory for
$131. Last year's gross profit was reduced by an unusually large increase in
packaging costs, due to a change in the way a specific product was applied.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A")increased $4,022 or 17.4%
to $27,162 for the nine months ended March 31, 2004 in comparison to the same
period last year. As a percentage of sales, SG&A increased to 12.3% for the nine
months ended March 31, 2004 versus 11.4% for the same period in fiscal 2003.
SG&A increased primarily due to the effect of foreign currency exchange rate
changes due to the strengthening of the Euro in our Euro zone operations ($884),
the inclusion of the newly acquired Pharma Waldhof ($686), increases in
professional fees related to investor relations ($91), compliance-related
professional fees, including internal control documentation and assessment as
mandated by the Sarbanes-Oxley legislation ($628); legal fees related to recent
business agreements, product registration fees and the dismissal of a lawsuit
related to a former supplier and ongoing litigation ($515); higher R & D costs
related to the development of APIs ($275) and increased compensation costs for
our European operations ($638). The Company sold certain real estate in July
2002 and realized a net gain of $291 on the sale. This gain reduced overall SG&A
and lowered SG&A as a percentage of sales. Excluding this transaction, SG&A, as
a percentage of sales would have been 11.5% last year.
OPERATING INCOME
For the nine months ended March 31, 2004 operating income was $12,696 compared
to $10,316, an increase of $2,380 or 23.1%. This increase was primarily due to
the overall increase in gross profit of $6,402, with the main contribution of
$4,626 coming from the Health Sciences segment, which increase was partially
offset by higher SG&A expenses of $4,022.
INTEREST AND OTHER INCOME (EXPENSE)
Interest expense for the nine months ended March 31, 2004 was $98 versus $222
for the same period last year. The decrease was attributable to lower levels of
debt experienced this year versus last year.
Interest and other income for the nine months ended March 31, 2004, was $1,116
compared to $226 last year. During those nine months, the Company received a
payment
of $395 versus $34 in the prior year regarding a government subsidy paid
annually for doing business in a free-trade zone in Shanghai, China. Also, there
was an unrealized gain on marketable securities in the current period of $75
versus an unrealized loss of $214 last year. In addition, the Company has
recognized gains on foreign currency on a mark-to-market basis of $645 this year
versus $118 last year.
PROVISION FOR INCOME TAXES
The effective tax rate decreased to 28.6% for the nine months ended March 31,
2004, versus 31.6% for the same period last year. This decrease in the effective
tax rate is due to proportionately higher earnings in jurisdictions with lower
tax rates, especially China.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
The nine-month period ended March 31, 2003, includes a one-time charge of
$1,873, or $0.12 per diluted share, attributable to the cumulative effect of
adopting SFAS No. 142, "Goodwill and Other Intangible Assets". This one-time
charge was related to the impairment of the goodwill associated with CDC
Products Corp. ("CDC") which is part of our Institutional Sanitary Supplies and
Other segment. The one-time charge for it was primarily due to the change in
methodologies used to evaluate the recoverability of goodwill as required under
SFAS 142.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Sales By Segment
Three Months Ended March 31
(Dollars in thousands)
Comparison 2004
2004 2003 Over/(Under) 20023
---- ---- -----------------
% of % of
Segment $ Total $ Total $ %
- ------- - ----- - ----- - -
Agrochemicals $ 4,817 6.1% $ 3,901 5.5% 916 23.5
Chemicals & Colorants 23,543 29.5 24,594 34.9 (1,051) (4.3)
Health Sciences 49,903 62.6 40,802 57.8 9,101 22.3
Institutional Sanitary
Supplies & Other 1,427 1.8 1,264 1.8 163 12.9
------ ----- ------ ----- ------
TOTAL NET SALES $79,690 100.0% $70,561 100.0% $ 9,129 12.9%
====== ====== ====== ===== ======
Gross Profit By Segment
Three Months Ended March 31
(Dollars in thousands)
Comparison 2004
2004 2003 Over/(Under) 2003
---- ---- -----------------
% of % of
Segment $ Total $ Total $ %
- ------- - ----- - ----- - -
Agrochemicals $ 1,498 9.3% $ 1,029 8.2% 469 45.6
Chemicals & Colorants 3,733 23.4 3,514 28.1 219 6.2
Health Sciences 10,214 64.0 7,397 59.2 2,817 38.1
Institutional Sanitary
Supplies & Other 525 3.3 559 4.5 (34) (6.1)
------ ----- ------ ----- ------
TOTAL GROSS PROFIT BY
SEGMENT $15,970 100.0% $12,499 100.0% $ 3,471 27.8%
====== ===== ======
UNALLOCATED COST OF SALES
(1) 991 912
------ ------
NET GROSS PROFIT $14,979 $11,587
====== ======
(1) Represents freight and storage costs that are not allocated to a segment.
NET SALES
HEALTH SCIENCES
Several factors contributed to the increase in revenue in the Health Sciences
segment. A large portion of the increase resulted from improved sales in our
European and Asian markets in addition to the newly acquired Pharma Waldhof
business, which in total contributed to an increase in sales of $7,594. This
increase was also attributable to the introduction of several new products,
strong follow-up sales of existing products, and a continued expansion of the
distribution agreement with a major supplier, which has allowed for increased
product and customer penetration in the current quarter. Sales resulting from
follow-up shipments of several generic products launched prior to this fiscal
year showed an increase of $7,176 over the same period last year. The increase
in sales of these generic products was more than offset by decreases in five
other generic products launched in prior fiscal years totaling $7,837 for the
quarter ended March 31, 2004. These decreases were caused by a drop in demand as
the products matured, competitors, insufficient supply of product due to
supplier's inability to meet FDA standards, and significant price erosion on the
largest volume product shipped in the previous year's period. The nutritionals
product line contributed to the segment's improvement with a $1,016 or 21.3%
increase in sales, which was mainly attributable to a significant volume
increase in one product and strong contributions from four others. We believe
the nutritional products will continue to outperform last year's pace for the
remainder of fiscal 2004.
CHEMICALS & COLORANTS
The decrease in revenue of $1,051 or 4.3% versus last year is primarily
attributable to a $1,460 decline in shipments to one large customer in addition
to a $2,072 decrease in sales of pigments and pigment intermediates due to
competitive pricing pressures and declining demand for these products. The
decreases were offset by increases in the dyes, coatings and polymer additives
categories, along with increases in European markets aggregating $2,607.
AGROCHEMICALS
The increase in revenue in the Agrochemicals segment was attributable to higher
volume for several existing products as well as sales generated from several new
products in the current quarter. The Agrochemical segment sales trend should
continue during the balance of fiscal 2004.
GROSS PROFIT
HEALTH SCIENCES
Gross profit improvement in the Health Sciences segment was attributable to the
various factors as described above. The generic pharmaceutical products with
increased sales of $7,176 provided increases in gross profit of $867 at lower
than usual gross margin rates. The generic products with decreased sales of
$7,837 in the current quarter resulted in lower gross profit dollars of $1,457.
Gross profits from nutritionals were $200 or 20.5% higher than the same period
last year due to increased volume and product mix. Gross margin rates for the
segment were higher at 20.5% versus 18.1% for the same period last year. The
improved gross margin rates were a result of higher rates generated from sales
in Europe, especially on Pharma Waldhof sales.
CHEMICALS & Colorants
Gross profits increased by $219 or 6.2% over the same period last year and the
segment showed improved margins of 15.9% versus 14.3% for the same period last
year. Contributions from categories such as food and beverages, miscellaneous
intermediates, polymer additives and foundry and metals in addition to improved
sales volume and margins in the European markets were the primary reasons for
the improvements. The increase in gross margin percentage was caused by a
decrease in sales to one major customer whose sales have generated lower than
usual margins, along with an improvement in margins across other categories due
to changes in product mix and, improved product pricing, in some cases. The
future trends are difficult to predict as they depend on product mix and the
introduction of new products.
AGROCHEMICALS
Gross margin for the Agrochemicals segment was 31.1% this quarter versus 26.4%
for the same period last year. There were gross profit contributions resulting
from a large increase in sales of one existing product, sales from several new
products as well as a price increase on one product. We expect to continue to
report increased gross margins for this segment compared to last fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $1,887 or 23.0%
to $10,093 for the quarter ended March 31, 2004 in comparison to $8,206 in last
year's third quarter. As a percentage of sales, SG&A increased to 12.7% in the
third quarter of fiscal 2004 versus 11.6% for the comparable period in fiscal
2003. SG&A increased primarily due to the inclusion of the newly acquired Pharma
Waldhof ($686), compliance-related professional fees, including internal control
documentation and assessment as mandated by the Sarbanes-Oxley legislation
($400) and legal fees related to recent business agreements and ongoing
litigation ($311).
OPERATING INCOME
For the quarter ended March 31, 2004 operating income was $4,886 compared to
$3,381, an increase of $1,505 or 44.5%. This increase was primarily due to the
overall increase in gross profit of $3,392, with the main contribution of $2,817
coming from the Health Sciences segment, which was partially offset by higher
SG&A expenses of $1,887.
INTEREST AND OTHER INCOME (EXPENSE)
Interest expense for the current quarter was $30 versus $80 in the prior year.
The decrease was attributable to lower levels of debt experienced this year
versus last year. Interest and other income remained flat at $228 for the
quarter ended March 31, 2004 as compared to $229 last year.
PROVISION FOR INCOME TAXES
The effective tax rate decreased to 27.0% from 31.7% for the same period last
year. This decrease in the effective tax rate is due to proportionately higher
earnings in jurisdictions with lower tax rates, especially China.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
At March 31, 2004, the Company had $30,771 in cash, $953 in short-term
investments and $1,299 of short-term bank loans.
The Company's cash position at March 31, 2004 increased $10,508 from the June
30, 2003 level. Operating activities provided cash of $15,588, primarily from
net income of $9,792, a reduction in inventory of $6,171 and an increase in
accrued merchandise purchases of $5,294. This was partially offset by an
increase in accounts receivable of $9,197 and a decrease in accounts payable of
$1,718. Better management of inventory and longer payment terms with suppliers
have helped our working capital position. We believe this could reverse modestly
over the next quarter.
Investing activities used cash of $4,616, $4,408 of which was used in the
acquisition of the Pharma Waldhof business. Financing activities used cash of
$761, primarily as a result of payments of short-term bank loans of $2,134 and
payments of cash dividends of $1,357. This was offset by proceeds from the
exercise of stock options of $2,538 and the issuance of treasury stock to
employees of $192. The new record prices reached by the Company's stock during
the past nine months has contributed to the high level of stock options
exercised by our employees.
CREDIT FACILITIES
The Company has credit facilities with two European financial institutions.
These facilities provide the Company with a line of credit of 14,500 Euros
(approximately $17,658), of which $1,299 was utilized as of March 31, 2004. 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. This agreement expires June 30, 2004.
The Company is in the process of negotiating to extend it. At March 31, 2004,
the Company had utilized $1,423 in letters of credit, leaving $13,577 of this
facility unused. 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 are secured by 65% 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 is also
subject to certain restrictive debt covenants, including covenants governing
liens, limitations on indebtedness, guarantees, sale of assets, sales of
receivables, and loans and investments. The Company was in compliance with all
covenants at March 31, 2004.
WORKING CAPITAL OUTLOOK
Working capital was $79,769 at March 31, 2004 versus $71,302 at June 30, 2003.
The increase in working capital was primarily attributable to cash generated
from operations. 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.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS AND CONTINGENCIES
The Company has no material financial commitments other than those under
operating lease agreements, letters of credit and unconditional purchase
obligations. The Company has certain contractual cash obligations and other
commercial commitments which will impact its short and long-term liquidity. At
March 31, 2004, the Company has no significant obligations for capital
expenditures. At March 31, 2004, 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 $ 1,299 $1,299 $ - $ - $ -
Operating leases 8,432 1,420 2,621 2,325 2,066
Commercial letters of credit 1,443 1,443 - - -
Standby letters of credit 129 129 - - -
Unconditional purchase
obligations (a) 11,537 11,537 - - -
------- ------- ----- ------ ------
Total $22,840 $15,828 $2,621 $2,325 $2,066
====== ====== ===== ===== =====
(a) As of March 31, 2004, the Company has outstanding purchase obligations
totaling $11,537 with suppliers of the Germany, Netherlands and Singapore
operations to acquire certain products for resale to third-party customers. Such
purchase obligations are based on anticipated sales to certain customers through
March 31, 2005.
Other significant commitments and contingencies include the following:
1. The Board of Directors declared a cash dividend on May 10, 2004 of
$0.085 per common share to shareholders of record as of June 14, 2004.
The payment will be made on June 25, 2004.
2. Effective December 2003, the Company modified its non-qualified
Supplemental Executive Retirement Plan ("the Plan"). The Plan is a
deferred compensation plan intended to provide certain executives with
supplemental retirement benefits beyond the Company's 401(k) Plan, as
well as to permit additional deferral of a portion of their
compensation. All compensation deferred under the Plan is held by the
Company in a grantor trust, which is considered an asset of the
Company. The funds held by the grantor trust amounted to $1,212 as of
March 31, 2004.
3. In connection with the acquisition of the Pharma Waldhof business, the
parties entered into a Supply & Services Agreement concerning the
supply of certain products and services to the Company. The Company
will purchase certain products for resale to third-party customers.
Services to be provided by the seller include shipping, receiving,
warehousing, quality control and labeling. The original term of this
agreement is three years ending on December 31, 2006. There is a
provision for an extension up to an additional two years if both
parties agree.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board ("FASB") issued an exposure draft
entitled "SHARE-BASED PAYMENT, AN AMENDMENT OF FASB STATEMENTS NO. 123 AND 95."
This exposure draft would require stock-based compensation to employees to be
recognized as a cost in the financial statements and that such cost be measured
according to the fair value of the stock options. In the absence of an
observable market price for the stock awards, the fair value of the stock
options would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the option, the
expected term of the option, the current price of the underlying shares, the
expected volatility of the underlying share price, the expected dividends on the
underlying shares and the risk-free interest rate. The proposed requirements in
the exposure draft would be effective for the first fiscal year beginning after
December 15, 2004. The FASB intends to issue a final Statement in late 2004. The
Company will continue to monitor communications on this subject from the FASB in
order to determine the impact on the Company's consolidated financial
statements.
In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46R
clarifies some of the provisions of FIN 46 and exempts certain entities from its
requirements. The adoption of FIN 46R did not have any impact to the
consolidated financial statements.
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
The Company has short-term investments at March 31, 2004 of $953, which consist
solely of corporate securities, are recorded at fair value, and 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 which
would not be material as of March 31, 2004. 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 March
31, 2004, the Company had foreign currency contracts outstanding that have a
notional amount of $998. The difference between the fair market value of the
foreign currency contracts and the related commitments at inception and the fair
market value of the contracts and the related commitments at March 31, 2004 was
not material.
In addition, the Company also enters into cross currency interest rate swaps to
reduce foreign currency exposure on inter-company transactions. In May 2003, the
Company entered into a five-year cross currency interest rate swap transaction
for the purpose of hedging fixed interest rate, foreign currency denominated
cash flows under an inter-company loan receivable. Under the terms of this
derivative financial instrument, U.S. dollar fixed principal and interest
payments to be received under an inter-company loan will be swapped for EURO
denominated fixed principal and interest payments. The fair market value of the
swap at March 31, 2004 was $(435). The gains or losses on the foreign currency
loan receivable will be offset by the gains or losses on the swap. Because the
Company is receiving fixed interest payments under the swap, it is still subject
to fluctuations in value due to changes in Euro and U.S. dollar foreign currency
rates and U.S. dollar interest rates. As of March 31, 2004, the impact of these
fluctuations was not significant. This hedge was deemed to be highly effective
as of March 31, 2004.
The Company is subject to risk from changes in foreign exchange rates for its
subsidiaries that use a foreign currency as their functional currency and are
translated into U.S. dollars. These changes result in cumulative translation
adjustments which are included in accumulated other comprehensive income (loss).
On March 31, 2004, the Company had translation exposure to various foreign
currencies with the most significant being the Euro and Singapore Dollars. The
potential loss resulting from a hypothetical 10% adverse change in quoted
foreign currency exchange rates, as of March 31, 2004, amounts to $2,860. 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 Securities and Exchange Commission rules, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report are listed below.
15.1 Letter of independent accountant KPMG LLP re: Unaudited
Interim Financial Information
31.1 Certification by President and CEO Leonard S. Schwartz
pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 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.
32.1 Certification by President and CEO Leonard S. Schwartz
pursuant to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by CFO Douglas Roth pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On January 14, 2004, the Company filed a Form 8-K in order to
announce its acquisition of Pharma Waldhof.
On February 11, 2004, the Company filed a Form 8-K in order to
report financial information for its second quarter of fiscal
2004.
On March 15, 2004, the Company filed a Form 8-K/A in order to
report the financial statements and pro forma financial
information required in connection with the Company's acquisition
of all of the capital stock of Pharma Waldhof Beteilingungs GmbH,
and all of the partnership interest of Pharma Waldhof GmbH & Co.
KG.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACETO CORPORATION
DATE May 17, 2004 BY /s/ Douglas Roth
----------------------------- --------------------------------------
Douglas Roth, Chief Financial Officer
DATE May 17, 2004 BY /s/ Leonard S. Schwartz
----------------------------- --------------------------------------
Leonard S. Schwartz, Chairman,
President and Chief Executive Officer