SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 2000 Commission file number 0-4217
ACETO CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-1720520
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE HOLLOW LANE, LAKE SUCCESS, NY 11042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(516) 627-6000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the close of the period covered by this report.
Common Stock - 6,041,600
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
Sept. 30, June 30,
2000 2000
ASSETS
Current assets:
Cash and cash equivalents $ 4,626 $ 2,811
Short-term investments 1,016 2,153
Receivables:
Trade, less allowance for doubtful accounts:
(Sept., $202; June, $239) 28,078 25,257
Other 1,572 2,651
29,650 27,908
Inventory 36,724 38,453
Prepaid expenses 465 622
Deferred income tax benefit, net 1,491 1,436
Property held for sale 456 456
Total current assets 74,428 73,839
Long-term investments 6,269 7,263
Long-term notes receivable 872 895
Property and equipment:
Machinery and equipment 770 712
Leasehold improvements 960 872
Computer equipment 1,346 1,293
Furniture and fixtures 796 803
Automobiles 119 136
3,991 3,816
Less accumulated depreciation 2,336 2,527
1,655 1,289
Goodwill, less accumulated amortization 4,401 4,467
(Sept., $335; June, $269)
Other assets 312 328
Total assets $ 87,937 $ 88,081
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
Sept. 30, June 30,
2000 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Drafts and acceptances payable $ 511 $ 464
Current installments of
long-term liabilities 867 642
Accounts payable 2,937 2,788
Accrued merchandise purchases 10,615 12,021
Accrued compensation 3,059 3,171
Accrued environmental remediation 1,301 1,312
Accrued income taxes 1,530 1,147
Other accrued expenses 1,834 2,024
Total current liabilities 22,654 23,569
Long-term liabilities, excluding
current installments 683 908
Redeemable preferred stock, $2.50 par
value per share; Authorized 2,000
shares; issued and outstanding: 0 shares - -
Shareholders' equity:
Common stock,$.01 par value per share;
Authorized 20,000 shares;
Issued 9,001 shares; 90 90
Outstanding: Sept., 6,041 shares;
June, 6,035 shares
Capital in excess of par value 57,054 57,054
Retained earnings 36,626 35,697
93,770 92,841
Less:
Cost of common stock held in treasury;
Sept., 2,960 shares; June, 2,966 shares 29,170 29,237
Total shareholders' equity 64,600 63,604
Commitments and contingencies
Total liabilities and shareholders' equity $ 87,937 $ 88,081
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
SEPT. 30,
2000 1999
Net sales $ 40,935 $37,818
Cost of sales 35,066 32,263
Gross profit 5,869 5,555
Selling, general and administrative
expenses 4,629 3,834
Operating profit 1,240 1,721
Other income (expense):
Interest expense (1) (12)
Interest and other income 302 275
301 263
Income before income taxes 1,541 1,984
Provision for income taxes 612 770
Net income $ 929 $ 1,214
Net income per common share:
Basic $ 0.15 $ 0.19
Diluted 0.15 0.19
Weighted average shares outstanding:
Basic 6,037 6,306
Diluted 6,091 6,533
See accompanying notes to consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
September 30,
2000 1999
Operating activities:
Net income $ 929 $ 1,214
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 173 108
Gain on sale of assets - (10)
Provision (recovery) for doubtful accounts (37) 19
Deferred tax provision (55) (88)
Changes in assets and liabilities:
Investments - trading securities (11) 220
Trade accounts receivable (2,784) 2,310
Other receivables 1,268 (878)
Inventory 1,729 1,774
Prepaid expenses 157 (31)
Other assets 16 14
Drafts and acceptances payable 47 (41)
Accounts payable 149 (440)
Accrued merchandise purchases (1,406) (2,415)
Accrued compensation (113) 260
Accrued environmental remediation (10) (9)
Accrued income taxes 384 659
Other accrued expenses (379) 55
Net cash provided by operating activities 57 2,721
Investing activities:
Purchases of investments - held-to-maturity (11) -
Proceeds from investments - held-to-maturity 2,152 17
Payments received on notes receivable 23 15
Purchases of property and equipment (473) (61)
Proceeds from sale of property - 10
Net cash provided by (used in) investing activities 1,691 (19)
Financing activities:
Proceeds from exercise of stock options 7 30
Payments for purchases of treasury stock - (2,719)
Issuance of treasury stock to employees 60 53
Net cash provided by (used in) financing
activities 67 (2,636)
Net increase in cash and cash equivalents 1,815 66
Cash and cash equivalents at beginning of period 2,811 3,991
Cash and cash equivalents at end of period $ 4,626 $ 4,057
See accompanying notes to consolidated financial statements.
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
included herein have been prepared by the Company and reflect all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows for all periods
presented. Interim results are not necessarily indicative of results which may
be achieved for the full year.
These consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance with
generally accepted accounting principles. Accordingly, these statements should
be read in conjunction with the Company's consolidated financial statements and
notes thereto contained in the Company's Form 10-K for the year ended June 30,
2000.
Note 2: Supplemental Cash Flow Information
Cash paid for interest and income taxes during the three months ended September
30, 2000 and 1999 was as follows:
2000 1999
Interest $ 1 $ 0
Income taxes 283 198
In connection with the acquisitions of CDC Products Corp. and Magnum Research
Corp., the Company recorded $1,050 in fiscal year ended June 30, 1999 and $500
in fiscal year ended June 30, 2000 of amounts due the previous owners as
liabilities.
Note 3: Segment Information
The Company has six reportable segments which are organized by products: (1)
Agrochemicals, whose products include herbicides, fungicides and insecticides,
as well as a sprout inhibitor for potatoes, (2) Industrial Chemicals, whose
products include a variety of specialty chemicals used in adhesives, coatings,
food, fragrance, cosmetics and many other areas, (3) Organic Intermediates and
Colorants, whose products include dye and pigment intermediates used in the
color-producing industries like textiles, inks, paper and coatings, as well as
intermediates used in production of agrochemicals, (4) Pharmaceutical
Biochemicals and Nutritionals products, which include the active ingredients
for generic pharmaceuticals, vitamins and nutritional supplements, (5)
Pharmaceutical Intermediates and Custom Manufacturing products, used in
preparation of pharmaceuticals, primarily by major ethical drug companies and
(6) Institutional Sanitary Supplies and Other, whose products include cleaning
solutions, fragrances and deodorants used by commercial and industrial
establishments. The Company does not allocate assets by segments as they are
not provided to the chief operating decision maker. The Company evaluates
performance of the segments based on gross profit. Summarized financial
information for each of the segments for the three months ended September 30,
2000 and 1999 follows:
Three Months Ended September 30, 2000 and 1999
Institutional
Organic Pharma- Pharma- Sanitary
Agro Indus- Inter ceutical ceutical Supplies Consolidated
chemicals trial Mediates Biochem- Inter- & Other Totals
Chem- & Colorants icals & mediates
icals Nutri- & Custom
tionals Mfg.
2000
Net
sales $1,830 12,314 12,113 9,612 3,740 1,326 $ 40,935
Gross
profit $ 575 2,209 1,561 1,841 282 656 $ 7,124
Unallo-
cated
cost
of sales (1) 1,255
Net gross profit $ 5,869
1999
Net
sales $1,412 12,386 11,682 8,453 2,788 1,097 $ 37,818
Gross
profit $ 479 2,029 1,726 1,623 338 312 $ 6,507
Unallo-
cated
cost
of sales (1) 952
Net gross profit $ 5,555
(1) Represents freight and storage costs that are not allocated to a segment.
Note 4: Interest and Other Income
Interest and other income earned during the three months ended September 30,
2000 and 1999 was comprised of the following:
Three Months
Ended
Sept. 30,
2000 1999
Dividends $ 12 $ 17
Interest 161 295
Net gain (loss) on investments 8 (73)
Net gain on sale of assets - 10
Royalty income 81 13
Miscellaneous 40 13
$ 302 $ 275
Note 5: Net Income per Common Share
A reconciliation between the numerators and denominators of the basic and
diluted income per share computation for net income follows:
Three Months
Ended
Sept. 30,
2000 1999
Net income available for common
shareholders $ 929 $1,214
Weighted average common shares 6,037 6,306
Effect of dilutive securities:
Stock options 54 88
Convertible preferred stock - 139
Weighted average common and 6,091 6,533
potential common shares
outstanding
Basic income per share $ 0.15 $ 0.19
Diluted income per share 0.15 0.19
For the three months ended September 30, 2000 and September 30, 1999, employee
stock options of 233 and 220 shares, respectively, were not included in the net
income per share calculation because their effect would have been anti-dilutive.
Note 6: Accounting for Derivatives and Hedging Activities
Effective July 1, 2000, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which establishes new accounting and
reporting guidelines for derivative instruments and hedging activities. SFAS
No. 133 requires the recognition of all derivative financial instruments as
either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. Changes in the fair values
of those derivatives will be reported in earnings or other comprehensive
income depending on the designation of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses
associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value or cash flows of the asset or liability hedged.
Under the provisions of SFAS No. 133, the method that will be used for
assessing the effectiveness of a hedging derivative, as well as the
measurement approach for determining the ineffective aspects of the hedge,
must be established at the inception of the hedged instrument.
Designation is established at the inception of a derivative, but redesignation
is permitted. For derivatives designated as fair value hedges, changes in fair
value are recognized in earnings. If the fair value hedge is fully effective,
the change in fair value of the hedged item attributable to the hedged risk,
is adjusted to fair value and is recognized in earnings.
The Company operates internationally, therefore its earnings, cash flows and
financial positions are exposed to foreign currency risk from foreign currency
denominated receivables and payables. These items are denominated in various
foreign currencies, including Euros, British Pounds, Yen and Deutsche Marks.
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the risk by hedging all foreign
currency obligations by purchasing future foreign currency contracts (futures)
with one of our financial institutions. Futures are traded on regulated U.S.
and international exchanges and represent commitments to purchase or sell a
particular foreign currency at a future date and at a specific price. Since
futures are purchased for the exact amount of foreign currency needed to pay
for specific purchase orders, the Company feels that it eliminates all risks
relating to foreign currency fluctuation. The Company takes delivery of all
futures, which have been designated as fair value hedges under SFAS 133, to pay
suppliers in the appropriate currency. The difference between the fair value
and nominal amounts of the foreign currency contracts and the related
commitments have been recorded as an asset with a corresponding liability in
the accompanying consolidated balance sheet at September 30, 2000. The hedge
contracts flow through cost of goods sold in the consolidated statement of
income. Senior management and members of the financial department continually
monitor foreign currency risks and the use of this derivative instrument.
Note 7: Comprehensive Income
The Company has no items of other comprehensive income, therefore there is no
difference between the Company's comprehensive income and net income.
Note 8: Reclassifications
Certain reclassifications have been made to the prior consolidated financial
statements to conform to the current presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES:
The Company's ability to generate cash from operations is considered adequate
to cover both short-term and long-term liquidity. In addition, the Company had
cash and both short and long-term investments which totaled $11.9 million and
$12.2 million at September 30 and June 30, 2000, respectively. All of these
investments are highly liquid. The Company also has sufficient lines of credit
available should any additional funds be required.
Working capital increased to $51.8 million at September 30, 2000 from $50.3
million at June 30, 2000. The increase in cash and cash equivalents and the
decrease in short-term investments is the result of current working capital
needs. Trade receivables increased to $28.1 million at September 30, 2000 from
$25.3 million at June 30, 2000; this was the result of the timing of cash
receipts along with an 8.2% increase in sales for the quarter ended September
30, 2000 compared to the quarter ended June 30, 2000. Inventory decreased to
$36.7 million from $38.5 million, and the total of drafts and acceptances
payable, accounts payable and accrued merchandise purchases decreased $1.2
million comparing the same periods. These were primarily due to the timing of
merchandise purchases and was not the result of a change in the trend of
business.
Results of Operations:
Net Sales By Segment
Three Months Ended September 30
Segment 2000 1999
% of % of
$ THOUSAND TOTAL $ THOUSAND TOTAL
Agrochemicals 1,830 4.5 1,412 3.7
Industrial
Chemicals 12,314 30.1 12,386 32.8
Organic
Intermediates &
Colorants 12,113 29.6 11,682 30.9
Pharmaceutical
Biochemicals &
Nutritionals 9,612 23.5 8,453 22.3
Pharmaceutical
Intermediates &
Custom Mfg. 3,740 9.1 2,788 7.4
Institutional
Sanitary
Supplies &
Other 1,326 3.2 1,097 2.9
TOTAL NET SALES
40,935 100.0 37,818 100.0
Gross Profit By Segment
Three Months Ended September 30
Segment 2000 1999
% of % of
$ THOUSAND TOTAL $ THOUSAND TOTAL
Agrochemicals 575 8.1 479 7.4
Industrial
Chemicals 2,209 31.0 2,029 31.2
Organic
Intermediates &
Colorants 1,561 21.9 1,726 26.5
Pharmaceutical
Biochemicals &
Nutritionals 1,841 25.8 1,623 24.9
Pharmaceutical
Intermediates &
Custom Mfg. 282 4.0 338 5.2
Institutional
Sanitary
Supplies &
Other 656 9.2 312 4.8
TOTAL GROSS
PROFIT BEFORE
FREIGHT AND
STORAGE COSTS 7,124 100.0 6,507 100.0
Sales and Gross Profit
In comparing the three months ended September 30, 2000 with the same period in
1999, sales increased 8%. The acquisition of the distribution business of
Schweizerhall, Inc., completed in January 2000, offset somewhat by falling
prices in the nutritional supplements industry, accounted for the 14% increase
in the Pharmaceutical Biochemicals and Nutritionals segment.
The 34% increase in the Pharmaceutical Intermediates and Custom Manufacturing
segment can be attributed to increased sales of one marginally profitable
intermediate. The Institutional Sanitary Supplies and Other segment increased
because sales of Magnum Research Corp., purchased in October 1999, were
included this year. The Agrochemicals segment increase of 30%, while large
percentagewise, is the result of one relatively large sale of a product
introduced in the fourth quarter of fiscal 1999. The other segments were
essentially unchanged, with the small increases or decreases the result of
normal variations in product mix during the quarter.
Gross profit by segment for the entire corporation increased 9%, approximately
mirroring the sales increase. The largest contributors to this increase were
the Agrochemicals segment, which showed a 20% increase, the Pharmaceutical
Biochemical and Nutritionals segment, which showed a 13% increase, and the
Industrial Chemicals segment, which showed a 9% increase. The Agrochemicals
and Pharmaceutical Biochemicals and Nutritional increase was in line with the
sales increase and was due to the same factors. The Industrial Chemicals
increase, which was higher than the increase in sales of that segment, was due
to improved sourcing, particularly from China.
The Institutional Sanitary Supplies and Other segment, which showed a very
large percentage increase, benefited from the inclusion of Magnum this year.
The Organic Intermediates and Colorants and the Pharmaceutical Intermediates
and Custom Manufacturing segments showed decreases in gross profit despite
increases in sales. The aforementioned sales of a marginally profitable
pharmaceutical intermediate accounted for the latter, while general pressure on
margins accounted for the former.
Selling, general and administrative expenses increased $795,000, or 21%
compared to the same period last year. The inclusion of Schweizerhall and
Magnum in the consolidated financial statements accounted for a significant
part of this increase. Selling expenses also increased due to a general
increase in travel. Legal fees, due to an ongoing arbitration with the former
owner of CDC, were unusually high and an increase in depreciation expense was
due to our new sanitary supply facility. Offsetting some of these increases
was a slight decrease in commercial insurance expense.
Interest and other income increased to $302,000 for the three months ended
September 30, 2000 from $275,000 for the same period last year. A gain on
marketable securities of $8,000 was recorded during the three months ended
September 30, 2000 compared to a loss of $73,000 during the same period last
year. Royalty income, for sales to European customers, from one of the
Company's subsidiaries totaled $81,000 in the quarter ended September 30, 2000
compared to $13,000 for the same period last year. Offsetting these increases,
interest on investments decreased $134,000 due to lower average cash balances
resulting from our most recent acquisitions.
The effective tax rate increased to 39.7% for the three months ended September
30, 2000 from 38.8% for the same period last year. In comparing these periods,
the effective tax rates are within the range of the Company's traditional
levels.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS 137 and SFAS 138, which was adopted by
the Company effective July 1, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. The impact of the adoption for the Companys'
foreign currency contracts was not material to the Companys' consolidated
financial statements.
In March 2000, the FASB issued FASB Interpretation No. (FIN) 44 "Accounting for
Certain Transactions involving Stock Compensation" an interpretation of
Accounting Principles Board Opinion No. 25 (Opinion 25). This interpretation
clarifies the application of Opinion 25 for certain issues. With certain
exceptions, FIN 44 applies prospectively to new awards, exchanges of awards in
a business combination, modifications to outstanding awards and changes in
grantee status on or after July 1, 2000. There has been no impact of this
adoption on the Companys' consolidated financial statement at September 30,
2000.
Market Risk
The Company maintains foreign currency contracts solely to hedge open purchase
commitments. It has established policies, procedures and internal processes
governing the management of this hedging to reduce market risks inherent in
foreign exchange. Also, the Company has interest rate exposure relating to
short and long term investments and minimal exposure in the equity markets.
Any change in these markets would not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements relating
to such matters as anticipated financial performance and business prospects.
When used in this Quarterly Report, the words "anticipates," "expects," "may,"
"intend" and similar expressions are intended to be among the statements that
identify forward-looking statements. From time to time, the Company may also
publish forward-looking statements. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company notes that a variety of
factors, including, but not limited to, foreign currency risks, political
instability, changes in foreign laws, regulations and tariffs, new
technologies, competition, customer and vendor relationships, seasonality,
inventory obsolenscence and inventory availability, could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits - Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K. During the three months ended
September 30, 2000 the Company did not file any reports
on Form 8-K.
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 NOVEMBER 13, 2000 BY (SIGNED) / BY DONALD HOROWITZ
Donald Horowitz, Chief Financial
Officer
DATE NOVEMBER 13, 2000 BY (SIGNED) / BY LEONARD S. SCHWARTZ
Leonard S. Schwartz,Chief Executive
Officer
