UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2007
Commission
file number 000-04217
ACETO
CORPORATION
(Exact
name of registrant as specified in its charter)
New
York
|
11-1720520
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
One
Hollow Lane, Lake Success, NY 11042
|
(Address
of principal executive offices)
|
(516)
627-6000
(Registrant's
telephone number, including area code)
www.aceto.com
(Registrant’s
website address)
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
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
The
Registrant has 24,345,785 shares of common stock outstanding as of November
5,
2007.
ACETO
CORPORATION AND SUBSIDIARIES
QUARTERLY
REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2007
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets – September 30, 2007 (unaudited) and June
30, 2007
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Income – Three Months Ended
September 30, 2007 and 2006 (unaudited)
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows – Three Months Ended
September 30, 2007 and 2006 (unaudited)
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
11
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition
and Results of Operations
|
12
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
18
|
|
|
|
Item
4.
|
Controls
and Procedures
|
19
|
|
|
|
PART
II. OTHER INFORMATION
|
19
|
|
|
|
Item
1A.
|
Risk
Factors
|
19
|
|
|
|
Item
6.
|
Exhibits
|
20
|
|
|
|
Signatures
|
|
21
|
|
|
|
Exhibits
|
|
|
PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ACETO
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
September
30,
2007
|
|
|
June
30,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
37,416
|
|
|
$ |
32,320
|
|
Investments
|
|
|
3,098
|
|
|
|
3,036
|
|
Trade
receivables, less allowance for doubtful
|
|
|
|
|
|
|
|
|
accounts
(September, $413, June $491)
|
|
|
56,120
|
|
|
|
58,206
|
|
Other
receivables
|
|
|
5,036
|
|
|
|
3,123
|
|
Inventory
|
|
|
59,759
|
|
|
|
60,679
|
|
Prepaid
expenses and other current assets
|
|
|
1,369
|
|
|
|
1,128
|
|
Deferred
income tax benefit, net
|
|
|
2,564
|
|
|
|
2,541
|
|
Total
current assets
|
|
|
165,362
|
|
|
|
161,033
|
|
|
|
|
|
|
|
|
|
|
Long-term
notes receivable
|
|
|
424
|
|
|
|
449
|
|
Property
and equipment, net
|
|
|
4,235
|
|
|
|
4,406
|
|
Property
held for sale
|
|
|
5,268
|
|
|
|
5,268
|
|
Goodwill
|
|
|
1,877
|
|
|
|
1,820
|
|
Intangible
assets, net
|
|
|
5,750
|
|
|
|
5,817
|
|
Deferred
income tax benefit, net
|
|
|
4,313
|
|
|
|
5,958
|
|
Other
assets
|
|
|
4,013
|
|
|
|
3,727
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
191,242
|
|
|
$ |
188,478
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
28,796
|
|
|
$ |
32,539
|
|
Short-term
bank loans
|
|
|
-
|
|
|
|
25
|
|
Note
payable – related party
|
|
|
500
|
|
|
|
500
|
|
Accrued
expenses
|
|
|
16,929
|
|
|
|
14,154
|
|
Deferred
income tax liability
|
|
|
885
|
|
|
|
885
|
|
Total
current liabilities
|
|
|
47,110
|
|
|
|
48,103
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
6,688
|
|
|
|
6,684
|
|
Environmental
remediation liability
|
|
|
5,816
|
|
|
|
5,816
|
|
Deferred
income tax liability
|
|
|
2,592
|
|
|
|
2,746
|
|
Minority
interest
|
|
|
320
|
|
|
|
302
|
|
Total
liabilities
|
|
|
62,526
|
|
|
|
63,651
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value, 40,000 shares authorized; 25,644 shares
issued; 24,346 and 24,330 shares outstanding at September 30,
2007 and June 30, 2007, respectively
|
|
|
256
|
|
|
|
256
|
|
Capital
in excess of par value
|
|
|
56,885
|
|
|
|
56,854
|
|
Retained
earnings
|
|
|
75,713
|
|
|
|
74,419
|
|
Treasury
stock, at cost, 1,298 and 1,314 shares at September 30, 2007 and
June 30,
2007, respectively
|
|
|
(12,542 |
) |
|
|
(12,693 |
) |
Accumulated
other comprehensive income
|
|
|
8,404
|
|
|
|
5,991
|
|
Total
shareholders’ equity
|
|
|
128,716
|
|
|
|
124,827
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
191,242
|
|
|
$ |
188,478
|
|
See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
ACETO
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(unaudited
and in thousands, except per-share amounts)
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
79,528
|
|
|
$ |
74,725
|
|
Cost
of sales
|
|
|
64,965
|
|
|
|
62,164
|
|
Gross
profit
|
|
|
14,563
|
|
|
|
12,561
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
10,786
|
|
|
|
9,155
|
|
Research
and development expenses
|
|
|
172
|
|
|
|
6
|
|
Operating
income
|
|
|
3,605
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(15 |
) |
|
|
(13 |
) |
Interest
and other income, net
|
|
|
327
|
|
|
|
288
|
|
|
|
|
312
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
3,917
|
|
|
|
3,675
|
|
Provision
for income taxes
|
|
|
2,623
|
|
|
|
1,213
|
|
Net
income
|
|
$ |
1,294
|
|
|
$ |
2,462
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
$ |
0.05
|
|
|
$ |
0.10
|
|
Diluted
net income per common share
|
|
$ |
0.05
|
|
|
$ |
0.10
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,336
|
|
|
|
24,282
|
|
Diluted
|
|
|
24,851
|
|
|
|
24,581
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
ACETO
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited
and in thousands)
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,294
|
|
|
$ |
2,462
|
|
Adjustments
to reconcile net income to net cash provided
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
639
|
|
|
|
381
|
|
Provision
for doubtful accounts
|
|
|
(30 |
) |
|
|
35
|
|
Non-cash
stock compensation
|
|
|
83
|
|
|
|
114
|
|
Deferred
income taxes
|
|
|
1,468
|
|
|
|
662
|
|
Unrealized
gain on trading securities
|
|
|
(41 |
) |
|
|
(5 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
3,048
|
|
|
|
(3,016 |
) |
Other
receivables
|
|
|
(1,725 |
) |
|
|
(707 |
) |
Inventory
|
|
|
1,651
|
|
|
|
1,850
|
|
Prepaid
expenses and other current assets
|
|
|
(225 |
) |
|
|
(315 |
) |
Other
assets
|
|
|
(359 |
) |
|
|
(301 |
) |
Accounts
payable
|
|
|
(4,233 |
) |
|
|
582
|
|
Other
accrued expenses and liabilities
|
|
|
2,437
|
|
|
|
2,839
|
|
Net
cash provided by operating activities
|
|
|
4,007
|
|
|
|
4,581
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Payments
received on notes receivable
|
|
|
19
|
|
|
|
8
|
|
Purchases
of property and equipment, net
|
|
|
(98 |
) |
|
|
(149 |
) |
Purchases
of investments
|
|
|
-
|
|
|
|
(2,001 |
) |
Purchase
of intangible asset
|
|
|
-
|
|
|
|
(42 |
) |
Net
cash used in investing activities
|
|
|
(79 |
) |
|
|
(2,184 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
70
|
|
|
|
13
|
|
Excess
tax benefit on exercise of stock options
|
|
|
13
|
|
|
|
4
|
|
Payments
of short-term bank loans
|
|
|
(25 |
) |
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
58
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,110
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
5,096
|
|
|
|
2,529
|
|
Cash
at beginning of period
|
|
|
32,320
|
|
|
|
33,732
|
|
Cash
at end of period
|
|
$ |
37,416
|
|
|
$ |
36,261
|
|
See
accompanying notes to condensed consolidated financial statements and
accountants’ review report.
ACETO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
and in thousands, except per-share amounts)
(1) Basis
of Presentation
The
condensed 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 U.S. generally accepted
accounting principles 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;
inventories; goodwill and other indefinite-lived intangible assets; long-lived
assets; environmental and other contingencies; income taxes; and stock-based
compensation.
These
condensed consolidated financial statements do not include all disclosures
associated with consolidated financial statements prepared in accordance
with
U.S. 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, 2007.
Certain
reclassifications have been made to the prior condensed consolidated financial
statements to conform to the current presentation.
(2) Investments
A
summary
of short-term investments were as follows:
|
|
September
30, 2007
|
|
|
June
30, 2007
|
|
|
|
Fair
Value
|
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Cost
Basis
|
|
Trading
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
equity securities
|
|
$ |
918
|
|
|
$ |
152
|
|
|
$ |
877
|
|
|
$ |
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
1,190
|
|
|
$ |
1,203
|
|
|
|
1,187
|
|
|
$ |
1,203
|
|
Government
and agency securities
|
|
|
990
|
|
|
$ |
1,000
|
|
|
|
972
|
|
|
$ |
1,000
|
|
|
|
$ |
3,098
|
|
|
|
|
|
|
$ |
3,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has classified all investments with maturity dates of greater than
three
months as current since it has the ability to redeem them within the year
and is
available for current operations.
Unrealized
gains on trading securities were $41 and $5 for the three months ended September
30, 2007 and 2006, respectively.
(3) Goodwill
and
Other Intangible Assets
Goodwill
of $1,877 and $1,820 as of September 30, 2007 and June 30, 2007, relates
to the
Health Sciences Segment.
Changes
in goodwill are attributable to changes in foreign currency exchange rates
used
to translate the financial statements of foreign subsidiaries.
ACETO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
and in thousands, except per-share amounts)
(4) Net
Income
Per Common Share
Basic
income per common share is based on the weighted average number of common
shares
outstanding during the period. Diluted income per common share
includes the dilutive effect of potential common shares
outstanding. The Company’s only potential common shares outstanding
are stock options, which resulted in a dilutive effect of 515 and 299 shares
for
the three months ended September 30, 2007, and 2006,
respectively. There were 1,204 and 1,692 stock options outstanding as
of September 30, 2007, and 2006, respectively, that were not included in
the
calculation of diluted income per common share for the three months ended
September 30, 2007, and 2006, respectively because their effect would have
been
anti-dilutive.
(5) 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:
|
|
Three
months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Comprehensive
income:
|
|
|
|
|
|
|
Net
income
|
|
|
1,294
|
|
|
|
2,462
|
|
Foreign
currency translation
adjustment
|
|
|
2,391
|
|
|
|
365
|
|
Unrealized
gain on available
for
sale securities
|
|
|
21
|
|
|
|
34
|
|
Change
in fair value of cross
currency
interest rate swaps
|
|
|
1
|
|
|
|
90
|
|
Total
|
|
$ |
3,707
|
|
|
$ |
2,951
|
|
The
financial statements of the Company's foreign subsidiaries are measured using
the local currency as the functional currency. Exchange gains or
losses resulting from the translation of financial statements of foreign
operations are accumulated in other comprehensive income. The foreign
currency translation adjustment for the three months ended September 30,
2007
primarily relates to the fluctuation of the conversion rate of the Euro.
The
currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-US subsidiaries.
(6) Income
Taxes
The
decrease in the net deferred income tax assets of $1,468 for the quarter
ended
September 30, 2007 related to German tax reform which was enacted in August
2007
that reduces the corporate tax rate for businesses from 40% to 30%, as well
as
implementing a cap on interest deductions and tightening the tax basis for
trade
tax income. This tax rate reduction becomes effective for tax years ending
after
January 1, 2008. Due to the reduction in the overall German tax rate, the
deferred income tax asset as of September 30, 2007 was revalued during the
month
of enactment of the tax reform and therefore was reduced by approximately
$1,429, which is reflected in the condensed consolidated financial statements
for the three months ended September 30, 2007.
The
decrease in the net deferred income tax assets of $662 for the quarter ended
September 30, 2006 related to the reduction of taxes payable due to the
utilization of foreign net operating loss carryforwards.
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement 109”. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to
be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN No. 48 on July 1, 2007 and determined
that the adoption of FIN No. 48 did not have a material impact on its
consolidated financial statements. In addition, there are no unrecognized
tax
benefits included in the consolidated balance sheet that would, if recognized,
have a material effect on the Company’s effective tax rate. The Company is
continuing its practice of recognizing interest and penalties related to
income
tax matters in income tax expense. The total accrual for interest and penalties
related to uncertain tax positions was approximately $69 as of September
30,
2007. The Company did not recognize interest or penalties related to income
taxes during the three months ended September 30, 2007. The Company files
U.S.
federal, U.S. state, and foreign tax returns, and is generally no longer
subject
to tax examinations for fiscal years prior to 2003 (in the case of certain
foreign tax returns, calendar year 2001).
ACETO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
and in thousands, except per-share amounts)
(7) Commitments
and Contingencies
The
Company and its subsidiaries are subject to various claims which have arisen
in
the normal course of business. The impact of the final resolution of
these matters on the Company’s results of operations in a particular reporting
period is not known. Management is of the opinion, however, that the
ultimate outcome of such matters will not have a material adverse effect
upon
the Company’s financial condition or liquidity.
In
May
2007, February 2007 and September 2006, the Company received letters from
the
Pulvair Site Group, a group of potentially responsible parties ("PRP Group")
who
are working with the State of Tennessee (the "State") to remediate a
contaminated property in Tennessee called the Pulvair site. The PRP Group
has
alleged that Aceto shipped hazardous substances to the site which were released
into the environment. The State had begun administrative proceedings
against the members of the PRP group and Aceto with respect to the cleanup
of
the Pulvair site and the group has begun to undertake cleanup. The PRP Group
is
seeking a settlement of approximately $2,100 from the Company for its share
to
remediate the site contamination. Although the Company acknowledges that
it
shipped materials to the site for formulation over twenty years ago, the
Company
believes that the evidence does not show that the hazardous materials sent
by
Aceto to the site have significantly contributed to the contamination of
the
environment. Accordingly, the Company believes that the settlement offer
is
unreasonable. Alternatively, counsel to the PRP Group has proposed that Aceto
join it as a participating member and pay 3.16% of the PRP Group's cost.
The Company believes that this percentage is high because it is based on
the total volume of materials that Aceto sent to the site, most of which
were
non-hazardous substances and as such, believes that it is a very minor
contributor to the site contamination. The impact of the resolution of this
matter on the Company's results of operations in a particular reporting period
is not known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's financial
condition or liquidity.
The
Company has environmental remediation obligations in connection with Arsynco’s
former manufacturing facility located in Carlstadt, New Jersey, which was
closed
in 1993 and is currently held for sale. During fiscal 2007, based on
continued monitoring of the contamination at the site and the current proposed
plan of remediation, the Company received an estimate from an environmental
consultant stating that the costs of remediation could be between $6,136
and
$7,611. As of September 30, 2007 and June 30, 2007 a liability of
$6,136 is included in the accompanying condensed consolidated balance
sheets. However, these matters, if resolved in a manner
different from those assumed in current estimates, could have a material
adverse
effect on the Company’s financial condition, operating results and cash flows
when resolved in a future reporting period.
In
connection with the environmental remediation obligation for Arsynco, the
Company has filed a claim against BASF Corporation (BASF), the former owners
of
the Arsynco property. The Company alleges that BASF is liable for a portion
of
the cost to remediate, however, since collection is uncertain at this time,
no
asset has been recorded.
In
March
2006, Arsynco received notice from the EPA of its status as a PRP under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
for a site described as the Berry’s Creek Study Area. Arsynco
is one of over 150 PRP’s which have potential liability for the required
investigation and remediation of the site. The estimate of the
potential liability is not quantifiable for a number of reasons, including
the
difficulty in determining the extent of contamination and the length of time
remediation may require. In addition, any estimate of liability must
also consider the number of other PRP’s and their financial
strength. Since an amount of the liability can not be reasonably
estimated at this time, no accrual is recorded for these potential future
costs. The impact of the resolution of this matter on the Company’s
results of operations in a particular reporting period is not
known. However, management believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company’s financial
condition or liquidity.
ACETO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
and in thousands, except per-share amounts)
A
subsidiary of the Company markets certain agricultural chemicals which are
subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA).
FIFRA
requires that test data be provided to the Environmental Protection Agency
(EPA)
to register, obtain and maintain approved labels for pesticide products.
The EPA
requires that follow-on registrants of these products compensate the initial
registrant for the cost of producing the necessary test data on a basis
prescribed in the FIFRA regulations. Follow-on registrants do not themselves
generate or contract for the data. However, when FIFRA requirements mandate
that
new test data be generated to enable all registrants to continue marketing
a
pesticide product, often both the initial and follow-on registrants establish
a
task force to jointly undertake the testing effort. The Company is presently
a
member of three such task force groups and historically, payments have been
in
the range of $250 - $500 per year. The Company may be required to
make additional payments in the future.
In
June
2006, the Company negotiated a lease termination with its landlord for the
facility previously occupied by CDC and Magnum. In connection with
the lease termination, the landlord and a third party entered into a long-term
lease for which the Company guaranteed the rental payments by the third party
through September 30, 2009. The aggregate future rental payments of
the third party that are guaranteed by the Company are $925 and the fair
value
of this guarantee is deemed to be insignificant.
Commercial
letters of credit are issued by the Company in the ordinary course of business
through major domestic banks as requested by certain suppliers. The
Company had open letters of credit of approximately $656 and $702 as of
September 30, 2007 and June 30, 2007, respectively. The terms of
these letters of credit are all less than one year. No material loss
is anticipated due to non-performance by the counterparties to these
agreements.
(8) Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to
be
applied to US GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Management is currently assessing the impact of
SFAS No. 157 on the consolidated financial position and results of
operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115" (" SFAS No. 159"). SFAS No. 159 allows companies the choice
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been
elected will be recognized in earnings at each subsequent reporting date.
The
provisions of SFAS No. 159 will be effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact of SFAS
No. 159
on the consolidated financial position and results of operations.
(9) Segment
Information
The
Company's business is organized along product lines into three principal
segments: Health Sciences, Chemicals & Colorants and Crop
Protection.
Health
Sciences - includes the active ingredients for generic pharmaceuticals,
vitamins, and nutritional supplements, as well as products used in preparing
pharmaceuticals, primarily by major innovative drug companies, and
biopharmaceuticals. Health Sciences also includes Aceto branded vaccines
for
companion animals and finished dosage form generic drugs.
Chemicals
& Colorants - includes a variety of specialty chemicals used in
plastics, resins, adhesives, coatings, food, flavor additives, fragrances,
cosmetics, metal finishing, electronics, air-conditioning systems and many
other
areas. Dye and pigment intermediates are used in the color-producing industries
such as textiles, inks, paper, and coatings. Organic intermediates are used
in
the production of agrochemicals.
ACETO
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
and in thousands, except per-share amounts)
Crop
Protection - includes herbicides, fungicides and insecticides that
control weed growth as well as control the spread of insects and other
microorganisms that can severely damage plant growth. Also includes a sprout
inhibitor for potatoes and an herbicide for sugar cane. The Company changed
the
name of this segment from Agrochemicals to Crop Protection in 2007 to more
accurately portray the markets in which it does business.
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.
Three
Months Ended September 30, 2007 and 2006:
|
|
Health
Sciences
|
|
|
Chemicals
&
Colorants
|
|
|
Crop
Protection
|
|
|
Consolidated
Totals
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
46,680
|
|
|
$ |
28,307
|
|
|
$ |
4,541
|
|
|
$ |
79,528
|
|
Gross
profit
|
|
|
10,102
|
|
|
|
3,594
|
|
|
|
867
|
|
|
|
14,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
42,504
|
|
|
$ |
28,842
|
|
|
$ |
3,379
|
|
|
$ |
74,725
|
|
Gross
profit
|
|
|
8,217
|
|
|
|
3,557
|
|
|
|
787
|
|
|
|
12,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
Board
of
Directors and Shareholders
Aceto
Corporation
We
have
reviewed the condensed consolidated balance sheet of Aceto Corporation and
subsidiaries as of September 30, 2007 and the related condensed consolidated
statements of income for the three-month periods ended September 30, 2007
and
2006, and the related condensed consolidated statements of cash flows for
the
three-month periods ended September 30, 2007 and 2006 included in the
accompanying Securities and Exchange Commission Form 10-Q for the period
ended
September 30, 2007. These interim financial statements are the
responsibility of the Company’s management.
We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight
Board,
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 review, we are not aware of any material modifications that should be
made
to the condensed consolidated financial statements referred to above for
them to
be in conformity with accounting principles generally accepted in the United
States of America.
We
have
previously audited, in accordance with standards of the Public Company
Accounting Oversight Board, the consolidated balance sheet of Aceto Corporation
and subsidiaries as of June 30, 2007, and the related consolidated statements
of
income, shareholders’ equity and comprehensive income and cash flows for the
year then ended (not presented herein); and in our report dated September
5,
2007, 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, 2007, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/
BDO
SEIDMAN LLP
Melville,
New York
November
7, 2007
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CAUTIONARY
STATEMENT RELATING TO THE 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 of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend those forward looking-statements to be covered by the
safe harbor provisions for forward-looking statements. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans and the outcome of any contingencies are
forward-looking statements. Any such 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 those words and
similar expressions are intended to identify such forward-looking
statements. 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 forward-looking statements
include, but are not limited to, unforeseen 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, the nature and pricing of competing products, 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 political conditions in the United States
and
abroad. We undertake no obligation to update any such forward-looking
statements, other than as required by law.
NOTE
REGARDING DOLLAR AMOUNTS
In
this
quarterly report, all dollar amounts are expressed in thousands, except for
share prices and per-share amounts.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to provide the readers of our
financial statements with a narrative discussion about our business. The
MD&A is provided as a supplement to and should be read in conjunction with
our financial statements and the accompanying notes.
Executive
Summary
We
are
reporting net sales of $79,528 for the three months ended September 30, 2007,
which represents a 6.4% increase from the $74,725 reported in the comparable
prior period. Gross profit for the three months ended September 30,
2007 was $14,563 and our gross margin was 18.3% as compared to gross profit
of
$12,561 and gross margin of 16.8% in the comparable prior period. Our
selling, general and administrative costs for the three months ended September
30, 2007 increased to $10,786, an increase of 17.8% over the $9,155 we reported
in the prior period. Our net income decreased to $1,294, or $0.05 per
diluted share, a decrease of 47.4% compared to the prior period.
Our
financial position as of September 30, 2007 remains strong, as we had cash
of
$37,416, working capital of $118,252, no long-term debt and shareholders’ equity
of $128,716.
Our
ongoing business is separated into three segments: Health Sciences,
Chemicals & Colorants and Crop Protection.
The
Health Sciences segment is our largest segment in terms of both sales and
gross
profits. Products that fall within this segment include active pharmaceutical
ingredients (“APIs”), pharmaceutical intermediates, nutritionals and
biopharmaceuticals.
We
typically partner with both customers and suppliers years in advance of a
drug
coming off patent to provide the generic equivalent. We believe we
have a pipeline of new APIs poised to reach commercial levels over the coming
years as the patents on existing drugs expire, both in the United States
and
Europe. In addition, we continue to explore opportunities to provide a
second-source option for existing generic drugs with approved ANDAs. The
opportunities that we are looking for are to supply the APIs for the more
mature
generic drugs where pricing has stabilized following the dramatic decreases
in
price that these drugs experienced after coming off patent. As is the
case in the generic industry, the entrance into the market of other generic
competition generally has a negative impact on the pricing of the affected
products.
By
leveraging our worldwide sourcing and regulatory capabilities, we believe
we can
be an alternative lower cost, second-source provider of existing APIs to
generic
drug companies.
The
Chemicals & Colorants segment is a major supplier to the many different
industries that require outstanding performance from chemical raw materials
and
additives. Products that fall within this segment include
intermediates for dyes, pigments and agrochemicals. We provide
chemicals used to make plastics, surface coatings, textiles, lubricants,
flavors
and fragrances. Many of Aceto’s raw materials are also used in high-tech
products like high-end electronic parts (circuit boards and computer chips)
and
binders for specialized rocket fuels. Aceto is currently responding to the
changing needs of our customers in the color producing industry by taking
our
resources and knowledge downstream as a supplier of select organic pigments.
We
expect that continued global Gross Domestic Product growth will drive higher
demand for the chemical industry, especially in China and other emerging
regions
of the world. With supply growth limited, we expect that industry supply/demand
balances will remain favorable. However, continued volatility in energy costs
will add uncertainty to our profit outlook.
The
Crop
Protection segment sells herbicides, fungicides, insecticides, and other
agricultural chemicals to customers, primarily located in the United States
and
Western Europe. In fiscal 2007, we entered into a multi-year contract with
a
major agricultural chemical distributor and launched generic Asulam, an
herbicide for sugar cane and the first generic registration that Aceto has
received. Our plan is to develop over time a pipeline of additional products
in
a similar manner.
Our
main
business strengths are sourcing, regulatory support, quality control, marketing
and distribution. With a physical presence in ten countries, we distribute
over
1,000 chemicals and pharmaceuticals used principally as raw materials in
the
pharmaceutical, agricultural, color, surface coating/ink and general chemical
consuming industries. We believe that we are currently the largest buyer
of
pharmaceutical and specialty chemicals for export from China, purchasing
from
over 500 different manufacturers.
In
this
MD&A section, we explain our general financial condition and results of
operations, including the following:
·
|
factors
that affect our business
|
·
|
our
earnings and costs in the periods
presented
|
·
|
changes
in earnings and costs between
periods
|
·
|
the
impact of these factors on our overall financial
condition
|
As
you
read this MD&A section, refer to the accompanying condensed consolidated
statements of income, which present the results of our operations for the
three
months ended September 30, 2007 and 2006. We analyze and explain the
differences between periods in the specific line items of the condensed
consolidated statements of income.
Critical
Accounting Estimates and Policies
As
disclosed in our Form 10-K for the year ended June 30, 2007, the discussion
and
analysis of our financial condition and results of operations is based on
our
consolidated financial statements, which have been prepared in accordance
with
U.S. generally accepted accounting principles. In preparing these
financial statements, we were required to make estimates and assumptions
that
affect the amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We regularly
evaluate our estimates including those related to allowances for bad debts,
inventories, goodwill and other indefinite-lived intangible assets, long-lived
assets, environmental and other contingencies, income taxes and stock-based
compensation. We base our estimates on various factors, including
historical experience, advice from outside subject-matter experts, and various
assumptions that we believe to be reasonable under the circumstances, which
together form the basis for our 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.
Since
June 30, 2007, there have been no significant changes to the assumptions
and
estimates related to those critical accounting estimates and
policies.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30,
2006
|
|
Net
Sales by Segment
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
Over/(Under)
2006
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
$
|
|
|
%
|
|
Segment
|
|
Net
sales
|
|
|
total
|
|
|
Net
sales
|
|
|
total
|
|
|
change
|
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Sciences
|
|
$ |
46,680
|
|
|
|
58.7 |
% |
|
$ |
42,504
|
|
|
|
56.9 |
% |
|
$ |
4,176
|
|
|
|
9.8 |
% |
Chemicals
& Colorants
|
|
|
28,307
|
|
|
|
35.6
|
|
|
|
28,842
|
|
|
|
38.6
|
|
|
|
(535 |
) |
|
|
(1.9 |
) |
Crop
Protection
|
|
|
4,541
|
|
|
|
5.7
|
|
|
|
3,379
|
|
|
|
4.5
|
|
|
|
1,162
|
|
|
|
34.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
79,528
|
|
|
|
100.0 |
% |
|
$ |
74,725
|
|
|
|
100.0 |
% |
|
$ |
4,803
|
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit by Segment
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
2007
|
|
|
|
2007
|
|
|
2006
|
|
|
Over/(Under)
2006
|
|
|
|
Gross
|
|
|
%
of
|
|
|
Gross
|
|
|
%
of
|
|
|
$
|
|
|
%
|
|
Segment
|
|
profit
|
|
|
sales
|
|
|
Profit
|
|
|
sales
|
|
|
change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Sciences
|
|
$ |
10,102
|
|
|
|
21.6 |
% |
|
$ |
8,217
|
|
|
|
19.3 |
% |
|
$ |
1,885
|
|
|
|
22.9 |
% |
Chemicals
& Colorants
|
|
|
3,594
|
|
|
|
12.7
|
|
|
|
3,557
|
|
|
|
12.3
|
|
|
|
37
|
|
|
|
1.0
|
|
Crop
Protection
|
|
|
867
|
|
|
|
19.1
|
|
|
|
787
|
|
|
|
23.3
|
|
|
|
80
|
|
|
|
10.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Gross
Profit
|
|
$ |
14,563
|
|
|
|
18.3 |
% |
|
$ |
12,561
|
|
|
|
16.8 |
% |
|
$ |
2,002
|
|
|
|
15.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
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|
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Net
Sales
Net
sales
increased $4,803, or 6.4%, to $79,528 for the three months ended September
30,
2007, compared with $74,725 for the prior period. We reported sales
increases in our Health Sciences and Crop Protection segments which were
partially offset by a slight sales decrease in our Chemicals & Colorants
segment, as explained below.
Health
Sciences
Net
sales
for the Health Sciences segment increased by $4,176 for the three months
ended
September 30, 2007, to $46,680, which represents a 9.8% increase from net
sales
of $42,504 for the prior period. This increase is the result of an
increase of $2,307 in the domestic generics product group, which consists
of
over forty products, as well as increased sales from our foreign operations
of
$1,443, specifically our German and Singapore operations.
Chemicals
& Colorants
Net
sales
for the Chemicals & Colorants segment were $28,307 for the three months
ended September 30, 2007, which is relatively consistent with $28,842 for
the
prior period. Our chemical business is diverse in terms of products,
customers and consuming markets. The slight decrease of $535, or
1.9%, over the prior period is partially attributable to a decline in sales
of
pigment intermediates and other intermediates which together decreased $937,
a
reduction of $1,202 in sales of our products sold to the food and beverage
industries, offset in part by an increase of $955 of sales of our pigments
products and a $621 increase in sales of our agricultural
intermediates.
Crop
Protection
Net
sales
for the Crop Protection segment increased to $4,541 for the three months
ended
September 30, 2007, an increase of $1,162, or 34.4%, from net sales of $3,379
for the prior period. The increase over the prior period is primarily
attributed to increased sales of our sprout inhibitor products, which are
utilized on potato crops.
Gross
Profit
Gross
profit increased $2,002 to $14,563 (18.3% of net sales) for the three months
ended September 30, 2007, as compared to $12,561 (16.8% of net sales) for
the
prior period.
Health
Sciences
Health
Sciences’ gross profit of $10,102 for the three months ended September 30, 2007
was $1,885 or 22.9% higher than the prior period. This increase in
gross profit was attributable to $1,074 increase in gross profit from our
foreign operations, primarily Germany and Singapore, as well as the overall
increase in sales volume. Gross profit as a percentage of sales for the three
months ended September 30, 2007 increased to 21.6% from 19.3% for the prior
period due primarily to favorable product mix in our nutraceutical
products.
Chemicals
& Colorants
Gross
profit for the three months ended September 30, 2007 increased by $37, or
1%,
over the prior period. The gross margin was 12.7% for the three months ended
September 30, 2007 compared to 12.3% for the prior period. The
increase in the gross margin relates to an increase in our foreign
operations.
Crop
Protection
Gross
profit for the Crop Protection segment increased to $867 for the three months
ended September 30, 2007, versus $787 for the prior period, an increase of
$80
or 10.2%. Despite an increase in sales, gross margin for the quarter
was 19.1% compared to the prior period gross margin of 23.3%. The decrease
in
the gross margin percentage primarily relates to lower gross profit on the
sprout inhibitor products.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) increased $1,631, or 17.8%, to
$10,786 for the three months ended September 30, 2007 compared to $9,155
for the
prior period. As a percentage of sales, SG&A increased to 13.6%
for the three months ended September 30, 2007 versus 12.3% for the prior
period. The increase in SG&A relates primarily to an increase of
$983 in legal expenses, the majority of which has been incurred relating
to an
anti-trust case that the Company has commenced against the owner of certain
licensed technology used with one of our crop protection products. We
expect the legal fees related to this case to decrease once the hearing has
concluded. In addition, the prior year amount was reduced by $243 of
proceeds received from credit insurance, which there was no comparable amount
received during the three months ended September 30, 2007, as well as $106
of
the increase relates to a rise in personnel related costs for our foreign
operations.
Research
and Development Expenses
Research
and development expenses (“R&D”) increased $166 over the prior period to
$172 for the three months ended September 30, 2007. R&D relates to the
development of two finished dosage form generic pharmaceutical products to
be
distributed in Europe.
Operating
Income
For
the
three months ended September 30, 2007, operating income was $3,605 compared
to
$3,400 in the prior period, an increase of $205 or 6.0%. This
increase was due to the overall increase in gross profit of $2,002 offset
by the
$1,797 increase in SG&A and R&D expenses.
Interest
and Other Income, Net
Interest
and other income, net was $327 for the three months ended September 30, 2007,
which represents an increase of $39 over the prior period mainly due to
unrealized gains on trading securities.
Provision
for Income Taxes
The
effective tax rate for the three months ended September 30, 2007 increased
to
67.0% from 33.0% for the prior period. The increase in the effective
tax rate was primarily due to German tax reform, which was enacted in August
2007, that reduces the corporate tax rate for businesses from 40% to 30%,
as
well as implementing a cap on interest deductions and tightening the tax
basis
for trade tax income. This tax rate reduction becomes effective for tax years
ending after January 1, 2008. Due to the future reduction in the overall
German
tax rate, the deferred income tax asset as of September 30, 2007 was revalued
during the month of enactment of the tax reform and therefore was reduced
by
approximately $1,429, which is reflected in the condensed consolidated financial
statements for the three months ended September 30, 2007. Without
this charge, we expect the fiscal 2008 effective tax rate to be 30.5% as
compared to last year’s effective tax rate of 33.8%.
Liquidity
and Capital Resources
Cash
Flows
At
September 30, 2007, we had $37,416 in cash, $3,098 in short-term investments
and
no short-term bank loans. Working capital was $118,252 at September
30, 2007 versus $112,930 at June 30, 2007.
Our
cash
position at September 30, 2007 increased $5,096 from the amount at June 30,
2007. Operating activities for the three months ended September 30,
2007 provided cash of $4,007, for this period, as compared to cash provided
by
operations of $4,581 for the comparable 2006 period. The $4,007 was comprised
of
$1,294 in net income and $2,119 derived from adjustments for non-cash items
plus
a net $594 increase from changes in operating assets and liabilities. The
non-cash items included $639 in depreciation and amortization expense and
$1,468
for the deferred income taxes provision. Accounts receivable decreased $3,048
during the three months ended September 30, 2007, due to decreased sales
during
the first quarter of 2008 as compared to the fourth quarter of 2007, as well
as
an improvement in days sales outstanding. Inventories decreased by approximately
$1,651 and accounts payable decreased by $4,233 as a result of orders for
the
Health Sciences and Chemicals and Colorants segments that we took in the
fourth
quarter of 2007 that did not ship until first quarter of 2008. Other
accrued expenses and long-term liabilities increased $2,437 during the three
months ended September 30, 2007, due primarily to an increase in accrued
expenses related to a joint venture and an increase in accrued expenses for
our
foreign subsidiaries related to increased sales and profitability overseas
partially offset by a decrease in accrued compensation as performance payments
were made in September 2007. Other receivables increased $1,725 due to an
increase in VAT taxes receivables in our European
subsidiaries. Operating activities for the three months ended
September 30, 2006 provided cash of $4,581, primarily due to net income of
$2,462 and changes in assets and liabilities.
Investing
activities for the three months ended September 30, 2007 used cash of $79
primarily related to purchases of property and equipment. Investing activities
for the three months ended September 30, 2006 used cash of $2,184, primarily
as
a result of purchases of investments of $2,001.
Financing
activities for the three months ended September 30, 2007 provided cash of
$58
primarily as a result of proceeds from the exercise of stock options of $70.
Financing activities for the three months ended September 30, 2006 provided
cash
of $17 primarily as a result of proceeds from the exercise of stock options
of
$13.
Credit
Facilities
We
have
available credit facilities with certain foreign financial
institutions. These facilities provide us with a line of credit of
$20,641, as of September 30, 2007. We are not subject to any
financial covenants under these arrangements.
In
June
2007, we amended our revolving credit agreement with a financial institution
that expires June 30, 2010, and provides for available credit of
$10,000. At September 30, 2007, we had utilized $656 in letters of
credit, leaving $9,344 of this facility unused. Under the credit
agreement, we may obtain credit through direct borrowings and letters of
credit. Our obligations under the credit agreement are guaranteed by
certain of our subsidiaries and are secured by 65% of the capital of certain
of
our non-domestic subsidiaries. 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. We are also subject to certain restrictive debt covenants,
including covenants governing liens, limitations on indebtedness, limitations
on
cash dividends, guarantees, sale of assets, sales of receivables, and loans
and
investments. We were in compliance with all covenants at September
30, 2007.
Working
Capital Outlook
Working
capital was $118,252 at September 30, 2007 versus $112,930 at June 30,
2007. The increase in working capital was primarily attributable to
net income, reduction of trade receivables and inventory during the
quarter. We continually evaluate possible acquisitions of or
investments in businesses that are complementary to our own, and such
transactions may require the use of cash. In October 2007, the
Company formed a joint venture in connection with their crop protection
business. The joint venture will require us to acquire product
registration costs and related data filed with the United States Environmental
Protection Agency, which could approximate $2,100 in fiscal 2008. We
believe that our 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 for the next twelve
months. We may obtain additional credit facilities to enhance our
liquidity.
Impact
of New Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement 109”. FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to
be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006.The Company adopted FIN No. 48 on July 1, 2007 and determined
that the adoption of FIN No. 48 did not have a material impact on its
consolidated financial statements. In addition, there are no unrecognized
tax
benefits included in our consolidated balance sheet that would, if recognized,
have a material effect on our effective tax rate. The Company is continuing
its
practice of recognizing interest and penalties related to income tax matters
in
income tax expense. The total accrual
for
interest and penalties related to uncertain tax positions was approximately
$69
as of September 30, 2007. The Company did not recognize interest or penalties
related to income taxes during the three months ended September 30, 2007.
The
Company files U.S. federal, U.S. state, and foreign tax returns, and is
generally no longer subject to tax examinations for fiscal years prior to
2003
(in the case of certain foreign tax returns, calendar year 2001).
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to
be
applied to US GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. We are currently assessing the impact of SFAS No.
157 on our consolidated financial position and results of
operations.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115" (" SFAS No. 159"). SFAS No. 159 allows companies the choice
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has
been
elected will be recognized in earnings at each subsequent reporting date.
The
provisions of SFAS No. 159 will be effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact of SFAS
No. 159
on the consolidated financial position and results of operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Market
Risk Sensitive Instruments
The
market risk inherent in our market-risk-sensitive instruments and positions
is
the potential loss arising from adverse changes in investment market prices,
foreign currency exchange-rates and interest rates.
Investment
Market Price Risk
We
had
short-term investments of $3,098 at September 30, 2007. Those
short-term investments consisted of government and agency securities, corporate
bonds and corporate equity securities, and they were recorded at fair value
and
had exposure to price risk. If this risk is estimated as the
potential loss in fair value resulting from a hypothetical 10% adverse change
in
prices quoted by stock exchanges, the effect of that risk would be $310 as
of
September 30, 2007. Actual results may differ.
Foreign
Currency Exchange Risk
In
order
to reduce the risk of foreign currency exchange rate fluctuations, we hedge
some
of our transactions denominated in a currency other than the functional
currencies applicable to each of our various entities. The
instruments used for hedging are short-term foreign currency contracts
(futures). The changes in market value of such contracts have a high
correlation to price changes in the currency of the related hedged
transactions. At September 30, 2007, we had foreign currency
contracts outstanding that had a notional amount of $11,836. The
difference between the fair market value of the foreign currency contracts
and
the related commitments at inception and the fair market value of the contracts
and the related commitments at September 30, 2007, was not
material.
In
addition, we enter into cross currency interest rate swaps to reduce foreign
currency exposure on inter-company transactions. In May 2003 we
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. Under the terms of the derivative
financial instrument, U.S. dollar fixed principal and interest payments to
be
received under the inter-company loan will be swapped for Euro denominated
fixed
principal and interest payments. The change in fair value of the swap
from date of purchase to September 30, 2007, was $(75). The gains or
losses on the inter-company loan due to changes in foreign currency rates
will
be offset by the gains or losses on the swap in the accompanying condensed
consolidated statements of income. Since our interest rate swap
qualifies as a hedging activity, the change in their fair value, amounting
to
$(1) and $(90) for the three months ended September 30, 2007 and 2006,
respectively, is recorded in accumulated other comprehensive income included
in
the accompanying condensed consolidated balance sheets.
We
are
subject to risk from changes in foreign exchange rates for our 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. On
September 30, 2007, we had translation exposure to various foreign currencies,
with the most significant being the Euro and the Chinese
Renminbi. The potential loss as of September 30, 2007, resulting from
a hypothetical 10% adverse change in quoted foreign currency exchange rates
amounted to $6,153. Actual results may differ.
Interest
rate risk
Due
to
our financing, investing and cash-management activities, we are subject to
market risk from exposure to changes in interest rates. We utilize a
balanced mix of debt maturities along with both fixed-rate and variable-rate
debt to manage our exposure to changes in interest rates. Our
financial instrument holdings at year-end were analyzed to determine their
sensitivity to interest rate changes. In this sensitivity analysis,
we 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 our results
of
operations.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are
designed to provide reasonable assurance that information required to be
disclosed 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 rules and forms of the Securities and Exchange Commission. Our disclosure
controls and procedures are also designed to ensure that information required
to
be disclosed in the reports that we file or submit under the Exchange Act
is
accumulated and communicated to our management, including our principal
executive and principal financial officer, to allow timely decisions regarding
required disclosure. Our chief executive officer and chief financial officer,
with assistance from other members of our management, have reviewed the
effectiveness of our disclosure controls and procedures as of September 30,
2007
and, based on their evaluation, have concluded that the disclosure controls
and
procedures were effective as of such date.
Changes
in Internal Control over Financial Reporting
There
has
been no change in our internal control over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our
fiscal quarter ended September 30, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1A. Risk Factors
In
addition to the other information set forth in this report, you should carefully
consider the risk factors disclosed under Part I – “Item 1A. Risk Factors” in
our Form 10-K for the year ended June 30, 2007 which could materially adversely
affect our business, financial condition, operating results and cash
flows. The risks and uncertainties described in our Form 10-K for the
year ended June 30, 2007 are not the only ones we face. Additionally,
risks and uncertainties not currently known to us or that we currently deem
immaterial also may materially adversely affect our business, financial
condition, operating results or cash flows.
Item
6. Exhibits
The
exhibits filed as part of this report are listed below.
15.1
|
Awareness
letter from independent registered public accounting
firm
|
31.1
|
Certification
pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
and
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
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 9, 2007 |
|
BY |
/s/
Douglas Roth |
|
|
|
|
Douglas
Roth, Chief Financial Officer |
|
|
|
|
(Principal
Financial and Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
DATE
November 9, 2007 |
|
BY |
/s/
Leonard S. Schwartz |
|
|
|
|
Leonard
S. Schwartz, Chairman, |
|
|
|
|
President
and Chief Executive Officer |
|
|
|
|
(Principal
Executive Officer) |
|
21