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ACETO CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to our business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results or financial position, and the outcome of any contingencies. Any such forward-looking statements are based on current expectations, estimates and projections of management. We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements. Words such as "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that could cause actual results to differ materially from those set forth or implied by any forward-looking statement include, but are not limited to, our ability to remain competitive with competitors, risks associated with the generic product industry, dependence on a limited number of suppliers, risks associated with healthcare reform and reductions in reimbursement rates, difficulty in predicting revenue stream and gross profit, industry and market changes, the effect of fluctuations in operating results on the trading price of our common stock, inventory levels, reliance on outside manufacturers, risks of incurring uninsured environmental and other industry specific liabilities, governmental approvals and regulations, risks associated with hazardous materials, potential violations of government regulations, product liability claims, reliance on Chinese suppliers, potential changes to Chinese laws and regulations, potential changes to laws governing our relationships in India, fluctuations in foreign currency exchange rates, tax assessments, changes in tax rules, global economic risks, risk of unsuccessful acquisitions, effect of acquisitions on earnings, indemnification liabilities, terrorist activities, reliance on key executives, litigation risks, volatility of the market price of our common stock, changes to estimates, judgments and assumptions used in preparing financial statements, failure to maintain effective internal controls, compliance with changing regulations, as well as other risks and uncertainties discussed in our reports filed with the Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 and other filings. Copies of these filings are available at www.sec.gov. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. NOTE REGARDING DOLLAR AMOUNTSIn this quarterly report, all dollar amounts are expressed in thousands, except for 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 $376,575 for the nine months ended March 31, 2013, which represents a 12.9% increase from the $333,439 reported in the comparable prior period. Gross profit for the nine months ended March 31, 2013 was $73,740 and our gross margin was 19.6% as compared to gross profit of $61,318 and gross margin of 18.4% in the comparable prior period. Our selling, general and administrative costs (SG&A) for the nine months ended March 31, 2013 increased to $47,769 from $41,678 which we reported in the prior period. Our net income increased to $16,926, or $0.62 per diluted share, compared to net income of $13,000, or $0.49 per diluted share in the prior period. 19 --------------------------------------------------------------------------------Our financial position as of March 31, 2013 remains strong, as we had cash and cash equivalents and short-term investments of $37,078, working capital of $137,326 and shareholders' equity of $185,169. Our business is separated into three principal segments: Human Health, Pharmaceutical Ingredients and Performance Chemicals. In fiscal 2012, we reconfigured and renamed our three business segments to more accurately reflect the scope of our business activities. As such, we recasted the segment information as if the composition of our reportable segments had existed in the prior period presented. Products that fall within our Human Health segment include finished dosage form generic drugs and nutraceutical products. On December 31, 2010, we acquired certain assets of Rising. This acquisition was a natural extension of our successful business model which provides customers and suppliers additional opportunities to penetrate the end user segment of the pharmaceutical market. With the Rising brand label, we have been able to expand our direct involvement in the pharmaceutical distribution space through greater global awareness of our capabilities in the marketing of pharmaceutical intermediates, active ingredients and the ultimate end-products, finished dosage form generics. Aceto supplies the raw materials used in the production of nutritional and packaged dietary supplements, including vitamins, amino acids, iron compounds and biochemicals used in pharmaceutical and nutritional preparations. Aceto's identification of a change in the attitudes of Europeans towards nutritional products led to the decision to globalize this business and create an operating model to focus on it. This globally structured business has become the model for all of our business segments, providing international reach and perspective for our customers. The Pharmaceutical Ingredients segment has two product groups: Active Pharmaceutical Ingredients (APIs) and Pharmaceutical Intermediates. As the use of generic drugs has grown significantly over the years, we believe Aceto's presence in this market also increased dramatically, both domestically and internationally. We supply APIs to the major generic drug companies, who we believe view Aceto as a valued partner in their effort to develop and market generic drugs. The process of introducing a new API from pipeline to market spans a number of years and begins with Aceto partnering with a generic pharmaceutical manufacturer and jointly selecting an API, several years before the expiration of a composition of matter patent, for future generisizing. We then identify the appropriate supplier, and concurrently utilizing our global technical network, ensure they meet the highest standards of quality to comply with regulations. The generic pharmaceutical company will submit the ANDA for FDA approval or European-equivalent approval. The introduction of the API to market occurs after all the development testing has been completed and the ANDA or European-equivalent is approved and the patent expires or is deemed invalid. Aceto, at all times, has a robust pipeline of APIs poised to reach commercial levels, both in the United States and Europe. Aceto has long been a supplier of pharmaceutical intermediates, the complex chemical compounds that are the building blocks used in producing APIs. These are the critical components of all drugs, whether they are already on the market or currently undergoing clinical trials. Faced with significant economic pressures as well as ever-increasing regulatory barriers, the innovative drug companies look to Aceto as a source for high quality intermediates. Utilizing our global sourcing, regulatory support and quality assurance network, Aceto works with the large, global pharmaceutical companies, sourcing lower cost, quality pharmaceutical intermediates that will meet the same high level standards adhered to by their current commercial products. According to an IMS Health press release on July 12, 2012, "Following several years of slowing growth, the global market for medicines is poised to rebound from an expected low point of 3-4 percent growth in 2012 to 5-7 percent in 2016, according to a new forecast issued by the IMS Institute for Healthcare Informatics. The report, The Global Use of Medicines: Outlook through 2016, found that annual global spending on medicines will rise from $956 billion in 2011 to nearly $1.2 trillion in 2016, representing a compound annual growth rate of 3-6 percent. Growth in annual global spending is forecast to more than double by 2016 to as much as $70 billion, up from a $30 billion pace this year, driven by volume increases in the pharmerging markets and an uptick in spending in developed nations." The Performance Chemicals segment includes specialty chemicals and agricultural protection products. 20 -------------------------------------------------------------------------------- Aceto is a major supplier to many different industrial segments that require outstanding performance from chemical raw materials and additives. We provide chemicals which make plastics, surface coatings, textiles, fuels and lubricants perform to their designed capabilities. These additive specialty products include antioxidants, photo initiators, catalysts, curatives, brighteners and adhesion promoters. Aceto is a supplier of chemicals to ecofriendly technologies, which are critical in protecting and enhancing the world's ecology. We provide specialty chemicals for the food, beverage and fragrance industries. Aceto's raw materials are also used in sophisticated technology products, such as high-end electronic parts (circuit boards and computer chips) and binders for specialized rocket fuels. Aceto is also a leader in the supply of diazos and couplers to the paper and film industries. Specific end uses for these products include microfilm, blueprints and photo tooling of printed circuit boards. We also provide organic intermediates and colorants. The color producing industry manufactures a wide assortment of products and Aceto is the supplier of choice to these producers of "color." From textiles and plastics to inks and paints, our specialty colorant intermediates allow manufacturers to develop an endless rainbow of colorful possibilities. According to an April 16, 2013 Federal Reserve Statistical Release, in the first quarter of calendar year 2013, the index for consumer durables, which impacts the Specialty Chemicals business of the Performance Chemicals segment, is expected to grow at an annual rate of 12.0%. Aceto's agricultural protection products include herbicides, fungicides and insecticides which control weed growth as well as the spread of insects and microorganisms that can severely damage plant growth. The agricultural world is dependent on a large variety of deterrent products and we believe Aceto has become a valued partner to the global generic agricultural industry by providing superior quality functional products. One of Aceto's most widely used agricultural protection products is a sprout inhibitor that extends the storage life of potatoes. We work with the large agrochemical distributors to provide alternate sources for key products. Utilizing our global sourcing and regulatory capabilities, we identify and qualify manufacturers either producing the product or with knowledge of the chemistry necessary to produce the product and then file an application with the EPA for a product registration. Aceto has an ongoing working relationship with manufacturers in China and India to determine which of the non-patented, or generic, agricultural protection products they produce can be effectively marketed in the Western world. Over the past several years, we have successfully brought numerous products to market. In addition, we have a strong pipeline, which includes future additions to our product portfolio. The combination of our global sourcing and regulatory capabilities makes the generic agricultural market a niche for us and we will continue to offer new product additions in this market as we move forward. In the National Agricultural Statistics Services release dated June 29, 2012, the total crop acreage planted in 2012 increased by 3.4% to 326 million acres. The number of peanut acres planted in 2012 was up almost 34% from 2011 levels while sugarcane acreage harvested increased approximately 2.2% from 2011. In addition, the potato acreage harvested in 2012 was relatively consistent to the 2011 level. We believe our main business strengths are sourcing, regulatory support, quality assurance and marketing and distribution. With business operations in nine countries, we distribute more than 1,100 chemical compounds used principally as finished products or raw materials in the pharmaceutical, nutraceutical, agricultural, coatings and industrial chemical consuming industries. We believe that we are currently one of the largest merchant buyers of pharmaceutical and performance chemicals for export from Asia, purchasing from over 500 different manufacturers in China and 200 manufacturers in India. In this MD&A, we explain our general financial condition and results of operations, including, among other things, 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 21-------------------------------------------------------------------------------- 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 and nine months ended March 31, 2013 and 2012. 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, 2012, 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 relating to critical accounting estimates and policies 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, partnered products, 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, 2012, there have been no significant changes to the assumptions and estimates related to those critical accounting estimates and policies. 22 --------------------------------------------------------------------------------RESULTS OF OPERATIONS Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012 Net Sales by Segment Nine months ended March 31, Comparison 2013 2013 2012 Over/(Under) 2012 % of % of $ % Segment Net sales Total Net sales Total Change Change Human Health $ 92,559 24.6 % $ 78,243 23.5 % $ 14,316 18.3 %Pharmaceutical Ingredients 142,169 37.7 121,537 36.4 20,632 17.0 Performance Chemicals 141,847 37.7 133,659 40.1 8,188 6.1 Net sales $ 376,575 100.0 % $ 333,439 100.0 % $ 43,136 12.9 % Gross Profit by Segment Nine months ended March 31, Comparison 2013 2013 2012 Over/(Under) 2012 Gross % of Gross % of $ % Segment Profit Sales Profit Sales Change Change Human Health $ 28,062 30.3 % $ 22,860 29.2 % $ 5,202 22.8 % Pharmaceutical Ingredients 25,429 17.9 18,654 15.3 6,775 36.3 Performance Chemicals 20,249 14.3 19,804 14.8 445 2.2 Gross profit $ 73,740 19.6 % $ 61,318 18.4 % $ 12,422 20.3 % Net Sales Net sales increased $43,136, or 12.9%, to $376,575 for the nine months ended March 31, 2013, compared with $333,439 for the prior period. We reported sales increases in all three of our business segments. Human Health Net sales for the Human Health segment increased by $14,316 for the nine months ended March 31, 2013, to $92,559, which represents a 18.3% increase over net sales of $78,243 for the prior period, largely driven by new generic product launches at Rising, offset by a reduction in domestic sales of nutritional products due to lower orders of existing products. 23 --------------------------------------------------------------------------------Pharmaceutical Ingredients Net sales for the Pharmaceutical Ingredients segment were $142,169 for the nine months ended March 31, 2013, when compared to the $121,537 for the prior period, representing an increase of $20,632 or 17.0%. The primary reason for the increase is due to the volume of large reorders for existing APIs sold by our United States and German operations, as well as a launch of a new product, sold domestically. In addition, sales of intermediates, which represent key components used in the manufacture of certain drug products, have risen both in the United States and abroad. Performance Chemicals Net sales for the Performance Chemicals segment increased to $141,847 for the nine months ended March 31, 2013, an increase of $8,188, or 6.1%, from net sales of $133,659 for the prior period. Our Performance Chemicals segment experienced an increase in sales of our agricultural protection products, primarily from sales of a wide-range insecticide used on various crops including cereals, citrus, cotton, grapes, ornamental grasses and vegetables and increased sales of a broad-spectrum herbicide. In addition, we had an increase in sales of our sprout inhibitor products, which are utilized on potato crops. These increases in agricultural protection product sales is partially offset by a decline in domestic sales of agricultural, dye and pigment intermediates, sold by our Specialty Chemicals business. Gross Profit Gross profit increased to $73,740 (19.6% of net sales) for the nine months ended March 31, 2013, as compared to $61,318 (18.4% of net sales) for the prior period. Human Health Human Health gross profit increased to $28,062 for the nine months ended March 31, 2013 when compared to the prior period of $22,860. The gross margin remained relatively consistent at 30.3% for the nine months ended March 31, 2013 compared to 29.2% for the prior period. The increase in gross profit in the Human Health segment primarily relates to increased sales volume of Rising products. Pharmaceutical Ingredients Pharmaceutical Ingredients' gross profit of $25,429 for the nine months ended March 31, 2013 was $6,775 or 36.3% higher than the prior period. The gross margin at 17.9% for the nine months ended March 31, 2013 was also higher than the prior period's gross margin of 15.3%. The increase in both gross profit and gross margin is predominantly the result of the increase in the sales volume of reorders of certain APIs, which typically yield a significantly higher gross margin. Performance Chemicals Gross profit for the Performance Chemicals segment increased to $20,249 for the nine months ended March 31, 2013, versus $19,804 for the prior period, an increase of $445 or 2.2%. The gross margin at 14.3% for the nine months ended March 31, 2013 was relatively flat compared to the prior period's gross margin of 14.8%. Selling, General and Administrative Expenses SG&A increased $6,091 or 14.6%, to $47,769 for the nine months ended March 31, 2013 compared to $41,678 for the prior period. As a percentage of sales, SG&A increased to 12.7% for the nine months ended March 31, 2013 versus 12.5% for the prior period. The primary reasons for the increase in SG&A are $2,840 additional accrued contingent consideration related to the Rising acquisition as well as increased research and development expenses related to certain Rising products and increased information technology maintenance and software related costs. We also experienced additional accrued performance award expense and increased fringe benefits and stock-based compensation expense due to increased financial performance. In addition, the Company recorded during the nine months ended March 31, 2012, approximately $884 of one-time costs associated with the separation of certain executive management employees. 24 --------------------------------------------------------------------------------Operating Income For the nine months ended March 31, 2013, operating income was $25,971 compared to $19,640 in the prior period, an increase of $6,331 or 32.2%. This increase was due to the overall increase in gross profit of $12,422 offset by the increase in SG&A of $6,091 from the comparable prior period. Interest Expense Interest expense was $1,570 for the nine months ended March 31, 2013, a decrease of $497 from the prior period. The decrease is primarily due to lower average loan balance outstanding as of March 31, 2013 versus March 31, 2012, as well as a lower Adjusted LIBOR rate during the period. Provision for Income Taxes The effective tax rate for the nine months ended March 31, 2013 was 35.7% versus 33.2% for the prior period. The increase in the effective tax rate was due to the expected mix of profits from higher tax rate jurisdictions in fiscal 2013. In addition, in fiscal 2011 we repatriated earnings from certain foreign subsidiaries, in connection with our acquisition of Rising. In the third quarter of fiscal 2012, our effective tax rate was favorably impacted by the reversal of approximately $529 of tax expense related to the final tax payment associated with the fiscal 2011 repatriation. The Company intends to permanently reinvest its undistributed earnings and has no plan for further repatriation. 25 -------------------------------------------------------------------------------- Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 Net Sales by Segment Three months ended March 31, Comparison 2013 2013 2012 Over/(Under) 2012 % of % of $ % Segment Net sales Total Net sales Total Change Change Human Health $ 36,299 24.1 % $ 28,182 23.2 % $ 8,117 28.8 % Pharmaceutical Ingredients 61,776 40.9 40,580 33.4 21,196 52.2 Performance Chemicals 52,796 35.0 52,653 43.4 143 0.3 Net sales $ 150,871 100.0 % $ 121,415 100.0 % $ 29,456 24.3 % Gross Profit by Segment Three months ended March 31, Comparison 2013 2013 2012 Over/(Under) 2012 Gross % of Gross % of $ % Segment Profit Sales Profit Sales Change Change Human Health $ 11,052 30.4 % $ 7,798 27.7 % $ 3,254 41.7 % Pharmaceutical Ingredients 13,382 21.7 6,185 15.2 7,197 116.4 Performance Chemicals 7,093 13.4 8,172 15.5 (1,079 ) (13.2 ) Gross profit $ 31,527 20.9 % $ 22,155 18.2 % $ 9,372 42.3 % Net Sales Net sales increased $29,456, or 24.3%, to $150,871 for the three months ended March 31, 2013, compared with $121,415 for the prior period. We reported sales increases in all three of our business segments. Human Health Net sales for the Human Health segment increased by $8,117 for the three months ended March 31, 2013, to $36,299, which represents a 28.8% increase over net sales of $28,182 for the prior period, largely driven by new generic product launches at Rising, offset by a reduction in domestic sales of nutritional products due to lower orders of existing products. 26 --------------------------------------------------------------------------------Pharmaceutical Ingredients Net sales for the Pharmaceutical Ingredients segment were $61,776 for the three months ended March 31, 2013, an increase of $21,196 or 52.2% from net sales of $40,580 for the prior period. The primary reason for the increase is due to the volume of large reorders for existing APIs sold by our United States and German operations, as well as a launch of a new product, sold domestically. In addition, sales of intermediates, which represent key components used in the manufacture of certain drug products, have risen both in the United States and abroad. Performance Chemicals Net sales for the Performance Chemicals segment increased slightly to $52,796 for the three months ended March 31, 2013, an increase of $143, or 0.3%, from net sales of $52,653 for the prior period. Although sales were consistent to the prior period, we experienced a decline in sales of domestic specialty chemicals products, specifically, sales of agricultural, dye and pigment intermediates. Our Performance Chemicals segment experienced an increase in sales of our agricultural protection products, primarily from sales of a wide-range insecticide used on various crops including cereals, citrus, cotton, grapes, ornamental grasses and vegetables, a rise in sales of an herbicide used on sugar cane and increased sales of a broad-spectrum herbicide. Gross Profit Gross profit increased to $31,527 (20.9% of net sales) for the three months ended March 31, 2013, as compared to $22,155 (18.2% of net sales) for the prior period. Human Health Human Health gross profit increased to $11,052 for the three months ended March 31, 2013 when compared to the prior period of $7,798. The gross margin increased to 30.4%, for the three months ended March 31, 2013 compared to 27.7% for the prior period. The increase in gross profit and gross margin in the Human Health segment primarily relates to increased sales volume of Rising products. Pharmaceutical Ingredients Pharmaceutical Ingredients' gross profit of $13,382 for the three months ended March 31, 2013 was $7,197 or 116.4% higher than the prior period gross profit of $6,185. The gross margin for the three months ended March 31, 2013 rose to 21.7% compared to 15.2% for the prior period. The increase in both gross profit and gross margin is predominantly the result of the increase in the sales volume of reorders of certain APIs, which typically yield a significantly higher gross margin. Performance Chemicals Gross profit for the Performance Chemicals segment decreased to $7,093 for the three months ended March 31, 2013, versus $8,172 for the prior period, a decrease of $1,079 or 13.2%. Gross margin for the quarter also decreased to 13.4% compared to the prior period gross margin of 15.5%. The drop in gross profit primarily relates to sales volume decreases on specialty chemical products, particularly domestic sales of agricultural, dye and pigment intermediates. The decrease in gross margin is related to overall unfavorable product mix on a variety of agricultural protection products, as well as on chemicals used in surface coatings. Selling, General and Administrative Expenses SG&A increased $5,200 or 35.7%, to $19,781 for the three months ended March 31, 2013 compared to $14,581 for the prior period. As a percentage of sales, SG&A increased to 13.1% for the three months ended March 31, 2013 versus 12.0% for the prior period. The primary reasons for the increase in SG&A are $2,840 additional accrued contingent consideration related to the Rising acquisition as well as increased research and development expenses related to certain Rising products and increased information technology maintenance and software related costs. We also experienced additional accrued performance award expense and increased fringe benefits and stock-based compensation expense due to increased financial performance. 27--------------------------------------------------------------------------------Operating Income For the three months ended March 31, 2013, operating income was $11,746 compared to $7,574 in the prior period, an increase of $4,172 or 55.1%. This increase was due to the overall increase in gross profit of $9,372 offset by the increase in SG&A of $5,200 from the comparable prior period. Interest and Other Income, Net Interest and other income, net was $333 for the three months ended March 31, 2013, which represents a decrease of $297 from $630 in the prior period, mainly due to increase in foreign exchange losses, offset in part by an increase in income related to a joint venture. Provision for Income Taxes The effective tax rate for the three months ended March 31, 2013 was 34.5% versus 28.7% for the prior period. In the third quarter of fiscal 2012, our effective tax rate was favorably impacted by the reversal of approximately $529 of tax expense related to the final tax payment associated with the fiscal 2011 repatriation. Without this adjustment, the effective tax rate would be 35.7% in fiscal year 2012. Liquidity and Capital Resources Cash Flows At March 31, 2013, we had $35,423 in cash and cash equivalents, of which $24,429 was outside the United States, $1,655 in short-term investments, all of which is held outside the United States and $43,868 in long-term debt (including the current portion), all of which is in the United States. Working capital was $137,326 at March 31, 2013 versus $118,328 at June 30, 2012. The $24,429 of cash held outside of the United States is fully accessible to meet any liquidity needs of the countries in which Aceto operates. The majority of the cash located outside of the United States is held by our European operations and can be transferred into the United States. Although these amounts are fully accessible, transferring these amounts into the United States or any other countries could have certain tax consequences. A deferred tax liability will be recognized when we expect that we will recover undistributed earnings of our foreign subsidiaries in a taxable manner, such as through receipt of dividends or sale of the investments. The Company intends to permanently reinvest these undistributed earnings and has no plan for further repatriation. A portion of our cash is held in operating accounts that are with third party financial institutions. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts. Our cash position at March 31, 2013 increased $10,561 from the amount at June 30, 2012. Operating activities for the nine months ended March 31, 2013 provided cash of $17,417, for this period, as compared to $9,833 for the comparable period. The $17,417 was comprised of $16,926 in net income and $7,441 derived from adjustments for non-cash items less a net $6,950 decrease from changes in operating assets and liabilities. The non-cash items included $5,203 in depreciation and amortization expense, $2,840 of accrued contingent consideration related to the Rising acquisition, $1,748 of earnings on an equity investment in a joint venture and $1,353 in non-cash stock compensation expense. Trade accounts receivable increased $20,791 during the nine months ended March 31, 2013, due predominantly to an increase in sales in this quarter as compared to the fourth quarter of fiscal 2012, as well as an increase in days sales outstanding, from June 30, 2012. Accounts payable increased by $7,959 due to timing of payments processed at the end of the quarter. Accrued expenses and other liabilities increased $9,222 due primarily to an increase in price concessions and partnered products liabilities related to increased sales from Rising, as well as timing of income tax payments. Our cash position at March 31, 2012 decreased $2,053 from the amount at June 30, 2011. Operating activities for the nine months ended March 31, 2012 provided cash of $9,833, for this period, as compared to cash provided by operations of $4,823 for the comparable period. The $9,833 was comprised of $13,000 in net income and $5,060 derived from adjustments for non-cash items less a net $8,227 decrease from changes in operating assets and liabilities, primarily inventory and accrued expenses and other liabilities. 28-------------------------------------------------------------------------------- Investing activities for the nine months ended March 31, 2013 used cash of $1,588, primarily related to the purchases of investments of $1,152 and payments for intangible assets and property and equipment of $1,465, offset by proceeds received upon sale of investments of $1,029. Investing activities for the nine months ended March 31, 2012 used cash of $2,206, primarily related to purchases of investments, property and equipment and intangible assets. Financing activities for the nine months ended March 31, 2013 used cash of $5,460 primarily from $8,897 of repayment of bank borrowings and $4,481 of payment of cash dividends. In addition, the Company paid $1,470 of deferred consideration to the sellers of Rising. This use of cash was offset by bank borrowings of $7,000 and $1,961 proceeds received from exercise of stock options. Financing activities for the nine months ended March 31, 2012 used cash of $8,629, primarily from $4,698 of bank loan repayments and the payment of dividends of $2,661. In addition, the Company paid $1,500 of deferred consideration to the sellers of Rising. Credit Facilities We have available credit facilities with certain foreign financial institutions. These facilities provide us with lines of credit of $8,538, as of March 31, 2013, all of which is available for borrowing by the respective foreign territories. We are not subject to any financial covenants under these arrangements. On December 31, 2010, the Company entered into a Credit Agreement (the "Credit Agreement") with two U.S. financial institutions. Aceto may borrow, repay and reborrow during the period ending December 31, 2015, up to but not exceeding at any one time outstanding $40,000 (the "Revolving Loans"). The Revolving Loans may be (i) Adjusted LIBOR Loans (as defined in the Credit Agreement), (ii) Alternate Base Rate Loans (as defined in the Credit Agreement) or (iii) a combination thereof. As of March 31, 2013, the Company borrowed Revolving Loans aggregating $14,000, which loans are Adjusted LIBOR Loans at an interest rate of 2.06% at March 31, 2013. The Credit Agreement also allows for the borrowing of up to $40,000 (the "Term Loan"). The Company borrowed a Term Loan of $40,000 on December 31, 2010. The Term Loan interest may be payable as an (i) Adjusted LIBOR Loan, (ii) Alternate Base Rate Loan, or (iii) a combination thereof. As of March 31, 2013, the remaining amount outstanding under the original amortizing Term Loan is $26,250 and is payable as an Adjusted LIBOR Loan at an interest rate of 2.06% at March 31, 2013. The Credit Agreement also provides that commercial letters of credit may be issued to provide the primary payment mechanism in connection with the purchase of any materials, goods or services by us in the ordinary course of business. At March 31, 2013, we had utilized $40,297 in bank loans and letters of credit, leaving $25,953 of this facility unused. 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. The Credit Agreement provides for a security interest in all of our personal property. The Credit Agreement contains several financial covenants including, among other things, maintaining a minimum level of debt service. We are also subject to certain restrictive covenants, including, among other things, 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 March 31, 2013. Pursuant to the requirements of the Credit Agreement, we are required to deliver Hedging Agreements (as defined in the Credit Agreement) fixing the interest rate on not less than $20,000 of the Term Loan. Accordingly, in March 2011, we entered into an interest rate swap for a notional amount of $20,000, which has been designated as a cash flow hedge. The expiration date of this interest rate swap is December 31, 2015. 29--------------------------------------------------------------------------------Working Capital Outlook Working capital was $137,326 at March 31, 2013 versus $118,328 at June 30, 2012. In March 2010, we purchased a building in Port Washington, New York, which is now the site of our global headquarters. We moved our corporate offices into this new building in April 2011. On June 30, 2011, we entered into a mortgage payable for $3,947 on this new corporate headquarters. This mortgage payable is secured by the land and building and is being amortized over a period of 20 years. The mortgage payable bears interest at 5.92% and matures on June 30, 2021. 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 connection with our agricultural protection business, we plan to continue to acquire product registrations and related data filed with the United States Environmental Protection Agency as well as payments to various task force groups, which could approximate $4,661 over the next twelve months. In accordance with the purchase agreement, as amended, related to the Rising acquisition, $7,970 of deferred consideration was to be paid by Aceto over a four year period with $1,500 paid in February 2012, $1,470 paid in December 2012, $1,500 to be paid not later than fifty-six days following the third anniversary of the closing date of the purchase and $3,500 to be paid not later than fifty-six days following the fourth anniversary of the closing date of the purchase. 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, the repayment of our bank loans and the anticipated continuation of cash dividends for the next twelve months. Impact of Recent Accounting Pronouncements In June 2011, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2011-05, "Presentation of Comprehensive Income", which eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders' equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12 "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" . ASU 2011-12 deferred certain aspects of ASU 2011-05. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this guidance in this first quarter of fiscal 2013. As this guidance only amends the presentation of the components of comprehensive income, the adoption did not have an impact on the Company's consolidated financial statements. In September 2011, the FASB issued ASU 2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment", to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company in fiscal 2013 and earlier adoption is permitted. The Company adopted ASU 2011-08 at the beginning of fiscal 2013. This adoption did not have a material impact on the Company's consolidated financial statements. In July 2012, the FASB issued ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard)" , which allows companies the option to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. Under this guidance, an entity is required to perform a quantitative impairment test if qualitative factors indicate that it is more likely than not that indefinite-lived intangible assets are impaired. The qualitative factors are consistent with the guidance established for goodwill impairment testing and include identifying and assessing events and circumstances that would most significantly impact, individually or in the aggregate, the carrying value of the indefinite-lived intangible assets. The revised standard is effective for the Company in fiscal 2014 and early adoption is permitted. The adoption of ASU 2012 -02 is not expected to have a material impact on the Company's consolidated financial statements. 30-------------------------------------------------------------------------------- In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements." ASU 2012-04 contains certain technical corrections and conforming fair value amendments to the FASB Accounting Standards Codification. The amendments that do not have transition guidance were effective upon issuance. The amendments that are subject to the transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 will not have a material impact on the Company's consolidated financial statements. |