WASHINGTON, D.C. 20549
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting
stock of the Company held by non-affiliates of the Company
based on the
closing price of the common stock on December 31, 2016 as reported on t
he NASDAQ Global Select Market was approximately
$564,677,707.
The Registrant has 30,109,417 shares of
common stock outstanding as of August 21, 2017.
Documents incorporated by reference: The
information required in response to Part III of this Annual Report on Form 10-K is hereby incorporated by reference to the specified
portions of the Registrant’s definitive proxy statement for the annual meeting of shareholders.
As previously reported
in a Form 8-K filed on November 3, 2017, Aceto Corporation (the “Company,” “we,” “us,” or “our”)
has identified and recorded an adjustment related to the misapplication of cash in the fiscal year ended June 30, 2015. The correction
resulted in a $4,007 decrease to trade receivables as of June 30, 2015, 2016 and 2017, a $1,402 increase to other receivables as
of June 30, 2015, 2016 and 2017, a $4,007 reduction in net sales for the year ended June 30, 2015 and a $2,605 reduction in net
income for the year ended June 30, 2015. We have performed a qualitative and quantitative analysis of this misapplication and have
determined that it is not material to fiscal year 2015.
A “material weakness”
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or
detected on a timely basis. Also as previously reported, after discussion with the Company’s Audit Committee and BDO USA,
LLP (“BDO”), the Company’s independent registered accounting firm, the Company determined that the above-mentioned
adjustment demonstrated that there was a material weakness in the design and effectiveness of our internal control over financial
reporting, in that our system of internal control did not generate a report that could be used by management to assure that precision
in the review of the aging of trade receivables was adequate. As a result of this material weakness, a reasonable possibility existed
that a material misstatement in trade receivables in our annual or interim financial statements could occur and not be prevented
or detected on a timely basis.
We are filing this
Amendment No. 1 on Form 10-K/A (this “Amendment”) to our annual report on Form 10-K for the fiscal year ended
June 30, 2017, which was originally filed on August 25, 2017 (the “Original Filing”), in order to:
As required by Rule 12b-15 under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), new certifications of our principal executive officer and principal
financial officer are also being filed as exhibits to this Amendment. Similarly, revised XBRL exhibits are being filed as exhibits
to this Amendment. As a result, Item 15, “Exhibits, Financial Statement Schedules”, has also been modified.
This Amendment should be read in conjunction
with the Original Filing, which continues to speak as of the date of the Original Filing. Except as specifically noted above, this
Amendment does not modify or update disclosures in the Original Filing. Accordingly, this Amendment does not reflect events occurring
after the filing of the Original Filing or modify or update any related or other disclosures.
Item 1A. Risk Factors
You should carefully consider the following
risk factors and other information included in this Annual Report on Form 10-K. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial could
also impair our business operations. If any of the following risk factors occur, our reputation, business, financial condition,
operating results and cash flows could be materially adversely affected.
If we are unable to compete effectively
with our competitors, many of which have greater market presence and resources than us, our reputation, business, financial condition,
operating results and cash flows could be materially adversely affected.
Our financial condition and operating results
are directly related to our ability to compete in the intensely competitive global pharmaceutical and chemical markets. We face
intense competition from global and regional distributors of pharmaceutical and chemical products, many of which are large pharmaceutical
and chemical manufacturers as well as distributors. Many of these companies have substantially greater resources than us, including,
among other things, greater financial, marketing and distribution resources. We cannot assure you that we will be able to compete
successfully with any of these companies. In addition, increased competition could result in price reductions, reduced margins
and loss of market share for our products, all of which could materially adversely affect our reputation, business, financial condition,
operating results and cash flows.
Our distribution operations of finished
dosage form generic drugs and APIs are subject to the risks of the generic pharmaceutical industry.
The ability of our business to provide
consistent, sequential quarterly growth is affected, in large part, by our participation in the launch of new products by generic
manufacturers and the subsequent advent and extent of competition encountered by these products. Revenues and gross profit derived
from the sales of generic pharmaceutical products tend to follow a pattern based on certain regulatory and competitive factors.
This competition can result in significant and rapid declines in pricing with a corresponding decrease in net sales. Net selling
prices of generic drugs typically decline over time, sometimes dramatically, as additional generic pharmaceutical companies receive
approvals and enter the market for a given generic product and competition intensifies. When additional versions of one of our
generic products enter the market, we generally lose market share and our selling prices and margins on that product decline.
The approval process for generic pharmaceutical
products often results in the FDA granting final approval simultaneously or within close proximity to a number of generic pharmaceutical
products at the time a patent claim for a corresponding branded product or other market exclusivity expires. This often forces
a generic firm to face immediate competition when it introduces a generic product into the market. Additionally, further generic
approvals often continue to be granted for a given product subsequent to the initial launch of the generic product. These circumstances
generally result in significantly lower prices, as well as reduced margins, for generic products compared to branded products.
New generic market entrants generally cause continued price and margin erosion over the generic product life cycle. As a result,
we could be unable to grow or maintain market share with respect to our generic pharmaceutical products, which could materially
adversely affect our reputation, business, financial condition, operating results and cash flows.
We may experience declines in sales
volumes or prices of certain of our products as the result of the concentration of sales to wholesalers and the continuing trend
towards consolidation of such wholesalers and other customer groups which could have a material adverse impact on our business,
financial condition, operating results and cash flows.
Wholesalers and retail drug chains have
undergone, and are continuing to undergo, significant consolidation. This consolidation may result in these groups gaining additional
purchasing leverage and consequently increasing the product pricing pressures facing our finished dosage form generic business.
The result of these developments could have a material adverse effect on our business, financial position, results of operations
and cash flows.
Our pipeline of products in development
may be subject to regulatory delays at the FDA. Delays in key products could have material adverse effects on our reputation, business,
financial condition, operating results and cash flows.
Our future revenue growth and profitability
are partially dependent upon our ability to introduce new products on a timely basis in relation to our competitors’ product
introductions. Our failure to do so successfully could materially adversely affect our reputation, business, financial condition,
operating results and cash flows. Many products require FDA approval or the equivalent regulatory approvals in our overseas markets
prior to being marketed. The process of obtaining FDA/regulatory approval to market new and generic pharmaceutical products is
rigorous, time-consuming, costly and often unpredictable. We may be unable to obtain requisite FDA approvals on a timely basis
for new generic products.
Pharmaceutical product quality standards
are steadily increasing and all products, including those already approved, may need to meet current standards. If our products
are not able to meet these standards, we may be required to discontinue marketing and/or recall such products from the market.
Steadily increasing quality standards are
applicable to pharmaceutical products still under development and those already approved and on the market. These standards result
from product quality initiatives implemented by the FDA, and updated U.S. Pharmacopeial Convention (“USP”) Reference
Standards. The USP is a scientific nonprofit organization that sets standards for the identity, strength, quality, and purity of
medicines, food ingredients, and dietary supplements manufactured, distributed, and consumed worldwide. Pharmaceutical products
approved prior to the implementation of new quality standards may not meet these standards, which could require us to discontinue
marketing and/or recall such products from the market, either of which could have a material adverse effect on our business, financial
position, results of operations and cash flows.
If brand pharmaceutical companies are
successful in limiting the use of generics through their legislative and regulatory efforts, our sales of generic products may
suffer.
Many brand pharmaceutical companies increasingly
have used state and federal legislative and regulatory means to delay generic competition. These efforts have included:
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pursuing new patents for existing products which may be granted just before the expiration of one
patent which could extend patent protection for additional years or otherwise delay the launch of generics;
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using the Citizen Petition process to request amendments to FDA standards;
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seeking changes to U.S. Pharmacopoeia, an organization which publishes industry recognized compendia
of drug standards;
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attaching patent extension amendments to non-related federal legislation;
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engaging in state-by-state initiatives to enact legislation that restricts the substitution of
some generic drugs, which could have an impact on products that we are developing;
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persuading regulatory bodies to withdraw the approval of brand name drugs for which the patents
are about to expire and converting the market to another product of the brand company on which longer patent protection exists;
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entering into agreements whereby other generic companies will begin to market an authorized generic,
a generic equivalent of a branded product, at the same time or after generic competition initially enters the market;
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filing suits for patent infringement and other claims that may delay or prevent regulatory approval,
manufacture, and/or sale of generic products; and,
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introducing “next-generation” products prior to the expiration of market exclusivity
for the reference product, which often materially reduces the demand for the generic or the reference product for which we seek
regulatory approval.
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In the U.S., some companies have lobbied
Congress for amendments to the Hatch-Waxman Act that would give them additional advantages over generic competitors. For example,
although the term of a company’s drug patent can be extended to reflect a portion of the time an NDA is under regulatory
review, some companies have proposed extending the patent term by a full year for each year spent in clinical trials rather than
the one-half year that is currently permitted.
If proposals like these were to become
effective, or if any other actions by our competitors and other third parties to prevent or delay activities necessary to the approval,
manufacture, or distribution of our products are successful, our entry into the market and our ability to generate revenues associated
with new products may be delayed, reduced, or eliminated, which could have material adverse effects on our reputation, business,
financial condition, operating results and cash flows.
A proposed FDA rule allowing generic
companies to distribute revised labels that differ from the corresponding reference listed drug (“RLD”) could have
an adverse effect on our operations because of a potential increase in litigation exposure.
On November 13, 2013, the FDA issued a
proposed rule (Docket No. FDA-2013-N-0500) titled "Supplemental Applications Proposing Labeling Changes for Approved Drugs
and Biological Products." Pursuant to the rule, the FDA will change existing regulations to allow generic drug application
holders, in advance of the FDA’s review, to distribute revised labeling, to reflect safety-related changes based on newly
acquired information. Currently, the labels of generic drugs must conform to those of the corresponding RLD and any failure-to-warn
claims against generic companies are preempted under U.S. Federal law. Once this rule is released, we could be found liable under
such failure-to-warn claims if we do not revise our labeling to reflect safety-related changes promptly upon receipt of applicable
safety information. While we proactively conduct surveillance for reported safety issues with our products, we cannot guarantee
that this will prevent us from being found liable under a failure-to-warn claim. When this proposed regulatory change is adopted,
it could increase our potential liability with respect to failure-to-warn claims, which, even if successfully defended, could have
material adverse effects on our reputation, business, financial condition, operating results and cash flows.
Our policies regarding returns, allowances,
rebates and chargebacks, and marketing programs adopted by wholesalers may reduce our revenues in future fiscal periods.
Based on industry practice, generic drug
manufacturers have liberal return policies and have been willing to give customers post-sale inventory allowances. Under these
arrangements, from time to time we give our customers credits on our generic products that our customers already hold in inventory
after we have decreased the market prices of the same generic products due to competitive pricing. Therefore, if new competitors
enter the marketplace and significantly lower the prices of any of their competing products, we could reduce the price of our product.
As a result, we would be obligated to provide credits to our customers who are then holding inventories of such products, which
could reduce sales revenue and gross margin for the period the credit is provided. Like our competitors, we also give credits for
chargebacks to wholesalers that have contracts with us for their sales to hospitals, group purchasing organizations, pharmacies
or other customers.
A chargeback is the difference between
the price the wholesaler pays and the price that the wholesaler’s end-customer pays for a product. Although we establish
reserves based on our prior experience and our best estimates of the impact that these policies may have in subsequent periods,
we cannot ensure that our reserves are adequate or that actual product returns, allowances, rebates, chargebacks and partnered
product liabilities will not exceed our estimates.
The regulatory approval process outside
the U.S. varies depending on foreign regulatory requirements, and failure to obtain regulatory approval in foreign jurisdictions
would prevent the marketing of our products in those jurisdictions.
We have certain worldwide intellectual
property rights to market some of our products and product candidates. We intend to seek approval to market certain of our products
outside of the U.S. To market our products in the European Union and other foreign jurisdictions, we must obtain separate regulatory
authorization and comply with numerous and varying regulatory requirements. Approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to marketing that product in those countries. The approval procedure varies
among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain
FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth
herein and approval by the FDA does not ensure approval by the regulatory authorities of any other country, nor does the approval
by foreign regulatory authorities in one country ensure approval by regulatory authorities in other foreign countries or the FDA.
If we fail to comply with these regulatory requirements or obtain and maintain required approvals, our target market will be reduced
and our ability to generate revenue from abroad will be adversely affected.
We have entered into collaborative arrangements that may
not result in marketable products.
We regularly enter into collaborative arrangements
to develop generic products for us to market in the U.S. We can offer no assurances that these arrangements will result in additional
approved products, or that we will be able to market the products at a profit. In addition, any expenses related to trials, or
additional studies required by the FDA, that we may incur in connection with these collaborative arrangements may negatively affect
our business, financial condition, operating results and cash flows
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Specifically:
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trials could be more costly than we anticipate;
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formulation development could take longer and be more costly than we expect; and
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we may be required to obtain specialized equipment in order to manufacture products on a commercial scale.
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Any of these events could have a material
adverse effect on our business, financial condition, operating results and cash flows.
Our growth and development will depend
on developing, commercializing and marketing new products, including both our own products and those developed with our collaboration
partners. If we do not do so successfully, our growth and development will be impaired.
Our future revenues and profitability will
depend, to a significant extent, upon our ability to successfully commercialize new generic pharmaceutical products in a timely
manner. As a result, we must continually develop and test new products, and these new products must meet regulatory standards and
receive requisite regulatory approvals. Products we are currently developing may or may not achieve the technology success or receive
the regulatory approvals or clearances necessary for us to market them. Furthermore, the development and commercialization process
is time-consuming and costly, and we cannot assure you that any of our products, if and when developed and approved, can be successfully
commercialized. Some of our collaboration partners may decide to make substantial changes to a product’s formulation or design,
may experience financial difficulties or have limited financial resources, any of which may delay the development, commercialization
and/or marketing of new products. In addition, if a co-developer on a new product terminates our collaboration agreement or does
not perform under the agreement, we may experience delays and, possibly, additional costs in developing and marketing that product.
The time necessary to develop generic
drugs may adversely affect whether, and the extent to which, we receive a return on our capital.
We generally begin our development activities
for a new generic drug product several years in advance of the patent expiration date of the brand-name drug equivalent. The development
process, including drug formulation, testing, and FDA review and approval, often takes three or more years. This process requires
that we expend considerable capital to pursue activities that do not yield an immediate or near-term return. Also, because of the
significant time necessary to develop a product, the actual market for a product at the time it is available for sale may be significantly
less than the originally projected market for the product, including the possibility that the product has become eligible for OTC
sales. If this were to occur, our potential return on our investment in developing the product, if approved for marketing by the
FDA, would be adversely affected and we may never receive a return on our investment in the product.
If we experience product recalls, we
may incur significant and unexpected costs, and our business reputation could be adversely affected.
We may be exposed to product recalls and
adverse public relations if our products are alleged to cause injury or illness, or if we are alleged to have violated governmental
regulations. A product recall could result in substantial and unexpected expenditures, which would reduce operating profit and
cash flow. In addition, a product recall may require significant management attention. Product recalls may hurt the value of our
brands and lead to decreased demand for our products. Product recalls also may lead to increased scrutiny by federal, state or
international regulatory agencies of our operations and increased litigation and could have a material adverse effect on our reputation,
business, financial condition, operating results and cash flows.
Dependence on a limited number of suppliers
of Human Health and Pharmaceutical Ingredients products could lead to delays, lost revenue or increased costs.
Our future operating results may depend
substantially on our suppliers’ ability to timely provide Human Health and Pharmaceutical Ingredients products in connection
with ANDAs and such suppliers’ ability to supply us with these ingredients or materials in sufficient volumes to meet our
production requirements. A number of the ingredients or materials that we use are available from only a single or limited number
of qualified suppliers, and may be used across multiple product lines. If there is a significant increase in demand for an ingredient
or other material resulting in an inability to meet demand, if an ingredient or material is otherwise in short supply or becomes
wholly unavailable, or if a supplier has a quality issue, we may experience delays or increased costs in obtaining that ingredient
or material. If we are unable to obtain sufficient quantities of ingredients or other necessary materials, we may experience production
delays in our supply.
Each of the following could also interrupt
the supply of, or increase the cost of, ingredients or other materials:
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an unwillingness of a supplier to supply ingredients or
other materials to us;
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consolidation of key suppliers;
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failure of a key supplier’s business process;
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a key supplier’s inability to access credit necessary
to operate its business; or
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failure of a key supplier to remain in business, to remain
an independent supplier, or to adjust to market conditions.
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Any interruption in the supply or increase
in the cost of ingredients or other materials provided by single or limited source suppliers could have a material adverse effect
on our reputation, business, financial condition, operating results and cash flows.
Our success in our Human Health segment
is linked to the size and growth rate of the generic pharmaceutical, vitamin, mineral and supplement markets and an adverse change
in the size or growth rate of these markets could have a material adverse effect on us.
An adverse change in size or growth rate
of the generic pharmaceutical, vitamin, mineral and supplement markets could have a material adverse effect on us. Underlying market
conditions are subject to change based on economic conditions, consumer preferences and other factors that are beyond our control,
including media attention and scientific research, which may be positive or negative.
Healthcare reform and a reduction in
the reimbursement levels by governmental authorities, HMOs, MCOs or other third-party payors could materially adversely affect
our business, financial condition, operating results and cash flows.
Third party payors increasingly challenge
pricing of pharmaceutical products. The trend toward managed healthcare, the growth of organizations such as HMOs and MCOs and
legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of pharmaceutical
products, resulting in lower prices and a reduction in product demand. Such cost containment measures and healthcare reform could
affect our ability to sell our products and could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
Any failure to comply with the complex
reporting and payment obligations under Medicare, Medicaid and other government programs may result in litigation or sanctions.
We are subject to various federal and state
laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims, marketing and pricing laws. We are also subject
to Medicaid and other government reporting and payment obligations that are highly complex and somewhat ambiguous. Violations of
these laws and reporting obligations are punishable by criminal and/or civil sanctions and exclusion from participation in federal
and state healthcare programs such as Medicare and Medicaid. The recent healthcare reform legislation made several changes to the
federal anti-kickback statute, false claims laws, and health care fraud statute such as increasing penalties and making it easier
for the government to bring sanctions against pharmaceutical companies. If our past, present or future operations are found to
be in violation of any of the laws described above or other similar governmental regulations, we may be subject to the applicable
penalty associated with the violation which could adversely affect our ability to operate our business and negatively impact our
financial results. Further, if there is a change in laws, regulations or administrative or judicial interpretations, we may have
to change our business practices or our existing business practices could be challenged as unlawful, which could have a material
adverse effect on our business, results of operations, financial condition and cash flows.
Our future results could be materially
affected by a number of public health issues whether occurring in the United States or abroad.
Public health issues, whether occurring
in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have a broader
adverse impact on consumer spending and confidence levels that would negatively affect our suppliers and customers. We may be required
to suspend operations in some or all of our locations, which could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
Our revenue stream and related gross
profit is difficult to predict.
Our revenue stream is difficult to predict
because it is primarily generated as customers place orders and customers can change their requirements or cancel orders. Many
of our sales orders are short-term and could be cancelled at any time. As a result, much of our revenue is not recurring from period
to period, which contributes to the variability of our results from period to period. In addition, certain of our products carry
a higher gross margin than other products, particularly in the Human Health and Pharmaceutical Ingredients segments. Reduced sales
of these higher margin products could have a material adverse effect on our operating results. We believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future performance.
From time to time we may need to rely
on licenses to proprietary technologies, which may be difficult or expensive to obtain.
We may need to obtain licenses to patents
and other proprietary rights held by third parties to develop, manufacture and market products. If we are unable to timely obtain
these licenses on commercially reasonable terms, our ability to commercially market our products may be inhibited or prevented,
which could have a material adverse effect on our business, financial condition, operating results and cash flows.
Changes to the industries and markets
that Aceto serves could have a material adverse effect on our business, financial condition, operating results and cash flows.
The business environment in which we operate
remains challenging. Portions of our operations are subject to the same business cycles as those experienced by automobile, housing,
and durable goods manufacturers. Our demand is largely derived from the demand for our customers’ products, which subjects
us to uncertainties related to downturns in our customers’ business and unanticipated customer production shutdowns or curtailments.
A material downturn in sales or gross profit due to weak end-user markets and loss of customers could have a material adverse effect
on our business, financial condition, operating results and cash flows.
Our operating results could fluctuate
in future quarters, which could adversely affect the trading price of our common stock.
Our operating results could fluctuate on
a quarterly basis as a result of a number of factors, including, among other things, the timing of contracts, orders, the delay
or cancellation of a contract, and changes in government regulations. Any one of these factors could have a significant impact
on our quarterly results. In some quarters, our revenue and operating results could fall below the expectations of securities analysts
and investors, which would likely cause the trading price of our common stock to decline.
We have significant inventories on hand.
The Company maintains significant inventories.
Any significant unanticipated changes in future product demand or market conditions, including, among other things, the current
uncertainty in the global market, could materially adversely affect the value of inventory and our business, financial condition,
operating results and cash flows.
Failure to obtain products from outside
manufacturers could adversely affect our ability to fulfill sales orders to our customers.
We rely on outside manufacturers to supply
products for resale to our customers. Manufacturing problems, including, among other things, manufacturing delays caused by plant
shutdowns, regulatory issues, damage or disruption to raw material supplies due to weather, including, among other things, any
potential effects of climate change, natural disaster or fire, could occur. If such problems occur, we cannot assure you that we
will be able to deliver our products to our customers profitably or on time.
Increases in the cost of shipping with
our third-party shippers could have a material adverse effect on our business, financial condition, operating results and cash
flows.
Shipping is a significant expense in the
operation of our business. Accordingly, any significant increase in shipping rates could have an adverse effect on our operating
results. Similarly, strikes or other service interruptions by those shippers could cause our operating expenses to rise and adversely
affect our ability to deliver products on a timely basis.
We could incur significant uninsured
environmental and other liabilities inherent in the chemical/pharmaceutical distribution industry that could materially adversely
affect our business, financial condition, operating results and cash flows.
The business of distributing chemicals
and pharmaceuticals is subject to regulation by numerous federal, state, local, and foreign governmental authorities. These regulations
impose liability for loss of life, damage to property and equipment, pollution and other environmental damage that could occur
in our business. Many of these regulations provide for substantial fines and remediation costs in the event of chemical spills,
explosions and pollution. While we believe that we are in substantial compliance with all current laws and regulations, we can
give no assurance that we will not incur material liabilities that are not covered by insurance or exceed our insurance coverage
or that such insurance will remain available on terms and at rates acceptable to us. Additionally, if existing environmental and
other regulations are changed, or additional laws or regulations are passed, the cost of complying with those laws could be substantial,
thereby materially adversely affecting our business, financial condition, operating results and cash flows.
In fiscal years 2011, 2009, 2008 and 2007,
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 PRP Group has
begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $1,700 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 and thus believes that, at most, it is a de minimis contributor to the site
contamination. Accordingly, the Company believes that the settlement offer is unreasonable. Management believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's financial condition or liquidity.
Our subsidiary, Arsynco, has environmental
remediation obligations in connection with its former manufacturing facility in Carlstadt, New Jersey. Estimates of how much it
would cost to remediate environmental contamination at this site have increased since the facility was closed in 1993. If the actual
costs are significantly greater than estimated, it could have a material adverse effect on our financial condition, operating results
and cash flows.
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 (“BCSA”). Arsynco is one of over 150 PRPs 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 PRPs and their financial strength. In
July 2014, Arsynco received notice from the U.S. Department of Interior (“USDOI”) regarding the USDOI’s intent
to perform a Natural Resource Damage (NRD) Assessment at the BCSA. Arsynco has to date declined to participate in the development
and performance of the NRD assessment process. Based on prior practice in similar situations, it is possible that the State may
assert a claim for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State
(or both) may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with
respect to Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with
that site. Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the
former owners of the Arsynco property. In September 2012, Arsynco entered into an agreement with three of the other PRPs that had
previously been impleaded into New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et
al., Docket No. ESX-L-9868-05 (the "NJDEP Litigation") and were considering impleading Arsynco into the same proceeding.
Arsynco entered into an agreement to avoid impleader. Pursuant to the agreement, Arsynco agreed to (1) a tolling period that would
not be included when computing the running of any statute of limitations that might provide a defense to the NJDEP Litigation;
(2) the waiver of certain issue preclusion defenses in the NJDEP Litigation; and (3) arbitration of certain potential future liability
allocation claims if the other parties to the agreement are barred by a court of competent jurisdiction from proceeding against
Arsynco. In July 2015, Arsynco was contacted by an allocation consultant retained by a group of the named PRPs, inviting Arsynco
to participate in the allocation among the PRPs’ investigation and remediation costs relating to the BCSA. Arsynco declined
that invitation. Since an amount of the liability cannot 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 currently known.
The distribution and sale of some of
our products are subject to prior governmental approvals and thereafter ongoing governmental regulation.
Our products are subject to laws administered
by federal, state and foreign governments, including the Toxic Substances Control Act as well as regulations requiring registration
and approval of many of our products. More stringent restrictions could make our products less desirable, which would adversely
affect our revenues and profitability. Some of our products are subject to the EPA registration and re-registration requirements,
and are registered in accordance with FIFRA. Such registration requirements are based, among other things, on data demonstrating
that the product will not cause unreasonable adverse effects on human health or the environment when used according to approved
label directions. Governmental regulatory authorities have required, and may require in the future, that certain scientific data
requirements be performed on our products and this may require us, on our behalf or in joint efforts with other registrants, to
perform additional testing. Responding to such requirements may cause delays in or the cessation of the sales of one or more of
our products which would adversely affect our profitability. We can provide no assurance that any testing approvals or registrations
will be granted on a timely basis, if at all, or that our resources will be adequate to meet the costs of regulatory compliance
or that the economic benefit of complying with the requirement will exceed our cost.
Incidents related to hazardous materials
could materially adversely affect our reputation, business, financial condition, operating results and cash flows.
Portions of our operations require the
controlled use of hazardous materials. Although we are diligent in designing and implementing safety procedures to comply with
the standards prescribed by federal, state, and local regulations, the risk of accidental contamination of property or injury to
individuals from these materials cannot be completely eliminated. In the event of such an incident, we could be liable for any
damages that result, which could materially adversely affect our reputation, business, financial condition, operating results and
cash flows.
We are also continuing to expand our business
in China and India, where environmental, health and safety regulations are still early in their development. As a result, we cannot
determine how these laws will be implemented and the impact of such regulation on the Company.
Violations of cGMP and other government
regulations could have a material adverse effect on our reputation, business, financial condition and results of operations.
All facilities and manufacturing techniques
used to manufacture pharmaceutical products for clinical use or for commercial sale in the United States and other Aceto markets
must be operated in conformity with current Good Manufacturing Practices ("cGMP") regulations as required by the FDA
and other regulatory bodies. Our suppliers’ facilities are subject to scheduled periodic regulatory and customer inspections
to ensure compliance with cGMP and other requirements applicable to such products. A finding that we or one or more of our suppliers
had materially violated these requirements could result in one or more regulatory sanctions, loss of a customer contract, disqualification
of data for client submissions to regulatory authorities and a mandated closing of our suppliers’ facilities, which in turn
could have a material adverse effect on our reputation, business, financial condition, operating results and cash flows.
Our business could give rise to product
liability claims that are not covered by insurance or indemnity agreements or exceed insurance policy or indemnity agreement limitations.
The marketing, distribution and use of pharmaceutical and chemical products involve substantial risk of product liability claims.
We could be held liable if any product we or our partners develop or distribute causes injury or is found otherwise unsuitable
during product testing, manufacturing, marketing or sale. A successful product liability claim that we have not insured against,
that exceeds our levels of insurance or for which we are not indemnified, may require us to pay a substantial amount of damages.
In the event that we are forced to pay such damages, this payment could have a material adverse effect on our reputation, business,
financial condition, operating results and cash flows.
Rising insurance costs, as well as the
inability to obtain certain insurance coverage for risks faced by us, could negatively impact profitability.
The cost of insurance, including workers
compensation, product liability and general liability insurance, has risen in recent years and may increase in the future. In response,
we may increase deductibles and/or decrease certain coverage to mitigate these costs. These increases and our increased risk due
to increased deductibles and reduced coverage could materially adversely affect our business, financial condition, operating results
and cash flows. Additionally, certain insurance coverage may not be available to us for risks faced by us. Sometimes the coverage
we obtain for certain risks may not be adequate to fully reimburse the amount of damage that we could possibly sustain. Should
either of these events occur, the lack of insurance to cover our entire loss could materially adversely affect our business, financial
condition, operating results and cash flows.
We source many of our products in China and
changes in the political and economic policies of China’s government could have a significant impact upon the business we
may be able to conduct in China and our financial condition, operating results and cash flows.
Our business operations could be materially
adversely affected by the current and future political environment in China. China has operated as a socialist state since the
mid-1900s and is controlled by the Communist Party of China. The Chinese government exerts substantial influence and control over
the manner in which companies, such as ours, must conduct business activities in China. China has only permitted provincial and
local economic autonomy and private economic activities since 1988. The government of China has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy, through regulation and state ownership. Our ability
to conduct business in China could be adversely affected by changes in Chinese laws and regulations, including, among others,
those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and
other matters. Under its current leadership, the government of China has been pursuing economic reform policies that encourage
private economic activity and greater economic decentralization. There is no assurance, however, that the government of China will
continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
China’s laws and regulations governing
our current business operations in China are sometimes vague and uncertain. Any changes in such laws and regulations could materially
adversely affect our business, financial condition, operating results and cash flows.
China’s legal system is a civil law
system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system
prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of China’s
laws and regulations, including among others, the laws and regulations governing the conduct of business in China, or the
enforcement and performance of arrangements with customers and suppliers in the event of the imposition of statutory liens,
death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws,
and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment,
corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively
new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation
and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing
or new laws or regulations may have on our business in China. If the relevant authorities find that we are in violation of China’s
laws or regulations, they would have broad discretion in dealing with such a violation, including, among other things: (i) levying
fines and (ii) requiring that we discontinue any portion or all of our business in China.
The promulgation of new laws, changes to
existing laws and the pre-emption of local regulations by national laws may adversely affect foreign businesses conducting
business in China. While the trend of legislation over the last 20 plus years has significantly enhanced the protection of foreign businesses
in China, there can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting
China’s political, economic or social life, will not affect China’s government’s ability to continue to support
and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
Our ability to compete in certain markets
we serve is dependent on our ability to continue to expand our capacity in certain offshore locations. However, as our presence
in these locations increases, we are exposed to risks inherent to these locations which could materially adversely affect our business,
financial condition, operating results and cash flows.
A significant portion of our outsourcing
has been shifted to India. As such, we are exposed to the risks inherent to operating in India including, among others, (1) a highly
competitive labor market for skilled workers which may result in significant increases in labor costs as well as shortages of qualified
workers in the future, and (2) the possibility that the U.S. federal government or the European Union may enact legislation which
may disincentivize customers from producing in their local countries which would reduce the demand for the services we provide
in India and could materially adversely affect our business, financial condition, operating results and cash flows.
Fluctuations in foreign currency exchange
rates could materially adversely affect our business, financial condition, operating results and cash flows.
A substantial portion of our revenue is
denominated in currencies other than the U.S. dollar because certain of our foreign subsidiaries operate in their local currencies.
Our business, financial condition, operating results and cash flows therefore could be materially adversely affected by fluctuations
in the exchange rate between foreign currencies and the U.S. dollar.
Failure to comply with U.S. or non-U.S.
laws regulating trade, such as the U.S. Foreign Corrupt Practices Act, could result in adverse consequences, including fines, criminal
sanctions, or loss of access to markets.
We are subject to the U.S. Foreign Corrupt
Practices Act (“FCPA”), which, among other things, prohibits corporations and individuals from paying, offering to
pay, or authorizing the payment of anything of value to any foreign government official, government staff member, political party,
or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity.
The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect their transactions
and to devise and maintain an adequate system of internal accounting controls. While our employees and agents are required to comply
with these laws, we cannot assure you that our internal policies and procedures will always protect us from violations of these
laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of events could
materially adversely affect our reputation, business, financial condition, operating results and cash flows.
Tax legislation and assessments by various
tax authorities could be materially different than the amounts we have provided for in our consolidated financial statements.
We are regularly audited by federal, state,
and foreign tax authorities. From time to time, these audits could result in proposed assessments. While we believe that we have
adequately provided for any such assessments, future settlements could be materially different than we have provided for and thereby
materially adversely affect our earnings and cash flows.
We operate in various tax jurisdictions, and although we believe
that we have provided for income and other taxes in accordance with the relevant regulations, if the applicable regulations were
ultimately interpreted differently by a taxing authority, we could be exposed to additional tax liabilities. Our effective tax
rate is based on our expected geographic mix of earnings, statutory rates, intercompany transfer pricing, and enacted tax rules.
Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis.
We believe our tax positions, including, among others, intercompany transfer pricing policies, are consistent with the tax laws
in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional
tax authorities and could have a significant impact on our effective tax rate. In addition, from time to time, various legislative
initiatives could be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate
will not be adversely affected by these initiatives. In connection with the Organization for Economic Cooperation and Development
Base Erosion and Profit Shifting (BEPS) project, starting in 2017, companies may be required to disclose more information to tax
authorities on operations around the world. The Company regularly assesses the likely outcomes of its tax audits to determine the
appropriateness of its tax reserves. However, any tax authority could take a position on tax treatment that is contrary to the
Company’s expectations, which could result in tax liabilities in excess of reserves.
The U.S. Congress and Trump administration may make substantial
changes to fiscal, tax, regulation and other federal policies that may adversely affect our business, financial condition, operating
results and cash flows.
The Trump administration has called for
substantial changes to U.S. fiscal and tax policies, which may include comprehensive corporate and individual tax reform. In addition,
the Trump administration has called for significant changes to U.S. trade, healthcare, immigration, foreign, and government regulatory
policy. To the extent the U.S. Congress or Trump administration implements changes to U.S. policy, those changes may impact, among
other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare,
the U.S. regulatory environment, inflation and other areas. Although we cannot predict the impact, if any, of these changes to
our business, they could adversely affect our business, financial condition, operating results and cash flows. Until we know what
policy changes are made and how those changes impact our business and the business of our competitors over the long term, we will
not know if, overall, we will benefit from them or be negatively affected by them.
Our business is subject to a number
of global economic risks.
From time to time, financial markets in
the United States, Europe and Asia have and could experience extreme disruption, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining
valuations of others. Governments have taken unprecedented actions intending to address extreme market conditions that include
severely restricted credit and declines in values of certain assets.
An economic downturn in the businesses
or geographic areas in which we sell our products could reduce demand for our products and result in a decrease in revenue that
could have a negative impact on our results of operations. Continued volatility and disruption of financial markets in the United
States, Europe and Asia could limit our customers’ ability to obtain adequate financing or credit to purchase our products
or to pay for outstanding invoices owed to us or to maintain operations, and result in a decrease in revenue or cash collections
that could have a material adverse effect on our business, financial condition, operating results and cash flows.
We have a significant amount of bank
loans.
At June 30, 2017, we have $90,000 of revolving
bank loans outstanding and $142,500 outstanding in a bank term loan. If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on the credit facility, it will be in default. This current debt arrangement requires
us to comply with several financial covenants. Our ability to comply with these covenants may be affected by events beyond our
control and could result in a default under our credit facility, which could have a material adverse effect on our business, financial
condition, operating results and cash flows.
Even if we are able to meet our debt service
obligations, the amount of debt we have could adversely affect us by limiting our ability to obtain any necessary financing in
the future for working capital, dividend payments, capital expenditures, debt service requirements, or other purposes. It also
places us at a disadvantage relative to our competitors who have lower levels of debt, while making us more vulnerable to a downturn
in our business or the economy in general. It also requires us to use a substantial portion of our cash to pay principal and interest
on our debt, instead of investing those funds in the business.
Making interest and principal payments
on our Convertible Senior Notes due 2020 (the “Notes”), which were issued in November 2015, requires and will continue
to require a significant amount of cash, and we may not have sufficient cash flows from our business to make future interest and
principal payments.
Our ability to continue to make scheduled
interest payments and to make future principal payments on the Notes depends on our future performance, which is subject to economic,
financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flows from operations
sufficient to service our debt. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives,
such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not
be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default
on our debt obligations, including the Notes, which could have a material adverse effect on our business, financial condition,
operating results and cash flows.
We may not have the ability to raise
the funds necessary to settle conversions of the Notes that we issued in November 2015 or to repurchase such Notes upon a fundamental
change, and our senior secured credit facility contains, and our future debt may contain, limitations on our ability to pay cash
upon conversion or repurchase of such Notes.
Holders of our Notes have the right to
require us to repurchase their notes upon the occurrence of certain fundamental events (each, a “fundamental change”)
at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and
unpaid interest, if any. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our common stock
to settle such conversion (other than paying cash in lieu of delivering any fractional shares), we will be required to make cash
payments in respect of the Notes being converted. However, we may not have enough available cash or be able to obtain financing
at the time we are required to make repurchases of notes surrendered therefor or pay cash upon conversions of notes being converted.
In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes is limited by agreements governing
our existing senior secured credit facility, and may be further limited by law, by regulatory authority or by agreements governing
our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the indenture governing the
Notes or to pay any cash payable on future conversions of the Notes as required by the indenture would constitute a default under
the indenture. A default under the indenture or the fundamental change itself could, if not cured within applicable time periods,
lead to a default under agreements governing our existing senior secured credit facility, and could also lead to a default under
agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable
notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments
upon conversions thereof.
Our senior secured credit facility limits
our ability to pay any cash amount upon the conversion or repurchase of the Notes.
Our existing senior secured credit facility
prohibits us from making any cash payments on the conversion or repurchase of the Notes if an event of default exists under that
facility or if, after giving effect to such conversion or repurchase (and any additional indebtedness incurred in connection with
such conversion or a repurchase), we would not be in pro forma compliance with our financial covenants under that facility. Any
new credit facility that we may enter into in the future may have similar restrictions. Our failure to make cash payments upon
the conversion or repurchase of the Notes as required under the terms of the Notes would permit holders of the Notes to accelerate
our obligations under the Notes.
The conditional conversion feature of
the Notes, if triggered, may adversely affect our financial condition and operating results
.
In the event the conditional conversion
feature of the Notes is triggered, holders of notes will be entitled to convert the Notes at any time during specified periods
at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering
solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to
settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In
addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify
all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in
a material reduction of our net working capital.
The accounting method for convertible
debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards
Board (“FASB”) issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification
470-20, Debt with Conversion and Other Options (“ASC 470-20”). Under ASC 470-20, an entity must separately account
for the liability and equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or
partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20
on the accounting for the Notes is that the equity component is required to be included in the capital in excess of par value section
of shareholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as original
issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to record a greater
amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value
of the Notes to their face amount over the term of the Notes. We will report lower net income in our financial results because
ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s
coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and
the trading price of the Notes.
In addition, under certain circumstances,
convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing
the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the
calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount.
Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of
shares of common stock that would be necessary to settle such excess are issued (which is the policy we intend to follow for settling
such excess). If we are unable to use the treasury stock method in the future for the shares issuable upon conversion of the Notes,
then our diluted earnings per share would be adversely affected.
We may need to raise additional capital
to fund larger acquisitions and investments in the future which may not be available on acceptable terms or at all.
Acquisitions and investments in new products
are an important component of our growth strategy. Larger acquisitions and investments will require us to raise additional
capital. We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments.
If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience dilution,
and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing shareholders.
If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, requiring us
to pay additional interest expense and potentially lowering our credit ratings. We may not be able to market such issuances
on favorable terms, or at all, in which case, we may not be able to develop or enhance our products, execute our business plan,
take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements.
Our acquisition strategy is subject
to a number of inherent risks, including, among other things, the risk that our acquisitions may not be successful.
We continually seek to expand our business
through acquisitions of other companies that complement our own and through joint ventures, licensing agreements and other arrangements.
Any decision regarding strategic alternatives would be subject to inherent risks, and we cannot guarantee that we will be able
to identify the appropriate opportunities, successfully negotiate economically beneficial terms, successfully integrate any acquired
business, retain key employees, or achieve the anticipated synergies or benefits of the strategic alternative selected. Acquisitions
can require significant capital resources and divert our management’s attention from our existing business. Additionally,
we may issue additional shares in connection with a strategic transaction, thereby diluting the holdings of our existing common
shareholders, incur debt or assume liabilities, become subject to litigation, or consume cash, thereby reducing the amount of cash
available for other purposes.
If we are unable to manage our growth,
our business, financial condition, operating results and cash flows could be materially adversely affected.
We have experienced rapid growth in the
past several years, including the acquisition of membership interests of PACK Pharmaceuticals, LLC in fiscal 2014 and the acquisition
of certain generic products and related assets of entities formerly known as Citron Pharma LLC and its affiliate Lucid Pharma in
fiscal 2017. This growth has required us to expand, upgrade, and improve our administrative, operational, and management systems,
internal controls and resources. Failing to manage growth effectively could have a material adverse effect on our business, financial
condition, operating results and cash flows.
Any acquisition that we make could result
in a substantial charge to our earnings.
We have previously incurred charges to
our earnings in connection with acquisitions, and may continue to experience charges to our earnings for any acquisitions that
we make, including, among other things, contingent consideration and impairment charges. These costs may also include substantial
severance and other closure costs associated with eliminating duplicate or discontinued products, employees, operations and facilities.
These charges could have a material adverse effect on our results of operations and they could have a material adverse effect on
the market price of our common stock.
We have significant goodwill and other
intangible assets. Consequently, potential impairment of goodwill and other intangibles may significantly impact our profitability.
Under U.S. generally accepted accounting
principles (“GAAP”), we are required to evaluate goodwill for impairment at least annually. If we determine that the
fair value is less than the carrying value, an impairment loss will be recorded in our statement of income. The determination of
fair value is a highly subjective exercise and can produce significantly different results based on the assumptions used and methodologies
employed. If our projected long-term sales growth rate, profit margins or terminal rate are considerably lower and/or the assumed
weighted average cost of capital is considerably higher, future testing may indicate impairment and we would have to record a non-cash
goodwill impairment loss in our statement of income.
Our information technology systems could
fail to perform adequately or we may fail to adequately protect such information technology systems against data corruption, cyber-based
attacks, or network security breaches.
We rely on information technology networks
and systems, including the Internet, to process, transmit, and store electronic information. In particular, we depend on our information
technology infrastructure to effectively manage its business data, supply chain, logistics, accounting, and other business processes
and electronic communications between our personnel and our customers and suppliers. If we do not allocate and effectively manage
the resources necessary to build and sustain an appropriate technology infrastructure, our business, financial condition, operating
results and cash flows therefore could be materially adversely affected. In addition, security breaches or system failures of this
infrastructure can create system disruptions, shutdowns, or unauthorized disclosure of confidential information. If we are unable
to prevent such breaches or failures, our operations could be disrupted, or we may suffer financial damage or loss because of lost
or misappropriated information.
Our business may be adversely affected
if we encounter complications in connection with the upgrade and implementation of our enterprise resource planning (“ERP”)
system, our information technology systems and infrastructure. Upgrading and integrating our business systems could result in implementation
issues and business disruptions.
In recent years, we have implemented or
planned implementations of a new ERP system at all of our global locations. We also are planning to implement a new ERP system
at our Rising subsidiary, which would include recently acquired assets during fiscal 2017. In general, the process of planning
and preparing for these types of implementations is extremely complex and we are required to address a number of challenges including
data conversion, system cutover and user training. Problems in any of these areas could cause operational problems during implementation
including delayed shipments, missed sales, billing and accounting errors and other operational issues. While we have invested significantly
in the operation and protection of data and information technology, there can be no assurance that our efforts will prevent service
interruptions, or identify breaches in our systems. Prolonged interruptions or significant breaches could materially adversely
affect our business, financial condition, operating results and cash flows.
Our potential liability arising from
our commitment to indemnify our directors, officers and employees could materially adversely affect our business, financial condition,
operating results and cash flows.
We have committed in our bylaws to indemnify
our directors, officers and employees against the reasonable expenses incurred by these persons in connection with any action brought
against them in such capacity, except in matters as to which they are adjudged to have breached a duty to us. The maximum potential
amount of future payments we could be required to make under this provision is unlimited. While we have ”directors and officers”
insurance policies that should cover all or some of this potential exposure, we could be adversely affected if we are required
to pay damages or incur legal costs in connection with a claim above our insurance limits.
Our business could be materially adversely
affected by terrorist activities.
Our business depends on the free flow of
products and services through the channels of commerce worldwide. Instability due to military, terrorist, political and economic
actions in other countries could materially disrupt our overseas operations and export sales. In fiscal years 2017 and 2016, approximately
27% and 32%, respectively of our revenues were attributable to operations conducted abroad and to sales generated from the United
States to foreign countries. In addition, in fiscal year 2017, approximately 62% and 17% of our purchases came from Asia and Europe,
respectively. In addition, in certain countries where we currently operate or export, intend to operate or export, or intend to
expand our operations, we could be subject to other political, military and economic uncertainties, including, among other things,
labor unrest, restrictions on transfers of funds and unexpected changes in regulatory environments.
We rely heavily on key executives for
our financial performance.
Our financial performance is highly dependent
upon the efforts and abilities of our key executives. The loss of the services of any of our key executives could therefore have
a material adverse effect upon our financial position and operating results. We do not maintain “key-man” insurance
on any of our key executives.
Shortage of qualified and technical
personnel in a competitive marketplace may prevent us from growing our business.
We may be unable to hire or retain qualified
and technical employees and there is substantial competition for highly skilled employees. If we fail to attract and retain key
employees, our business could be adversely impacted.
Litigation could harm our business and
our management and financial resources.
Substantial, complex or extended litigation
could cause us to incur large expenditures and could distract our management. For example, lawsuits by employees, stockholders,
collaborators, distributors, customers, or end-users of our products or services could be very costly and substantially disrupt
our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure you that we
will always be able to resolve such disputes out of court or on favorable terms.
The market price of our stock could
be volatile.
The market price of our common stock has
been subject to volatility and may continue to be volatile in the future, due to a variety of factors, including, among other things:
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quarterly fluctuations in our operating income and earnings per share results
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technological innovations or new product introductions by us or our competitors
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tariffs, duties and other trade barriers including, among other things, anti-dumping duties
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disputes concerning patents or proprietary rights
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changes in earnings estimates and market growth rate projections by market research analysts
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any future issuances of our common stock, which may include primary offerings for cash, stock splits,
issuances in connection with business acquisitions, restricted stock/units and the grant or exercise of stock options from time
to time
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sales of common stock by existing security holders
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securities class actions or other litigation
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The market price for our common stock may
also be affected by our ability to meet analysts' expectations. Any failure to meet such expectations, even slightly, could have
an adverse effect on the market price of our common stock. In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies.
Our stock repurchase program could affect
the price of our common stock and increase volatility. The repurchase program may be suspended or terminated at any time, which
could result in a decrease in the trading price of our common stock.
In May 2017, the Board of Directors of
the Company authorized the continuation of the Company’s stock repurchase program, expiring in May 2020. Under the stock
repurchase program, the Company is authorized, but not obligated, to purchase up to 5,000 shares of common stock in open market
or private transactions, at prices not to exceed the market value of the common stock at the time of such purchase. Repurchases
pursuant to our stock repurchase program could affect our stock price and increase the volatility of our common stock. The existence
of a stock repurchase program could also potentially reduce the market liquidity for our stock. Although the stock repurchase program
is intended to enhance long-term stockholder value, we cannot provide assurance that this will occur. The stock repurchase program
may be suspended or terminated at any time, and we have no obligation to repurchase any amount of our common stock under the program.
There are inherent uncertainties involved
in estimates, judgments and assumptions used in preparing financial statements in accordance with U.S. generally accepted accounting
principles. Any changes in the estimates, judgments and assumptions we use could have a material adverse effect on our business,
financial condition, operating results and cash flows.
The consolidated financial statements included
in the periodic reports we file with the SEC are prepared in accordance with GAAP. Preparing financial statements in accordance
with GAAP involves making estimates, judgments and assumptions, including accruals for chargebacks, rebates, returns, partnered
products and other allowances, that affect reported amounts of assets, liabilities, revenues, expenses and income. Estimates, judgments
and assumptions are inherently subject to change, and any such changes could result in corresponding changes to the reported amounts.
Changes in accounting standards issued
by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial
statements.
Our financial statements are subject to
the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time-to-time we are required to
adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible
that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated
financial statements and that such changes could have a material adverse effect on our results of operations and financial condition.
Failure to maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act could have material adverse effect on our business and stock
price.
Section 404 of the Sarbanes-Oxley
Act requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each
fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in
our Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to report on our
internal controls over financial reporting. If we fail to maintain the adequacy of our internal controls, we cannot assure you
that we will be able to conclude in the future that we have effective internal controls over financial reporting. If we fail to
maintain effective internal controls, we might be subject to sanctions or investigation by regulatory authorities, such as the
Securities and Exchange Commission or NASDAQ. Any such action could adversely affect our financial results and the market price
of our common stock and may also result in delayed filings with the Securities and Exchange Commission. For example, in connection
with the revisions made in this Form 10-K/A, management re-evaluated the effectiveness of our internal control over financial reporting
as of June 30, 2017 and concluded that adjustments related to the misapplication of cash in the year ended June 30, 2015 demonstrated
that there was a material weakness in the design and effectiveness of our internal control over financial reporting, in that our
system of internal control did not generate a report that could be used by management to assure that precision in the review of
the aging of trade receivables was adequate. As a result of this material weakness, a reasonable possibility existed that a material
misstatement in trade receivables in our annual or interim financial statements could occur and not be prevented or detected on
a timely basis and, therefore, that we did not maintain effective internal control over financial reporting as of June 30, 2017.
See “Part II, Item 9A - Controls and Procedures”. While management believes that it has remediated the underlying causes
of this material weakness, if our remediation efforts do not operate effectively, if we are unsuccessful in implementing or following
our remediation efforts, or if we are otherwise unable to remediate the material weakness, this may result in untimely or inaccurate
reporting of our financial results.
Compliance with changing regulation
of corporate governance and public disclosure could result in additional expenses.
Complying with changing laws, regulations
and standards relating to corporate governance and public disclosure, including, among others, the Sarbanes-Oxley Act of 2002 and
new SEC regulations, will require the Company to expend additional resources. We are committed to maintaining the highest standards
of corporate governance and public disclosure. As a result, we may be required to continue to invest necessary resources to comply
with evolving laws, regulations and standards, and this investment could result in increased expenses and a diversion of management
time and attention from revenue-generating activities.
The expansion of social media platforms
present new risks and challenges, which could have a material adverse effect on our reputation, business, financial condition,
operating results and cash flows.
The inappropriate use of certain media
vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection and/or
dissemination of personally identifiable information. In addition, negative posts or comments about us on any social networking
website could seriously damage our reputation. Further, the disclosure of non-public company sensitive information through external
media channels could lead to information loss as there might not be structured processes in place to secure and protect information.
If our non-public sensitive information is disclosed or if our reputation is seriously damaged through social media, it could have
a material adverse effect on our business, financial condition, operating results and cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(1) Description of Business
Aceto Corporation and subsidiaries (“Aceto”
or the “Company”) is primarily engaged in the sourcing, regulatory support, quality assurance, development, marketing,
sales and distribution of finished dosage form generic pharmaceuticals, nutraceutical products, pharmaceutical intermediates and
active ingredients, agricultural protection products and specialty chemicals used principally as finished products or raw materials
in the pharmaceutical, nutraceutical, agricultural, coatings and industrial chemical consuming industries.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Company has identified and recorded an
adjustment related to the misapplication of cash in the year ended June 30, 2015. The correction resulted in a $4,007 decrease
to trade receivables as of June 30, 2015, 2016 and 2017, a $1,402 increase to other receivables as of June 30, 2015, 2016 and 2017,
a $4,007 reduction in net sales for the year ended June 30, 2015 and a $2,605 reduction in net income for the year ended June 30,
2015. The Company has performed a qualitative and quantitative analysis of this misapplication and has determined that it is not
material to fiscal year 2015, however, the Company has corrected these amounts in the historical periods presented in these financial
statements for the three years ended June 30, 2017.
Principles of Consolidation
The consolidated financial statements include
the financial statements of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions
are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements and the disclosure
of contingent assets and liabilities at the date of the financial statements. These judgments can be subjective and complex, and
consequently actual results could differ from those estimates and assumptions. The Company’s most critical accounting policies
relate to revenue recognition; allowance for doubtful accounts; inventory; goodwill and other indefinite-life intangible assets;
long-lived assets; environmental matters and other contingencies; income taxes; stock-based compensation; and purchase price allocation.
Cash Equivalents
The Company considers all highly liquid debt
instruments with original maturities at the time of purchase of three months or less to be cash equivalents. Included in cash equivalents
as of June 30, 2017 and June 30, 2016 is $220 and $104, respectively, of restricted cash.
Investments
The Company classifies investments in marketable
securities as trading, available-for-sale or held-to-maturity at the time of purchase and periodically re-evaluates such classifications.
Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Held-to-maturity securities
are recorded at cost and are adjusted for the amortization or accretion of premiums or discounts over the life of the related security.
Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate
component of accumulated other comprehensive income (loss) until realized. In determining realized gains and losses, the cost of
securities sold is based on the specific identification method. Interest and dividends on the investments are accrued at the balance
sheet date.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Inventory
Inventory, which consists principally of finished
goods, are stated at the lower of cost (first-in first-out method) and net realizable value. The Company writes down its inventory
for estimated excess and obsolete goods by an amount equal to the difference between the carrying cost of the inventory and net
realizable value based upon assumptions about future demand and market conditions.
Environmental and Other Contingencies
The Company establishes accrued liabilities
for environmental matters and other contingencies when it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. If the contingency is resolved for an amount greater or less than the accrual, or the Company’s
share of the contingency increases or decreases, or other assumptions relevant to the development of the estimate were to change,
the Company would recognize an additional expense or benefit in the consolidated statements of income in the period such determination
was made.
Pension Benefits
In connection with certain historical acquisitions
in Germany, the Company assumed defined benefit pension plans covering certain employees who meet certain eligibility requirements.
The net pension benefit obligations recorded and the related periodic costs are based on, among other things, assumptions of the
discount rate, estimated return on plan assets, salary increases and the mortality of participants. The obligation for these claims
and the related periodic costs are measured using actuarial techniques and assumptions. Actuarial gains and losses are deferred
and amortized over future periods. The Company’s plans are funded in conformity with the funding requirements of applicable
government regulations.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive
loss as of June 30, 2017 and 2016 are as follows:
|
|
2017
|
|
|
2016
|
|
Cumulative foreign currency translation adjustments
|
|
$
|
(4,340
|
)
|
|
$
|
(6,120
|
)
|
Fair value of interest rate swaps
|
|
|
(581
|
)
|
|
|
-
|
|
Defined benefit plans, net of tax
|
|
|
(191
|
)
|
|
|
(205
|
)
|
Total
|
|
$
|
(5,112
|
)
|
|
$
|
(6,325
|
)
|
The foreign currency translation adjustments
for the years ended June 30, 2017 and 2016 primarily relate 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.
Common Stock
At the annual meeting of shareholders of the
Company, held on December 15, 2015, the Company’s shareholders approved the
proposal to amend
Aceto’s Certificate of Incorporation to increase the total number of authorized shares of common stock from 40,000 shares
to 75,000 shares.
Cash dividends of $0.065 per common share were
paid in September, December, March and June of fiscal year 2017. Cash dividends of $0.06 per common share were paid in September,
December, March and June of fiscal years 2016 and 2015. On August 24, 2017, the Company's board of directors declared a regular
quarterly dividend of $0.065 per share to be distributed on September 21, 2017 to shareholders of record as of September 8, 2017.
On May 4, 2017, the Board of Directors of the
Company authorized the continuation of the Company’s stock repurchase program, expiring in May 2020. Under the stock repurchase
program, the Company is authorized to purchase up to 5,000 shares of common stock in open market or private transactions, at prices
not to exceed the market value of the common stock at the time of such purchase. The Company did not repurchase shares in fiscal
2017 or fiscal 2016.
The Board of Directors has authority under
the Company’s Restated Certificate of Incorporation to issue shares of preferred stock with voting and other relative rights
to be determined by the Board of Directors.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Stock-based Compensation
GAAP requires that all stock-based compensation
be recognized as an expense in the financial statements and that such costs be measured at the fair value of the award. GAAP also
requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows.
All restricted stock grants include a service
requirement for vesting. The Company has also granted restricted stock units that include either a performance or market condition.
The fair value of restricted stock unit with either solely a service requirement or with the combination of service and performance
requirements is based on the closing fair market value of Aceto’s common stock on the date of grant. The fair value of market
condition-based awards is estimated at the date of grant using a binomial lattice model or Monte Carlo Simulation. All models incorporate
various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the
awards. Stock-based compensation expense is recognized on a straight-line basis over the service period or over our best estimate
of the period over which the performance condition will be met, as applicable.
Revenue Recognition
The Company recognizes revenue from product
sales at the time of shipment and passage of title and risk of loss to the customer. The Company has no acceptance or other post-shipment
obligations and does not offer product warranties or services to its customers.
Sales are recorded net of estimated returns
of damaged goods from customers, which historically have been immaterial, and sales incentives offered to customers. Sales incentives
include volume incentive rebates. The Company records volume incentive rebates based on the underlying revenue transactions that
result in progress by the customer in earning the rebate.
The Company has arrangements with various third
parties, such as drug store chains and managed care organizations, establishing prices for its finished dosage form generics. While
these arrangements are made between Aceto and its customers, the customers independently select a wholesaler from which they purchase
the products. Alternatively, certain wholesalers may enter into agreements with the customers, with the Company’s concurrence,
which establishes the pricing for certain products which the wholesalers provide. Upon each sale of finished dosage form generics,
estimates of chargebacks, rebates, returns, government reimbursed rebates, sales discounts and other adjustments are made. These
estimates are based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers,
and other factors known to management at the time of accrual. These estimates are recorded as reductions to gross revenues, with
corresponding adjustments either as a reduction of accounts receivable or as a liability for price concessions.
Under certain arrangements, Rising will issue
a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler
and the customer’s contract price. As sales to the large wholesale customers increase or decrease, the reserve for chargebacks
will also generally increase or decrease. The provision for chargebacks varies in relation to changes in sales volume, product
mix, pricing and the level of inventory at the wholesalers. The Company continually monitors the reserve for chargebacks and makes
adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.
The Company estimates its provision for returns
of finished dosage generics based on historical experience, product expiration dates, changes to business practices, credit terms
and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the
past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes
adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve
for returns increases as net sales increase.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Government rebate accruals are based on estimated
payments due to governmental agencies for purchases made by third parties under various governmental programs. Other rebates are
offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase
product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of
net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. The Company
provides a provision for government reimbursed rebates and other rebates at the time of sale based on contracted rates and historical
redemption rates. Assumptions used to establish the provision include level of customer inventories, contract sales mix and average
contract pricing. Aceto regularly reviews the information related to these estimates and adjusts the provision accordingly.
Sales discount accruals are based on payment
terms extended to customers.
The following table summarizes activity in
the consolidated balance sheet for contra assets and liability for price concessions for the years ended June 30, 2017, 2016 and
2015:
|
|
Accruals for Chargebacks, Rebates, Returns and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Other
|
|
|
Sales
|
|
|
|
Chargebacks
|
|
|
Returns
|
|
|
Reimbursed Rebates
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at June 30, 2014
|
|
$
|
10,986
|
|
|
$
|
20,249
|
|
|
$
|
1,005
|
|
|
$
|
3,630
|
|
|
$
|
690
|
|
Current year provision
|
|
|
208,965
|
|
|
|
21,403
|
|
|
|
4,259
|
|
|
|
36,923
|
|
|
|
9,381
|
|
Credits issued during the year
|
|
|
(187,784
|
)
|
|
|
(10,960
|
)
|
|
|
(4,326
|
)
|
|
|
(36,218
|
)
|
|
|
(7,389
|
)
|
Balance at June 30, 2015
|
|
$
|
32,167
|
|
|
$
|
30,692
|
|
|
$
|
938
|
|
|
$
|
4,335
|
|
|
$
|
2,682
|
|
Current year provision
|
|
|
247,186
|
|
|
|
7,618
|
|
|
|
5,124
|
|
|
|
90,915
|
|
|
|
10,267
|
|
Credits issued during the year
|
|
|
(256,638
|
)
|
|
|
(15,482
|
)
|
|
|
(4,750
|
)
|
|
|
(88,048
|
)
|
|
|
(10,526
|
)
|
Balance at June 30, 2016
|
|
$
|
22,715
|
|
|
$
|
22,828
|
|
|
$
|
1,312
|
|
|
$
|
7,202
|
|
|
$
|
2,423
|
|
Acquisitions
|
|
|
23,526
|
|
|
|
1,496
|
|
|
|
4,500
|
|
|
|
28,944
|
|
|
|
2,360
|
|
Current year provision
|
|
|
431,606
|
|
|
|
19,666
|
|
|
|
7,694
|
|
|
|
162,023
|
|
|
|
20,129
|
|
Credits issued during the year
|
|
|
(417,928
|
)
|
|
|
(11,631
|
)
|
|
|
(4,642
|
)
|
|
|
(158,836
|
)
|
|
|
(18,875
|
)
|
Balance at June 30, 2017
|
|
$
|
59,919
|
|
|
$
|
32,359
|
|
|
$
|
8,864
|
|
|
$
|
39,333
|
|
|
$
|
6,037
|
|
Credits issued during a given period represent
cash payments or credit memos issued to the Company’s customers as settlement for the related reserve. Management has the
experience and access to relevant information that it believes is necessary to reasonably estimate the amounts of such deductions
from gross revenues. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly,
if and when actual experience differs from previous estimates. The Company has not experienced any significant changes in its estimates
as it relates to its chargebacks, rebates or sales discounts in each of the years in the three year period ended June 30, 2017.
During the year ended June 30, 2015, the Company recorded $3,497 in additional gross profit related to a change in estimate for
product returns due to the most recent returns experience. The Company had not experienced any significant changes in its estimates
as it relates to its product returns during the years ended June 30, 2017 and June 30, 2016.
Partnered Products
The Company has various products that are subject
to one of two types of collaborative arrangements with certain pharmaceutical companies. One type of arrangement relates to the
Company’s finished dosage form generics business acting strictly as a distributor and purchasing products at arm’s
length; in that type of arrangement, there is no profit sharing element. The second type of collaborative arrangement results in
a profit sharing agreement between the Company and a developer and/or manufacturer of a finished dosage form generic drug. Both
types of collaborative arrangements are conducted in the ordinary course of Rising’s business. The nature and purpose of
both of these arrangements is for the Company to act as a distributor of finished dose products to its customers. Under these
arrangements, the Company maintains distribution rights with respect to specific drugs within the U.S. marketplace. Generally,
the distribution rights are exclusive rights in the territory. In certain arrangements, the Company is required to maintain
service level minimums including, but not limited to, market share and purchase levels, in order to preserve the exclusive rights.
The Company’s accounting policy with respect to these collaborative arrangements calls for the Company to present the sales
and associated costs on a gross basis, with the amounts of the shared profits earned by the pharmaceutical companies on sales of
these products, if applicable, included in cost of sales in the consolidated statements of income. The shared profits are settled
on a quarterly basis. For each of the fiscal years 2017, 2016 and 2015, there was approximately $54,454, $41,036 and $51,352 respectively,
of shared profits included in cost of sales, related to these types of collaborative arrangements. In the case of a collaborative
arrangement where the Company solely acts as a distributor and purchases product at arm’s length, the costs of those purchases
are included as a cost of sales similar to any other purchase arrangement.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Shipping and Handling Fees and Costs
All amounts billed to a customer in a sales
transaction related to shipping and handling represent revenues earned and are included in net sales. The costs incurred by the
Company for shipping and handling are reported as a component of cost of sales. Cost of sales also includes inbound freight, receiving,
inspection, warehousing, distribution network, and customs and duty costs.
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 following table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding for the fiscal years ended June 30, 2017, 2016 and 2015:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
32,283
|
|
|
|
29,110
|
|
|
|
28,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock awards and units
|
|
|
349
|
|
|
|
471
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
32,632
|
|
|
|
29,581
|
|
|
|
29,247
|
|
The Convertible Senior Notes (see Note 9) will
only be included in the dilutive net income per share calculations using the treasury stock method during periods in which the
average market price of Aceto’s common stock is above the applicable conversion price of the Convertible Senior Notes, or
$33.215 per share, and the impact would not be anti-dilutive.
Income Taxes
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Property and Equipment
Property and equipment are stated at cost and
are depreciated using the straight line method over the estimated useful lives of the related asset. The Company allocates depreciation
and amortization to cost of sales. Expenditures for improvements that extend the useful life of an asset are capitalized. Ordinary
repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any related gains or losses are included in income.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The components of property and equipment were
as follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
Estimated useful
life (years)
|
|
Machinery and equipment
|
|
$
|
398
|
|
|
$
|
405
|
|
|
|
3-7
|
|
Leasehold improvements
|
|
|
979
|
|
|
|
1,056
|
|
|
|
Shorter of asset life or lease term
|
|
Computer equipment and software
|
|
|
7,255
|
|
|
|
6,048
|
|
|
|
3-5
|
|
Furniture and fixtures
|
|
|
2,094
|
|
|
|
2,365
|
|
|
|
5-10
|
|
Automobiles
|
|
|
184
|
|
|
|
184
|
|
|
|
3
|
|
Building
|
|
|
8,678
|
|
|
|
8,690
|
|
|
|
20
|
|
Land
|
|
|
1,967
|
|
|
|
1,960
|
|
|
|
-
|
|
|
|
|
21,555
|
|
|
|
20,708
|
|
|
|
|
|
Accumulated depreciation and amortization
|
|
|
11,127
|
|
|
|
10,664
|
|
|
|
|
|
|
|
$
|
10,428
|
|
|
$
|
10,044
|
|
|
|
|
|
Property held for sale represents land and
land improvements of $7,152 and $6,868 at June 30, 2017 and 2016, respectively. See Note 8, “Environmental Remediation”
for further discussion on property held for sale.
Depreciation and amortization of property and
equipment amounted to $1,520, $1,522 and $1,571 for the years ended June 30, 2017, 2016, and 2015 respectively.
Goodwill and Other Intangibles
Goodwill is calculated as the excess of the
cost of purchased businesses over the fair value of their underlying net assets. Other intangible assets principally consist of
customer relationships, license agreements, technology-based intangibles, EPA registrations and related data, trademarks and product
rights and related intangibles. Goodwill and other intangible assets that have an indefinite life are not amortized.
In accordance with GAAP, the Company tests
goodwill and other indefinite life intangible assets for impairment on at least an annual basis. Goodwill impairment exists if
the net book value of a reporting unit exceeds its estimated fair value. Initially, an assessment of qualitative factors is conducted
in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If the Company determines that it is more likely than not that its carrying amount is greater than its fair value for a reporting
unit, then it proceeds with the subsequent two-step process: (i) the Company determines impairment by comparing the fair value
of a reporting unit with its carrying value, and (ii) if there is an impairment, the Company measures the amount of impairment
loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. To determine the fair value of
these intangible assets, the Company uses many assumptions and estimates using a market participant approach that directly impact
the results of the testing. In making these assumptions and estimates, the Company uses industry accepted valuation models and
set criteria that are reviewed and approved by various levels of management. The Company has the option to bypass the initial qualitative
assessment stage and proceed directly to perform step one of the two-step process. In fiscal 2017, the Company performed step one
of the two-step process and in fiscal 2016 the Company performed a qualitative assessment. There was no impairment of goodwill
and other intangible assets in fiscal 2017 and fiscal 2016.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of
Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured
by comparing the carrying amount of the assets to their estimated fair value. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Accounting for Derivatives and Hedging Activities
The Company accounts for derivatives and hedging
activities under the provisions of GAAP which establishes accounting and reporting guidelines for derivative instruments and hedging
activities. GAAP requires the recognition of all derivative financial instruments as either assets or liabilities in the statement
of financial condition and measurement of those instruments at fair value. Changes in the fair values of those derivatives are
reported in earnings or other comprehensive income depending on the designation of the derivative and whether it qualifies for
hedge accounting. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements depends on its hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or liability hedged. The method that is used for assessing the
effectiveness of a hedging derivative, as well as the measurement approach for determining the ineffective aspects of the hedge,
is established at the inception of the hedged instrument.
The Company operates internationally, therefore
its earnings, cash flows and financial positions are exposed to foreign currency risk from foreign-currency-denominated receivables
and payables, which, in the U.S., have been denominated in various foreign currencies, including, among others, Euros, British
Pounds, Japanese Yen, Singapore Dollars and Chinese Renminbi and at certain foreign subsidiaries in U.S. dollars and other non-local
currencies.
Management believes it is prudent to minimize
the risk caused by foreign currency fluctuation. Management minimizes the currency risk on its foreign currency receivables and
payables by purchasing foreign currency contracts (futures) with one of its financial institutions. Futures are traded on regulated
U.S. and international exchanges and represent commitments to purchase or sell a particular foreign currency at a future date and
at a specific price. Since futures are purchased for the amount of the foreign currency receivable or for the amount of foreign
currency needed to pay for specific purchase orders, and the futures mature on the due date of the related foreign currency vendor
invoices or customer receivables, the Company believes that it eliminates risks relating to foreign currency fluctuation. The Company
takes delivery of all futures to pay suppliers in the appropriate currency. The gains or losses for the changes in the fair value
of the foreign currency contracts are recorded in cost of sales (sales) and offset the gains or losses associated with the impact
of changes in foreign exchange rates on trade payables (receivables) denominated in foreign currencies. Senior management and members
of the financial department continually monitor foreign currency risks and the use of this derivative instrument.
In conjunction
with its existing credit agreement (see Note 9), the Company entered into an interest rate swap on March 21, 2017 for an additional
interest cost of 2.005% on a notional amount of $100,000, which has been designated as a cash flow hedge
.
The
expiration date of this interest rate swap is December 21, 2021.
Foreign Currency
The financial statements of the Company’s
foreign subsidiaries are translated into U.S. dollars in accordance with GAAP. Where the functional currency of a foreign subsidiary
is its local currency, balance sheet accounts are translated at the current exchange rate and income statement items are translated
at the average exchange rate for the period. Exchange gains or losses resulting from the translation of financial statements of
foreign operations are accumulated in other comprehensive income. Where the local currency of a foreign subsidiary is not its functional
currency, financial statements are translated at either current or historical exchange rates, as appropriate.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(3) Business Combinations
On December 21, 2016, wholly owned subsidiaries
of Rising Pharmaceuticals, Inc. (“Rising”), a wholly owned subsidiary of Aceto, completed the acquisition of certain
generic products and related assets of entities formerly known as Citron Pharma LLC (“Citron”) and its affiliate Lucid
Pharma LLC (“Lucid”). Rising formed two subsidiaries to consummate the product acquisition – Rising Health, LLC
(“Rising Health”) (which acquired certain products and related assets of Citron) and Acetris Health, LLC (“Acetris
Health”) (which acquired certain products and related assets of Lucid). Citron is a privately-held New Jersey-based pharmaceutical
company focused on developing and marketing generic pharmaceutical products in partnership with leading generic pharmaceutical
manufacturers based in India and the United States. Lucid is a privately-held New Jersey-based generic pharmaceutical distributor
specializing in providing cost-effective products to various agencies of the U.S. Federal Government including the Veterans Administration
and the Defense Logistics Agency. Lucid services 18 national contracts with the Federal Government, nearly all of which have 5-year
terms.
Aceto and Rising Health possess complementary
asset-light business models, drug development and manufacturing partnerships and product portfolios. The Company believes, consistent
with its strategy of expanding Rising’s portfolio of finished dosage form generic products through product development partnerships
and acquisitions of late stage assets, abbreviated new drug applications (“ANDAs”) and complementary generic drug businesses,
this transaction significantly expanded its roster of commercialized products and pipeline of products under development. The Company
believes the acquired assets meet the definition of a business. In addition, the Company believes that this product acquisition
greatly enhances its size and stature within the generic pharmaceutical industry, expands its partnership network and offers the
Company opportunities to realize meaningful cost and tax efficiencies.
At closing, Aceto paid the sellers $270,000
in cash, committed to make a $50,000 unsecured deferred payment that will bear interest at a rate of 5% per annum to the sellers
on December 21, 2021 and agreed to issue 5,122 shares of Aceto common stock beginning on December 21, 2019. The product purchase
agreement also provides the sellers with a 5-year potential earn-out of up to an additional $50,000 in cash, based on the financial
performance of four pre-specified pipeline products that are currently in development. As of June 30, 2017, the Company accrued
$2,807 related to this contingent consideration.
The product acquisition was accounted for using
the purchase method of accounting. The following table summarizes the allocation of the preliminary purchase price to the estimated
fair values of the assets acquired and liabilities assumed on the closing date of December 21, 2016:
Trade receivables
|
|
$
|
78,937
|
|
Inventory
|
|
|
38,995
|
|
Prepaid expenses and other current assets
|
|
|
1,425
|
|
Goodwill
|
|
|
169,071
|
|
Intangible assets
|
|
|
224,850
|
|
Total assets acquired
|
|
|
513,278
|
|
|
|
|
|
|
Accounts payable
|
|
|
46,840
|
|
Accrued expenses
|
|
|
53,458
|
|
Deferred payment
|
|
|
50,000
|
|
Contingent consideration
|
|
|
2,580
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
360,400
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The fair values of the net assets acquired
were determined using discounted cash flow analyses and estimates made by management. The preliminary purchase price was allocated
to intangible assets as follows: approximately $169,071 to goodwill, which is nonamortizable under generally accepted accounting
principles and is deductible for income tax purposes; approximately $135,700 of product rights, amortizable over a period of approximately
ten years; approximately $88,800 of customer relationships, amortizable over approximately eleven years; and approximately $350
of trademarks, amortizable over a period of approximately six months. Amortization of the acquired intangible assets is deductible
for income tax purposes. Goodwill represents the excess of the preliminary purchase price paid over the fair value of the underlying
net assets acquired and was allocated to the Human Health Segment.
As part of the product acquisition, the Company entered into an
Administrative Services Agreement with the sellers in which excess cash payments may be made by either of the parties in connection
with certain liabilities assumed upon the closing of the transaction related to rebates, chargebacks, commercial rebates and Medicaid
and other government rebates. As of the closing date, the Company is responsible for the processing and administration of these
related adjustments to sales completed prior to the closing date. In general, (i) if the amounts reserved for these liabilities
underestimate the amounts that the Company is required to pay with respect to these items, the sellers will be required to reimburse
the Company for the difference and (ii) if the amounts reserved for these liabilities overestimate the amounts that the Company
is required to pay, the Company will be required to reimburse the sellers for the difference. Settlement is to be made two years
after the closing date of December 21, 2016.
For the period from December 22, 2016 to June
30, 2017, net sales and income before income taxes from the product acquisition was approximately $122,118 and $7,437, respectively,
which have been included in the Consolidated Statement of Income for the year ended June 30, 2017. The following represents unaudited
pro forma operating results as if the operations of Rising Health and Acetris Health had been included in the Company’s consolidated
statements of operations as of July 1, 2015.
|
|
Year ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
739,318
|
|
|
$
|
731,100
|
|
Net income
|
|
|
24,166
|
|
|
|
30,469
|
|
Net income per common share
|
|
$
|
0.70
|
|
|
$
|
0.89
|
|
Diluted net income per common share
|
|
$
|
0.69
|
|
|
$
|
0.88
|
|
The pro forma financial information includes
business combination accounting effects from the product acquisition including amortization charges from acquired intangible assets
of approximately $21,000 for both periods presented, increase in interest expense of approximately $13,200 for both periods presented
associated with bank borrowings to fund the product acquisition and interest expense associated with the deferred payment to the
sellers, $4,502 step-up in the fair value of the acquired inventory in the year ended June 30, 2016, reversal of acquisition related
transaction costs of $8,818 and tax related effects in both periods. The unaudited pro forma information as presented above is
for informational purposes only and is not indicative of the results of operations that would have been achieved if the product
acquisition had taken place at the beginning of fiscal 2016.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(4) Investments
A summary of short-term investments was as
follows:
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
2,046
|
|
|
$
|
881
|
|
Short-term investments consist of time
deposits that the Company classifies as held-to- maturity and are recorded at cost plus accumulated interest. 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 amounts are available for current operations.
(5) Fair Value Measurements
GAAP defines fair value as the price that would
be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement
date. GAAP establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions
based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three
levels:
Level 1 – Quoted market prices in active
markets for identical assets or liabilities;
Level 2 – Inputs other than Level 1 inputs
that are either directly or indirectly observable; and
Level 3 – Unobservable inputs that are
not corroborated by market data.
On a recurring basis, Aceto measures at fair
value certain financial assets and liabilities, which consist of cash equivalents, investments and foreign currency contracts.
The Company classifies cash equivalents and investments within Level 1 if quoted prices are available in active markets. Level
1 assets include instruments valued based on quoted market prices in active markets which generally include corporate equity securities
publicly traded on major exchanges. Time deposits are very short-term in nature and are accordingly valued at cost plus accrued
interest, which approximates fair value, and are classified within Level 2 of the valuation hierarchy. The Company uses foreign
currency futures contracts to minimize the risk caused by foreign currency fluctuation on its foreign currency receivables and
payables by purchasing futures with one of its financial institutions. Futures are traded on regulated U.S. and international exchanges
and represent commitments to purchase or sell a particular foreign currency at a future date and at a specific price. Aceto’s
foreign currency derivative contracts are classified within Level 2 as the fair value of these hedges is primarily based on observable
futures foreign exchange rates. At June 30, 2017, the Company had foreign currency contracts outstanding that had a notional amount
of $62,187. Unrealized losses on hedging activities for the years ended June 30, 2017, 2016, and 2015, amounted to $515, $10 and
$703, respectively, and are included in interest and other income, net, in the consolidated statements of income. The contracts
have varying maturities of less than one year.
In conjunction
with its existing credit agreement (see Note 9), the Company entered into an interest rate swap on March 21, 2017 for an additional
interest cost of 2.005% on a notional amount of $100,000, which has been designated as a cash flow hedge
.
The
expiration date of this interest rate swap is December 21, 2021. The remaining balance of this derivative as of June 30, 2017 is
$95,000. The unrealized loss to date associated with this derivative, which is recorded in accumulated other comprehensive loss
in the consolidated balance sheet at June 30, 2017, is $581. Aceto’s interest rate swaps are classified within Level 2 as
the fair value of this hedge is primarily based on observable interest rates.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
At June 30, 2017, the Company had $2,952 of
contingent consideration, $2,807 of which related to the acquisition of certain products and related assets of Citron and Lucid,
which was completed in December 2016 (see Note 3) and $145 of contingent consideration related to a previously acquired company
in France. At June 30, 2016, the Company had $132 of contingent consideration related to a previously acquired company in France.
The contingent consideration was calculated using the present value of a probability weighted income approach.
During the fourth quarter of each year, the
Company evaluates goodwill for impairment at the reporting unit level using a market participant approach using Level 3 inputs.
Additionally, on a nonrecurring basis, the Company uses fair value measures when analyzing asset impairment.
Changes in contingent consideration during
2017 and 2016 are as follows:
Balance as of June 30, 2015
|
|
$
|
2,622
|
|
Reversal of fair value of liability-PACK
|
|
|
(833
|
)
|
Reversal of fair value of liability-France
|
|
|
(241
|
)
|
Payments
|
|
|
(1,500
|
)
|
Accrued interest expense
|
|
|
85
|
|
Change in foreign currency exchange rate
|
|
|
(1
|
)
|
Balance as of June 30, 2016
|
|
$
|
132
|
|
Acquisitions
|
|
|
2,580
|
|
Accrued interest expense
|
|
|
237
|
|
Change in foreign currency exchange rate
|
|
|
3
|
|
Balance as of June 30, 2017
|
|
$
|
2,952
|
|
Long-lived assets and certain identifiable
intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If it is determined such indicators are present and the review indicates that the assets
will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization periods, their carrying
values are reduced to estimated fair value. Measurements based on undiscounted cash flows are considered to be Level
3 inputs.
In November 2015, the Company issued $143,750
aggregate principal amount of Notes (see Note 9). Since Aceto has the option to settle the potential conversion of the Notes in
cash, the Company separated the embedded conversion option feature from the debt feature and accounts for each component separately,
based on the fair value of the debt component assuming no conversion option. The calculation of the fair value of the debt component
required the use of Level 3 inputs, and was determined by calculating the fair value of similar non-convertible debt, using a theoretical
borrowing rate of 6.5%.
The value of the embedded conversion option was determined using an expected
present value technique (income approach) to estimate the fair value of similar non-convertible debt
and included utilization
of c
onvertible investors’ credit assumptions and high yield bond indices. The carrying amount
of the Notes approximate a fair value of $133,000 at June 30, 2017 and $134,400 at June 30, 2016 giving effect for certain factors,
including the term of the Notes, current stock price of Aceto stock and effective interest rate.
A portion of the offering
proceeds was used to simultaneously enter into privately negotiated convertible note hedge transactions with option counterparties,
which are affiliates of certain of the initial purchasers in the offering of the Notes and privately negotiated warrant transactions
with the option counterparties (see Note 9). The Company calculated the fair value of the bond hedge based on the price that was
paid to purchase the call. The Company also calculated the fair value of the warrant based on the price at which the affiliate
purchased the warrants from the Company. Since the convertible note hedge and warrant are both indexed to the Company’s common
stock and otherwise would be classified as equity, Aceto recorded both elements as equity, resulting in a net reduction to
capital
in excess of par value
of $13,489.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The carrying values of all financial instruments
classified as a current asset or current liability are deemed to approximate fair value because of the short maturity of these
instruments. The fair values of the Company’s notes receivable and short-term and long-term bank loans were based upon current
rates offered for similar financial instruments to the Company.
The following tables summarize the valuation
of the Company’s financial assets and liabilities which were determined by using the following inputs at June 30, 2017 and
2016:
|
|
Fair Value Measurements at June 30, 2017 Using
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
$
|
5,781
|
|
|
|
-
|
|
|
$
|
5,781
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
|
2,046
|
|
|
|
-
|
|
|
|
2,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts-assets (1)
|
|
|
-
|
|
|
|
486
|
|
|
|
-
|
|
|
|
486
|
|
Foreign currency contracts-liabilities (2)
|
|
|
-
|
|
|
|
137
|
|
|
|
-
|
|
|
|
137
|
|
Derivative liability for interest rate swap(3)
|
|
|
|
|
|
|
581
|
|
|
|
|
|
|
|
581
|
|
Contingent consideration (4)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,952
|
|
|
|
2,952
|
|
|
(1)
|
Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of
June 30, 2017.
|
|
(2)
|
Included in “Accrued expenses” in the accompanying
Consolidated Balance Sheet as of June 30, 2017.
|
|
(3)
|
Included in “Long-term liabilities” in the
accompanying Consolidated Balance Sheet as of June 30, 2017.
|
|
(4)
|
$145 included in “Accrued expenses” and $2,807 included in “Long-term liabilities”
in the accompanying Consolidated Balance Sheet as of June 30, 2017.
|
|
|
Fair Value Measurements
at June 30, 2016 Using
|
|
|
|
Quoted Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
$
|
6,249
|
|
|
|
-
|
|
|
$
|
6,249
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
|
881
|
|
|
|
-
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts-assets (5)
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Foreign currency contracts-liabilities (6)
|
|
|
-
|
|
|
|
169
|
|
|
|
-
|
|
|
|
169
|
|
Contingent consideration (7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
132
|
|
|
|
132
|
|
|
(5)
|
Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of
June 30, 2016.
|
|
(6)
|
Included in “Accrued expenses” in the accompanying
Consolidated Balance Sheet as of June 30, 2016.
|
|
(7)
|
Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet
as of June 30, 2016.
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(6) Goodwill and Other Intangible Assets
As of June 30, 2017 and June 30, 2016, there
was goodwill of $236,970 and $67,871, respectively.
Changes in the Company's goodwill during 2017
and 2016 are as follows:
|
|
Human
Health
Segment
|
|
|
Pharmaceutical
Ingredients
Segment
|
|
|
Performance
Chemicals
Segment
|
|
|
Total
Goodwill
|
|
Balance as of June 30, 2015
|
|
$
|
66,039
|
|
|
$
|
1,650
|
|
|
$
|
181
|
|
|
$
|
67,870
|
|
Changes in foreign currency exchange rates
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Balance as of June 30, 2016
|
|
|
66,039
|
|
|
|
1,651
|
|
|
|
181
|
|
|
|
67,871
|
|
Acquisitions
|
|
|
169,071
|
|
|
|
-
|
|
|
|
-
|
|
|
|
169,071
|
|
Changes in foreign currency exchange rates
|
|
|
-
|
|
|
|
23
|
|
|
|
5
|
|
|
|
28
|
|
Balance as of June 30, 2017
|
|
$
|
235,110
|
|
|
$
|
1,674
|
|
|
$
|
186
|
|
|
$
|
236,970
|
|
Intangible assets subject to amortization as
of June 30, 2017 and 2016 were as follows:
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
110,787
|
|
|
$
|
13,968
|
|
|
$
|
96,819
|
|
Trademarks
|
|
|
2,218
|
|
|
|
2,195
|
|
|
|
23
|
|
Product rights and related intangibles
|
|
|
221,335
|
|
|
|
37,677
|
|
|
|
183,658
|
|
License agreements
|
|
|
6,537
|
|
|
|
6,035
|
|
|
|
502
|
|
EPA registrations and related data
|
|
|
14,307
|
|
|
|
11,011
|
|
|
|
3,296
|
|
|
|
$
|
355,184
|
|
|
$
|
70,886
|
|
|
$
|
284,298
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
21,761
|
|
|
$
|
7,815
|
|
|
$
|
13,946
|
|
Trademarks
|
|
|
1,868
|
|
|
|
1,800
|
|
|
|
68
|
|
Product rights and related intangibles
|
|
|
83,048
|
|
|
|
23,511
|
|
|
|
59,537
|
|
License agreements
|
|
|
6,611
|
|
|
|
5,531
|
|
|
|
1,080
|
|
EPA registrations and related data
|
|
|
13,591
|
|
|
|
9,927
|
|
|
|
3,664
|
|
Technology-based intangibles
|
|
|
155
|
|
|
|
140
|
|
|
|
15
|
|
|
|
$
|
127,034
|
|
|
$
|
48,724
|
|
|
$
|
78,310
|
|
Intangible assets with definitive useful lives
are amortized using the straight-line method over their estimated useful lives. The straight-line method is utilized as it best
reflects the use of the asset. The estimated useful lives of customer relationships, trademarks, product rights and related intangibles,
license agreements and EPA registrations are 7-11 years, 3-4 years, 3-14 years, 6-11 years and 10 years respectively.
As of June 30, 2017 and June 30, 2016, the
Company also had $783 and $761, respectively, of intangible assets pertaining to trademarks which have indefinite lives and are
not subject to amortization. The change in trademarks with indefinite lives is attributable to foreign currency exchange rates
used to translate the financial statements of foreign subsidiaries.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Amortization expense for intangible assets
subject to amortization amounted to $22,234, $11,176 and $10,278 for the years ended June 30, 2017, 2016 and 2015, respectively.
The estimated aggregate amortization expense for intangible assets subject to amortization for each of the succeeding years ending
June 30, 2018 through June 30, 2023 are as follows: 2018: $16,747; 2019: $32,431; 2020: $31,880; 2021: $31,819; 2022: $31,782 and
2023 and thereafter: $139,639.
(7) Accrued Expenses
The components of accrued expenses as of June
30, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Accrued compensation
|
|
$
|
5,793
|
|
|
$
|
6,880
|
|
Accrued environmental remediation costs-current portion
|
|
|
6,112
|
|
|
|
9,180
|
|
Reserve for price concessions
|
|
|
80,556
|
|
|
|
31,342
|
|
Partnered product liabilities
|
|
|
16,068
|
|
|
|
-
|
|
Other accrued expenses
|
|
|
9,799
|
|
|
|
5,273
|
|
|
|
$
|
118,328
|
|
|
$
|
52,675
|
|
(8) Environmental Remediation
In fiscal years 2011, 2009, 2008 and 2007,
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 PRP Group has
begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $1,700 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 and thus believes that, at most, it is a de minimis contributor to the site
contamination. Accordingly, the Company believes that the settlement offer is unreasonable. 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, Inc. (“Arsynco”), a subsidiary formerly involved in manufacturing chemicals located in
Carlstadt, New Jersey, which was closed in 1993 and is currently held for sale. Based on continued monitoring of the contamination
at the site and the approved plan of remediation, Arsynco received an estimate from an environmental consultant stating that the
costs of remediation could be between $21,500 and $23,300. Remediation commenced in fiscal 2010, and as of June 30, 2017 and June
30, 2016, a liability of $8,451 and $12,532, respectively, is included in the accompanying consolidated balance sheets for this
matter. For the year ended June 30, 2017, the Company recorded environmental remediation charges of $903, which is included in
selling, general and administrative expenses in the accompanying consolidated statements of income for the year ended June 30,
2017. In accordance with GAAP, management believes that the majority of costs incurred to remediate the site will be capitalized
in preparing the property which is currently classified as held for sale. An appraisal of the fair value of the property by a third-party
appraiser supports the assumption that the expected fair value after the remediation is in excess of the amount required to be
capitalized. 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, in July 2009, Arsynco entered into a settlement agreement with BASF Corporation (“BASF”), the
former owners of the Arsynco property. In accordance with the settlement agreement, BASF paid for a portion of the prior remediation
costs and going forward, will co-remediate the property with the Company. The contract requires that BASF pay $550 related to past
response costs and pay a proportionate share of the future remediation costs. Accordingly, the Company had recorded a gain of $550
in fiscal 2009. This $550 gain relates to the partial reimbursement of costs of approximately $1,200 that the Company had previously
expensed. The Company also recorded an additional receivable from BASF, with an offset against property held for sale, representing
its estimated portion of the future remediation costs. The balance of this receivable for future remediation costs as of June 30,
2017 and June 30, 2016 is $3,803 and $5,639, respectively, which is included in the accompanying consolidated balance sheets.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
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 (“BCSA”). Arsynco is one of over 150 PRPs 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 PRPs and their financial strength. In July 2014,
Arsynco received notice from the U.S. Department of Interior (“USDOI”) regarding the USDOI’s intent to perform
a Natural Resource Damage (NRD) Assessment at the BCSA. Arsynco has to date declined to participate in the development and performance
of the NRD assessment process. Based on prior practice in similar situations, it is possible that the State may assert a claim
for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State (or both)
may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with respect to
Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with that site.
Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the former owners
of the Arsynco property. In September 2012, Arsynco entered into an agreement with three of the other PRPs that had previously
been impleaded into New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et al., Docket
No. ESX-L-9868-05 (the "NJDEP Litigation") and were considering impleading Arsynco into the same proceeding. Arsynco
entered into an agreement to avoid impleader. Pursuant to the agreement, Arsynco agreed to (1) a tolling period that would not
be included when computing the running of any statute of limitations that might provide a defense to the NJDEP Litigation; (2)
the waiver of certain issue preclusion defenses in the NJDEP Litigation; and (3) arbitration of certain potential future liability
allocation claims if the other parties to the agreement are barred by a court of competent jurisdiction from proceeding against
Arsynco. In July 2015, Arsynco was contacted by an allocation consultant retained by a group of the named PRPs, inviting Arsynco
to participate in the allocation among the PRPs’ investigation and remediation costs relating to the BCSA. Arsynco declined
that invitation. Since an amount of the liability cannot 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 currently known.
(9) Debt
Long-term debt
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible Senior Notes, net
|
|
$
|
121,676
|
|
|
$
|
115,829
|
|
Revolving bank loans
|
|
|
90,000
|
|
|
|
-
|
|
Term bank loans
|
|
|
139,227
|
|
|
|
-
|
|
Mortgage
|
|
|
2,763
|
|
|
|
2,960
|
|
|
|
|
353,666
|
|
|
|
118,789
|
|
Less current portion
|
|
|
14,466
|
|
|
|
197
|
|
|
|
$
|
339,200
|
|
|
$
|
118,592
|
|
Convertible Senior Notes
In November 2015, Aceto offered $125,000 aggregate
principal amount of Convertible Senior Notes due 2020 (the "Notes") in a private offering to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. In addition, Aceto granted the initial purchasers for
the offering an option to purchase up to an additional $18,750 aggregate principal amount pursuant to the initial purchasers’
option to purchase additional Notes, which was exercised in November 2015. Therefore the total offering was $143,750 aggregate
principal amount. The Notes are unsecured obligations of Aceto and rank senior in right of payment to any of Aceto’s subordinated
indebtedness, equal in right of payment to all of Aceto’s unsecured indebtedness that is not subordinated, effectively junior
in right of payment to any of Aceto’s secured indebtedness to the extent of the value of the assets securing such indebtedness
and structurally junior in right of payment to all indebtedness and other liabilities (including trade payables) of Aceto’s
subsidiaries. The Notes will be convertible into cash, shares of Aceto common stock or a combination thereof, at Aceto’s
election, upon the satisfaction of specified conditions and during certain periods. The Notes will mature in November 2020. The
Notes pay 2.0% interest semi-annually in arrears on May 1 and November 1 of each year, which commenced on May 1, 2016. The Notes
are convertible into 4,328 shares of common stock, based on an initial conversion price of $33.215 per share.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Holders may convert all or any portion of their
notes, in multiples of one thousand dollar principal amount, at their option at any time prior to the close of business on the
business day immediately preceding May 1, 2020 only under the following circumstances: (i) during any calendar quarter (and only
during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar
quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the five consecutive
business day period after any five consecutive trading day period (which is referred to as the “measurement period”)
in which the trading price per one thousand dollar principal amount of Notes for each trading day of the measurement period was
less than 98% of the product of the last reported sale price of Aceto’s common stock and the conversion rate on each such
trading day; or (iii) upon the occurrence of specified corporate events.
Upon conversion
by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof.
As a result of its cash conversion option, the Company separately accounted for the value of the embedded conversion option as
a debt discount (with an offset to capital in excess of par value). The debt discount is being amortized as additional non-cash
interest expense using the effective interest method over the term of the Notes. Debt issuance costs are being amortized as additional
non-cash interest expense.
The Company presents debt issuance costs as a direct deduction from the carrying value of the
debt liability rather than showing the debt issuance costs as a deferred charge on the balance sheet.
In connection with
the offering of the Notes, Aceto entered into privately negotiated convertible note hedge transactions with option counterparties,
which are affiliates of certain of the initial purchasers. The convertible note hedge transactions are expected generally to reduce
the potential dilution to Aceto’s common stock and/or offset any cash payments Aceto is required to make in excess of the
principal amount of converted Notes upon any conversion of Notes. Aceto also entered into privately negotiated warrant transactions
with the option counterparties. The warrant transactions could separately have a dilutive effect to the extent that the market
price per share of Aceto’s common stock as measured over the applicable valuation period at the maturity of the warrants
exceeds the applicable strike price of the warrants. By entering into these transactions with the option counterparties, the Company
issued convertible debt and a freestanding “call-spread.”
The carrying value
of the Notes is as follows:
|
|
June
30,
2017
|
|
|
June
30,
2016
|
|
|
|
|
|
|
|
|
Principal amount
|
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(19,255
|
)
|
|
|
(24,267
|
)
|
Unamortized debt issuance costs
|
|
|
(2,819
|
)
|
|
|
(3,654
|
)
|
Net carrying value
|
|
$
|
121,676
|
|
|
$
|
115,829
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The following table
sets forth the components of total “interest expense” related to the Notes recognized in the accompanying consolidated
statements of income for the year ended June 30:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contractual coupon
|
|
$
|
2,867
|
|
|
$
|
1,788
|
|
Amortization of debt discount
|
|
|
5,012
|
|
|
|
2,974
|
|
Amortization of debt issuance costs
|
|
|
835
|
|
|
|
522
|
|
|
|
$
|
8,714
|
|
|
$
|
5,284
|
|
Credit Facilities
On December 21, 2016 the Company entered into
a Second Amended and Restated Credit Agreement (the “A&R Credit Agreement”), with eleven banks, which amended and
restated in its entirety the Amended and Restated Credit Agreement, dated as of October 28, 2015, as amended by Amendment No. 1
to Amended and Restated Credit Agreement, dated as of November 10, 2015, and Amendment No. 2 to Amended and Restated Credit Agreement,
dated as of August 26, 2016 (collectively, the “First Amended Credit Agreement”). The A&R Credit Agreement increases
the aggregate available revolving commitment under the First Amended Credit Agreement from $150,000 to an initial aggregate available
revolving commitment of $225,000 (the “Initial Revolving Commitment”). Under the A&R Credit Agreement, the Company
may borrow, repay and reborrow from and as of December 21, 2016, to but excluding December 21, 2021 (the “Maturity Date”)
provided, that if any of the Notes remain outstanding on the date that is 91 days prior to the maturity date of the Notes (the
“2015 Convertible Maturity Date”), then the Maturity Date shall mean the date that is 91 days prior to the 2015 Convertible
Maturity Date. The A&R Credit Agreement provides for (i) Eurodollar Loans (as such terms are defined in the A&R Credit
Agreement), (ii) ABR Loans (as such terms are defined in the A&R Credit Agreement) or (iii) a combination thereof. As of June
30, 2017, the Company borrowed Revolving Loans aggregating $90,000 which loans are Eurodollar Loans at interest rates ranging from
3.21% to 3.45 % at June 30, 2017. The applicable interest rate margin percentage is subject to adjustment quarterly based upon
the Company’s senior secured net leverage ratio.
Under the A&R Credit Agreement, the Company
also borrowed $150,000 in term loans (the “Initial Term Loan). Subject to certain conditions, including obtaining commitments
from existing or prospective lenders, the Company will have the right to increase the amount of the Initial Revolving Commitment
(each, a “Revolving Facility Increase” and, together with the Initial Revolving Commitment, the “Revolving Commitment”)
and/or the Initial Term Loan in an aggregate amount not to exceed $100,000 pursuant to an incremental loan feature in the A&R
Credit Agreement. As of June 30, 2017, the remaining amount outstanding under the Initial Term Loan is $142,500 and is payable
as a Eurodollar Loan at an interest rate of 3.30%. The proceeds of the Initial Revolving Commitment and Initial Term Loan have
been used to partially finance the acquisition of generic products and related assets of Citron and its affiliate Lucid, and pay
fees and expenses related thereto. The applicable interest rate margin percentage is subject to adjustment quarterly based upon
the Company’s senior secured net leverage ratio.
The Initial Term Loan is payable as to principal
in nineteen consecutive, equal quarterly installments of $3,750, which commenced on March 31, 2017 and will continue on each March
31, June 30, September 30 and December 31 thereafter. To the extent not previously paid, the final payment on the Term Loan Maturity
Date (as defined in the A&R Credit Agreement) shall be in an amount equal to the then outstanding unpaid principal amount of
the Initial Term Loan.
As such, the Company has classified $15,000
of the Initial Term Loan as short-term in the consolidated balance sheet at June 30, 2017. The A&R Credit Agreement, similar
to the First Amended Credit Agreement, provides that commercial letters of credit shall be issued to provide the primary payment
mechanism in connection with the purchase of any materials, goods or services in the ordinary course of business. The Company had
no open letters of credit at June 30, 2017 and June 30, 2016.
In accordance with generally accepted accounting
principles, $3,659 of deferred financing costs associated with the Initial Term Loan are presented as a direct deduction from the
carrying value of the debt liability rather than showing the deferred financing costs as a deferred charge on the balance sheet.
In addition, deferred financing costs of $1,748 associated with the Revolving Commitment have been recorded as a deferred charge
on the balance sheet.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The A&R Credit Agreement, like the First
Amended Credit Agreement, provides for a security interest in substantially all of the personal property of the Company and certain
of its subsidiaries. The A&R Credit Agreement contains several financial covenants including, among other things, maintaining
a minimum level of debt service and certain leverage ratios. Under the A&R Credit Agreement, the Company and its subsidiaries
are also subject to certain restrictive covenants, including, among other things, covenants governing liens, limitations on indebtedness,
limitations on guarantees, limitations on sales of assets and sales of receivables, and limitations on loans and investments. The
Company was in compliance with all covenants at June 30, 2017.
The Company has available lines of credit with
foreign financial institutions. At June 30, 2017, the Company had available lines of credit with foreign financial institutions
totaling $7,351. At June 30, 2016, the Company had available lines of credit with foreign financial institutions totaling $7,397.
The Company has issued a cross corporate guarantee to the foreign banks. Short term loans under these agreements bear interest
at a fixed rate of 4.5% at June 30, 2017 and June 30, 2016 and 5.0% at June 30, 2015. The Company is not subject to any financial
covenants under these arrangements.
Under the above financing arrangements, the
Company had $232,500 in bank loans and $1,737 in standby letters of credit, leaving an unused facility of $140,613 at June 30,
2017. At June 30, 2016 the Company had $0 in bank loans and $1,758 in standby letters of credit leaving an unused facility of $155,639.
Mortgage
On June 30, 2011, the Company entered into
a mortgage payable for $3,947 on its new corporate headquarters, in Port Washington, New York. This mortgage payable is secured
by the land and building and is being amortized over a period of 20 years. The mortgage payable, which was modified in October
2013, bears interest at 4.92% as of June 30, 2017 and matures on June 30, 2021.
Maturity of Long-term Debt
Long-term debt matures by fiscal year as follows:
2018
|
|
$
|
14,466
|
|
2019
|
|
|
14,466
|
|
2020
|
|
|
14,466
|
|
2021
|
|
|
138,115
|
|
2022
|
|
|
172,153
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
353,666
|
|
(10) Stock Based Compensation Plans
At the annual meeting of shareholders of the
Company, held on December 15, 2015, the Company’s shareholders approved the Aceto Corporation 2015 Equity Participation Plan
(the “2015 Plan”). Under the 2015 Plan, grants of stock options, stock appreciation rights, restricted stock, restricted
stock units and other stock-based awards (“Stock Awards”) may be offered to employees, non-employee directors, consultants
and advisors of the Company, including the chief executive officer, chief financial officer and other named executive officers.
The maximum number of shares of common stock of the Company that may be issued pursuant to Stock Awards granted under the 2015
Plan will not exceed, in the aggregate, 4,250 shares. Stock Awards that are intended to qualify as “performance-based compensation”
for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, may be granted. Performance-based awards
may be granted, vested and paid based on the attainment of specified performance goals.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
At the annual meeting of shareholders of the
Company, held on December 6, 2012, the Company’s shareholders approved the amended and restated Aceto Corporation 2010 Equity
Participation Plan (the “2010 Plan”). Under the 2010 Plan, grants of stock options, restricted stock, restricted stock
units, stock appreciation rights, and stock bonuses may be made to employees, non-employee directors and consultants of the Company.
The maximum number of shares of common stock of the Company that may be issued pursuant to awards granted under the 2010 Plan will
not exceed, in the aggregate, 5,250 shares. In addition, restricted stock may be granted to an eligible participant in lieu of
a portion of any annual cash bonus earned by such participant. Such award may include additional shares of restricted stock (premium
shares) greater than the portion of bonus paid in restricted stock. The restricted stock award is vested at issuance and the restrictions
lapse ratably over a period of years as determined by the Board of Directors, generally three years. The premium shares vest when
all the restrictions lapse, provided that the participant remains employed by the Company at that time.
At the annual meeting of shareholders of the
Company held December 6, 2007, the shareholders approved the Aceto Corporation 2007 Long-Term Performance Incentive Plan (the “2007
Plan”). The Company has reserved 700 shares of common stock for issuance under the 2007 Plan to the Company’s employees
and non-employee directors. There are five types of awards that may be granted under the 2007 Plan-options to purchase common stock,
stock appreciation rights, restricted stock, restricted stock units and performance incentive units.
In September 2016, the Company granted 28 performance
stock options to an executive officer at an exercise price of $20.03 per share.
The
performance options vest if the closing stock price meets or exceeds the target price of $40 for 20 consecutive trading days prior
to June 30, 2021 and the explicit service period of 1 year has been met.
The options will expire June 30, 2021, if the stock
price target is not achieved. If it is achieved, the options will expire ten years from the date of grant.
There were no stock options granted in fiscal
years 2016 or 2015.
As of June 30, 2017, there were 3,144, 255
and 0 shares of common stock available for grant under the 2015, 2010 and 2007 Plans, respectively.
In December 1998, the Company adopted the Aceto
Corporation 1998 Omnibus Equity Award Plan (1998 Plan). The 1998 Plan expired in December 2008. Outstanding options survive the
expiration of the 1998 Plan.
The following summarizes the shares of common
stock under options for all plans at June 30, 2017, 2016 and 2015, and the activity with respect to options for the respective
years then ended:
|
|
Shares subject to
option
|
|
|
Weighted average
exercise price per
share
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance at June 30, 2014
|
|
|
551
|
|
|
$
|
7.72
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(146
|
)
|
|
|
8.74
|
|
|
|
|
|
Forfeited (including cancelled options)
|
|
|
(8
|
)
|
|
|
10.94
|
|
|
|
|
|
Balance at June 30, 2015
|
|
|
397
|
|
|
$
|
7.28
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(95
|
)
|
|
|
7.56
|
|
|
|
|
|
Forfeited (including cancelled options)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
302
|
|
|
$
|
7.19
|
|
|
|
|
|
Granted
|
|
|
28
|
|
|
|
20.03
|
|
|
|
|
|
Exercised
|
|
|
(70
|
)
|
|
|
7.90
|
|
|
|
|
|
Forfeited (including cancelled options)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
260
|
|
|
$
|
8.36
|
|
|
$
|
1,968
|
|
Options exercisable at June 30, 2017
|
|
|
232
|
|
|
$
|
6.98
|
|
|
$
|
1,968
|
|
The total intrinsic value of stock options
exercised during the years ended June 30, 2017, 2016 and 2015 was approximately $865, $1,700 and $1,713, respectively.
The
weighted average remaining contractual life of options outstanding at June 30, 2017 was approximately 4 years. At June 30, 2017,
outstanding options had expiration dates ranging from December 2017 to June 2021.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
Under the 2015 Plan, 2010 Plan, 2002 Plan and
the 1998 Plan, compensation expense is recorded for the fair value of the restricted stock awards in the year the related bonus
is earned and over the vesting period for the market value at the date of grant of the premium shares granted. In fiscal 2017,
2016 and 2015, restricted stock awarded and premium shares vested of 5, 7 and 5 common shares, respectively, were issued under
employee incentive plans, which increased stockholders’ equity by $109, $113 and $77, respectively. The related non-cash
compensation expense related to the vesting of premium shares during the year was $26, $22 and $22 in fiscal 2017, 2016 and 2015,
respectively. Additionally, non-cash compensation expense of $55, $0 and $21 was recorded in fiscal 2017, 2016 and 2015, respectively,
relating to stock option grants, which is included in selling, general and administrative expenses. As of June 30, 2017, the total
unrecognized compensation cost related to option awards is $95.
The following summarizes the non-vested stock options at June 30,
2017 and the activity with respect to non-vested options for the year ended June 30, 2017:
|
|
Shares
subject to
option
|
|
|
Weighted
average grant
date fair value
|
|
Non-vested at June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
28
|
|
|
$
|
5.44
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested at June 30, 2017
|
|
|
28
|
|
|
$
|
5.44
|
|
The per-share fair value of stock options granted during 2017 was
$5.44 on the date of the grant using a Monte Carlo simulation option-pricing model with the following assumptions:
|
|
2017
|
|
|
|
|
|
Expected life
|
|
|
4.9 years
|
|
Expected volatility
|
|
|
39.4
|
%
|
Risk-free interest rate
|
|
|
1.26
|
%
|
Dividend yield
|
|
|
1.30
|
%
|
During the year ended June 30, 2017, the Company
granted 277 shares of restricted common stock to its employees that vest over three years and 22 shares of restricted common stock
to its non-employee directors, which vest over approximately one year as well as 42 restricted stock units that have varying vest
dates through July 2017. In addition, the Company also issued a target grant of 160 performance-vested restricted stock units,
which grant could be as much as 280 restricted stock units if certain performance criteria and market conditions are met. Performance-vested
restricted stock units will cliff vest 100% at the end of the third year following grant in accordance with the performance metrics
set forth in the applicable employee performance-vested restricted stock unit grant.
During the year ended June 30, 2016, the Company
granted 221 shares of restricted common stock to its employees that vest over three years and 14 shares of restricted common stock
to its non-employee directors, which vest over approximately one year as well as 46 restricted stock units that have varying vest
dates through July 2017. In addition, the Company also issued a target grant of 142 performance-vested restricted stock units,
which grant could be as much as 248 if certain performance criteria and market conditions are met. Performance-vested restricted
stock units will cliff vest 100% at the end of the third year following grant in accordance with the performance metrics set forth
in the applicable employee performance-vested restricted stock unit grant.
During the year ended June 30, 2015, the Company
granted 165 shares of restricted common stock to its employees that vest over three years and 12 shares of restricted common stock
to its non-employee directors, which vest over approximately one year as well as 67 restricted stock units that have varying vest
dates through August 2016. In addition, the Company also issued a target grant of 116 performance-vested restricted stock units,
which grant could be as much as 203 if certain performance criteria and market conditions are met. Performance-vested restricted
stock units will cliff vest 100% at the end of the third year following grant in accordance with the performance metrics set forth
in the applicable employee performance-vested restricted stock unit grant.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
For the years ended June 30, 2017, 2016 and
2015, the Company recorded stock-based compensation expense of approximately $6,875, $6,697, and $4,494, respectively, which is
included in selling, general and administrative expenses, for shares of restricted common stock and restricted stock units.
The remaining stock-based compensation expense
for restricted stock awards and units is approximately $8,382 at June 30, 2017 and the related weighted average period over which
it is expected that such unrecognized compensation cost will be recognized is approximately 1.8 years.
A summary of restricted stock awards including
restricted stock units as of June 30, 2017, is presented below:
|
|
Shares
|
|
|
Weighted
average grant
date fair value
|
|
Non-vested at beginning of year
|
|
|
795
|
|
|
$
|
20.73
|
|
Granted
|
|
|
501
|
|
|
|
18.92
|
|
Vested
|
|
|
(396
|
)
|
|
|
17.26
|
|
Forfeited
|
|
|
(103
|
)
|
|
|
21.33
|
|
Non-vested at June 30, 2017
|
|
|
797
|
|
|
$
|
21.24
|
|
(11) Interest and Other Income
Interest and other income during fiscal 2017,
2016 and 2015 was comprised of the following:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Dividends
|
|
$
|
277
|
|
|
$
|
222
|
|
|
$
|
233
|
|
Interest
|
|
|
264
|
|
|
|
313
|
|
|
|
282
|
|
Foreign government subsidies received
|
|
|
64
|
|
|
|
25
|
|
|
|
22
|
|
Joint venture equity earnings
|
|
|
2,336
|
|
|
|
2,060
|
|
|
|
1,761
|
|
Foreign currency gains (losses)
|
|
|
(298
|
)
|
|
|
56
|
|
|
|
(1,065
|
)
|
Deferred compensation plan losses
|
|
|
(257
|
)
|
|
|
(35
|
)
|
|
|
(96
|
)
|
Rental income
|
|
|
158
|
|
|
|
154
|
|
|
|
151
|
|
Miscellaneous income
|
|
|
33
|
|
|
|
28
|
|
|
|
198
|
|
|
|
$
|
2,577
|
|
|
$
|
2,823
|
|
|
$
|
1,486
|
|
The Company’s joint venture earnings
represent the Company’s investment in a corporate joint venture established for the purpose of selling a particular agricultural
protection product. The Company’s initial investment was $6 in fiscal 2009, representing a 30% ownership and the Company
accounts for this joint venture using the equity method of accounting.
(12) Income Taxes
The components of income before the provision
for income taxes are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic operations
|
|
$
|
9,555
|
|
|
$
|
43,906
|
|
|
$
|
44,269
|
|
Foreign operations
|
|
|
7,806
|
|
|
|
9,948
|
|
|
|
5,589
|
|
|
|
$
|
17,361
|
|
|
$
|
53,854
|
|
|
$
|
49,858
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The components of the provision for income
taxes are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,713
|
|
|
$
|
15,129
|
|
|
$
|
16,991
|
|
Deferred
|
|
|
(585
|
)
|
|
|
(204
|
)
|
|
|
(1,357
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
555
|
|
|
|
755
|
|
|
|
1,526
|
|
Deferred
|
|
|
(110
|
)
|
|
|
173
|
|
|
|
189
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,221
|
|
|
|
3,222
|
|
|
|
2,337
|
|
Deferred
|
|
|
191
|
|
|
|
13
|
|
|
|
(706
|
)
|
|
|
$
|
5,985
|
|
|
$
|
19,088
|
|
|
$
|
18,980
|
|
Income taxes payable, which is included in
accrued expenses, was $64 and $2,119 at June 30, 2017 and 2016, respectively.
The tax effects of temporary differences that
give rise to the deferred tax assets and liabilities at June 30, 2017 and 2016 are presented below:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued deferred compensation
|
|
$
|
4,229
|
|
|
$
|
4,122
|
|
Accrual for sales deductions not currently deductible
|
|
|
5,796
|
|
|
|
5,925
|
|
Additional inventoried costs for tax purposes
|
|
|
697
|
|
|
|
389
|
|
Allowance for doubtful accounts receivable
|
|
|
106
|
|
|
|
106
|
|
Depreciation and amortization
|
|
|
11,957
|
|
|
|
7,784
|
|
Debt issuance costs
|
|
|
7,611
|
|
|
|
9,462
|
|
Foreign deferred tax assets
|
|
|
983
|
|
|
|
1,121
|
|
Domestic net operating loss carryforwards
|
|
|
81
|
|
|
|
109
|
|
Foreign net operating loss carryforwards
|
|
|
692
|
|
|
|
685
|
|
Total gross deferred tax assets
|
|
|
32,152
|
|
|
|
29,703
|
|
Valuation allowances
|
|
|
(773
|
)
|
|
|
(794
|
)
|
|
|
|
31,379
|
|
|
|
28,909
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign deferred tax liabilities
|
|
|
(65
|
)
|
|
|
(27
|
)
|
Goodwill
|
|
|
(10,244
|
)
|
|
|
(7,586
|
)
|
Original issue discount – convertible senior notes
|
|
|
(7,260
|
)
|
|
|
(9,115
|
)
|
Other
|
|
|
(1,136
|
)
|
|
|
(26
|
)
|
Total gross deferred tax liabilities
|
|
|
(18,705
|
)
|
|
|
(16,754
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
12,674
|
|
|
$
|
12,155
|
|
The following table shows the current and non-current
deferred tax assets (liabilities) at June 30, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Current deferred tax assets, net
|
|
$
|
546
|
|
|
$
|
3,244
|
|
Non-current deferred tax assets, net
|
|
|
19,453
|
|
|
|
18,053
|
|
Non-current deferred tax liabilities
|
|
|
(7,325
|
)
|
|
|
(9,142
|
)
|
Net deferred tax assets
|
|
$
|
12,674
|
|
|
$
|
12,155
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The net change in the total valuation allowance
for the years ended June 30, 2017 and June 30, 2016 was a decrease of $21 and $16, respectively. A valuation allowance is provided
when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company has established
valuation allowances primarily for net operating loss carryforwards in certain foreign countries. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
are not expected to be realized. The assessment of the amount of value assigned to the Company’s deferred tax assets under
the applicable accounting rules is judgmental. Management is required to consider all available positive and negative evidence
in evaluating the likelihood that the Company will be able to realize the benefit of its deferred tax assets in the future. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
net operating loss carryforwards are utilizable and temporary differences become deductible. The Company has federal and state
net operating loss carryforwards of $0 and $81, respectively, which will expire in fiscal year 2018. The Company has foreign net
operating loss carryforwards of $692 which do not have any expiry dates. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, taxable income in carryback years if carryback is permitted and tax planning
strategies in making this assessment. In order to fully realize the net deferred tax assets recognized at June 30, 2017, the Company
will need to generate future taxable income of approximately $34,638.
Based upon the level of historical taxable
income and projections for taxable income over the periods which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these deductible differences. There can be no assurance, however,
that the Company will generate any earnings or any specific level of continuing earnings in the future. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward
period are reduced.
Deferred taxes have not been provided for undistributed
earnings of foreign subsidiaries amounting to approximately $111,569 at June 30, 2017 since substantially all of these earnings
are expected to be indefinitely reinvested in foreign operations. A deferred tax liability will be recognized when the Company
expects that it will recover these undistributed earnings in a taxable manner, such as through the receipt of dividends or sale
of the investments. The Company intends to indefinitely reinvest the remaining undistributed earnings and has no plan for further
repatriation. Determination of the amount of unrecognized deferred U.S. income tax liabilities, net of unrecognized foreign tax
credits, is not practical to calculate because of the complexity of this hypothetical calculation resulting in various methods
available, each with different U.S. tax consequences
.
A reconciliation of the statutory federal income
tax rate and the effective tax rate for continuing operations for the fiscal years ended June 30, 2017, 2016 and 2015 follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal income tax benefit
|
|
|
1.2
|
|
|
|
1.7
|
|
|
|
2.4
|
|
Decrease (increase) in valuation allowance
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.4
|
|
Foreign tax rate differential
|
|
|
(1.8
|
)
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
Other
|
|
|
-
|
|
|
|
(0.9
|
)
|
|
|
1.2
|
|
Effective tax rate
|
|
|
34.5
|
%
|
|
|
35.4
|
%
|
|
|
38.1
|
%
|
The Company operates in various tax jurisdictions,
and although it believes that it has provided for income and other taxes in accordance with the relevant regulations, if the applicable
regulations were ultimately interpreted differently by a taxing authority, the Company may be exposed to additional tax liabilities.
There are no material 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 Company did not recognize interest and penalties during the years ended June 30, 2017 and June 30, 2016. 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 2013 (in the case of certain foreign tax returns, fiscal year 2012).
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(13) Supplemental Cash Flow Information
Cash paid for interest and income taxes during
fiscal 2017, 2016 and 2015 was as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest
|
|
$
|
7,794
|
|
|
$
|
2,970
|
|
|
$
|
3,954
|
|
Income taxes, net of refunds
|
|
$
|
7,912
|
|
|
$
|
16,076
|
|
|
$
|
25,459
|
|
In connection with the acquisition of certain
products and related assets of Citron and Lucid, approximately 5,122 shares of Aceto common stock with a fair value of $90,400,
to be issued beginning on December 21, 2019, a $50,000 unsecured deferred payment payable on December 21, 2021 and a contingent
earn out liability of $2,580 are non-cash items and are excluded from the Consolidated Statement of Cash Flows during the year
ended June 30, 2017. In addition, the Company had non-cash items excluded from the Consolidated Statements of Cash Flows during
the years ended June 30, 2017, 2016 and 2015 of $284, $294 and $726, respectively related to capitalized environmental remediation
costs and property held for sale and $1,578 measurement period adjustments to goodwill during the year ended June 30, 2015.
(14) Retirement Plans
Defined Contribution Plans
The Company has defined contribution retirement
plans in which certain employees are eligible to participate, including deferred compensation plans (see below). The Company's
annual contribution per employee, which is at management's discretion, is based on a percentage of the employee’s compensation.
The Company's provision for these defined contribution plans amounted to $1,794, $1,957 and $1,849 in fiscal 2017, 2016 and 2015,
respectively.
Defined Benefit Plans
The Company sponsors certain defined benefit
pension plans covering certain employees of its German subsidiaries who meet the plan’s eligibility requirements. The accrued
pension liability as of June 30, 2017 was $883. The accrued pension liability as of June 30, 2016 was $853. Net periodic pension
costs, which consists principally of interest cost and service cost was $30 in fiscal 2017, $28 in fiscal 2016 and $53 in fiscal
2015. The Company’s plans are funded in conformity with the funding requirements of the applicable government regulations.
An assumed weighted average discount rate of 2.0%, 1.9% and 1.6% and a compensation increase rate of 0.0% were used in determining
the actuarial present value of benefit obligations as of June 30, 2017, 2016 and 2015, respectively.
Deferred Compensation Plans
To comply
with the requirements of the American Jobs Creation Act of 2004, as of December 2004, the Company froze its non-qualified Supplemental
Executive Retirement Plan (the Frozen Plan) and has not allowed any further deferrals or contributions to the Frozen Plan after
December 31, 2004. All of the earned benefits of the participants in the Frozen Plan as of December 31, 2004, will be preserved
under the existing plan provisions.
On March
14, 2005, the Company’s Board of Directors adopted the Aceto Corporation Supplemental Executive Deferred Compensation Plan
(the Plan). The Plan is a non-qualified deferred compensation plan intended to provide certain qualified executives with supplemental
benefits beyond the Company’s 401(k) plan, as well as to permit additional deferrals of a portion of their compensation.
The Plan is intended to comply with the provisions of section 409A of the Internal Revenue Code of 1986, as amended, and is designed
to provide comparable benefits to those under the Frozen Plan. Substantially all compensation deferred under the Plan, as well
as Company contributions, is held by the Company in a grantor trust, which is considered an asset of the Company. The assets held
by the grantor trust are in life insurance policies. Effective July 1, 2013, the Plan was frozen and a new plan, entitled “Aceto
Corporation 2013 Senior Executive Retirement Plan” was adopted by the Company’s Board of Directors.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
As of June 30, 2017, the Company recorded a
liability under the Plans of $3,551 (of which $3,337 is included in long-term liabilities and $214 is included in accrued expenses)
and an asset (included in other assets) of $3,087, primarily representing mutual fund investments owned by the Company. As of June
30, 2016, the Company recorded a liability under the Plans of $3,046 (of which $3,028 is included in long-term liabilities and
$18 is included in accrued expenses) and an asset (included in other assets) of $2,693, primarily representing the cash surrender
value of policies owned by the Company.
(15) Financial Instruments
Derivative Financial Instruments
The Company is exposed to credit losses in
the event of non-performance by the financial institutions, who are the counterparties, on its future foreign currency contracts.
The Company anticipates, however, that the financial institutions will be able to fully satisfy their obligations under the contracts.
The Company does not obtain collateral to support financial instruments, but monitors the credit standing of the financial institutions.
Fair Value of Financial Instruments
The carrying values of all financial instruments
classified as a current asset or current liability are deemed to approximate fair value because of the short maturity of these
instruments. The fair value of the Company’s notes receivable and accrued expenses was based upon current rates offered for
similar financial instruments to the Company.
The Company believes that borrowings outstanding under
its long-term bank loans and mortgage approximate fair value because such borrowings bear interest at current variable market rates.
Business and Credit Concentration
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist principally of trade receivables. The Company’s customers are dispersed
across many industries and are located throughout the United States as well as in Canada, France, Germany, Malaysia, The Netherlands,
Switzerland, the United Kingdom, and other countries. The Company estimates an allowance for doubtful accounts based upon the creditworthiness
of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company’s
estimate of this allowance. At June 30, 2017, three customers approximated 32%, 20% and 15%, respectively, of net trade accounts
receivable. At June 30, 2016, three customers approximated 35%, 19% and 10%, respectively, of net trade accounts receivable.
One customer accounted for 12% of net sales
in fiscal 2017, 14% of net sales in fiscal 2016 and 13% of net sales in fiscal 2015. Another customer accounted for 11% of net
sales in fiscal 2017, 7% of net sales in 2016 and 6% of net sales in 2015. No single product accounted for as much as 10% of net
sales in fiscal 2017, 2016 or 2015.
During the fiscal years ended June 30, 2017,
2016 and 2015, approximately 62%, 56% and 65%, respectively, of the Company’s purchases came from Asia and approximately
17%, 22% and 12%, respectively, came from Europe.
The Company maintains operations located outside
of the United States. Net assets located in Europe and Asia approximated $68,235 and $50,641, respectively at June 30, 2017. Net
assets located in Europe and Asia approximated $62,399 and $48,846, respectively at June 30, 2016.
(16) Commitments, Contingencies and Other
Matters
As of June 30, 2017, the Company has outstanding
purchase obligations totaling $61,381 with suppliers to the Company’s domestic and foreign operations to acquire certain
products for resale to third party customers.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
The Company and its subsidiaries are subject
to various claims which have arisen in the normal course of business. The Company provides for costs related to contingencies when
a loss from such claims is probable and the amount is reasonably determinable. In determining whether it is possible to provide
an estimate of loss, or range of possible loss, the Company reviews and evaluates its litigation and regulatory matters on a quarterly
basis in light of potentially relevant factual and legal developments. If the Company determines an unfavorable outcome is not
probable or reasonably estimable, the Company does not accrue for a potential litigation loss. While the Company has determined
that there is a reasonable possibility that a loss has been incurred, no amounts have been recognized in the financial statements,
other than what has been discussed below, because the amount of the liability cannot be reasonably estimated at this time.
In fiscal years 2011, 2009, 2008 and 2007,
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 PRP Group has
begun to undertake cleanup. The PRP Group is seeking a settlement of approximately $1,700 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 and thus believes that, at most, it is a de minimis contributor to the site
contamination. Accordingly, the Company believes that the settlement offer is unreasonable. 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, Inc. (“Arsynco”), a subsidiary formerly involved in manufacturing chemicals located in
Carlstadt, New Jersey, which was closed in 1993 and is currently held for sale. Based on continued monitoring of the contamination
at the site and the approved plan of remediation, Arsynco received an estimate from an environmental consultant stating that the
costs of remediation could be between $21,500 and $23,300. Remediation commenced in fiscal 2010, and as of June 30, 2017 and June
30, 2016, a liability of $8,451 and $12,532, respectively, is included in the accompanying consolidated balance sheets for this
matter. For the year ended June 30, 2017, the Company recorded environmental remediation charges of $903 which is included in selling,
general and administrative expenses in the accompanying consolidated statements of income for the year ended June 30, 2017. In
accordance with GAAP, management believes that the majority of costs incurred to remediate the site will be capitalized in preparing
the property which is currently classified as held for sale. An appraisal of the fair value of the property by a third-party appraiser
supports the assumption that the expected fair value after the remediation is in excess of the amount required to be capitalized.
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, in July 2009, Arsynco entered into a settlement agreement with BASF Corporation (“BASF”), the
former owners of the Arsynco property. In accordance with the settlement agreement, BASF paid for a portion of the prior remediation
costs and going forward, will co-remediate the property with the Company. The contract requires that BASF pay $550 related to past
response costs and pay a proportionate share of the future remediation costs. Accordingly, the Company had recorded a gain of $550
in fiscal 2009. This $550 gain relates to the partial reimbursement of costs of approximately $1,200 that the Company had previously
expensed. The Company also recorded an additional receivable from BASF, with an offset against property held for sale, representing
its estimated portion of the future remediation costs. The balance of this receivable for future remediation costs as of June 30,
2017 and June 30, 2016 is $3,803 and $5,639, respectively, which is included in the accompanying consolidated balance sheets.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
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 (“BCSA”). Arsynco is one of over 150 PRPs 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 PRPs and their financial strength. In July 2014,
Arsynco received notice from the U.S. Department of Interior (“USDOI”) regarding the USDOI’s intent to perform
a Natural Resource Damage (NRD) Assessment at the BCSA. Arsynco has to date declined to participate in the development and performance
of the NRD assessment process. Based on prior practice in similar situations, it is possible that the State may assert a claim
for natural resource damages with respect to the Arsynco site itself, and either the federal government or the State (or both)
may assert claims against Arsynco for natural resource damages in connection with Berry's Creek; any such claim with respect to
Berry's Creek could also be asserted against the approximately 150 PRPs which the EPA has identified in connection with that site.
Any claim for natural resource damages with respect to the Arsynco site itself may also be asserted against BASF, the former owners
of the Arsynco property. In September 2012, Arsynco entered into an agreement with three of the other PRPs that had previously
been impleaded into New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et al., Docket
No. ESX-L-9868-05 (the "NJDEP Litigation") and were considering impleading Arsynco into the same proceeding. Arsynco
entered into an agreement to avoid impleader. Pursuant to the agreement, Arsynco agreed to (1) a tolling period that would not
be included when computing the running of any statute of limitations that might provide a defense to the NJDEP Litigation; (2)
the waiver of certain issue preclusion defenses in the NJDEP Litigation; and (3) arbitration of certain potential future liability
allocation claims if the other parties to the agreement are barred by a court of competent jurisdiction from proceeding against
Arsynco. In July 2015, Arsynco was contacted by an allocation consultant retained by a group of the named PRPs, inviting Arsynco
to participate in the allocation among the PRPs’ investigation and remediation costs relating to the BCSA. Arsynco declined
that invitation. Since an amount of the liability cannot 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 currently known.
A subsidiary of the Company markets certain
agricultural protection products which are subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). FIFRA requires
that test data be provided to the 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 several such task force groups, which requires payments for such memberships. In addition, in connection
with our agricultural protection business, the Company plans to acquire product registrations and related data filed with the United
States Environmental Protection Agency to support such registrations and other supporting data for several products. The acquisition
of these product registrations and related data filed with the United States Environmental Protection Agency as well as payments
to various task force groups could approximate $2,357 through fiscal 2018, of which $0 has been accrued as of June 30, 2017 and
June 30, 2016.
The Company leases office facilities in the
United States, The Netherlands, Germany, France, Singapore and the Philippines expiring at various dates between October 2017 and
June 2021.
At June 30, 2017, the future minimum lease
payments for office facilities and equipment for each of the five succeeding years and in the aggregate are as follows:
Fiscal year
|
|
Amount
|
|
2018
|
|
$
|
1,673
|
|
2019
|
|
|
2,327
|
|
2020
|
|
|
1,766
|
|
2021
|
|
|
1,327
|
|
2022
|
|
|
1,031
|
|
Thereafter
|
|
|
6,744
|
|
|
|
$
|
14,868
|
|
Total rental expense amounted to $1,301, $1,265
and $1,567 for fiscal 2017, 2016 and 2015, respectively.
(17) Related Party Transactions
During fiscal 2017, 2016 and 2015, the Company
purchased inventory from its corporate joint venture in the amount of $3,236, $2,831 and $3,204, respectively.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
During fiscal 2017, Rising Health and Acetris
Health incurred costs of $1,865 and $165, respectively, related to consulting services provided by former Citron and Lucid employees,
in connection with a transition services agreement entered into at the time of the Company’s 2016 product purchase agreement.
Citron and Lucid are affiliates of Vimal Kavuru, a member of the Company’s Board of Directors.
In October 2017, Rising will commence leasing
approximately 125,000 gross square feet of warehouse space in Somerset, New Jersey. This building is owned by an affiliate of Mr.
Kavuru.
On November 2, 2016, the Company, Citron and
Cronus Research Labs Private Limited,
a research and development company headquartered in
India that is
affiliated with Vimal Kavuru (“Cronus”), entered into two amended and restated joint development
agreements pursuant to which Cronus has been engaged to develop a portfolio of nine pipeline products (“Development Agreement
I”) and certain other products (“Development Agreement II” and together with Development Agreement I, the “Development
Agreements”) on behalf of Citron. Under the terms of Development Agreement I, Cronus has agreed to pay the first $3,500 of
the development costs incurred after December 21, 2016, and 50% of any development costs incurred above that threshold in exchange
for obtaining reimbursement for its costs funded out of the profits earned, if any, from the pipeline products that are commercially
launched, and a specified portion of the profits from those products thereafter. Under the terms of Development Agreement II, Cronus
has agreed to pay the development costs for the products covered thereby in exchange for obtaining reimbursement for its costs
funded out of the profits earned, if any, from such products that are commercially launched (subject to a $1,445 maximum), and
a specified portion of the profits from those products thereafter.
Mr. Kavuru was not a member of the Company’s
Board at the time that the above-mentioned transition services agreement, lease or Development Agreements were executed.
(18) Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09,
Compensation – Stock Compensation
(Topic 718): Scope of Modification Accounting,
which provides guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for all entities
for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.
The Company does not believe this new accounting standard update will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04
Intangibles - Goodwill and Other (Topic 350)
which would eliminate the requirement to calculate the implied fair value of
goodwill to measure a goodwill impairment charge. Instead, the amount of an impairment charge would be recognized if the carrying
amount of a reporting unit is greater than its fair value. ASU 2017-04 is effective for public companies for fiscal years beginning
after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company does not believe this new accounting pronouncement will have a material impact on its consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU
2017-01 is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within
those periods. The Company does not believe this new accounting pronouncement will have a material impact on its consolidated financial
statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses eight specific
cash flow issues with the objective of reducing diversity in how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of the provisions of ASU
2016-15.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which will change
certain aspects of accounting for share-based payments to employees. ASU 2016-09 is effective for fiscal years (and interim reporting
periods within those years) beginning after December 15, 2016. ASU 2019-09 requires that all tax benefits and deficiencies related
to share-based payments be recognized and recorded through the statement of income for all awards settled or expiring after the
adoption of ASU 2016-09. Under prior guidance, tax benefits in excess of compensation costs ("windfalls") were recorded
in equity, and any tax deficiencies ("shortfalls") were recorded in equity to the extent of previous windfalls and then
to the statement of income. ASU 2016-09 also requires, either prospectively or retrospectively, that all tax-related cash flows
resulting from share-based payments be reported as operating activities on the statement of cash flows, a change from prior guidance
that required windfall tax benefits to be presented as an inflow from financing activities and an outflow from operating activities
on the statement of cash flows. Additionally, ASU 2016-09 allows entities to make an accounting policy election for the impact
of most types of forfeitures on the recognition of expense for share-based payment awards by allowing the forfeitures to be either
estimated, as was required under prior guidance, or recognized when they actually occur. Under ASU 2016-09, it is possible for
equity awards to have a more dilutive effect on earnings per share (EPS). Under prior guidance, anticipated income tax windfalls
and shortfalls were included in the calculation of assumed proceeds when applying the treasury stock method for computing the dilutive
effect of share-based awards in the calculation of diluted EPS. Because there is no longer any excess tax benefits recognized in
additional paid capital under ASU 2016-09, when applying the treasury stock method for computing diluted EPS, the assumed proceeds
do not include any windfall tax benefits. As a result, fewer hypothetical shares can be repurchased under the treasury stock method,
resulting in an assumption of more incremental shares being issued upon the exercise of shared-based awards. Therefore, equity
awards have a more dilutive effect on EPS for any period where the average market price of an entity's underlying stock exceeds
the average fair value of outstanding dilutive equity awards for the period. The provisions of ASU 2016-09 are effective
for the Company at the beginning of fiscal 2018. The impact of ASU 2016-09 on the Company's income tax expense or benefit and related
cash flows during and after the period of adoption are dependent in part upon future grants and vesting of stock-based compensation
awards and other factors that are not fully controllable or predicable by the Company such as the future market price of the Company's
common stock, the timing of employee exercises of vested stock options, and the future achievement of performance criteria that
affect performance-based awards.
Under ASU 2016-09, the Company will recognize
forfeitures when they actually occur.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
that replaces existing lease guidance. The new standard is intended to provide enhanced transparency
and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet.
The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of
expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years (and interim reporting periods within
those years) beginning after December 15, 2018. The Company is currently evaluating the impact of the provisions of ASU 2016-02.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Assets.
This ASU is intended to simplify the presentation
of deferred taxes on the balance sheet and will require an entity to present all deferred tax assets and deferred tax liabilities
as non-current on the balance sheet. Under the current guidance, entities are required to separately present deferred taxes as
current or non-current. Netting deferred tax assets and deferred tax liabilities by tax jurisdiction will still be required under
the new guidance. This guidance will be effective for Aceto beginning in the first quarter of fiscal 2018. The Company does not
believe this new accounting standard update will have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330)
–
Simplifying the Measurement of Inventory.
This ASU requires that an entity measure
inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for fiscal
years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of this standard will
not have any impact on the consolidated financial statements of the Company.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
In May 2014, the FASB issued ASU 2014-09,
Revenue
from Contracts with Customers (Topic 606),
which is the new comprehensive revenue recognition standard that will supersede
all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue
when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services. In August 2015, the FASB subsequently issued ASU 2015-14, Revenue from
Contracts with Customers - Deferral of the Effective Date, which approved a one year deferral of ASU 2014-09 for annual reporting
periods beginning after December 15, 2017, including interim periods within that reporting period. In March 2016 and April 2016,
the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross
versus Net), and ASU 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing, respectively,
which further clarify the guidance related to those specific topics within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients, to reduce the risk of diversity in
practice for certain aspects in ASU 2014-09, including collectibility, noncash consideration, presentation of sales tax and transition.
Additionally, in December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. ASU 2016-20 makes minor corrections or minor improvements to the standard that are not expected to have
a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company has
made progress in its evaluation of the amended guidance, including identification of revenue streams. The Company recognizes revenue
from product sales at the time of shipment and passage of title and risk of loss and control of the goods is transferred to the
customer. The Company has no acceptance or other post-shipment obligations and does not offer product warranties or services to
its customers. Although the Company is continuing to assess the impact of the amended guidance, Aceto generally anticipates that
the timing of recognition of revenue will be substantially unchanged under the amended guidance. The Company is continuing to evaluate
the impact on certain other transactions including third-party collaborations and other arrangements. The amended guidance will
be effective for Aceto in the first quarter of fiscal 2019 and permits adoption under either the full retrospective approach (recognize
effects of the amended guidance in each prior reporting period presented) or the modified retrospective approach (recognize the
cumulative effect of adoption as an adjustment to retained earnings at the date of initial application). The Company anticipates
adopting this amended standard on a modified retrospective basis.
(19) Segment Information
The Company's business is organized along product
lines into three principal segments: Human Health, Pharmaceutical Ingredients and Performance Chemicals.
Human Health
- includes finished dosage
form generic drugs and nutraceutical products.
Pharmaceutical Ingredients –
includes
pharmaceutical intermediates and active pharmaceutical ingredients (“APIs”).
Performance Chemicals
- The Performance
Chemicals segment is made up of two product groups: Specialty Chemicals and Agricultural Protection Products. Specialty Chemicals
include a variety of chemicals used in the manufacture of plastics, surface coatings, cosmetics and personal care, textiles, fuels
and lubricants, perform to their designed capabilities. 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.
Agricultural Protection Products include 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.
The Company's chief operating decision maker
evaluates performance of the segments based on net sales, gross profit and income before income taxes. Unallocated corporate amounts
are deemed by the Company as administrative, oversight costs, not managed by the segment managers. 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. During all periods presented, our chief operating decision maker has been the
Chief Executive Officer of the Company. In accordance with GAAP, the Company has aggregated certain operating segments into reportable
segments because they have similar economic characteristics, and the operating segments are similar in all of the following areas:
(a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for
their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of
the regulatory environment.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
|
|
Human
Health
|
|
|
Pharmaceutical
Ingredients
|
|
|
Performance
Chemicals
|
|
|
Unallocated
Corporate
|
|
|
Consolidated
Totals
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
315,395
|
|
|
$
|
157,445
|
|
|
$
|
165,478
|
|
|
$
|
-
|
|
|
$
|
638,318
|
|
Gross profit
|
|
|
78,109
|
|
|
|
25,474
|
|
|
|
37,209
|
|
|
|
-
|
|
|
|
140,792
|
|
Income before income taxes
|
|
|
15,434
|
|
|
|
9,322
|
|
|
|
18,829
|
|
|
|
(26,224
|
)
|
|
|
17,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
228,035
|
|
|
$
|
161,011
|
|
|
$
|
169,478
|
|
|
$
|
-
|
|
|
$
|
558,524
|
|
Gross profit
|
|
|
77,880
|
|
|
|
28,752
|
|
|
|
36,153
|
|
|
|
-
|
|
|
|
142,785
|
|
Income before income taxes
|
|
|
36,362
|
|
|
|
11,856
|
|
|
|
17,799
|
|
|
|
(12,163
|
)
|
|
|
53,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
221,256
|
|
|
$
|
149,296
|
|
|
$
|
172,392
|
|
|
$
|
-
|
|
|
$
|
542,944
|
|
Gross profit
|
|
|
71,742
|
|
|
|
26,683
|
|
|
|
33,002
|
|
|
|
-
|
|
|
|
131,427
|
|
Income before income taxes
|
|
|
31,145
|
|
|
|
8,697
|
|
|
|
14,289
|
|
|
|
(4,273
|
)
|
|
|
49,858
|
|
Net sales and gross profit by source country
for the years ended June 30, 2017, 2016 and 2015 were as follows:
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
483,678
|
|
|
$
|
400,883
|
|
|
$
|
403,094
|
|
|
$
|
116,792
|
|
|
$
|
117,180
|
|
|
$
|
107,727
|
|
Germany
|
|
|
79,105
|
|
|
|
76,666
|
|
|
|
69,889
|
|
|
|
13,609
|
|
|
|
15,154
|
|
|
|
14,660
|
|
Netherlands
|
|
|
9,949
|
|
|
|
16,217
|
|
|
|
14,656
|
|
|
|
1,231
|
|
|
|
1,598
|
|
|
|
1,325
|
|
France
|
|
|
35,796
|
|
|
|
30,177
|
|
|
|
27,976
|
|
|
|
4,651
|
|
|
|
4,043
|
|
|
|
3,634
|
|
Asia-Pacific
|
|
|
29,790
|
|
|
|
34,581
|
|
|
|
27,329
|
|
|
|
4,509
|
|
|
|
4,810
|
|
|
|
4,081
|
|
Total
|
|
$
|
638,318
|
|
|
$
|
558,524
|
|
|
$
|
542,944
|
|
|
$
|
140,792
|
|
|
$
|
142,785
|
|
|
$
|
131,427
|
|
Sales generated from the United States to foreign
countries amounted to $21,750, $23,810 and $38,295 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Long-lived assets by geographic region as of
June 30, 2017 and June 30, 2016 were as follows:
|
|
Long-lived assets
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
528,359
|
|
|
$
|
152,701
|
|
Europe
|
|
|
2,538
|
|
|
|
2,504
|
|
Asia-Pacific
|
|
|
1,582
|
|
|
|
1,781
|
|
Total
|
|
$
|
532,479
|
|
|
$
|
156,986
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017, 2016 AND 2015
(in thousands, except per-share amounts)
(20) Unaudited Quarterly Financial Data
The following is a summary of the unaudited
quarterly results of operations for the years ended June 30, 2017 and 2016.
|
|
For the quarter ended
|
|
Fiscal year ended June 30, 2017
|
|
September 30,
2016 (1)
|
|
|
December 31,
2016(2)
|
|
|
March 31,
2017(2)(3)
|
|
|
June 30,
2017 (2)(4)
|
|
Net sales
|
|
$
|
128,018
|
|
|
$
|
125,552
|
|
|
$
|
190,128
|
|
|
$
|
194,620
|
|
Gross profit
|
|
|
30,839
|
|
|
|
30,805
|
|
|
|
42,319
|
|
|
|
36,829
|
|
Net income (loss)
|
|
|
4,385
|
|
|
|
(564
|
)
|
|
|
5,588
|
|
|
|
1,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.15
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
$
|
0.06
|
|
|
|
For the quarter ended
|
|
Fiscal year ended June 30, 2016
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
|
March 31,
2016(5)
|
|
|
June 30,
2016(6)
|
|
Net sales
|
|
$
|
133,500
|
|
|
$
|
131,674
|
|
|
$
|
157,926
|
|
|
$
|
135,424
|
|
Gross profit
|
|
|
34,581
|
|
|
|
35,868
|
|
|
|
38,289
|
|
|
|
34,047
|
|
Net income
|
|
|
9,298
|
|
|
|
8,270
|
|
|
|
10,424
|
|
|
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.32
|
|
|
$
|
0.28
|
|
|
$
|
0.35
|
|
|
$
|
0.23
|
|
The net income per common share calculation
for each of the quarters is based on the weighted average number of shares outstanding in each period. Therefore, the sum of the
quarters in a year does not necessarily equal the year’s net income per common share.
(1) Includes pretax item of $170 environmental
remediation charge in connection with Arsynco.
(2) Results for the last nine days of the quarter
ended December 31, 2016 and for the subsequent two quarters reflect the acquisition of certain generic products and related assets
from Citron and Lucid on December 21, 2016.
(3) Includes pretax item of $733 environmental
remediation charge in connection with Arsynco.
(4) Includes pretax item of $3,139 representing
immaterial correction of an error associated with certain accrued expenses.
(5) Includes pretax items consisting of $833
reversal of contingent consideration related to the PACK acquisition and $241 reversal of contingent consideration related to the
acquisition of a company in France.
(6) Includes pretax item of $1,313 environmental
remediation charge in connection with Arsynco.