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.
x
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):
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, 2015 as reported on t
he NASDAQ Global Select Market was approximately $774,640,722.
The Registrant has 29,648,664 shares of common
stock outstanding as of August 22, 2016.
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.
PART I
CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking
statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained
in this Annual Report on Form 10-K may not occur. Generally, these statements relate to our business plans or strategies, projected
or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from
acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results
or financial position, and the outcome of any contingencies. Any such forward-looking statements are based on current expectations,
estimates and projections of management. We intend for these forward-looking statements to be covered by the safe-harbor provisions
for forward-looking statements. Words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,”
and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements
are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many
of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements
are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 1A
of this Annual Report on Form 10-K.
Any one or more of these uncertainties, risks
and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately
prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied
in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether
from new information, future events or otherwise.
NOTE REGARDING DOLLAR AMOUNTS
In this Annual Report on Form 10-K, all dollar
amounts are expressed in thousands, except share prices and per-share amounts.
Item 1. Business
General
Aceto Corporation, together with its consolidated
subsidiaries, are referred to herein collectively as “Aceto”, “the Company”, “we”, “us”,
and “our”, unless the context indicates otherwise. Aceto was incorporated in 1947 in the State of New York. We are
an international company engaged in the marketing, sales and distribution of finished dosage form generic pharmaceuticals, nutraceutical
products, pharmaceutical active ingredients and intermediates, specialty performance chemicals inclusive of agricultural intermediates
and agricultural protection products. Our business is organized along product lines into three principal segments: Human Health,
Pharmaceutical Ingredients and Performance Chemicals.
We believe our main business strengths are
sourcing, regulatory support, quality assurance and marketing and distribution. We distribute more than 1,100 chemical compounds
used principally as finished products or raw materials in the pharmaceutical, nutraceutical, agricultural, coatings and industrial
chemical industries. With business operations in ten countries, we believe that our global reach is distinctive in the industry,
enabling us to source and supply quality products on a worldwide basis. Leveraging local professionals, we source more than two-thirds
of our products from Asia, buying from approximately 500 companies in China and 200 in India. No single supplier accounted for
as much as 10% of purchases in fiscal 2016 and 2015.
Strategic relationships with manufacturers
of pharmaceutical, nutraceutical, agricultural and specialty chemical products in the United States and internationally serve as
a valuable resource to Aceto customers, enabling them to procure vital chemical based products necessary for their diverse and
complex applications. A strong global technical network differentiates Aceto from commodity distribution companies. With regional
managers in the United States, Europe and Asia, we provide regulatory support and quality assurance for customers and suppliers
worldwide. Our regulatory network ensures that all products we distribute are produced to applicable required standards and conform
to customer specifications for their intended end use.
Our presence in China, Germany, France, The
Netherlands, Singapore, India, Hong Kong, Philippines, the United Kingdom and
the United States, along with strategically
located warehouses worldwide, enable us to respond quickly to demands from customers worldwide, assuring that a consistent, high-quality
supply of pharmaceutical, nutraceutical, specialty chemicals and agricultural protection products are readily accessible. We are
able to offer our customers competitive pricing, continuity of supply, and quality control. Highly experienced staff, many of whom
are technically trained, enable Aceto to meet individual customer needs. Our marketing, sales, regulatory and technical professionals
possess an intimate knowledge of worldwide sources of supply and product applications, as well as statutory and technical requirements.
Many of our professionals are respected leaders in their industry, bringing 25 or more years of experience to customer applications.
This longevity has fostered confidence and loyalty among customers and suppliers.
Aceto partners with customers during the product
development process, creating new applications for existing products, as well as new product sourcing opportunities. We offer solutions
for product and production challenges, while assisting with quality assurance, government approvals and compliance. All of these
value-added services allow Aceto’s customers to be more responsive to their end use customers and more competitive in the
global marketplace. We believe our more than 65 years of experience, our reputation for reliability and stability, and our long-term
relationships with suppliers have fostered loyalty among our customers.
We remain confident about our business prospects.
We anticipate organic growth through our plans to introduce new products for finished dosage form generic drugs, the further globalization
of our nutraceutical business, the continued globalization of our Performance Chemicals business, the expansion of our agricultural
protection products by investing in product lines and intellectual property, the continued enhancement of our sourcing operations
in China and India, and the steady improvement of our quality assurance and regulatory capabilities.
We believe our track record of continuous product
introductions demonstrates our commitment to be recognized by the worldwide generic pharmaceutical industry as an important, reliable
supplier. Our plans involve seeking strategic acquisitions that enhance our earnings and forming alliances with partners that add
to our capabilities, when possible.
Other than product rights and license agreements
for certain of our finished dosage form generic products which are part of our Human Health business and U.S. Environmental Protection
Agency (EPA) registrations for our Performance Chemicals, we hold no patents, franchises or concessions that we consider material
to our operations.
Information concerning revenue and gross profit
attributable to each of our reportable segments and geographic information is found in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, and in Note 19 to the Consolidated Financial Statements,
Part II, Item 8, “Financial Statements and Supplementary Data.”
Human Health
Products that fall within the Human
Health segment include finished dosage form generic drugs and nutraceutical products. Aceto sells niche generic prescription
products and over-the-counter pharmaceutical products under the Rising label to leading wholesalers, chain drug stores,
distributors and mass merchandisers. As part of our asset-light model, products are developed in collaboration with selected
pharmaceutical development partners and with networks of finished dosage form manufacturing partners. Leveraging our
extensive experience supplying active pharmaceutical ingredients and pharmaceutical intermediates, Aceto entered the end-user
segment of the generic pharmaceuticals industry in 2010 through the acquisition of Rising, a U.S. marketer and distributor of
finished dosage form generics founded in the early 1990s. To supplement our organic growth and further expand into the U.S.
generic pharmaceuticals industry, Rising Pharmaceuticals acquired PACK Pharmaceuticals, a national marketer and distributor
of generic prescription and over-the-counter pharmaceutical products, in April, 2014. During fiscal 2015, PACK was fully
integrated with Rising and is now part of Rising’s operations in New Jersey. Rising, a wholly-owned subsidiary of
Aceto, is an integral component of Aceto's continued strategy to become a Human Health oriented company.
In September 2015, we purchased three Abbreviated
New Drug Applications (“ANDAs”) for the products Ciprofloxacin Ophthalmic Solution 3%, Levofloxacin Ophthalmic Solution
0.5%, and Diclofenac Sodium Ophthalmic Solution 0.1% from Nexus Pharmaceuticals. Also in September 2015, we purchased three ANDAs
from a subsidiary of Endo International plc for the products Methimazole Tablets, Glycopyrrolate Tablets and Meclizine Tablets.
In addition, in September 2014, we purchased three ANDAs from Par Pharmaceuticals, from which Dutasteride Softgel Capsules 0.5mg
was launched in November 2015.
According to an IMS Health press release on
April 14, 2016, “total spending on medicines in the U.S. reached $310 billion in 2015 on an estimated net price basis, up
8.5 percent from the previous year, according to a new report issued today by the IMS Institute for Healthcare Informatics. The
surge of new medicines remained strong last year and demand for recently launched brands maintained historically high levels. The
savings from branded medicines facing generic competition were relatively low in 2015, and the impact of price increases on brands
was limited due to higher rebates and price concessions from manufacturers. Specialty drug spending reached $121 billion on a net
price basis, up more than 15 percent from 2014. The study—
Medicines Use and Spending in the U.S.: A Review of 2015 and
Outlook to 2020
—found that longer-term trends continued to play out last year, driven by the Affordable Care Act and
ongoing response to rising overall healthcare costs. Increasingly, healthcare is being delivered by different types of healthcare
professionals and from different facilities, while patients face higher out-of-pocket costs and access barriers. The outlook for
medicine spending through 2020 is for mid-single digit growth, driven by clusters of innovative treatments and offset by the rising
impact of brands facing generic or biosimilar competition.”
Aceto supplies the raw materials used in the production of nutritional
and packaged dietary supplements, including vitamins, amino acids, iron compounds and biochemicals used in pharmaceutical and nutritional
preparations.
Pharmaceutical Ingredients
The Pharmaceutical Ingredients segment has
two product groups: Active Pharmaceutical Ingredients (APIs) and Pharmaceutical Intermediates.
We supply APIs to many of the major generic
drug companies, who we believe view Aceto as a valued partner in their effort to develop and market generic drugs. The process
of introducing a new API from pipeline to market spans a number of years and begins with Aceto partnering with a generic pharmaceutical
manufacturer and jointly selecting an API, several years before the expiration of a composition of matter patent, for future genericizing.
We then identify the appropriate supplier, and concurrently utilizing our global technical network, work to ensure that the supplier
meets standards of quality to comply with regulations. Our client, the generic pharmaceutical company, will submit the ANDA for
U.S. Food and Drug Administration (“FDA”) approval or European-equivalent approval. The introduction of the API to
market occurs after all the development testing has been completed and the ANDA or European-equivalent is approved and the patent
expires or is deemed invalid. Our goal is to have, at all times, a pipeline of APIs at various stages of development both in the
United States and Europe. Additionally, as the pressure to lower the overall cost of healthcare increases, Aceto has focused on,
and works very closely with our customers to develop new API opportunities to provide alternative, more economical, second-source
options for existing generic drugs. By leveraging our worldwide sourcing, regulatory and quality assurance capabilities, we provide
to generic drug manufacturers an alternative, economical source for existing API products.
Aceto has long been a supplier of pharmaceutical
intermediates, the complex chemical compounds that are the building blocks used in producing APIs. These are the critical components
of all drugs, whether they are already on the market or currently undergoing clinical trials. Faced with significant economic pressures
as well as ever-increasing regulatory barriers, the innovative drug companies look to Aceto as a source for high quality intermediates.
Aceto employs, on occasion, the same second
source strategy for our pharmaceutical intermediates business that we use in our API business. Historically, pharmaceutical manufacturers
have had one source for the intermediates needed to produce their products. Utilizing our global sourcing, regulatory support and
quality assurance network, Aceto works with the large, global pharmaceutical companies, sourcing lower cost, quality pharmaceutical
intermediates that will meet the same high level standards that their current commercial products adhere to.
According to an IMS Health press release on
November 18, 2015, “more than half of the world’s population will live in countries where medicine use will exceed
one dose per person per day by 2020, up from 31 percent in 2005, as the “medicine use gap” between developed and pharmerging
markets narrows. According to new research released by the IMS Institute for Healthcare Informatics, total spending on medicines
will reach $1.4 trillion by 2020 due to greater patient access to chronic disease treatments and breakthrough innovations in drug
therapies. Global spending is forecast to grow at a 4-7 percent compound annual rate over the next five years.” The IMS report,
entitled,
Global Medicines Use in 2020: Outlook and Implications
, projects that “total global spend for pharmaceuticals
will increase by $349 billion on a constant-dollar basis, compared with $182 billion during the past five years. Spending is measured
at the ex-manufacturer level before adjusting for rebates, discounts, taxes and other adjustments that affect net sales received
by manufacturers. The impact of these factors is estimated to reduce growth by $90 billion, or approximately 25 percent of the
growth forecast through 2020.”
Performance Chemicals
The Performance Chemicals segment includes
specialty chemicals and agricultural protection products.
Aceto is a major supplier to many different
industrial segments providing chemicals used in the manufacture of plastics, surface coatings, cosmetics and personal care, textiles,
fuels and lubricants. The paint and coatings industry produces products that bring color, texture, and protection to houses, furniture,
packaging, paper, and durable goods. Many of today's coatings are eco-friendly, by allowing inks and coatings to be cured by ultraviolet
light instead of solvents, or allowing power coatings to be cured without solvents. These growing technologies are critical in
protecting and enhancing the world's ecology. Aceto seeks to supply the specialty additives that make modern coating techniques
possible.
The chemistry that makes much of the modern
world possible is often done by building up simple molecules to sophisticated compounds in step-by-step chemical processes. The
products that are incorporated in each step are known as intermediates and they can be as varied as the end uses they serve, such
as crop protection products, dyes and pigments, textiles, fuel additives, electronics - essentially all things chemical.
Aceto provides various specialty chemicals
for the food, flavor, fragrance, paper and film industries. Aceto’s raw materials are also used in sophisticated technology
products, such as high-end electronic parts used for photo tooling, circuit boards, production of computer chips, and in the production
of many of today's modern gadgets.
According to a July 15, 2016 Federal Reserve
Statistical Release, in the second quarter of calendar year 2016, the index for consumer durables, which impacts the Specialty
Chemicals business of the Performance Chemicals segment, is expected to decrease at an annual rate of 0.3%.
Aceto’s agricultural protection products
include herbicides, fungicides and insecticides, which control weed growth as well as the spread of insects and microorganisms
that can severely damage plant growth. One of Aceto's most widely used agricultural protection products is a sprout inhibitor that
extends the storage life of potatoes. Utilizing our global sourcing and regulatory capabilities, we identify and qualify manufacturers
either producing the product or with knowledge of the chemistry necessary to produce the product, and then file an application
with the U.S. EPA for a product registration. Aceto has an ongoing working relationship with manufacturers in China and India to
determine which of the non-patented or generic, agricultural protection products they produce can be effectively marketed in the
Western world. We have successfully brought numerous products to market. We have a strong pipeline, which includes potential future
additions to our product portfolio. The combination of our global sourcing and regulatory capabilities makes the generic agricultural
market a niche for us. We expect to continue to offer new product additions in this market. In the National Agricultural Statistics
Services release dated June 30, 2016, the total crop acreage planted in the United States in 2016 increased 1.5% to 323 million
acres from 319 million acres in 2015. The number of peanut acres planted in 2016 decreased 2% from 2015 levels while sugarcane
acreage harvested increased 3% from 2015. In addition, the potato acreage harvested in 2016 declined approximately 3% from the
2015 level.
Research and Development Expenses
Research and development expenses (R&D)
represent investment in our generic finished dosage form product pipeline, which includes both Rising and PACK products. R&D
expenses during fiscal years 2016, 2015 and 2014 were $7,937, $5,942 and $5,222 respectively.
Long-lived Assets
Long-lived assets, excluding property held
for sale, by geographic region as of June 30, 2016, 2015 and 2014 were as follows:
|
|
Long-lived assets
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
152,701
|
|
|
$
|
152,886
|
|
|
$
|
160,544
|
|
Europe
|
|
|
2,504
|
|
|
|
2,544
|
|
|
|
3,458
|
|
Asia-Pacific
|
|
|
1,781
|
|
|
|
1,893
|
|
|
|
2,042
|
|
Total
|
|
$
|
156,986
|
|
|
$
|
157,323
|
|
|
$
|
166,044
|
|
Suppliers and Customers
We will only purchase products from specifically
approved plants that meet our strict guidelines for quality. We periodically visit our suppliers to evaluate their ability to deliver
satisfactory products on a timely and cost efficient basis, and their quality system, facilities and equipment system, materials
system, production system, packaging and labeling system and laboratory control system. During the fiscal years ended June 30,
2016 and 2015 approximately 56% and 65%, respectively, of our purchases were from Asia and approximately 22% and 12%, respectively,
were from Europe.
Our customers are primarily located throughout
the United States, Europe and Asia. We will continue our program of regular visits to our suppliers' plants, and will continue
to educate them on the quality of product and service required by our customers. Aceto is uniquely able to do this, as almost all
of our sales representatives are technically trained (chemists, chemical engineers, biologists, pharmacologists, etc.) most with
in-plant or industrial laboratory experience that allows them to effectively communicate customer requirements to sourcing teams.
Our customers include a wide range of companies in the industrial chemical, agricultural, and human health and pharmaceutical industries,
and range from small trading companies to Fortune 500 companies. During fiscal years 2016, 2015 and 2014, sales made to customers
in the United States totaled $380,533, $369,663 and $325,190, respectively. Sales made to customers outside the United States during
fiscal years 2016, 2015 and 2014 totaled $177,991, $177,288 and $184,989, respectively, of which, approximately 56%, 62% and 59%,
respectively, were to customers located in Europe. One customer (AmerisourceBergen Corporation) accounted for 14% of net sales
in fiscal 2016 and 13% of net sales in 2015. No single customer accounted for as much as 10% of net sales in fiscal 2014. No single
product accounted for as much as 10% of net sales in fiscal 2016, 2015 or 2014.
Competition
The Company operates in a highly competitive
business environment. We compete by offering high-quality products produced around the world by both large and small manufacturers
at attractive prices. Because of our long standing relationships with many suppliers as well as our sourcing operations in both
China and India, we are able to ensure that any given product is manufactured at a facility that can meet the regulatory requirements
for that product. For the most part, we store our inventory of chemical-based products in public warehouses strategically located
throughout the United States, Europe, and Asia, and we can therefore fill our customer orders on a timely basis. We have developed
ready access to key purchasing, research, and technical executives of our customers and suppliers. This allows us to ensure that
when necessary, sourcing decisions can be made quickly. We will also continue to search for new products, as well as for new sources
for products where we feel our existing sources have lapsed in either product or delivery quality, and/or have failed to meet the
needs of our customers or markets.
Environmental and Regulatory
We are subject to extensive regulation by federal,
state and local agencies in the countries in which we do business. Of particular importance is the FDA in the U.S. It has jurisdiction
over testing, safety, effectiveness, manufacturing, labeling, marketing, advertising and post-marketing surveillance of our Human
Health products.
Certain of our products involve the use, storage
and transportation of toxic and hazardous materials. The Company's operations are subject to extensive laws and regulations relating
to the storage, handling, transportation and discharge of materials into the environment and the maintenance of safe working conditions.
We have designed safety procedures to comply with the standards prescribed by federal, state and local regulations. We promote
the use of environmentally friendly recyclable packaging by our suppliers. We endeavor to meet our customers' packaging requirements.
We only use warehouses and carriers approved to handle chemicals and that have appropriate permits and licenses.
Our global quality assurance
network, with regional managers in the U.S., Europe and Asia, seeks to ensure that the quality of a product meets both its
specifications and intended use. Our technical network performs a service that allows Aceto to source and qualify APIs,
pharmaceutical intermediates, finished dosage form generics, agricultural products, specialty chemicals, and nutraceutical
products from around the world. It also provides substantial regulatory support and technical assistance to manufacturers
worldwide, enabling them to meet the stringent regulatory guidelines that govern the pharmaceutical, nutraceutical, specialty
chemicals and agricultural protection industries.
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.
Employees
At June 30, 2016, we had 270 employees, none
of whom were covered by a collective bargaining agreement.
Available information
We file annual, quarterly, and current reports,
proxy statements, and other information with the U.S. Securities and Exchange Commission (“SEC”). You may read and
copy any document we file at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549.
You may call the SEC at 1-800-SEC-0330 for
information on the public reference room. The SEC maintains a website that contains annual, quarterly, and current reports, proxy
statements, and other information that issuers (including Aceto) file electronically with the SEC. The SEC’s website is
www.sec.gov
.
Our website is
www.aceto.com
. We make
available free of charge through our Internet site, via a link to the SEC’s website at
www.sec.gov
, our annual reports
on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Forms 3, 4 and 5 filed on behalf of our directors and
executive officers; and any amendments to those reports and forms. We make these filings available as soon as reasonably practicable
after they are electronically filed with, or furnished to, the SEC. The information on our website is not incorporated by reference
into this Annual Report on Form 10-K.
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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·
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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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·
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using the Citizen Petition process to request amendments to FDA standards;
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·
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seeking changes to U.S. Pharmacopoeia, an organization which publishes industry recognized compendia
of drug standards;
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·
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attaching patent extension amendments to non-related federal legislation;
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·
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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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·
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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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·
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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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·
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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
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 and chargebacks 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.
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.
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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.
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.
Changes in tax rules could adversely affect
our future reported financial results or the way we conduct our business.
Our future reported financial results could
be adversely affected if tax or accounting rules regarding unrepatriated earnings change. The Obama administration announced several
proposals to reform United States tax rules, including, among others, proposals that could result in a reduction or elimination
of the deferral of United States tax on our unrepatriated earnings, potentially requiring those earnings to be taxed at the United
States federal income tax rate.
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.
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.
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.
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 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 2016 and 2015, approximately
32% and 33%, 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 2016, approximately 56% and 22% 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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|
·
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technological innovations or new product introductions by us or our competitors
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·
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tariffs, duties and other trade barriers including, among other things, anti-dumping duties
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·
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disputes concerning patents or proprietary rights
|
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·
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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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·
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sales of common stock by existing security holders
|
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·
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securities class actions or other litigation
|
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 2014, the Board of Directors of the
Company authorized the continuation of the Company’s stock repurchase program, expiring in May 2017. 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 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.
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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In March 2010, we purchased a building in Port
Washington, New York, which is the site of our global headquarters. We moved our corporate offices into this new building in April
2011. Our global headquarters consists of approximately 48,000 gross square feet and is subject to a mortgage, which at June 30,
2016, had an outstanding balance of $2,960.
Since the closing of the Rising acquisition
on December 31, 2010, the Company leases approximately 41,000 gross square feet of office space in Allendale, New Jersey. This
lease expires in October 2017.
In November 2007, we purchased approximately
2,300 gross square meters of land along with 12,000 gross square feet of office space in Mumbai, India.
Arsynco owns a 12-acre parcel in Carlstadt,
New Jersey.
In November 2004, we purchased approximately
1,300 gross square meters of office space located in Shanghai, China for our sales offices and investment purposes.
We also lease office space in Hamburg, Germany;
Düsseldorf, Germany; Heemskerk, The Netherlands; Paris, France; Lyon, France, Singapore and the Philippines. These offices
are used for sales and administrative purposes.
We believe that our properties are generally
well maintained, in good condition and adequate for our present needs.
Item 3. Legal Proceedings
We are subject to various claims that have
arisen in the normal course of business. We do not know what impact the final resolution of these matters will have on our results
of operations in a particular reporting period.
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.
In March 2006, Arsynco received notice from
the United States Environmental Protection Agency (“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 owner 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 the 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.
Item 4. Mine Safety Disclosures
Not Applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(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, marketing, sales and
distribution of finished dosage form generics, 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
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; and stock-based compensation.
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, 2016 and June 30, 2015 is $104 and $58, 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.
Inventory
Inventory, which consists principally of finished
goods, are stated at the lower of cost (first-in first-out method) or market. 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 the estimated market
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Cumulative foreign currency translation adjustments
|
|
$
|
(6,120
|
)
|
|
$
|
(6,488
|
)
|
Fair value of interest rate swaps
|
|
|
-
|
|
|
|
(338
|
)
|
Defined benefit plans, net of tax
|
|
|
(205
|
)
|
|
|
(270
|
)
|
Total
|
|
$
|
(6,325
|
)
|
|
$
|
(7,096
|
)
|
The foreign currency translation adjustments
for the year ended June 30, 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 $0.06 per common share were
paid in September, December, March and June of fiscal years 2016, 2015 and 2014. On August 25, 2016, the Company's board of directors
declared a regular quarterly dividend of $0.065 per share to be distributed on September 20, 2016 to shareholders of record as of
September 9, 2016.
On May 8, 2014, the Board of Directors of the
Company authorized the continuation of the Company’s stock repurchase program, expiring in May 2017. 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
2016 or fiscal 2015.
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, 2016, 2015 AND 2014
(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, Aceto 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, 2016, 2015 AND 2014
(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, 2016, 2015 and
2014:
|
|
Accruals for Chargebacks, Returns and Other Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
Other
|
|
|
Sales
|
|
|
|
|
Chargebacks
|
|
|
Returns
|
|
|
Reimbursed Rebates
|
|
|
Rebates
|
|
|
Discounts
|
|
Balance at June 30, 2013
|
|
$
|
3,007
|
|
|
$
|
8,092
|
|
|
$
|
502
|
|
|
$
|
1,545
|
|
|
$
|
-
|
|
Current year provision
|
|
|
60,469
|
|
|
|
17,312
|
|
|
|
2,503
|
|
|
|
20,811
|
|
|
|
4,339
|
|
Credits issued during the year
|
|
|
(52,490
|
)
|
|
|
(5,155
|
)
|
|
|
(2,000
|
)
|
|
|
(18,726
|
)
|
|
|
(3,649
|
)
|
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
|
|
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, 2016.
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, 2016 and June 30, 2014.
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 Rising subsidiary 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 Rising 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, Rising 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 2016, 2015 and 2014, there was approximately $41,036, $51,352 and $26,972 respectively, of shared profits included
in cost of sales, related to these types of collaborative arrangements. In the case of a collaborative arrangement where Rising
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, 2016, 2015 AND 2014
(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, 2016, 2015 and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
29,110
|
|
|
|
28,731
|
|
|
|
28,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and restricted stock awards and units
|
|
|
471
|
|
|
|
516
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
29,581
|
|
|
|
29,247
|
|
|
|
28,563
|
|
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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.
The components of property and equipment were
as follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
Estimated useful
life (years)
|
Machinery and equipment
|
|
$
|
405
|
|
|
$
|
401
|
|
|
3-7
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
1,056
|
|
|
|
1,065
|
|
|
Shorter of asset life
or lease term
|
Computer equipment and software
|
|
|
6,048
|
|
|
|
5,233
|
|
|
3-5
|
Furniture and fixtures
|
|
|
2,365
|
|
|
|
2,472
|
|
|
5-10
|
Automobiles
|
|
|
184
|
|
|
|
185
|
|
|
3
|
Building
|
|
|
8,690
|
|
|
|
8,682
|
|
|
20
|
Land
|
|
|
1,960
|
|
|
|
1,970
|
|
|
-
|
|
|
|
20,708
|
|
|
|
20,008
|
|
|
|
Accumulated depreciation and amortization
|
|
|
10,664
|
|
|
|
9,552
|
|
|
|
|
|
$
|
10,044
|
|
|
$
|
10,456
|
|
|
|
Property held for sale represents land and
land improvements of $6,868 and $6,574 at June 30, 2016 and 2015, respectively. See Note 8, “Environmental Remediation”
for further discussion on property held for sale.
Depreciation and amortization of property and
equipment amounted to $1,522, $1,571 and $1,430 for the years ended June 30, 2016, 2015, and 2014 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 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 2016, the Company performed a qualitative assessment and
in fiscal 2015, the Company performed step one of the two-step process.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(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 the Credit Agreement, dated
as of April 30, 2014, the Company entered into an interest rate swap on April 30, 2014 for a notional amount of $25,750, which
had been designated as a cash flow hedge. The expiration date of this interest rate swap was April 30, 2019. In November 2015,
the Company terminated the interest rate swap agreement resulting in a termination payment of $420. Pursuant to the requirements
of the Credit Agreement, dated December 31, 2010, the Company was required to deliver Hedging Agreements (as defined in the agreement)
fixing the interest rate on not less than $20,000 of the term loan at that time. Accordingly, in March 2011, the Company entered
into an interest rate swap for a notional amount of $20,000, which had been designated as a cash flow hedge and which expired on
December 31, 2015.
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, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
(3) Business Combinations
PACK Pharmaceuticals, LLC
On April 30,
2014, Rising Pharmaceuticals, Inc. (“Rising”), a wholly owned subsidiary of Aceto, acquired 100% of the issued and
outstanding membership interests of PACK Pharmaceuticals, LLC (“PACK”). PACK, a national marketer and distributor of
generic prescription and over-the-counter pharmaceutical products, had headquarters in Buffalo Grove, Illinois, a suburb of Chicago,
Illinois. The Company believes that the acquisition of PACK by Rising has advanced Aceto’s strategy to expand further into
the finished dosage pharmaceutical business. PACK and Rising had very similar business models including operating their businesses
in collaboration with selected pharmaceutical development partners and with networks of finished dosage form manufacturing partners,
focusing on niche products and selling generic prescription products and over-the-counter pharmaceutical products under their respective
labels to leading wholesalers, chain drug stores, distributors and mass market merchandisers.
The
purchase price was approximately $91,596, which was comprised of the issuance of 260 shares of Aceto common stock, valued at $5,685,
and a cash payment of approximately $85,911. The purchase agreement also provided for a three-year earn-out of up to $15,000 in
cash based on the achievement of certain performance-based targets. As of June 30, 2016 and 2015, the Company accrued $0 and $783
respectively, related to this contingent consideration. In the third quarter of fiscal 2016 and the fourth quarter of fiscal 2015,
the Company reversed $833 and $3,468, respectively, of contingent consideration due to management’s evaluation and assessment
of the performance-based targets. The $833 and $3,468 reversals are included in selling, general and administrative expenses in
the Consolidated Statements of Income for the years ended June 30, 2016 and June 30, 2015 respectively.
Other
On December 10, 2013, the Company acquired
all of the outstanding stock of a company in France which has been accounted for as a business combination. In the third quarter
of fiscal 2016, the Company recorded $241 reversal of contingent consideration related to this acquisition due to management’s
evaluation and assessment of the potential earnout amounts defined in the purchase agreements. The $241 reversal is included in
selling, general and administrative expenses in the Consolidated Statements of Income for the year ended June 30, 2016.
(4) Investments
A summary of short-term investments was as
follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
Fair Value
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Cost Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
881
|
|
|
$
|
920
|
|
|
$
|
3,416
|
|
|
$
|
3,393
|
|
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:
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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, 2016, the Company had foreign currency contracts outstanding that had a notional amount
of $58,087. Unrealized losses on hedging activities for the years ended June 30, 2016, 2015, and 2014, amounted to $10, $703 and
$40, 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 the Credit Agreement, dated
as of April 30, 2014, the Company entered into an interest rate swap on April 30, 2014 for an additional interest cost of 1.63%
on a notional amount of $25,750, which had been designated as a cash flow hedge. The expiration date of this interest rate swap
was April 30, 2019. In November 2015, the Company terminated the interest rate swap agreement resulting in a termination payment
of $420, which is included in interest expense in the consolidated statement of income for the year ended June 30, 2016. Pursuant
to the requirements of the Credit Agreement, dated December 31, 2010, the Company was required to deliver Hedging Agreements (as
defined in the agreement) fixing the interest rate on not less than $20,000 of the term loan at that time. Accordingly, in March
2011, the Company entered into an interest rate swap for an additional interest cost of 1.91% on a notional amount of $20,000,
which had been designated as a cash flow hedge and which expired on December 31, 2015. Aceto’s interest rate swaps were previously
classified within Level 2 as the fair value of this hedge was primarily based on observable interest rates.
As of June 30, 2016 and June 30, 2015, the
Company had $0 and $783, respectively, of contingent consideration related to the PACK acquisition, which was completed in April
2014 and $132 and $359, respectively, of contingent consideration related to the acquisition of a company in France, which occurred
in December 2013. In addition, as of June 30, 2015, the Company had $1,480, of contingent consideration that was recorded at fair
value in the Level 3 category, which related to the acquisition of Rising that was completed during fiscal 2011. The Rising contingent
consideration was paid in September 2015. The contingent consideration was calculated using the present value of a probability
weighted income approach.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
Changes in contingent consideration during
2016 and 2015 are as follows:
Balance as of June 30, 2014
|
|
$
|
9,904
|
|
Reversal of fair value of liability-PACK
|
|
|
(3,468
|
)
|
Payments
|
|
|
(4,500
|
)
|
Accrued interest expense
|
|
|
765
|
|
Change in foreign currency exchange rate
|
|
|
(79
|
)
|
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
|
|
During the fourth
quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level using a discounted cash flow model
using Level 3 inputs.
Additionally, on a nonrecurring basis, the Company uses fair value measures
when analyzing asset impairment. 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 approximates a fair value of $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.
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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, 2016 and
2015:
|
|
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 (1)
|
|
|
-
|
|
|
|
160
|
|
|
|
-
|
|
|
|
160
|
|
Foreign currency contracts-liabilities (2)
|
|
|
-
|
|
|
|
169
|
|
|
|
-
|
|
|
|
169
|
|
Contingent consideration (3)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
132
|
|
|
|
132
|
|
|
(1)
|
Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of
June 30, 2016.
|
|
(2)
|
Included in “Accrued expenses” in the accompanying
Consolidated Balance Sheet as of June 30, 2016.
|
|
(3)
|
Included in “Long-term liabilities” in the accompanying Consolidated Balance Sheet
as of June 30, 2016.
|
|
|
Fair Value Measurements at June 30, 2015 Using
|
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
$
|
6,376
|
|
|
|
-
|
|
|
$
|
6,376
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
-
|
|
|
|
3,416
|
|
|
|
-
|
|
|
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts-assets (4)
|
|
|
-
|
|
|
|
119
|
|
|
|
-
|
|
|
|
119
|
|
Foreign currency contracts-liabilities (5)
|
|
|
-
|
|
|
|
767
|
|
|
|
-
|
|
|
|
767
|
|
Derivative liability for interest rate swap (6)
|
|
|
-
|
|
|
|
338
|
|
|
|
-
|
|
|
|
338
|
|
Contingent consideration (7)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,622
|
|
|
|
2,622
|
|
|
(4)
|
Included in “Other receivables” in the accompanying Consolidated Balance Sheet as of
June 30, 2015.
|
|
(5)
|
Included in “Accrued expenses” in the accompanying
Consolidated Balance Sheet as of June 30, 2015.
|
|
(6)
|
$13 included in “Accrued expenses” and $325 included in “Long-term liabilities”
in the accompanying Consolidated Balance Sheet as of June 30, 2015.
|
|
(7)
|
$1,480 included in “Accrued expenses” and $1,142 included in “Long-term liabilities”
in the accompanying Consolidated Balance Sheet as of June 30, 2015.
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
(6) Goodwill and Other Intangible Assets
As of June 30, 2016 and June 30, 2015, there
was goodwill of $67,871 and $67,870, respectively.
Changes in the Company's goodwill during 2016
and 2015 are as follows:
|
|
Human
Health
Segment
|
|
|
Pharmaceutical
Ingredients
Segment
|
|
|
Performance
Chemicals
Segment
|
|
|
Total
Goodwill
|
|
Balance as of June 30, 2014
|
|
$
|
64,461
|
|
|
$
|
1,832
|
|
|
$
|
223
|
|
|
$
|
66,516
|
|
Measurement period adjustments
|
|
|
1,578
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,578
|
|
Changes in foreign currency exchange rates
|
|
|
-
|
|
|
|
(182
|
)
|
|
|
(42
|
)
|
|
|
(224
|
)
|
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
|
|
Intangible assets subject to amortization as
of June 30, 2016 and 2015 were as follows:
|
|
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
|
|
|
|
Gross
Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
21,664
|
|
|
$
|
6,013
|
|
|
$
|
15,651
|
|
Trademarks
|
|
|
1,868
|
|
|
|
1,756
|
|
|
|
112
|
|
Product rights and related intangibles
|
|
|
73,261
|
|
|
|
16,410
|
|
|
|
56,851
|
|
License agreements
|
|
|
6,037
|
|
|
|
4,568
|
|
|
|
1,469
|
|
EPA registrations and related data
|
|
|
12,800
|
|
|
|
8,683
|
|
|
|
4,117
|
|
Technology-based intangibles
|
|
|
155
|
|
|
|
118
|
|
|
|
37
|
|
|
|
$
|
115,785
|
|
|
$
|
37,548
|
|
|
$
|
78,237
|
|
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, EPA registrations and related data and technology-based intangibles are 7-11 years, 3-4 years, 3-14 years,
6-11 years, 10 years, and 7 years, respectively.
As of June 30, 2016 and June 30, 2015, the
Company also had $761 and $760, 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, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
Amortization expense for intangible assets
subject to amortization amounted to $11,176, $10,278 and $6,662 for the years ended June 30, 2016, 2015 and 2014, respectively.
The estimated aggregate amortization expense for intangible assets subject to amortization for each of the succeeding years ending
June 30, 2017 through June 30, 2022 are as follows: 2017: $10,584; 2018: $9,815; 2019: $9,320; 2020: $8,830; 2021: $8,784 and 2022
and thereafter: $30,977.
(7) Accrued Expenses
The components of accrued expenses as of June
30, 2016 and 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
Accrued compensation
|
|
$
|
6,880
|
|
|
$
|
6,942
|
|
Accrued environmental remediation costs-current portion
|
|
|
9,180
|
|
|
|
8,084
|
|
Reserve for price concessions
|
|
|
31,342
|
|
|
|
35,965
|
|
Other accrued expenses
|
|
|
5,273
|
|
|
|
8,850
|
|
|
|
$
|
52,675
|
|
|
$
|
59,841
|
|
(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
total cost of remediation could be between $19,400 and $21,200. Remediation commenced in fiscal 2010, and as of June 30, 2016 and
2015, a liability of $12,532 and $11,079, respectively, is included in the accompanying consolidated balance sheets for this matter.
In the fourth quarter of fiscal 2016, $1,313 environmental remediation charge was recorded and included in selling, general and
administrative expenses in the accompanying consolidated statement of income. 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,
2016 and 2015 is $5,639 and $4,985, respectively, which is included in the accompanying consolidated balance sheets.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
In March 2006, Arsynco received notice from
the United States Environmental Protection Agency (“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 owner 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 the 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,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Convertible Senior Notes, net
|
|
$
|
115,829
|
|
|
$
|
-
|
|
Revolving bank loans
|
|
|
-
|
|
|
|
45,000
|
|
Term bank loans
|
|
|
-
|
|
|
|
62,000
|
|
Mortgage
|
|
|
2,960
|
|
|
|
3,157
|
|
|
|
|
118,789
|
|
|
|
110,157
|
|
Less current portion
|
|
|
197
|
|
|
|
10,197
|
|
|
|
$
|
118,592
|
|
|
$
|
99,960
|
|
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. Interest will be payable semi-annually in arrears. 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. After deducting the underwriting discounts and commissions and other expenses (including
the net cost of the bond hedge and warrant, discussed below), the net proceeds from the offering was approximately $125,108. 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, 2016, 2015 AND 2014
(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) of $27,241. The value of the embedded conversion option was determined based on the estimated fair
value of the debt without the conversion feature, which was determined using an expected present value technique (income approach)
to estimate the fair value of similar non-convertible debt (see Note 5); the debt discount is being amortized as additional non-cash
interest expense using the effective interest method over the term of the Notes.
Offering costs of
$5,153 have been allocated to the debt and equity components in proportion to the allocation of proceeds to the components, as
debt issuance costs and equity issuance costs, respectively. The debt issuance costs of $4,177 are being amortized as additional
non-cash interest expense using the straight-line method over the term of the debt, since this method was not significantly different
from the effective interest method. The $976 portion allocated to equity issuance costs was charged to capital in excess of par
value. As discussed in Note 18, the Company adopted
Accounting Standards Update 2015-03,
Interest—Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
in the second quarter of fiscal 2016. 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.” A call-spread consists of Aceto’s (1) purchasing a
call option on its own shares with an exercise price of $33.215 and (2) writing a call option on its own shares at a higher strike
price of $44.71 (premium of 75%) (i.e., issuing a warrant). The purchased call option has an exercise price equal to the conversion
price of Aceto’s convertible debt, which economically reduces the potential common stock dilution that may arise from the
conversion of the Notes. The written call option has a higher strike price to partially finance the purchased call option. 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, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
The carrying value
of the Notes is as follows:
|
|
June
30,
2016
|
|
|
|
|
|
|
Principal amount
|
|
$
|
143,750
|
|
Unamortized debt discount
|
|
|
(24,267
|
)
|
Unamortized debt issuance costs
|
|
|
(3,654
|
)
|
Net carrying value
|
|
$
|
115,829
|
|
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:
|
|
Year
Ended
June
30, 2016
|
|
|
|
|
|
|
Contractual coupon
|
|
$
|
1,788
|
|
Amortization of debt discount
|
|
|
2,974
|
|
Amortization of debt issuance costs
|
|
|
522
|
|
|
|
$
|
5,284
|
|
Credit Facilities
On October 28,
2015, the Company entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”), which amended
and restated in its entirety the Credit Agreement, dated as of April 30, 2014 with three domestic financial institutions, as amended
on June 25, 2015 by Amendment No. 1 to the Credit Agreement (together, the “First Amended Credit Agreement”).
The A&R Credit Agreement increases the aggregate available revolving commitment under the First
Amended Credit Agreement from $75,000 to an initial aggregate available revolving commitment of $150,000 (the “Initial Revolving
Commitment”), which may be increased in accordance with the terms and conditions of the A&R Credit Agreement by an aggregate
amount not to exceed $100,000 (the “Expansion Commitment” and, together with the Initial Revolving Commitment, the
“Revolving Commitment”). Under the A&R Credit Agreement, the Company may borrow, repay and reborrow loans up to
the Revolving Commitment from and as of October 28, 2015, to but excluding the earlier of October 28, 2020 and the termination
of the Revolving Commitment, in amounts up to, but not exceeding at any one time, the Revolving Commitment. The A&R Credit
Agreement does not provide for any term loan commitment. The proceeds from initial borrowings under the A&R Credit Agreement
have been used to repay all amounts outstanding pursuant to the term loan commitment and revolving loan commitment under Aceto’s
First Amended Credit Agreement. The proceeds from the issuance of the Notes were used to pay initial borrowings under the A&R
Credit Agreement. As of June 30, 2016, there were no amounts outstanding under the A&R Credit Agreement.
The A&R Credit Agreement provides for (i)
Eurodollar Loans (as such term is defined in the A&R Credit Agreement), (ii) ABR Loans (as such term is defined in the A&R
Credit Agreement) or (iii) a combination thereof. Borrowings under the A&R Credit Agreement will bear interest per annum at
a base rate or, at the Company’s option, LIBOR, plus an applicable margin ranging from 0.00% to 0.75% in the case of ABR
Loans, and 1.00% to 1.75% in the case of Eurodollar Loans. The applicable interest rate margin percentage will be determined by
the Company’s senior secured net leverage ratio.
The A&R Credit Agreement, similar to Aceto’s
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 open letters
of credit of approximately $0 and $21 at June 30, 2016 and June 30, 2015 respectively.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
The A&R Credit Agreement, like Aceto’s
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. 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, 2016.
The Company has available lines of credit with
foreign financial institutions. At June 30, 2016, the Company had available lines of credit with foreign financial institutions
totaling $7,397. At June 30, 2015, the Company had available lines of credit with foreign financial institutions totaling $7,391.
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, 2016 and 5.0% at June 30, 2015 and 2014. The Company is not subject to any financial covenants
under these arrangements.
Under the above financing arrangements, the
Company had $0 in bank loans and $0 in letters of credit leaving an unused facility of $155,639 at June 30, 2016. At June 30, 2015
the Company had $107,000 in bank loans and $21 in letters of credit leaving an unused facility of $37,370.
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, 2016 and matures on June 30, 2021.
Maturity of Long-term Debt
Long-term debt matures by fiscal year as follows:
2017
|
|
$
|
197
|
|
2018
|
|
|
197
|
|
2019
|
|
|
197
|
|
2020
|
|
|
197
|
|
2021
|
|
|
118,001
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
118,789
|
|
(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, 2016, 2015 AND 2014
(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.
As of June 30, 2016, there were 4,250, 174
and 0 shares of common stock available for grant under the 2015, 2010 and 2007 Plans, respectively.
In September 2002, the Company adopted the
Aceto Corporation 2002 Stock Option Plan (2002 Plan), which was ratified by the Company’s shareholders in December 2002.
The 2002 Plan expired in December 2012. Outstanding options survive the expiration of the 2002 Plan.
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, 2016, 2015 and 2014, 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, 2013
|
|
|
960
|
|
|
$
|
8.36
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(392
|
)
|
|
|
9.34
|
|
|
|
|
|
Forfeited (including cancelled options)
|
|
|
(17
|
)
|
|
|
6.58
|
|
|
|
|
|
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
|
|
|
$
|
4,439
|
|
Options exercisable at June 30, 2016
|
|
|
302
|
|
|
$
|
7.19
|
|
|
$
|
4,439
|
|
The total intrinsic
value of stock options exercised during the years ended June 30, 2016, 2015 and 2014 was approximately $1,700, $1,713 and $3,607,
respectively.
The weighted average remaining contractual life of options outstanding at June 30, 2016 was approximately
4 years.
There were no stock options granted in fiscal
years 2016, 2015 or 2014.
Under the 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 2016, 2015 and
2014, restricted stock awarded and premium shares vested of 7, 5 and 7 common shares, respectively, were issued under employee
incentive plans, which increased stockholders’ equity by $113, $77 and $93, respectively. The related non-cash compensation
expense related to the vesting of premium shares during the year was $22, $22 and $20 in fiscal 2016, 2015 and 2014, respectively.
Additionally, non-cash compensation expense of $0, $21 and $207 was recorded in fiscal 2016, 2015 and 2014, respectively, relating
to stock option grants, which is included in selling, general and administrative expenses.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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.
During the year ended June 30, 2014, the Company
granted 214 shares of restricted common stock to its employees that vest over three years and 11 shares of restricted common stock
to its non-employee directors, which vest over approximately one year as well as 32 restricted stock units that have varying vest
dates from August 2014 through July 2015. In addition, the Company also issued a target grant of 131 performance-vested restricted
stock units, which grant could be as much as 196 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.
For the years ended June 30, 2016, 2015 and
2014, the Company recorded stock-based compensation expense of approximately $6,697, $4,494, and $2,929, 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 $7,997 at June 30, 2016 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, 2016, is presented below:
|
|
Shares
|
|
|
Weighted
average grant
date fair value
|
|
Non-vested at beginning of year
|
|
|
688
|
|
|
$
|
15.81
|
|
Granted
|
|
|
422
|
|
|
|
22.99
|
|
Vested
|
|
|
(274
|
)
|
|
|
12.64
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
15.49
|
|
Non-vested at June 30, 2016
|
|
|
795
|
|
|
$
|
20.73
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
(11) Interest and Other Income
Interest and other income during fiscal 2016,
2015 and 2014 was comprised of the following:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Dividends
|
|
$
|
222
|
|
|
$
|
233
|
|
|
$
|
257
|
|
Interest
|
|
|
313
|
|
|
|
282
|
|
|
|
237
|
|
Foreign government subsidies received
|
|
|
25
|
|
|
|
22
|
|
|
|
38
|
|
Joint venture equity earnings
|
|
|
2,060
|
|
|
|
1,761
|
|
|
|
2,024
|
|
Foreign currency gains (losses)
|
|
|
56
|
|
|
|
(1,065
|
)
|
|
|
(102
|
)
|
Rental income
|
|
|
154
|
|
|
|
151
|
|
|
|
144
|
|
Miscellaneous (expense) income
|
|
|
(7
|
)
|
|
|
102
|
|
|
|
(96
|
)
|
|
|
$
|
2,823
|
|
|
$
|
1,486
|
|
|
$
|
2,502
|
|
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:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic operations
|
|
$
|
43,906
|
|
|
$
|
48,276
|
|
|
$
|
30,884
|
|
Foreign operations
|
|
|
9,948
|
|
|
|
5,589
|
|
|
|
13,790
|
|
|
|
$
|
53,854
|
|
|
$
|
53,865
|
|
|
$
|
44,674
|
|
The components of the provision for income
taxes are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
15,129
|
|
|
$
|
18,393
|
|
|
$
|
12,720
|
|
Deferred
|
|
|
(204
|
)
|
|
|
(1,357
|
)
|
|
|
(2,728
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
755
|
|
|
|
1,526
|
|
|
|
1,547
|
|
Deferred
|
|
|
173
|
|
|
|
189
|
|
|
|
(113
|
)
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
3,222
|
|
|
|
2,337
|
|
|
|
4,490
|
|
Deferred
|
|
|
13
|
|
|
|
(706
|
)
|
|
|
(242
|
)
|
|
|
$
|
19,088
|
|
|
$
|
20,382
|
|
|
$
|
15,674
|
|
Income taxes payable, which is included in
accrued expenses, was $2,119 and $0 at June 30, 2016 and 2015, respectively.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
The tax effects of temporary differences that
give rise to the deferred tax assets and liabilities at June 30, 2016 and 2015 are presented below:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued deferred compensation
|
|
$
|
4,122
|
|
|
$
|
3,025
|
|
Accrual for sales deductions not currently deductible
|
|
|
5,925
|
|
|
|
6,388
|
|
Additional inventoried costs for tax purposes
|
|
|
389
|
|
|
|
262
|
|
Allowance for doubtful accounts receivable
|
|
|
106
|
|
|
|
132
|
|
Depreciation and amortization
|
|
|
7,784
|
|
|
|
6,899
|
|
Debt issuance costs
|
|
|
9,462
|
|
|
|
-
|
|
Accrual for payments to former senior management and other personnel related costs
|
|
|
-
|
|
|
|
29
|
|
Contingent consideration
|
|
|
-
|
|
|
|
286
|
|
Foreign deferred tax assets
|
|
|
1,121
|
|
|
|
1,201
|
|
Domestic net operating loss carryforwards
|
|
|
109
|
|
|
|
132
|
|
Foreign net operating loss carryforwards
|
|
|
685
|
|
|
|
678
|
|
Total gross deferred tax assets
|
|
|
29,703
|
|
|
|
19,032
|
|
Valuation allowances
|
|
|
(794
|
)
|
|
|
(810
|
)
|
|
|
|
28,909
|
|
|
|
18,222
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Foreign deferred tax liabilities
|
|
|
(27
|
)
|
|
|
(66
|
)
|
Goodwill
|
|
|
(7,586
|
)
|
|
|
(6,117
|
)
|
Original issue discount – convertible senior notes
|
|
|
(9,115
|
)
|
|
|
-
|
|
Other
|
|
|
(26
|
)
|
|
|
(83
|
)
|
Total gross deferred tax liabilities
|
|
|
(16,754
|
)
|
|
|
(6,266
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
12,155
|
|
|
$
|
11,956
|
|
The following table shows the current and non-current
deferred tax assets (liabilities) at June 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Current deferred tax assets, net
|
|
$
|
3,244
|
|
|
$
|
2,050
|
|
Non-current deferred tax assets, net
|
|
|
18,053
|
|
|
|
9,972
|
|
Current deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Non-current deferred tax liabilities
|
|
|
(9,142
|
)
|
|
|
(66
|
)
|
Net deferred tax assets
|
|
$
|
12,155
|
|
|
$
|
11,956
|
|
The net change in the total valuation allowance
for the years ended June 30, 2016 and June 30, 2015 was a decrease of $16 and $205, 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. 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, 2016, the Company will need to generate future taxable income of approximately $33,400.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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 $106,597 at June 30, 2016 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, 2016, 2015 and 2014 follows:
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local taxes, net of federal income tax benefit
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
2.5
|
|
Decrease (increase) in valuation allowance
|
|
|
-
|
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
Foreign tax rate differential
|
|
|
(0.4
|
)
|
|
|
(0.9
|
)
|
|
|
(1.1
|
)
|
Other
|
|
|
(0.9
|
)
|
|
|
0.9
|
|
|
|
(1.2
|
)
|
Effective tax rate
|
|
|
35.4
|
%
|
|
|
37.8
|
%
|
|
|
35.1
|
%
|
The Company operates 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 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, 2016 and June 30, 2015. 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 2012 (in the case of certain foreign tax returns, fiscal year 2011).
(13) Supplemental Cash Flow Information
Cash paid for interest and income taxes during
fiscal 2016, 2015 and 2014 was as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest
|
|
$
|
2,970
|
|
|
$
|
3,954
|
|
|
$
|
2,100
|
|
Income taxes, net of refunds
|
|
$
|
16,076
|
|
|
$
|
25,459
|
|
|
$
|
14,645
|
|
The Company had non-cash items excluded from
the Consolidated Statements of Cash Flows during the years ended June 30, 2016 and 2015 of $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. In connection with the acquisition of PACK, the Company issued shares of Aceto common stock
with a fair market value of $5,685 which is a non-cash item and is excluded from the Consolidated Statement of Cash Flows during
the year ended June 30, 2014.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
(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 $1,957, $1,849 and $1,474 in fiscal 2016, 2015 and 2014,
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, 2016 was $853. The accrued pension liability as of June 30, 2015 was $926. Net periodic pension
costs, which consists principally of interest cost and service cost was $28 in fiscal 2016, $53 in fiscal 2015 and $80 in fiscal
2014. The Company’s plans are funded in conformity with the funding requirements of the applicable government regulations.
An assumed weighted average discount rate of 1.9%, 1.6% and 3.0% and a compensation increase rate of 0.0%, 0.0% and 0.0% were used
in determining the actuarial present value of benefit obligations as of June 30, 2016, 2015 and 2014, 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.
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.
As of June 30, 2015, the Company recorded a liability under the Plans of $2,974 (of which $2,855 is included in long-term liabilities
and $119 is included in accrued expenses) and an asset (included in other assets) of $2,550, 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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
Off-Balance Sheet Risk
Commercial letters of credit are issued by
the Company during the ordinary course of business through major banks as requested by certain suppliers. The Company had open
letters of credit of approximately $0 and $21 as of June 30, 2016 and 2015, respectively. The terms of these letters of credit
are all less than one year. No material loss is anticipated due to non-performance by the counterparties to these agreements.
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, 2016, three customers approximated 34%, 20% and 11%, respectively, of net trade accounts
receivable. At June 30, 2015, two customers approximated 40% and 21%, respectively, of net trade accounts receivable.
One customer accounted for 14% of net sales
in fiscal 2016. One customer accounted for 13% of net sales in fiscal 2015. No single customer accounted for as much as 10% of
net sales in fiscal 2014. No single product accounted for as much as 10% of net sales in fiscal 2016, 2015 or 2014.
During the fiscal years ended June 30, 2016,
2015 and 2014, approximately 56%, 65% and 64%, respectively, of the Company’s purchases came from Asia and approximately
22%, 12% and 14%, respectively, came from Europe.
The Company maintains operations located outside
of the United States. Net assets located in Europe and Asia approximated $62,399 and $48,846, respectively at June 30, 2016. Net
assets located in Europe and Asia approximated $57,161 and $47,097, respectively at June 30, 2015.
(16) Commitments, Contingencies and Other
Matters
As of June 30, 2016, the Company has outstanding
purchase obligations totaling $77,367 with suppliers to the Company’s domestic and foreign operations to acquire certain
products for resale to third party customers.
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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 $19,400 and $21,200. Remediation commenced in fiscal 2010, and as of June 30, 2016 and 2015,
a liability of $12,532 and $11,079, respectively, is included in the accompanying consolidated balance sheets for this matter.
In the fourth quarter of fiscal 2016, $1,313 environmental remediation charge was recorded and included in selling, general and
administrative expenses in the accompanying consolidated statement of income. 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,
2016 and 2015 is $5,639 and $4,985, respectively, which is included in the accompanying consolidated balance sheets.
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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 $1,802 through fiscal 2017, of which $0 has been accrued as of June 30, 2016 and
June 30, 2015.
The Company leases office facilities in the
United States, The Netherlands, Germany, France, Singapore and the Philippines expiring at various dates between October 2014 and
June 2021.
At June 30, 2016, 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
|
|
2017
|
|
$
|
1,419
|
|
2018
|
|
|
877
|
|
2019
|
|
|
377
|
|
2020
|
|
|
69
|
|
2021
|
|
|
3
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
2,745
|
|
Total rental expense amounted to $1,265, $1,567
and $1,576 for fiscal 2016, 2015 and 2014, respectively.
(17) Related Party Transactions
During fiscal 2016, 2015 and 2014, the Company
purchased inventory from its joint venture in the amount of $2,831, $3,204 and $2,808, respectively.
(18) Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“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. The Company is currently evaluating the impact of the provisions of ASU 2016-09.
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.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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, with early adoption
permitted. The Company does not believe this new accounting standard update will have a material impact on its consolidated financial
statements.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805); Simplifying the Accounting for Measurement-Period Adjustments.
This ASU requires that
an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period
in the reporting period in which the adjustments amounts are determined. This is in contrast to existing guidance that requires
retrospective adjustments to provisional amounts recognized in a business combination. This guidance is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2015. The Company does not believe that this updated standard
will have a material impact on the Company’s 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 Company is currently
evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. The FASB issued
ASU 2015-03 to simplify the presentation of debt issuance costs related to a recognized debt liability to present the 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 August 2015, the FASB issued ASU 2015-15,
Interest—Imputation of Interest (Subtopic 835-30)
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,
which clarified
that debt issuance costs associated with line of credit arrangements may continue to be presented as an asset, regardless of whether
there are any outstanding borrowings on the line of credit arrangement. This guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2015, with early adoption permitted. As previously discussed in Note 9,
the Company adopted ASU 2015-03 during the second quarter of fiscal year 2016.
In February 2015, the FASB issued ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis.
ASU 2015-02 changes the analysis that a reporting entity
must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an
interim period. The Company believes the adoption of ASU 2015-02 will not have an impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40)
. This ASU provides guidance to determine when and how
to disclose going-concern uncertainties in the financial statements. The new standard requires management to assess an entity’s
ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. ASU 2014-15 will be
effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. ASU 2014-15
will be effective for the Company beginning June 30, 2017. The Company does not believe that this pronouncement will have an impact
on its consolidated financial statements.
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(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. Additionally, 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. The Company
has not determined the impact of adoption on its consolidated financial statements.
(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.
|
|
Human
Health
|
|
|
Pharmaceutical
Ingredients
|
|
|
Performance
Chemicals
|
|
|
Unallocated
Corporate
|
|
|
Consolidated
Totals
|
|
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
|
|
$
|
225,263
|
|
|
$
|
149,296
|
|
|
$
|
172,392
|
|
|
$
|
-
|
|
|
$
|
546,951
|
|
Gross profit
|
|
|
75,749
|
|
|
|
26,683
|
|
|
|
33,002
|
|
|
|
-
|
|
|
|
135,434
|
|
Income before income taxes
|
|
|
35,152
|
|
|
|
8,697
|
|
|
|
14,289
|
|
|
|
(4,273
|
)
|
|
|
53,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
160,217
|
|
|
$
|
176,425
|
|
|
$
|
173,537
|
|
|
$
|
-
|
|
|
$
|
510,179
|
|
Gross profit
|
|
|
48,496
|
|
|
|
36,615
|
|
|
|
29,592
|
|
|
|
-
|
|
|
|
114,703
|
|
Income before income taxes
|
|
|
19,710
|
|
|
|
17,557
|
|
|
|
13,273
|
|
|
|
(5,866
|
)
|
|
|
44,674
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
Net sales and gross profit by source country
for the years ended June 30, 2016, 2015 and 2014 were as follows:
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
400,883
|
|
|
$
|
407,101
|
|
|
$
|
355,715
|
|
|
$
|
117,180
|
|
|
$
|
111,734
|
|
|
$
|
82,573
|
|
Germany
|
|
|
76,666
|
|
|
|
69,889
|
|
|
|
84,024
|
|
|
|
15,154
|
|
|
|
14,660
|
|
|
|
22,614
|
|
Netherlands
|
|
|
16,217
|
|
|
|
14,656
|
|
|
|
14,869
|
|
|
|
1,598
|
|
|
|
1,325
|
|
|
|
1,581
|
|
France
|
|
|
30,177
|
|
|
|
27,976
|
|
|
|
29,412
|
|
|
|
4,043
|
|
|
|
3,634
|
|
|
|
4,182
|
|
Asia-Pacific
|
|
|
34,581
|
|
|
|
27,329
|
|
|
|
26,159
|
|
|
|
4,810
|
|
|
|
4,081
|
|
|
|
3,753
|
|
Total
|
|
$
|
558,524
|
|
|
$
|
546,951
|
|
|
$
|
510,179
|
|
|
$
|
142,785
|
|
|
$
|
135,434
|
|
|
$
|
114,703
|
|
Sales generated from the United States to foreign
countries amounted to $23,810, $38,295 and $31,156 for the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
Long-lived assets by geographic region as of
June 30, 2016 and June 30, 2015 were as follows:
|
|
Long-lived assets
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
152,701
|
|
|
$
|
152,886
|
|
Europe
|
|
|
2,504
|
|
|
|
2,544
|
|
Asia-Pacific
|
|
|
1,781
|
|
|
|
1,893
|
|
Total
|
|
$
|
156,986
|
|
|
$
|
157,323
|
|
(20) Unaudited Quarterly Financial Data
The following is a summary of the unaudited
quarterly results of operations for the years ended June 30, 2016 and 2015.
|
|
For the quarter ended
|
|
Fiscal year ended June 30, 2016
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
|
March 31,
2016(1)
|
|
|
June 30,
2016(2)
|
|
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
|
|
|
|
For the quarter ended
|
|
Fiscal year ended June 30, 2015
|
|
September 30,
2014
|
|
|
December 31,
2014
|
|
|
March 31,
2015
|
|
|
June 30,
2015(3)
|
|
Net sales
|
|
$
|
130,803
|
|
|
$
|
123,765
|
|
|
$
|
145,796
|
|
|
$
|
146,587
|
|
Gross profit
|
|
|
27,651
|
|
|
|
30,019
|
|
|
|
36,598
|
|
|
|
41,166
|
|
Net income
|
|
|
4,828
|
|
|
|
6,608
|
|
|
|
8,411
|
|
|
|
13,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.17
|
|
|
$
|
0.23
|
|
|
$
|
0.29
|
|
|
$
|
0.46
|
|
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2016, 2015 AND 2014
(in thousands, except per-share amounts)
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 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.
(2) Includes pretax item of $1,313 environmental
remediation charge in connection with Arsynco.
(3) Includes pretax items consisting of $1,618
environmental remediation charge in connection with Arsynco, $3,468 reversal of contingent consideration related to the PACK acquisition
and $3,497 change in estimate for product returns.