-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P5zCApPz6E+iYiiuj6/p56eXqxn3Qccgn2VfOyhA2pivNkjpeqc63xxfb4BFDfxt 7ZewRVLw6QyjOkKPDDGK8g== 0000950123-02-005223.txt : 20020515 0000950123-02-005223.hdr.sgml : 20020515 20020515105029 ACCESSION NUMBER: 0000950123-02-005223 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBREX CORP CENTRAL INDEX KEY: 0000820081 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222476135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10638 FILM NUMBER: 02648928 BUSINESS ADDRESS: STREET 1: ONE MEADOWLANDS PLZ CITY: E RUTHERFORD STATE: NJ ZIP: 07073 BUSINESS PHONE: 2018043000 MAIL ADDRESS: STREET 1: ONE MEADOWLANDS PLAZA CITY: E. RUTHERFORD STATE: NJ ZIP: 07073 10-Q 1 y60770e10-q.txt CAMBREX CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to ---------- Commission file number 1-10638 ------- CAMBREX CORPORATION ------------------- (Exact name of registrant as specified in its charter) DELAWARE 22-2476135 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073 -------------------------------------------------------- (Address of principal executive offices) (201) 804-3000 -------------- (Registrant's telephone number, including area code) 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 twelve 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 [ ] As of April 30, 2002, there were 25,966,604 shares outstanding of the registrant's Common Stock, $.10 par value. CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended March 31, 2002 Table of Contents
Page No. -------- Part I Financial information Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets as of March 31, 2002 and December 31, 2001 2 Condensed consolidated income statements for the three months ended March 31, 2002 and 2001 3 Condensed consolidated statements of cash flows for the three months ended March 31, 2002 and 2001 4 Notes to condensed consolidated financial statements 5 -11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 15 Part II Other information Item 4. Matters Submitted to a Vote of Securities Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands)
March 31, December 31, 2002 2001 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ..................... $ 33,103 $ 23,696 Trade receivables, net ........................ 83,364 74,093 Inventories, net .............................. 109,159 107,746 Deferred tax assets ........................... 19,175 18,599 Prepaid expenses and other current assets ..... 18,673 19,526 ---------- ---------- Total current assets ........................ 263,474 243,660 Property, plant and equipment, net ............... 287,959 287,605 Goodwill ......................................... 215,216 219,822 Other Intangible assets, net ..................... 55,022 49,189 Other assets ..................................... 16,714 17,791 ---------- ---------- Total assets ................................ $ 838,385 $ 818,067 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ...... $ 62,837 $ 66,233 Income taxes payable .......................... 6,520 1,263 Short-term debt and current portion of Long-term debt .............................. 2,773 2,567 ---------- ---------- Total current liabilities ........................ 72,130 70,063 Long-term debt ................................... 311,976 312,524 Deferred tax liabilities ......................... 50,256 48,570 Other noncurrent liabilities ..................... 26,477 27,730 ---------- ---------- Total liabilities ........................... 460,839 458,887 ---------- ---------- Stockholders' equity: Common stock, $.10 par value; issued 28,162,459 and 28,007,825 shares at respective dates .. 2,816 2,823 Additional paid-in capital .................... 200,731 197,748 Retained earnings ............................. 251,972 237,759 Treasury stock, at cost 2,234,421 and 2,234,421 shares at respective dates ................. (16,659) (16,911) Accumulated other comprehensive loss .......... (61,314) (62,239) ---------- ---------- Total stockholders' equity .................. 377,546 359,180 ---------- ---------- Total liabilities and stockholders' equity .. $ 838,385 $ 818,067 ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 2 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands, except per-share data)
Three months ended March 31, -------------------------- 2002 2001 ---------- ---------- Gross sales .................................... $ 132,455 $ 131,185 Commissions and allowances ......... 1,468 1,256 ---------- ---------- Net sales ...................................... 130,987 129,929 Other revenues .............................. 1,568 1,348 ---------- ---------- Net revenues ................................... 132,555 131,277 Cost of goods sold ............................. 82,862 80,961 ---------- ---------- Gross Profit ................................... 49,693 50,316 Operating expenses: Selling, general and administrative ......... 22,608 23,456 Research and development .................... 3,935 4,596 ---------- ---------- Total operating expenses .................. 26,543 28,052 Operating profit ............................... 23,150 22,264 Other expenses: Interest expense, net ....................... 2,927 2,138 Other income, net ........................... (34) (144) ---------- ---------- Income before income taxes ..................... 20,257 20,270 Provision for income taxes .................. 5,267 5,878 ---------- ---------- Net income ..................................... $ 14,990 $ 14,392 ========== ========== Weighted average shares outstanding: Basic ....................................... 25,888 25,411 Effect of dilutive stock options ............ 703 880 ---------- ---------- Diluted ..................................... 26,591 26,291 Earnings per share of common stock and common stock equivalents: Basic ....................................... $ 0.58 $ 0.57 ========== ========== Diluted ..................................... $ 0.56 $ 0.55 ========== ========== Cash dividends paid per share .................. $ 0.03 $ 0.03 ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 3 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three months ended March 31, -------------------------- 2002 2001 ---------- ---------- Cash flows from operating activities: Net income ................................... $ 14,990 $ 14,392 Depreciation and amortization ................ 8,795 11,511 Deferred income tax provision ................ 1,685 -- Changes in assets and liabilities: Receivables, net ........................... (9,535) 731 Inventories ................................ (1,822) (3,659) Prepaid expenses and other current assets .. 659 (7,105) Accounts payable and accrued liabilities ... (2,084) 2,517 Income taxes payable ....................... 4,899 1,116 Other non-current assets and liabilities ... 2,998 (9,678) ---------- ---------- Net cash provided by operating activities .. 20,585 9,825 ---------- ---------- Cash flows from investing activities: Capital expenditures ......................... (13,092) (7,597) Other investing activities ................... (115) 562 ---------- ---------- Net cash used in investing activities ...... (13,207) (7,035) ---------- ---------- Cash flows from financing activities: Dividends .................................... (776) (762) Net increase (decrease) in short-term debt ... 263 (285) Long-term debt activity (including current portion): Borrowings ................................. 7,050 14,000 Repayments ................................. (7,589) (4,117) Proceeds from the issuance of common stock ... 3,228 5,430 ---------- ---------- Net cash provided by financing activities .. 2,176 14,266 ---------- ---------- Effect of exchange rate changes on cash ......... (147) (772) ---------- ---------- Net increase in cash and cash equivalents ....... 9,407 16,284 Cash and cash equivalents at beginning of period 23,696 21,721 ---------- ---------- Cash and cash equivalents at end of period ...... $ 33,103 $ 38,005 ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 4 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per-share amounts) (1) BASIS OF PRESENTATION Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and subsidiaries. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments necessary for a fair presentation of financial position and results of operations in conformity with generally accepted accounting principles. These interim financial statements should be read in conjunction with the financial statements for the year ended December 31, 2001. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Goodwill and Intangible Assets: The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" in the first quarter of fiscal 2002. The effect of this adoption was to cease amortization of goodwill and certain other indefinite-lived intangible assets, which resulted in a decrease in amortization expense in the first quarter 2002 of approximately $2.6 million after income taxes. The Company has established reporting units based on its current segment structure for purposes of testing goodwill for impairment. Goodwill has been assigned to the reporting units to which the value of the goodwill relates. The Company completed the first step of the transitional goodwill impairment test and has determined that no impairment exists at January 1, 2002. The Company will evaluate goodwill and other intangible assets at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable based on the estimated future cash flows. The changes in the carrying amount of goodwill for the quarter ended March 31, 2002, are as follows:
Rutherford BioTechnology Human Health Chemicals Segment Segment Segment Total ---------------------------------------------------------- Balance as of January 1, 2002 . $ 183,941 $ 32,032 $ 3,849 $ 219,822 Purchase Accounting Adjustments on Recent Acquisitions ...... (3,987) (3,987) Cumulative Translation Effect . (74) (545) -- (619) ---------- ---------- ---------- ---------- Balance as of March 31, 2002 .. $ 179,880 $ 31,487 $ 3,849 $ 215,216 ========== ========== ========== ==========
Other intangible assets that are not subject to amortization, consist of the following:
As of March 31, 2002 As of December 31, 2001 ----------------------------------- ----------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net ------ ------------ --- ------ ------------ --- Proprietary Process $ 4,721 $ (2,345) $ 2,376 $ 4,721 $ (2,345) $ 2,376 License Agreements 4,500 (113) 4,387 4,500 (113) 4,387 Trademarks ........ 44,038 (10,169) 33,869 44,038 (10,169) 33,869 -------- -------- -------- -------- -------- -------- Total ........ $ 53,259 $(12,627) $ 40,632 $ 53,259 $(12,627) $ 40,632 ======== ======== ======== ======== ======== ========
5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other intangible assets, which will continue to be amortized, consist of the following:
As of As of March 31, 2002 December 31, 2001 Gross Carrying Gross Carrying Amount Amount ------ ------ Patents ................ $ 2,469 $ 2,469 Proprietary Process .... 5,129 1,091 Supply Agreements ...... 2,100 2,100 Trademarks ............. 785 -- Unpatented Technology .. 4,945 4,945 Fully Amortized Assets* 12,347 12,347 Other .................. 1,460 1,480 ------------ ------------ Total ............. 29,235 24,432 Accumulated Amortization (14,845) (15,875) ------------ ------------ Net .................... $ 14,390 $ 8,557 ============ ============
*This category includes certain fully amortized patents, proprietary process and non-compete agreements. Amortization expense for the quarter ended March 31, 2002 was $390. The expected amortization expense related to intangible assets in the future is as follows: For the year ended December 31, 2002 .................... $1,555 For the year ended December 31, 2003 .................... $1,543 For the year ended December 31, 2004 .................... $1,333 For the year ended December 31, 2005 .................... $1,308 For the year ended December 31, 2006 .................... $1,298
Pro-forma net income and diluted earnings per share for the quarter ended March 31, 2001, reflecting the adoption of SFAS No. 142, were as follows:
For the Quarter Ended March 31, ------------------------- 2002 2001 ---------- ---------- Net income as reported ..................... $ 14,990 $ 14,392 Pro-forma amortization effect, after taxes . -- 1,663 ---------- ---------- Net income - pro forma ..................... 14,990 16,055 Diluted earnings per share as reported ..... 0.56 0.55 Add back: Goodwill and other indefinite-lived amortization expense ............... N/A 0.06 ---------- ---------- Diluted earnings per share - pro forma ..... $ 0.56 $ 0.61 ========== ==========
Accounting for Impairment or Disposal of Long-Lived Assets: In August 2001, the FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 primarily addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 became effective on January 1, 2002. Adoption of this Statement had no impact on the Company's results. 6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INVENTORIES Inventories at March 31, 2002 and December 31, 2001 consist of the following:
March 31, December 31, 2002 2001 ---------- ---------- Finished goods ......................... $ 47,500 $ 48,184 Work in process ........................ 29,008 27,093 Raw materials .......................... 28,120 28,777 Supplies ............................... 4,531 3,692 ---------- ---------- Total ............................ $ 109,159 $ 107,746 ========== ==========
(4) LONG-TERM DEBT Long-term debt at March 31, 2002 and December 31, 2001 consists of the following:
March 31, December 31, 2002 2001 ---------- ---------- Bank credit facilities ................. $ 298,400 $ 298,350 Other .................................. 13,581 14,179 ---------- ---------- Subtotal ......................... 311,981 312,529 ---------- ---------- Less: current portion ................. (5) (5) ---------- ---------- Total ............................ $ 311,976 $ 312,524 ========== ==========
The Company met all the bank covenants for the first three months of 2002. (5) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the three months ended March 31, 2002 was $15,915 compared to a comprehensive loss of $(8,660) in the prior year comparable period. The increase in comprehensive income was due primarily to foreign currency translation. 7 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) RESTRUCTURING AND OTHER CHARGES On November 30, 2001, the Company announced a plan to realign its businesses which included the creation of Rutherford Chemicals, Inc., effective January 1, 2002, in recognition of the Company's strategy to focus on the Life Sciences businesses. In addition, on November 30, 2001 the Company announced its commitment to a restructuring and cost savings program which includes impaired assets, severance, and other costs related to the realignment of the businesses. The restructuring and cost savings program was largely executed in the fourth quarter of 2001, with the remaining actions to be completed by the end of 2002. In the fourth quarter, Cambrex recorded special pre-tax charges of $23.1 million, the majority of which were non-cash items. As a result of the Company's previously announced business restructuring which created Rutherford Chemicals, Inc., together with an impairment charge within those businesses, the Company incurred $18.6 million of charges to operating expense, composed of asset write-downs of $17.2 million and severance costs of $1.4 million. The Company also incurred $4.5 million of inventory write-downs charged to cost of sales, consisting of $2.5 million associated with discontinued products manufactured at Rutherford Chemical facilities and a separate $2 million Biosciences inventory charge. The asset write-downs consisted primarily of fixed asset write-offs and impairments. A $10.0 million impairment charge was recorded on certain assets at one of the Company's domestic chemicals sites, based on the estimated fair value for the assets determined by discounting the expected future cash flows. A $1.6 million impairment was also recorded related to an unused chemical facility to recognize its estimated current fair value. In addition, a $5.6 million charge was recorded to write-off fixed assets related to discontinued product lines at another of the Company's domestic chemical sites. Severance charges, which apply largely to the Company's various chemical sites, relate to involuntary terminations of approximately 62 employees. All affected employees received notification in the fourth quarter 2001. As of March 31, 2002 all but one employee have been terminated. The balance in the restructuring reserve was $445 and $900 at March 31, 2002 and December 31, 2001, respectively. The decrease in the first quarter was due to severance payments. (7) SEGMENT INFORMATION The Company announced in late November 2001 a plan to realign its businesses in recognition of the Company's strategic emphasis on the growing opportunities in the life sciences industry. Effective January 1, 2002, the operating units that primarily produce specialty and fine chemicals, and animal health and agriculture products were combined under a new subsidiary, Rutherford Chemicals, Inc. The chemical company manages CasChem, Inc., Bayonne, New Jersey; Cosan Chemical Corporation, Carlstadt, New Jersey; Heico Chemicals, Inc., Delaware Water Gap, Pennsylvania; Nepera, Inc., Harriman, New York; Zeeland Chemicals, Inc., Zeeland, Michigan; and Seal Sands Ltd., Teeside, United Kingdom. With this realignment, the Company is reporting four operating segments going forward in 2002: Human Health, Biosciences, Rutherford Chemicals and All Other. 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) SEGMENT INFORMATION Following is a summary of business segment results for the following dates:
Three months ended March 31, -------------------------- 2002 2001 ---------- ---------- Gross Sales: Human Health ............................. $ 56,220 $ 52,433 Biosciences .............................. 37,195 27,326 Rutherford Chemicals ..................... 33,261 41,868 All Other ................................ 5,779 9,558 ---------- ---------- $ 132,455 $ 131,185 ========== ========== Gross Profit: Human Health ............................. $ 25,846 $ 23,707 Biosciences .............................. 17,648 14,919 Rutherford Chemicals ..................... 5,174 8,930 All Other ................................ 1,025 2,760 ---------- ---------- $ 49,693 $ 50,316 ========== ========== Operating Profit:* Human Health and All Other ............... $ 20,994 $ 19,095 Biosciences .............................. 6,415 5,434 Rutherford Chemicals ..................... 2,152 5,143 Corporate ................................ (6,411) (7,408) ---------- ---------- Total Operating Profit ................... 23,150 22,264 ---------- ---------- Reconciliation to Net Income: Interest Expense, net .................... 2,927 2,138 Other Income, net ........................ (34) (144) Taxes .................................... 5,267 5,878 ---------- ---------- Net Income ............................... $ 14,990 $ 14,392 ========== ========== Capital Spending: Human Health and All Other ............... $ 4,604 $ 4,200 Biosciences .............................. 4,016 767 Rutherford Chemicals ..................... 4,415 2,365 Corporate ................................ 57 265 ---------- ---------- $ 13,092 $ 7,597 ========== ========== Depreciation: Human Health and All Other ............... $ 4,350 $ 4,081 Biosciences .............................. 1,033 990 Rutherford Chemicals ..................... 2,545 3,244 Corporate ................................ 477 536 ---------- ---------- $ 8,405 $ 8,851 ========== ========== Amortization: Human Health and All Other ............... $ 3 $ 858 Biosciences .............................. 387 1,530 Rutherford Chemicals ..................... -- 272 ---------- ---------- $ 390 $ 2,660 ========== ==========
*The operating segments include charges for certain corporate allocations reflecting services provided. Unallocated corporate spending is included in "Corporate." 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) SEGMENT INFORMATION
March 31, December 31, 2002 2001 ---------- ---------- Total Assets: Human Health and All Other ................. $ 275,974 $ 257,362 Biosciences ................................ 356,597 356,450 Rutherford Chemicals ....................... 160,298 160,136 Corporate .................................. 45,516 44,119 ---------- ---------- $ 838,385 $ 818,067 ========== ==========
(8) CONTINGENCIES The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Environmental In connection with laws and regulations pertaining to the protection of the environment, the Company is a party to several environmental remediation investigations and cleanups and, along with other companies, has been named a "potentially responsible party" for certain waste disposal sites ("Superfund sites"). Each of these matters is subject to various uncertainties, and it is possible that some of these matters will be decided unfavorably against the Company. The Company had accruals, included in current accrued liabilities and other non-current liabilities of $1,400 at March 31, 2002 and December 31, 2001, for costs associated with the study and remediation of Superfund sites and the Company's current and former operating sites for matters that are probable and reasonably estimable. Based on currently available information and analysis, the Company's accrual represents management's best estimate of what it believes are the reasonably possible environmental cleanup related costs of a non-capital nature. After reviewing information currently available, management believes any amounts paid in excess of the accrued liabilities will not have a material effect on its financial position or results of operations. However, these matters, if resolved in a manner different from the estimates could have a material adverse effect on financial condition, operating results and cash flows when resolved in a future reporting period. Litigation The Company and its subsidiary Profarmaco S.r.l. ("Profarmaco") were named as defendants in a proceeding instituted by the Federal Trade Commission ("FTC") on December 21, 1998, in the United States District Court for the District of Columbia. The complaint alleges that exclusive license agreements which Profarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering the drug master files for (and therefore the right to buy and use) two active pharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of an effort on Mylan's part to restrict competition in the supply of lorazepam and clorazepate and to increase the price charged for these products when Mylan sold them as generic pharmaceuticals. The complaint further alleges that these agreements violate the Federal Trade Commission Act, and that Mylan, Cambrex, Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor in the United States, engaged in an unlawful restraint of trade and conspired to monopolize and attempted to monopolize the markets for the generic pharmaceuticals incorporating the APIs. A lawsuit making similar allegations against the Company and Profarmaco, and seeking injunctive relief and treble damages, has been filed by the Attorneys General of 31 states in the United States District Court for the District of Columbia on behalf of those states and persons in those states who were purchasers of the generic pharmaceuticals. 10 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company and Profarmaco have also been named in purported class action complaints brought by private plaintiffs in various state courts on behalf of purchasers of lorazepam and clorazepate in generic form, making allegations essentially similar to those raised in the FTC's complaint and seeking various forms of relief including treble damages. On February 9, 2001, a federal court in Washington, DC entered an Order and Stipulated Permanent Injunction as part of a settlement of the FTC and Attorneys General's suits. Under these settlement documents Mylan has agreed to pay over $140 million on its own behalf and on behalf of most of the other defendant companies including Cambrex and Profarmaco. In the Order and Injunction, the settling defendants also agreed to monitor certain future conduct. The Company strongly believes that its licensing arrangements with Mylan are in accordance with regulatory requirements and will vigorously defend the various other lawsuits and class actions. The private litigation continues. However, the Company and Mylan terminated the exclusive licenses to the drug master files as of December 31, 1998. In entering these licensing arrangements, the Company elected not to raise the price of its products and had no control or influence over the pricing of its final generic product. Mylan had been fully covering the costs for the defense and indemnity of Cambrex and Profarmaco under certain obligations set forth in the license agreements. Cambrex agreed to cover separate legal defense costs incurred for Cambrex and Profarmaco on a going forward basis beginning August 1, 2000. These costs have not been and are not expected to be significant. On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and seller of niacinamide ("Vitamin B-3"), received a Federal Grand Jury subpoena for the production of documents relating to the pricing and possible customer allocation with regard to that product. The Company understands that the subpoena was issued as part of the Federal Government's ongoing anti-trust investigation into various business practices in the vitamin industry generally. In the fourth quarter of 1999, the Company reached a settlement with the Government concerning Nepera's alleged role in Vitamin B-3 violations from 1992 to 1995. On October 13, 2000, the Government settlement was finalized with Nepera entering into a voluntary plea agreement with the Department of Justice. Under this agreement, Nepera entered a plea of guilty to one count of price fixing and market allocation of Vitamin B-3 from 1992 to 1995 in violation of section one of the Sherman Act and agreed to pay a fine of $4.0 million. Under the plea agreement, Nepera was placed on probation for one year, which has ended. The fine was paid in February 2001. Nepera has been named as a defendant, along with several other companies, in a number of private civil actions brought on behalf of alleged purchasers of Vitamin B-3. An accrual of $6.0 million was recorded in the fourth quarter 1999 to cover the anticipated government settlements, related litigation, and legal expenses. Based on recent discussions with various plaintiffs counsel, as well as current estimates of expenditures for legal fees, an additional accrual of $4.4 million was established in the fourth quarter of 2001. The balance of this accrual as of March 31, 2002 was approximately $4.2 million and at December 31, 2001 was approximately $4.4 million. This accrual has been recorded in Accounts Payable and Accrued Liabilities. Subsequent to March 31, 2002, certain related litigation has been settled, reducing the accrual balance to approximately $3.2 million. While it is not possible to predict with certainty the outcome of the above litigation matters and various other lawsuits, it is the opinion of management that the ultimate resolution of these proceedings should not have a material adverse effect on the Company's results of operations, cash flows and financial position. These matters, if resolved in a unfavorable manner, could have a material effect on the operating results and cash flows when resolved in a future reporting period. 11 CAMBREX CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per-share amounts) RESULTS OF OPERATIONS COMPARISON OF FIRST QUARTER 2002 VERSUS FIRST QUARTER 2001 The Company announced in late November 2001 a plan to realign its businesses in recognition of the Company's strategic emphasis on the growing opportunities in the life sciences industry. Effective January 1, 2002, the operating units that primarily produce specialty and fine chemicals, and animal health and agriculture products were combined under a new subsidiary, Rutherford Chemicals, Inc. With this alignment, the Company plans to report four operating segments going forward in 2002: Human Health, Biosciences, Rutherford Chemicals and All Other. The segment "All Other" is comprised of the non-human health products manufactured at certain operating sites which are otherwise part of the Human Health operating segment. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. The effect of this adoption was to cease amortization of goodwill and certain indefinite-lived intangible assets which resulted in a decrease in amortization expense in the first quarter 2002 of approximately $2.6 million after income taxes. On a pro-forma basis, the first quarter 2001 net income would have been $16.1 million versus the $14.4 million reported last year. Net income in the first quarter of 2002 was $15.0 million versus $14.4 million ($16.1 million on a pro-forma basis) in the same period a year ago due to increased sales in Human Health and Biosciences Segments, the reduced amortization expense as a result of the adoption of FASB No. 142, offset by lower sales in Rutherford Chemicals, slightly lower average margins, and higher administrative and interest costs due to the 2001 acquisitions. The following tables show the gross sales of the Company's four segments, in dollars and as a percentage of the Company's total gross sales for the quarters ended March 31, 2002 and 2001.
Quarter Ended March 31, ------------------------------------------------ 2002 2001 --------------------- --------------------- $ % $ % --- --- --- --- Human Health ................... $ 56,220 42.4% $ 52,433 40.0% Biosciences .................... 37,195 28.1 27,326 20.8 Rutherford Chemicals ........... 33,261 25.1 41,868 31.9 All Other ...................... 5,779 4.4 9,558 7.3 -------- -------- -------- -------- Total gross sales ........ $132,455 100% $131,185 100% ======== ======== ======== ========
12 RESULTS OF OPERATIONS (CONTINUED) The following table shows the sales and gross profit of the Company's four product segments for the first quarter 2002 and 2001.
Gross Gross Gross Sales Profit $ Profit % ----- -------- -------- 2002 Human Health ........................ $ 56,220 $ 25,846 46.0% Biosciences ......................... 37,195 17,648 47.4 Rutherford Chemicals ................ 33,261 5,174 15.6 All Other ........................... 5,779 1,025 17.7 -------- -------- -------- Total ......................... $132,455 $ 49,693 37.5% ======== ======== ========
Gross Gross Gross Sales Profit $ Profit % ----- -------- -------- 2001 Human Health ........................ $ 52,433 $ 23,707 45.2% Biosciences ......................... 27,326 14,919 54.6 Rutherford Chemicals ................ 41,868 8,930 21.3 All Other ........................... 9,558 2,760 28.9 -------- -------- -------- Total ......................... $131,185 $ 50,316 38.4% ======== ======== ========
Gross sales in the first quarter 2002 increased 1.0% to $132,455 from $131,185 in the first quarter 2001. Sales in the Human Health and Biosciences Segments increased compared to the first quarter 2001 and more than offset the decrease in the Rutherford Chemicals and All Other. The effect of foreign currency exchange rates on gross sales for the first quarter resulted in a negative impact on sales of $1,663, or 1.3%, compared to the corresponding period in 2001. Gross sales for 2002 would have been $134,118 using 2001 exchange rates compared to 2001 sales of $131,185. The Human Health Segment gross sales of $56,220 were $3,787 (7.2%) above the first quarter 2001. Gross sales were above the prior year primarily due to increased sales of pharmaceuticals used in central nervous system and respiratory preparations due to higher U.S. demand, higher sales of an anti-infective product resulting from re-entry into this market, and continued growth of a pharmaceutical intermediate used in therapeutic treatment of end-state kidney disease. Partly offsetting these increases were lower sales of certain generic cardiovascular supplements due to timing of shipments and customer inventory management. Human Health sales growth would have been 9.6% except for negative currency impact. The Bioscience Segment gross sales of $37,195 increased 36.1% primarily due to the impact of the biopharmaceutical manufacturing acquisitions completed during the second half of 2001 and from strong shipments of media and endotoxin detection products. Rutherford Chemicals Segment gross sales of $33,261 in the first quarter 2002 declined $8,607 (20.6%) versus the first quarter 2001, reflecting lower demand for performance enhancing chemicals, timing of campaigns on agricultural products and continued weakness in the telecommunications and photographic industries. 13 RESULTS OF OPERATIONS (CONTINUED) The All Other Segment gross sales of $5,779 decreased $3,779 (39.5%) below the first quarter 2001 reflecting lower animal feed additive sales due primarily to competitive pricing pressures and customer inventory build-ups, and the impact of a customer bringing in-house the manufacture of a performance enhancing polymer product. Export sales from U.S. businesses of $12,743 in the first quarter 2002 decreased 5.0% from the first quarter 2001. International sales from our European operations totaled $61,966 for the first quarter of 2002 as compared with $62,779 in 2001, a decrease of 1.3%. Gross profit in the first quarter of 2002 was $49.7 million compared to $50.3 million in 2001. Gross margin declined slightly to 37.5% from 38.4% in the first quarter of 2001. Higher Human Health margins, driven by favorable product mix, were offset by an unfavorable product mix in the Biosciences segment driven by under-absorption of fixed costs at the biopharmaceutical contract manufacturing sites, lower production volume in certain base business manufacturing facilities to manage inventory levels and unfavorable product mix. Gross margins for Rutherford Chemicals and All Other declined primarily reflecting lower volumes. In addition, the first quarter 2001 results for Rutherford Chemicals included the favorable impact of an insurance recovery as a result of a damaged reactor which was replaced at the end of 2001. Selling, general and administrative expenses as a percentage of gross sales was 17.1% in the first quarter 2002, compared to 17.9% (16.1% on a pro-forma basis considering adoption of SFAS No. 142) in the first quarter 2001. Higher administrative costs, excluding the impact of SFAS 142, were due primarily to the impact of the second half 2001 biopharmaceutical manufacturing acquisitions and higher insurance premiums, partly offset by lower sales and marketing costs due to staff reductions mainly in Rutherford Chemical locations. Research and development expenses of $3,935 were 3.0% of gross sales in the first quarter 2002, compared to $4,596 or 3.5% of gross sales in 2001. This decrease was due to open positions in the BioSciences group, seasonality of spending and staff reductions at Rutherford Chemical sites. The operating profit in the first quarter 2002 was $23,150 compared to $22,264 in 2001 ($24,604 on a pro-forma basis considering adoption of SFAS No. 142) reflecting higher sales, the reduced amortization and R&D expenses, partly offset by the lower gross margins and higher administrative costs. Net interest expense of $2,927 in the first quarter 2002 increased $789 from 2001 reflecting the higher average debt balance due to financing of the 2001 acquisitions, partly offset by lower average interest rates. The average interest rate was 4.1% in the first quarter 2002 versus 6.2% in 2001. The provision for income taxes for the first quarter 2002 resulted in an effective rate of 26.0% as compared with 29.0% in the first quarter 2001. The decrease reflects favorable tax audits, favorable geographic earnings mix and the impact of the continuing R&D tax credit programs. 14 LIQUIDITY AND CAPITAL RESOURCES During the three months ended March 31, 2002, the Company generated cash flows from operations totaling $20,585, an increase of $10,760 versus the same period a year ago. This increase in cash flows is due to lower inventory purchases, timing of tax payments and collection of a portion of an insurance claim receivable related to a Rutherford Chemicals site, partly offset by higher trade receivables due to higher sales. Capital expenditures were $13,092 in the three months of 2002 as compared to $7,597 in 2001. Part of the funds were used for plant and lab upgrades at the Bio Science and Nordic facilities, as well as for new small scale production equipment for generic pharmaceuticals at the Salsbury facility. Cash flow provided from financing activities of $2,176 included proceeds from exercise of stock options of $3,228, partly offset by net repayments of debt of $539 and payments of $776 in dividends. During the first three months of 2002, the Company paid cash dividends of $0.03 per share. Management believes that existing sources of capital, together with cash flows from operations, will be sufficient to meet foreseeable cash flow requirements. In April, 2002 the Company received a favorable arbitration ruling of approximately $5.2 million, subject to possible further legal process, with respect to one of its agreements within the Rutherford Chemicals business. A portion of this amount will be treated as a return of purchase price with the remainder, less expenses, treated as income, most likely in the second quarter of 2002. Forward-Looking Statements This document contains forward-looking statements. Investors should be aware of factors that could cause Cambrex actual results to vary materially from those projected in the forward-looking statements. These factors include, but are not limited to, global economic trends; competitive pricing or product development activities; markets, alliances, and geographic expansions developing differently than anticipated; government legislation and/or regulation (particularly on environmental issues); and technology, manufacturing and legal issues. 15 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS. 1. At the Annual Meeting of Stockholders held on April 25, 2002, four Directors in Class III were elected to hold office as Directors of the Company until the 2005 Annual Meeting of Stockholders. 2. Also, the Stockholders voted for the appointment of PricewaterhouseCoopers LLP as the Company's Independent Accountants for 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The exhibits filed as part of this report are listed below. No exhibits are filed as part of this report. b) Reports on Form 8-K The registrant filed no reports on Form 8-K during the first quarter of the year ended March 31, 2002. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAMBREX CORPORATION By /s/ Salvatore J. Guccione ----------------------------------- Salvatore J. Guccione Sr. Vice President and Chief Financial Officer (On behalf of the Registrant and as the Registrant's Principal Financial Officer) Date: May 13, 2002 17 -----END PRIVACY-ENHANCED MESSAGE-----