-----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, FAfvMtqLhYT2Xfc8a10gZNnahRuLaNsqm2u1KSxTe3D3h29paZyRxfeqqVIBYWI3 T78ExVYt6+MEI0QDlMLt8Q== 0000950123-02-010826.txt : 20021114 0000950123-02-010826.hdr.sgml : 20021114 20021114090428 ACCESSION NUMBER: 0000950123-02-010826 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02821972 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 y65661e10vq.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 September 30, 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 October 31, 2002, there were 26,029,456 shares outstanding of the registrant's Common Stock, $.10 par value. CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended September 30, 2002 Table of Contents
Page No. Part I Financial information Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets as of September 30, 2002 and December 31, 2001 2 Condensed consolidated income statements for the three months and nine months ended September 30, 2002 and 2001 3 Condensed consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 4 Notes to unaudited condensed consolidated financial statements 5 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 21 Item 4. Controls and Procedures 22 Part II Other information Item 4. Matters Submitted to a Vote of Securities Holders 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 25 - 26
Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands except share data)
September 30, December 31, 2002 2001 ------------- ------------ ASSETS Current assets: Cash and cash equivalents .................. $ 58,854 $ 23,696 Trade receivables, net ..................... 70,170 74,093 Inventories, net ........................... 112,685 107,746 Deferred tax assets ........................ 19,408 18,599 Prepaid expenses and other current assets .. 21,841 19,526 --------- ---------- Total current assets .................. 282,958 243,660 Property, plant and equipment, net .............. 296,954 287,605 Intangible assets, net .......................... 272,482 269,011 Other assets .................................... 13,750 17,791 --------- ---------- Total assets .......................... $ 866,144 $ 818,067 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ... 75,890 66,233 Income taxes payable ....................... 992 1,263 Short-term debt and current portion of long-term debt ........................ 12 2,567 --------- ---------- Total current liabilities ....................... 76,894 70,063 Long-term debt .................................. 297,668 312,524 Deferred tax liabilities ........................ 50,127 48,570 Other non-current liabilities ................... 27,992 27,730 --------- ---------- Total liabilities ..................... 452,681 458,887 --------- ---------- Stockholders' equity: Common stock, $.10 par value; issued 28,318,059 and 28,007,825 shares at respective dates ........................... 2,840 2,823 Additional paid-in capital ................. 203,111 197,748 Retained earnings .......................... 268,683 237,759 Treasury stock, at cost 2,290,603 and 2,234,421 shares at respective dates ....... (16,812) (16,911) Accumulated other comprehensive loss ....... (44,359) (62,239) --------- ---------- Total stockholders' equity ............ 413,463 359,180 --------- ---------- Total liabilities and stockholders' equity ................................ $ 866,144 $ 818,067 ========= ==========
See accompanying notes to unaudited condensed consolidated financial statements. 2 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands except share data)
Three months ended Nine months ended September 30, September 30, ---------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Gross sales ............................ $ 122,991 $ 117,588 $ 389,709 $ 371,334 Commissions & allowances ............ 1,297 1,148 4,087 3,302 --------- --------- --------- --------- Net sales .............................. 121,694 116,440 385,622 368,032 Other revenues ..................... 3,281 1,075 10,535 2,798 --------- --------- --------- --------- NET REVENUES ........................... 124,975 117,515 396,157 370,830 Cost of goods sold ..................... 75,115 76,806 239,804 232,086 --------- --------- --------- --------- GROSS PROFIT ........................... 49,860 40,709 156,353 138,744 Operating expenses: Selling, general and administrative .................. 25,345 21,232 72,121 65,214 Asset impairments and Other charges .................. 8,414 -- 8,839 -- Vitamin B-3 provision .............. 6,000 -- 6,000 -- Research and development ........... 4,377 5,170 13,004 14,557 --------- --------- --------- --------- Total operating expenses ........ 44,136 26,402 99,964 79,771 OPERATING PROFIT ....................... 5,724 14,307 56,389 58,973 Other (income) expenses: Interest expense, net .............. 2,874 3,420 8,653 7,705 Other (income)/expense, net ........ 937 (76) 3,711 (315) --------- --------- --------- --------- Income before income taxes ............. 1,913 10,963 44,025 51,583 (Benefit) provision for income taxes (184) 2,862 10,765 14,236 --------- --------- --------- --------- NET INCOME ............................. $ 2,097 $ 8,101 $ 33,260 $ 37,347 ========= ========= ========= ========= Weighted average shares outstanding: Basic .............................. 26,012 25,754 25,967 25,608 Effect of dilutive stock options ... 711 859 698 1,007 --------- --------- --------- --------- Diluted ............................ 26,723 26,613 26,665 26,615 Earnings per share of common stock and common stock equivalents: Basic .............................. $ 0.08 $ 0.31 $ 1.28 $ 1.46 ========= ========= ========= ========= Diluted ............................ $ 0.08 $ 0.30 $ 1.25 $ 1.40 ========= ========= ========= ========= Cash dividends paid per share ...... $ 0.03 $ 0.03 $ 0.09 $ 0.09 ========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 3 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) (in thousands)
Nine Months ended September 30, ----------------------- 2002 2001 --------- --------- Cash flows from operating activities: Net income ................................................... $ 33,260 $ 37,347 Depreciation and amortization ................................ 28,318 36,605 Vitamin B-3 Provision ........................................ 6,000 -- Asset impairments and other charges (see Note 6) ............. 9,425 -- Investment impairment (see note 7) ........................... 3,089 Deferred income tax provision ................................ (809) -- Changes in assets and liabilities (net of assets and Liabilities acquired): Receivables, net .................................... 6,629 4,034 Inventories ......................................... (1,687) (15,031) Prepaid expenses and other current assets ........... 703 (5,566) Accounts payable and accrued liabilities ............ (5,268) (12,004) Income taxes payable ................................ (1,702) (2,269) Other non-current assets and liabilities ............ 2,832 (9,564) --------- --------- Net cash provided by operating activities ........... 80,790 33,552 --------- --------- Cash flows from investing activities: Capital expenditures ......................................... (35,059) (29,238) Acquisition of businesses (net of cash acquired) ............. -- (120,392) Other investing activities ................................... 586 (185) --------- --------- Net cash used in investing activities ................... (34,473) (149,815) --------- --------- Cash flows from financing activities: Dividends .................................................... (2,336) (2,303) Net increase (decrease) in short-term debt ................... (2,658) 2,638 Long-term debt activity (including current portion): Borrowings ............................................. 34,700 258,743 Repayments ............................................. (49,836) (141,286) Proceeds from the exercises of stock options ................. 8,499 10,824 Purchases of treasury stock .................................. (2,267) (1,532) --------- --------- Net cash provided by (used) in financing activities .... (13,898) 127,084 --------- --------- Effect of exchange rate changes on cash .......................... 2,739 (965) --------- --------- Net increase in cash and cash equivalents ........................ 35,158 9,856 Cash and cash equivalents at beginning of period ................. 23,696 21,721 --------- --------- Cash and cash equivalents at end of period ....................... $ 58,854 $ 31,577 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 4 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands) (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. (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 third quarter and nine months ended September 30, 2002 of approximately $2.6 and $7.7 million, respectively 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 existed 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 nine months ended September 30, 2002, are as follows:
Bio- Human Rutherford Technology 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 ........ (4,884) -- -- (4,884) Cumulative Translation Effect ..... 670 2,870 86 3,626 -------- ------- ------ -------- Balance as of September 30, 2002 .. $179,727 $34,902 $3,935 $218,564 ======== ======= ====== ========
Other intangible assets that are not subject to amortization, consist of the following:
As of September 30, 2002 As of December 31, 2001 --------------------------------- --------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net -------- ------------ -------- -------- ------------ -------- Proprietary Process ..... $ 4,020 $ (2,345) $ 1,675 $ 4,721 $ (2,345) $ 2,376 License Agreements ...... 4,000 (641) 3,359 4,500 (641) 3,859 Trademarks .............. 44,038 (9,641) 34,397 44,038 (9,641) 34,397 -------- -------- -------- -------- -------- -------- Total .............. $ 52,058 $(12,627) $ 39,431 $ 53,259 $(12,627) $ 40,632 ======== ======== ======== ======== ======== ========
5 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) Intangible Assets: Other intangible assets, which will continue to be amortized, consist of the following:
As of As of September 30, December 31, 2002 2001 Gross Gross Carrying Carrying Amount Amount ------------- ----------- Patents .............................. $ 2,478 $ 2,469 Proprietary Process .................. 5,830 1,091 Supply Agreements .................... 2,100 2,100 Trademarks ........................... 785 -- Unpatented Technology ................ 5,382 4,945 Other ................................ 1,234 1,480 Fully Amortized Assets* .............. 12,347 12,347 -------- -------- Total ........................... 30,156 24,432 -------- -------- Accumulated Amortization ............. (15,669) (15,875) -------- -------- Net .................................. $ 14,487 $ 8,557 ======== ========
*This category includes certain fully amortized patents, proprietary process and non-compete agreements. Amortization expense for the quarter and nine months ended September 30, 2002 was $380 and $1,157. The expected amortization expense related to intangible assets currently recorded 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 and nine months ended September 30, 2002, reflecting the adoption of SFAS No. 142, were as follows:
For the Quarter Nine Months Ended Ended September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income as reported ........................... $ 2,097 $ 8,101 $ 33,260 $ 37,347 Pro-forma amortization effect, after taxes ....... -- 2,588 -- 6,226 ---------- ---------- ---------- ---------- Net income - pro forma ........................... 2,097 10,689 33,260 43,573 Diluted earnings per share as reported ........... 0.08 0.30 1.25 1.40 Add back: Goodwill and other indefinite-lived amortization expense ..................... N/A 0.10 N.A 0.24 ---------- ---------- ---------- ---------- Diluted earnings per share - pro forma ........... $ 0.08 $ 0.40 $ 1.25 $ 1.64 ========== ========== ========== ==========
6 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) 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. While the adoption of this Statement had no impact on the Company's results, the Company will continue to evaluate its long-lived assets whenever events and changes in circumstance suggest that the carrying amount may not be recoverable. Accounting for Costs Associated with Exit or Disposal Activities: In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this Statement is not expected to have material impact on the Company's results. (3) INVENTORIES Inventories at September 30, 2002 and December 31, 2001 consist of the following:
September 30, December 31, 2002 2001 ------------ ----------- Finished Goods $ 50,665 $ 48,184 Work in process 31,112 27,093 Raw Materials 26,130 28,777 Fuel oil and supplies 4,778 3,692 --------- --------- Total $ 112,685 $ 107,746 ========= =========
(4) COMPREHENSIVE INCOME/(LOSS) Comprehensive Income/(Loss) for the three and nine months ended September 30, 2002 was ($393) and $51,140 respectively. The amounts for the same periods in 2001 were $12,075 and $18,621, respectively. The decrease in the third quarter 2002 versus 2001 was due primarily to lower net income which was impacted by asset impairments and other charges (See Note 6), an accrual for Vitamin B-3 litigation (See Note 10), and higher unrealized losses on interest rate swap contracts. The increase for the nine months was due primarily to foreign currency translation partly offset by the asset impairments, other charges and Vitamin B-3 accrual. (5) LONG-TERM DEBT Long-term debt at September 30, 2002 and December 31, 2001 consists of the following:
September 30, December 31, 2002 2001 ------------ ----------- Bank credit facilities $ 284,700 $ 298,350 Other 12,968 14,179 --------- --------- Subtotal 297,668 312,529 Less: current portion - (5) --------- --------- Total $ 297,668 $ 312,524 ========= =========
The Company met all the bank loan covenants for the first nine months of 2002. 7 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES 2001 ACTIONS 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 2001, 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 $2.0 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 62 employees. All affected employees received notification in the fourth quarter 2001. As of September 30, 2002, all employees have been terminated. The balance in the restructuring reserve for the 2001 actions was $130 and $900 at September 30, 2002 and December 31, 2001, respectively. The decrease in the first nine months was due to severance payments. 2002 ACTIONS In the third quarter 2002, the Company recorded special pre-tax charges of $9.0 million, the majority of which were non-cash items. The charges included a fixed asset write-down of $6.1 million due to the discontinuation of a proposed product line, closure costs for a small manufacturing facility of $2.1 million, and severance costs of $0.2 million. These costs were charged to operating expenses. In addition, $0.6 million of inventory write-downs were recorded in cost of goods sold related to the discontinued product line. The fixed asset write-down related to certain assets at a Rutherford Chemicals domestic site, based on an assessment completed in the third quarter that indicated the return on investment was below management's expectations and as a result, an impairment charge was recorded reflecting the asset value associated with the discontinued product line. The closure costs relate to another domestic Rutherford facility and include asset write downs, disposal and other related costs. The severance charges of $0.2 million for the third quarter related to 12 involuntary terminations at the two Rutherford Chemicals facilities. All affected employees received notification in the third quarter 2002. 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES (CONTINUED) 2002 ACTIONS (CONTINUED) The accrual balance related to the 2002 actions for severance and other costs included above was $1.2 million at September 30, 2002. The second quarter 2002 included a pre-tax charge of $0.4 million for a fixed asset impairment within Rutherford Chemicals. (7) OTHER INCOME AND EXPENSES, NET Other (income) expense, net was $3,711 and ($315) for the nine months ending September 30, 2002 and 2001, respectively. The nine months 2002 period includes an investment impairment of $3.1 million, of which $0.6 million was recorded in the third quarter, related to a prior investment in an emerging technology company. The company, in which the investment was held, has experienced significant financial difficulties in recent months. This led Cambrex to evaluate the current market value of the investment. This evaluation indicated that a decline in the was market value was other than temporary, and accordingly an impairment charge was recorded. (8) OTHER REVENUE ARBITRATION AWARD In April 2002, the Company received a favorable arbitration award related to disputes concerning Rutherford Chemicals toll manufacturing and licensed product line agreements. The arbitration decision compensated the Company for lost profits for the years 2001 through 2005. The Company originally paid $4.5 million to acquire the product line rights from Arizona Chemicals Corporation. The total award, net of legal and other related costs, was $4.3 million, of which $0.5 million was recorded as a reduction of the intangible asset basis and $3.8 million was recorded in Other revenues in the second quarter of 2002. HEDGE CONTRACT GAINS (LOSSES) Gains and losses resulting from foreign currency transactions are included in the results of operations as a component of Other revenues. Foreign currency gains (losses) for the three and nine months ended September 30, 2002 and 2001 were $1,717 and $445, and ($458) and ($2,016), respectively. (9) 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. This chemical subsidiary manages CasChem, Inc., Bayonne, New Jersey; Cosan Chemical Corporation, Carlstadt, New Jersey; Heico Chemicals, Delaware Water Gap, Pennsylvania; Nepera, Inc., Harriman, New York; Zeeland Chemicals, Inc., Zeeland, Michigan; and Seal Sands Chemicals Ltd., Teesside, United Kingdom. With this realignment, the Company is reporting four operating segments in 2002: Human Health, Biosciences, Rutherford Chemicals and All Other. The Human Health segment is made up primarily of active pharmaceutical ingredients and advanced pharmaceutical intermediates manufactured using organic chemistry. The Biosciences segment includes contract biopharmaceutical manufacturing services, cell culture products, endotoxin detection, molecular biology and other bioresearch products. The Rutherford Chemicals segment includes animal health and agricultural products and fine and specialty chemicals used in a variety of end markets. The All Other segment consists primarily of fine and specialty chemicals manufactured in human health facilities. 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) SEGMENT INFORMATION (CONTINUED) Following is a summary of business segment information for the following dates:
Three months ended Nine months ended September 30, September 30, 2002 2001 2002 2001 --------- --------- --------- --------- Gross Sales: Human Health ................... $ 46,499 $ 46,407 $ 158,635 $ 150,414 Biosciences .................... 42,087 31,699 119,580 86,589 Rutherford Chemicals ........... 30,855 33,184 96,000 112,362 All Other ...................... 3,550 6,298 15,494 21,969 --------- --------- --------- --------- $ 122,991 $ 117,588 $ 389,709 $ 371,334 ========= ========= ========= ========= Gross Profit: Human Health ................... $ 21,164 $ 19,422 $ 71,592 $ 66,938 Biosciences .................... 22,481 16,146 61,439 45,274 Rutherford Chemicals ........... 5,104 3,789 20,328 20,615 All Other ...................... 1,111 1,352 2,994 5,917 --------- --------- --------- --------- $ 49,860 $ 40,709 $ 156,353 $ 138,744 ========= ========= ========= ========= Operating Profit*: Human Health and All Other .................. $ 15,622 $ 14,126 $ 55,290 $ 51,837 Biosciences .................... 10,463 3,897 26,511 13,041 Rutherford Chemicals(a) ........ (7,187) 321 1,381 8,847 Corporate(b) ................... (13,174) (4,037) (26,793) (14,752) --------- --------- --------- --------- Total Operating Profit ......... $ 5,724 $ 14,307 $ 56,389 $ 58,973 ========= ========= ========= ========= Interest Expense, net .......... $ 2,874 $ 3,420 $ 8,653 $ 7,705 Other Expense (Income), Net .... 937 (76) 3,711 (315) Taxes .......................... (184) 2,862 10,765 14,236 --------- --------- --------- --------- Net Income ..................... $ 2,097 $ 8,101 $ 33,260 $ 37,347 ========= ========= ========= ========= Capital Spending: Human Health and All Other ................ $ 5,921 5,600 $ 19,151 $ 13,387 Biosciences .................... 4,592 1,676 7,735 3,312 Rutherford Chemicals ........... 1,669 3,699 7,262 8,633 Corporate ...................... 838 2,970 911 3,906 --------- --------- --------- --------- Total .......................... $ 13,020 13,945 $ 35,059 $ 29,238 ========= ========= ========= =========
(a) The third quarter and year-to-date 2002 balances include a fixed asset write-down of $6.1 million, closure costs for a small manufacturing facility of $2.1 million, severance costs of $0.2 million, related inventory write-down of $0.6 million, and an $0.8 million benefit related to an insurance settlement. In addition, year-to-date 2002 balance includes a favorable arbitration award of $3.8 million, a $1.8 million benefit related to an insurance settlement, and an asset impairment of $0.4 million. (b) The third quarter and year-to-date 2002 balances include a Vitamin B-3 accrual of $6.0 million. *The operating segments include charges for certain corporate allocations reflecting services provided. Unallocated corporate spending is included in "Corporate." 10 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) SEGMENT INFORMATION (CONTINUED)
Three months ended Nine months ended September 30, September 30, ----------------------- ---------------------- 2002 2001 2002 2001 ---------- -------- ---------- --------- Depreciation: Human Health and All Other $ 4,856 $ 3,946 $ 13,762 $ 12,234 Biosciences 1,981 1,240 4,448 3,218 Rutherford Chemicals 2,415 3,196 7,519 9,671 Corporate 478 536 1,432 1,607 ---------- -------- ---------- --------- Total $ 9,730 $ 8,918 $ 27,161 $ 26,730 ========== ======== ========== ========= Amortization: Human Health and All Other $ - $ 854 $ 6 $ 2,514 Biosciences 380 2,979 1,151 6,549 Rutherford Chemicals - 270 - 812 ---------- -------- ---------- --------- Total $ 380 $ 4,103 $ 1,157 $ 9,875 ========== ======== ========== =========
September 30, December 31, 2002 2001, ------------ ----------- Total Assets: Human Health and All Other $ 300,377 $ 257,362 Biosciences 356,619 356,450 Rutherford Chemicals 144,605 160,136 Corporate 64,543 44,119 ---------- ---------- Total $ 866,144 $ 818,067 ========== ==========
(10) 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 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 September 30, 2002 and December 31, 2000, 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. 11 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) CONTINGENCIES (CONTINUED) 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 API's. A lawsuit making similar allegations against the Company and Profarmaco, and seeking injunctive relief and treble damages, was 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. 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 paid 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 were 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 the 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. 12 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) CONTINGENCIES (CONTINUED) Litigation (continued) From the fourth quarter 1999 through December 31, 2001 the Company provided for $10.4 million to cover the anticipated government settlements, related litigations, and legal expenses. During the third quarter 2002, based on discussions with various plaintiffs counsel, as well as current estimates of expenditures for legal fees, an additional accrual of $6.0 million was established. The balance of these accruals as of September 30, 2002 was approximately $6.5 million and at December 31, 2001 was approximately $4.4 million. This accrual has been recorded in Accounts Payable and Accrued Liabilities. In addition, certain related litigation has been settled during 2002, thus reducing the overall accrual balance from December 31, 2001. While it is not possible to predict with certainty the outcome of the above litigation matters and various other lawsuits in which the Company is involved, it is the opinion of management, after consultation with counsel, 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. Other The Company has a $5 million investment in a privately owned, emerging biotechnology company that has therapeutic products in various stages of clinical trials. The investment is monitored on a continual basis to evaluate whether any changes in value become other than temporary. No impairment has been recognized to date. 13 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 THIRD QUARTER 2002 VERSUS THIRD 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 is reporting four operating segments in 2002. Human Health, Biosciences, Rutherford Chemical 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. On a pro-forma basis, the third quarter 2001 net income would have been $10,689 versus the $8,101 reported last year. The net income in the third quarter of 2002 was $2,097 versus $8,101 ($10,689 on a pro-forma basis) in the same period a year ago. The 2002 results include special charges, before taxes, of $8,219 for impaired assets and facility closure cost, severance of $195 in the Rutherford Chemicals business, $6,000 for future vitamin B-3 settlement and litigation costs, $589 for an investment impairment and $586 for a Rutherford inventory write off related to the impaired assets. In addition, the Rutherford business had an $844 benefit from an insurance settlement. All items have been charged to operating expenses with the exception of the inventory write off and insurance benefit which are reflected in Cost of Goods Sold and the investment impairment which is reflected in Other expenses. Without these special charges and the insurance benefit, the third quarter 2002 net income would have been $12,327. The results reflect higher sales in the Biosciences Segment, higher gross margins across all business segments and the reduced amortization expense as a result of the adoption of FASB No. 142, offset by the special charges noted above, lower sales volume in both the Rutherford Chemicals and All Other business segments and higher administrative costs. The following tables show the gross sales and gross profit of the Company's four segments, in dollars and as a percentage of the Company's total gross sales for the quarters ended September 30, 2002 and 2001.
Quarter Ended September 30, -------------------------------------- 2002 2001 ---- ---- Human Health $ 46,499 37.8% $ 46,407 39.5% Biosciences 42,087 34.2 31,699 27.0 Rutherford Chemicals 30,855 25.1 33,184 28.2 All Other 3,550 2.9 6,298 5.3 --------- ----- --------- ----- Total gross sales $ 122,991 100.0% $ 117,588 100.0% ========= ===== ========= =====
14 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THIRD QUARTER 2002 VERSUS THIRD QUARTER 2001 (CONTINUED) The following table shows the gross sales and profit of the Company's four product segments for the third quarter 2002 and 2001.
Gross Gross Gross Sales Profit $ Profit % ---------- --------- ---- 2002 Human Health $ 46,499 $ 21,164 45.5% Biosciences 42,087 22,481 53.4 Rutherford Chemicals 30,855 5,104 16.5 All Other 3,550 1,111 31.3 ---------- --------- ---- Total $ 122,991 $ 49,860 40.5% ========== ========= ====
Gross Gross Gross Sales Profit $ Profit % ---------- --------- ---- 2001 Human Health $ 46,407 $ 19,422 41.9% Biosciences 31,699 16,146 50.9 Rutherford Chemicals 33,184 3,789 11.4 All Other 6,298 1,352 21.5 ---------- --------- ---- Total $ 117,588 $ 40,709 34.6% ========== ========= ====
Gross sales in the third quarter 2002 increased 4.6% to $122,991 from $117,588 in the third quarter 2001. Sales in the Biosciences Segment increased compared to the third quarter 2001 and more than offset the decrease in the Rutherford Chemicals and All Other. Human Health sales were essentially flat versus the prior year. The Human Health Segment gross sales of $46,499 were $92 (0.2%) above the third quarter 2001. Increased sales of a gastro intestinal Active Pharmaecutical Ingredient (API), due to increased US demand and the introduction of a new amphetamine product used to treat attention deficit disorder, were offset by lower sales of cardiovascular and central nervous system preparations due to lower U.S. demand, timing of shipments and competitive pressures as well as a 2001 shipment of an anti-infective product in clinical trials which did not repeat in 2002. Human Health sales declined 4.9% without the currency impact of the weaker U.S. dollar. The Biosciences Segment gross sales of $42,087 increased 32.8% in the third quarter 2002 due to the impact of the late 2001 Massachusetts biopharmaceutical manufacturing acquisition (up 16.9% excluding the acquisition), higher suite utilization in the Maryland biopharmaceutical manufacturing facility, increased sales of endotoxin detection products aided by the introduction of FDA compliant software, higher Media and Serum sales (primarily liquid form) due to market share gains in Europe and strong shipments of Normal Human Cells reflecting improved product supply and quality. These gains were partly offset by a decrease in diagnostic products due to the early 2002 divesture of the in-vitro diagnostic product line. Biosciences segment sales growth would have been 30.4% without the currency impact of the weaker U.S. dollar. Rutherford Chemicals Segment gross sales of $30,855 in the third quarter 2002 declined $2,329 (7.0%) versus the third quarter 2001, reflecting continued weakness in the telecommunications and industrial coatings industries as well as lower demand, competitive pressures and timing of campaigns for certain agricultural products. These decreases were partly offset by higher sales of certain personal care products and higher photographic demand versus last year. 15 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THIRD QUARTER 2002 VERSUS THIRD QUARTER 2001 (CONTINUED) The All Other Segment gross sales of $3,550 were down 43.6% from the third quarter 2001 reflecting lower animal feed additive sales due primarily to customer inventory build-ups, the impact of a customer bringing in-house the manufacture of a performance enhancing polymer product as well as customer inventory management on another performance enhancing polymer product. Export sales from U.S. businesses of $12,501 in the third quarter 2002 increased from $11,300 in the third quarter 2001. International sales from European operations totaled $57,443 for the third quarter of 2002 as compared with $53,689 in 2001. Gross profit in the third quarter of 2002 was $49,860 compared to $40,709 in 2001. Gross margin percentage increased to 40.5% from 34.6% in the third quarter of 2001. The 2002 third quarter gross margin includes the benefit of the insurance claim settlement, and a special charge for a Rutherford inventory write-down. Excluding these items the gross margin would have been 40.3%. The Bioscience segment experienced higher margins driven by favorable product mix and higher plant utilization. Human Health segment margins also increased due to favorable product mix which includes the effect of the Company's foreign currency hedging strategy. Hedge contract gains are reflected in Other Revenue. Rutherford Chemicals also achieved higher margins reflecting the effect of the insurance settlement and a favorable product mix partly offset by lower volumes and the inventory write down noted above. The All Other segment gross margins increased in the quarter due to a pricing adjustment in accordance with a customer supply agreement. Without this price adjustment, margins would have been lower than the prior year. Selling, general and administrative expenses as a percentage of gross sales were 20.6% in the third quarter 2002, compared to 18.0% (14.8% on a pro-forma basis considering adoption of SFAS No. 142) in the third quarter 2001. Higher administrative costs, excluding the impact of SFAS 142, were due primarily to the impact of the second half 2001 biopharmaceutical manufacturing acquisition, increased employee benefit plan expenses, higher insurance premiums, management incentives, recruiting and relocation costs and currency translation in 2002. The Company recorded special charges of $ 8,414 for asset impairments within the Rutherford Chemicals business in the third quarter 2002 which reflect the discontinuation of a proposed product line, the closure of a small manufacturing facility and severance costs. In addition, a further provision of $6,000 for Vitamin B-3 settlement and litigation costs was recognized to reflect management's latest estimates. Research and development expenses of $4,377 were 3.5% of gross sales in the third quarter 2002, compared to $5,170 or 4.4% of gross sales in 2001. The decrease primarily reflects open positions in the Biosciences segment, as well as lower spending at Rutherford Chemical sites. The operating profit in the third quarter 2002 was $5,724 compared to $14,307 in 2001 ($18,091 on a pro-forma basis considering adoption of SFAS No. 142). Excluding the impact of the special charges and benefits mentioned above, operating profit for the third quarter 2002 was $19,880. The results reflect higher sales in the Biosciences Segment, higher gross margin across all business segments and the reduced amortization expense as a result of the adoption of FASB No. 142, offset by the special charges noted above, lower sales volume in both the Rutherford Chemicals and All Other business segments and the higher administrative costs. Net interest expense of $2,874 in the third quarter 2002 decreased $546 from 2001 primarily reflecting lower average interest rates. The average interest rate was 4.5% in the third quarter 2002 versus 5.0% in 2001. 16 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THIRD QUARTER 2002 VERSUS THIRD QUARTER 2001 (CONTINUED) The effective tax rate for the third quarter 2002 is a benefit of 9.6% as compared with a provision of 26.0% for the third quarter 2001. The decrease reflects the tax effect of the special charges and a change in the geographic mix of income due to these charges. The tax benefit of the special charges is computed at the 35% federal statutory rate, partially offset by a net 4% provision related to the change in the geographic mix of domestic and international income resulting in a net 31% benefit. The impact of these items was to change the annual estimated effective tax rate from 26% to 24.5% and the Company recorded the required adjustment in the third quarter. Were it not for the special charges, the effective tax rate would have been 26%. 17 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS OF 2002 VERSUS NINE MONTHS OF 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 is reporting four operating segments going forward in 2002. Human Health, Biosciences, Rutherford Chemical 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. On a pro-forma basis, the first nine months 2001 net income would have been $43,573 versus the $37,347 reported last year. The net income for the first nine months of 2002 was $33,260 versus $37,347 ($43,573 million on a pro-forma basis) in the same period a year ago. The 2002 results include special charges, before taxes, of $8,839 for impaired assets in the Rutherford Chemicals business, $6,000 for an accrual for vitamin B-3 settlement and litigation costs, $3,089 for an investment impairment and $586 for a Rutherford inventory write off. In addition, the Rutherford business had a pre-tax $2,620 benefit from an insurance claim settlement related to a previously disclosed reactor outage at a Rutherford Chemicals site, and a $3,760, before tax, favorable arbitration award related to a disputed product line agreement. The arbitration award reimbursed the Company for lost profits for the years 2001 through 2005. All items have been charged to operating expenses with the exception of the inventory write off and insurance benefit which are reflected in Cost of Goods Sold, the investment impairment which is reflected in Other expenses and the arbitration award which is reflected in Other revenue. Without these items, the year-to-date 2002 net income would have been $41,558. The results reflect higher sales in the Human Health and Biosciences Segments, the favorable items noted above and the reduced amortization expense as a result of the adoption of FASB No. 142. These items are partly offset by lower sales in Rutherford Chemicals and All other segments, the special charges noted above, higher administrative expenses and higher interest costs due to funding the 2001 acquisitions. The following tables show the gross sales and gross profit of the Company's four segments, in dollars and as a percentage of the Company's total gross sales for the first nine months 2002 and 2001.
Nine Months Ended September 30, ----------------------------------------------- 2002 2001 ---- ---- Human Health $ 158,635 40.7% $ 150,414 40.5% Biosciences 119,580 30.7 86,589 23.3 Rutherford Chemicals 96,000 24.6 112,362 30.3 All Other 15,494 4.0 21,969 5.9 ---------- ----- ---------- ----- Total gross sales $ 389,709 100.0% $ 371,334 100.0% ========== ===== ========== =====
18 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS OF 2002 VERSUS NINE MONTHS OF 2001 The following table shows the gross sales and profit of the Company's four product segments for the third quarter 2002 and 2001.
Gross Gross Gross Sales Profit $ Profit % 2002 Human Health $ 158,635 $ 71,592 45.1% Biosciences 119,580 61,439 51.4 Rutherford Chemicals 96,000 20,328 21.2 All Other 15,494 2,994 19.3 ----------- ---------- ---- Total $ 389,709 $ 156,353 40.1% =========== ========== ====
Gross Gross Gross Sales Profit $ Profit % 2001 Human Health $ 150,414 $ 66,938 44.5% Biosciences 86,589 45,274 52.3 Rutherford Chemicals 112,362 20,615 18.3 All Other 21,969 5,917 26.9 ----------- ---------- ---- Total $ 371,334 $ 138,744 37.4% =========== ========== ====
Gross sales for the first nine months 2002 increased 4.9% to $389,709 from $371,334 in the first nine months 2002. Sales in the Biosciences and Human Health segments increased compared to the first nine months 2001 which more than offset the decrease in the Rutherford Chemicals and All Other segments. The Human Health Segment gross sales of $158,635 were $8,221 (5.5%) above the first nine months 2001. Gross sales were above the prior year primarily due to sales of a new amphetamine product used to treat attention deficit disorder, higher sales of gastrointestinal API's to meet increased demand and reflecting successful pricing negotiations, continued growth of a pharmaceutical intermediate used in therapeutic treatment of end-state kidney disease, higher market share in imaging products worldwide, higher sales of an anti-infective product resulting from re-entry into this market, and increased sales of pharmaceuticals used in central nervous system preparations due to higher U.S. and European demand, as well as timing of shipments. Partly offsetting these increases were lower sales of cardiovascular actives due to customer inventory management and competitive pressures, as well as a 2001 shipment of an anti-infection product in clinical trials which did not repeat in 2002. Human Health segment sales growth would have been 3.8% without the currency impact of the weaker U.S. dollar. The Bioscience Segment gross sales of $119,580 increased 38.1% (up 13% without acquisitions) in the first nine months 2002 compared to the prior year period primarily due to the impact of the biopharmaceutical manufacturing acquisitions completed during the second half of 2001 along with improved suite utilization performance at the Maryland biopharmaceutical facility, and increased sales of endotoxin detection products reflecting the impact of a more focused sales force, higher Media and Serum sales (primarily liquid form) due to market share gains in Europe and strong shipments of Normal Human Cells reflecting improved product supply and quality. These increases were partly offset by the impact of the sale of the IVD cell business during the first quarter of 2002. Bioscience segment sales growth would have been 37.3% without the currency impact of the weaker U.S. dollar. 19 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS OF 2002 VERSUS NINE MONTHS OF 2001 Rutherford Chemicals Segment gross sales of $96,000 in the first nine months of 2002 declined $16,362 (14.6%) versus the first nine months of 2001, reflecting lower demand, competition pressures and timing of production campaigns for crop protection products, lower demand for certain performance enhancing chemicals, and continued weakness in the telecommunications and industrial coatings industries. These decreases were partly offset by increased sales of feed additive and personal care products. The All Other Segment gross sales of $15,494 in the first nine months of 2002 were $6,475 (29.5%) below the prior year period of $21,969, reflecting lower feed additive sales due to customer inventory management, and the impact of a customer bringing in-house the manufacture of a performance enhancing polymer product, as well as customer inventory build-ups on another performance enhancing polymer product. Export sales from U.S. businesses were $37,690 in the first nine months of 2002 compared to $35,404 in 2001. International sales from European operations totaled $180,818 for the first nine months of 2002 compared to $177,625 in 2001. Gross profit in the first nine months of 2002 was $156,353 compared to $138,744 in 2001. Gross margin in 2002 increased to 40.1% from 37.4% in the first nine months of 2001. Included in the 2002 gross margins are a $2,620 benefit from an insurance settlement recorded against Cost of Goods Sold and $3,760 for a favorable arbitration award recorded in Other Revenue. Both items concern the Rutherford Chemicals businesses. Margins also include a special charge of $586 in the third quarter 2002 for a Rutherford inventory write-down related to the Rutherford asset impairments. Excluding these items, the overall 2002 gross margin was 38.6%. The Human Health gross margins were up slightly compared to the prior year due to a favorable product mix and overall higher volumes offset by lower production in certain European plants. The Bioscience segment margins declined slightly due primarily to under absorption of fixed costs at the biopharmaceutical contract manufacturing sites in the first half of 2002, partly offset by favorable product mix and higher volumes in the base business. Excluding the favorable items discussed above, lower Rutherford Chemicals and All Other segment margins primarily reflect lower volumes. Selling, general and administrative expenses as a percentage of gross sales was 18.5% in the first nine months 2002, compared to 17.6% (15.2% on a pro-forma basis considering adoption of SFAS No. 142) for the same period in 2001. Higher administrative costs, excluding the impact of SFAS 142, were due primarily to the impact of the second half 2001 biopharmaceutical manufacturing acquisitions, a reduction of environmental accruals in the second quarter 2001, higher insurance premiums, employee benefit expenses and management incentives in 2002. Research and development expenses of $13,004 were 3.3% of gross sales in 2002, compared to $14,557 or 3.9% of gross sales in 2001, reflecting open positions in the Biosciences group, seasonality of spending and staff reductions mainly in Rutherford Chemicals locations. The operating profit in the first nine months of 2002 was $56,389 compared to $58,973 in 2001 ($67,923 on a pro-forma basis considering adoption of SFAS No. 142). Excluding the impact of the Rutherford insurance and arbitration items and the asset impairment charges, operating profit for the first nine months of 2002 was $65,434. The results primarily reflect higher sales in the Human Health and Biosciences Segments, the insurance settlement and arbitration award noted above and the reduced amortization expense as a result of the adoption of FASB No. 142. These items are partly offset by lower sales in Rutherford Chemicals and All other segments, the special charges noted above and higher administrative costs. 20 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS 2002 VERSUS NINE MONTHS 2001 (CONTINUED) Net interest expense of $8,653 in the first nine months of 2002 increased $948 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 4.33% for the first nine months of 2002 versus 5.54% in 2001. The provision for income taxes for the first nine months of 2002 resulted in an effective rate of 24.5% as compared with 27.6% in the same period of 2001. The decrease reflects the tax effect of the restructuring and special charges and a change in the geographic mix of income and the impact of the continuing R&D tax credit programs. Were it not for the restructuring and special charges the effective tax rate would have been 26%. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2002, the Company generated cash flow from operations totaling $80,790, an increase of $47,238 versus the same period a year ago. This increase in cash flows is due primarily to lower inventory purchases, timing of trade payable and tax payments, collection of the Rutherford insurance claim receivable and arbitration award, and lower trade receivables. Capital expenditures were $35,059 in the nine months of 2002 as compared to $29,238 in 2001. Part of the funds were used for plant and laboratory upgrades at the Bio Science, BioWhittaker and Nordic facilities, as well as for a new production line for small scale pharmaceuticals at the Salsbury facility. The majority of the capital expenditures for the nine months of 2002 were in the Biosciences and Human Health segments. Cash flow used by financing activities of $13,898 included net repayment of debt of $17,794 and payment of $2,336 in dividends partly offset by proceeds from exercises of stock options of $5,980. During the first nine months of 2002, the Company paid cash dividends of $0.09 per share. Management believes that existing sources of capital, together with cash flows from operations, will be sufficient to meet foreseeable cash flow requirements. 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. 21 ITEM 4. CONTROLS AND PROCEDURES a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's "disclosure controls and procedures" (as defined in Rules 13a-14(c) and under the Securities Exchange Act of 1934 (the "Exchange Act")) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report. Based on such evaluation, they have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls during the period covered by this quarterly report. 22 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS. Refer to Form 10-Q for the quarterly period ended June 30, 2002. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit 99.1 - CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Exhibit 99.2 - CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. c) Reports on Form 8K. The registrant did not file any reports on Form 8-K during the first nine months 2002. 23 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: November 14, 2002 24 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, James A. Mack, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cambrex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the registrant and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ James A. Mack ------------------------------ James A. Mack Chairman of the Board and Chief Executive Officer Date: November 14, 2002 25 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Salvatore J. Guccione, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cambrex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the registrant and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Salvatore J. Guccione ------------------------------------ Salvatore J. Guccione Senior Vice President and Chief Financial Officer Date: November 14, 2002 26 EX-99.1 3 y65661exv99w1.txt CERTIFICATION EXHIBIT 99.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350 (a) and (b)), the undersigned hereby certify as follows: 1. James A. Mack is the Chairman of the Board and Chief Executive Officer of Cambrex Corporation. 2. The Company's Form 10-Q for the quarterly period ended September 30, 2002, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and 3. The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 /s/ James A. Mack ----------------------------- James A. Mack Chairman of the Board and Chief Executive Officer 27 EX-99.2 4 y65661exv99w2.txt CERTIFICATION EXHIBIT 99.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350 (a) and (b)), the undersigned hereby certify as follows: 1. Salvatore J. Guccione is Senior Vice President and Chief Financial Officer of Cambrex Corporation. 2. The Company's Form 10-Q for the quarterly period ended September 30, 2002, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and 3. The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2002 /s/ Salvatore J. Guccione ------------------------------------ Salvatore J. Guccione Senior Vice President and Chief Financial Officer 28 -----END PRIVACY-ENHANCED MESSAGE-----