-----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, Pj9/1RE5TewQU5+pDDcUmEWYH2ETr2msOZvcfBGoC37pss0az6Ih4DrJQwoPzu86 5JueiZZvs0ruMUd3YkPkcg== 0000950123-05-005772.txt : 20050506 0000950123-05-005772.hdr.sgml : 20050506 20050506142435 ACCESSION NUMBER: 0000950123-05-005772 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050506 DATE AS OF CHANGE: 20050506 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: 05807189 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 y08778e10vq.txt CAMBREX CORPORATION CONFORMED 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, 2005 -------------- 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No As of April 30, 2005, there were 26,395,102 shares outstanding of the registrant's Common Stock, $.10 par value. CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended March 31, 2005 Table of Contents
Page No. -------- Part I Financial information Item 1. Financial Statements (Unaudited) Consolidated balance sheets as of March 31, 2005 and December 31, 2004 2 Consolidated income statements for the three months ended March 31, 2005 and 2004 3 Consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 4 Notes to unaudited consolidated financial statements 5 - 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 - 24 Item 4. Controls and Procedures 25 Part II Other information Item 2. Changes in Securities and Use of Proceeds 26 Item 4. Matters Submitted to a Vote of Securities Holders 26 Item 6. Exhibits 26 Signatures 27
Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except share data)
March 31, December 31, 2005 2004 --------- ------------ ASSETS Current assets: Cash and cash equivalents ............................. $ 91,375 $ 91,532 Trade receivables, net ................................ 67,076 68,370 Inventories, net ...................................... 96,875 91,039 Deferred tax assets ................................... 4,291 2,605 Prepaid expenses and other current assets ............. 16,937 20,825 --------- --------- Total current assets ................................ 276,554 274,371 Property, plant and equipment, net ....................... 272,148 280,790 Goodwill ................................................. 175,359 176,275 Other intangible assets, net ............................. 54,639 54,381 Other assets ............................................. 5,226 6,168 --------- --------- Total assets ........................................ $ 783,926 $ 791,985 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................... $ 35,894 $ 38,552 Accrued liabilities ................................... 49,516 52,181 Short-term debt and current portion of long-term debt . 1,400 1,400 --------- --------- Total current liabilities ........................... 86,810 92,133 Long-term debt ........................................... 234,602 226,187 Deferred tax liabilities ................................. 21,887 21,686 Other non-current liabilities ............................ 60,139 60,663 --------- --------- Total liabilities ................................... 403,438 400,669 --------- --------- Stockholders' equity: Common stock, $.10 par value; issued 28,827,891 and 28,825,603 shares at respective dates ............. 2,883 2,883 Additional paid-in capital ............................ 215,513 213,120 Retained earnings ..................................... 179,102 175,804 Treasury stock, at cost; 2,435,539 and 2,593,129 shares at respective dates ......................... (20,701) (21,991) Deferred compensation ................................. (4,107) (1,982) Accumulated other comprehensive income ................ 7,798 23,482 --------- --------- Total stockholders' equity .......................... 380,488 391,316 --------- --------- Total liabilities and stockholders' equity .......... $ 783,926 $ 791,985 ========= =========
See accompanying notes to unaudited consolidated financial statements. 2 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands, except per-share data)
Three months ended March 31, ----------------------- 2005 2004 --------- --------- Gross sales ............................................ $ 110,462 $ 113,549 Commissions & allowances ............................ 989 959 --------- --------- Net sales .............................................. 109,473 112,590 Other revenues ...................................... 2,460 3,042 --------- --------- NET REVENUES ........................................... 111,933 115,632 Cost of goods sold ..................................... 68,671 70,161 --------- --------- GROSS PROFIT ........................................... 43,262 45,471 Operating expenses: Selling, general and administrative expenses .......................... 26,497 27,437 Research and development expenses ................... 5,858 4,743 Other, net .......................................... -- (1,863) --------- --------- Total operating expenses .......................... 32,355 30,317 OPERATING PROFIT ....................................... 10,907 15,154 Other expenses: Interest expense, net ............................... 2,730 2,929 Other expense, net .................................. 190 127 --------- --------- Income from continuing operations before income taxes ................................. 7,987 12,098 Provision for income taxes .......................... 3,897 4,339 --------- --------- INCOME FROM CONTINUING OPERATIONS ...................... 4,090 7,759 DISCONTINUED OPERATIONS (NOTE 8) Loss from discontinued operations net of provision for income taxes of $0 .................................. -- (742) --------- --------- Net income ............................................. $ 4,090 $ 7,017 ========= ========= Basic earnings per share: Income from continuing operations ................... $ 0.16 $ 0.30 Loss from discontinued operations ................... -- (0.03) --------- --------- Net income .......................................... 0.16 0.27 Diluted earnings per share: Income from continuing operations ................... 0.15 0.29 Loss from discontinued operations ................... -- (0.03) --------- --------- Net income .......................................... 0.15 0.26 Weighted average shares outstanding: Basic ............................................... 26,346 26,001 Effect of dilutive stock options .................... 284 604 --------- --------- Diluted ............................................. 26,630 26,605 Cash dividends paid per share .......................... $ 0.03 $ 0.03 ========= =========
See accompanying notes to unaudited consolidated financial statements. 3 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three months ended March 31, ---------------------- 2005 2004 -------- -------- Cash flows from operating activities: Net income ............................................ $ 4,090 $ 7,017 Depreciation and amortization ......................... 9,944 10,747 Deferred income tax provision ......................... -- 472 Changes in assets and liabilities: Receivables, net .................................... (690) 1,024 Inventories ......................................... (8,821) (5,046) Prepaid expenses and other current assets ........... (399) 5,080 Accounts payable and accrued liabilities ............ (1,127) 3,099 Income taxes payable ................................ 2,027 2,200 Other non-current assets and liabilities ............ 2,943 (775) -------- -------- Net cash provided by operating activities ............. 7,967 23,818 -------- -------- Cash flows from investing activities: Capital expenditures .................................. (9,046) (7,224) Other investing activities ............................ (2,643) (412) -------- -------- Net cash used in investing activities ................. (11,689) (7,636) -------- -------- Cash flows from financing activities: Dividends paid ........................................ (792) (786) Net increase in short-term debt ....................... -- 2,111 Long-term debt activity (including current portion): Borrowings .......................................... 24,814 5,300 Repayments .......................................... (16,387) (15,241) Proceeds from stock options exercised ................. 32 3,929 Other financing activities ............................ 111 (63) -------- -------- Net cash provided by/(used in) financing activities . 7,778 (4,750) -------- -------- Effect of exchange rate changes on cash .................. (4,213) (2,044) -------- -------- Net (decrease)/increase in cash and cash equivalents ..... (157) 9,388 -------- -------- Cash and cash equivalents at beginning of period ......... 91,532 64,294 -------- -------- Cash and cash equivalents at end of period ............... $ 91,375 $ 73,682 ======== ========
See accompanying notes to unaudited consolidated financial statements. 4 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) (1) BASIS OF PRESENTATION Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and subsidiaries. The accompanying unaudited consolidated financial statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments which are of a normal and recurring nature and are 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, 2004. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year. (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Inventory Costs In November 2004, the FASB published SFAS No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criteria of "so abnormal". In addition, this Statement requires that allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facility. This Statement will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. An earlier application of the new amendment is permitted for inventory costs incurred during fiscal years beginning after the date of the issuance of this Statement. The Company is reviewing SFAS No. 151 to determine its impact on the Company's financial position or results of operations. Share-Based Payment In December 2004, the FASB published SFAS No. 123R (revised 2004) "Share-Based Payment". SFAS No. 123R supersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees" and its related implementation guidance. This Statement eliminates the alternative to use APB Opinion No. 25's intrinsic value method of accounting that was provided in Statement No. 123 as originally issued. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). This Statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date and is based on the transition methodology applied. In April 2005, the SEC issued guidance announcing that public companies will now be required to adopt SFAS No. 123R by their first fiscal year beginning on or after June 15, 2005. The Company is in the process of reviewing the SFAS No. 123R implementation and determining its transition methodology and its impact on the Company's financial position in 2006. Conditional Asset Retirement Obligations In March 2005, the Financial Accounting Standards Board issued Interpretation Number 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). This statement clarifies the meaning of the term "conditional 5 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) asset retirement" as used in Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" and clarifies when an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation. The statement requires the accelerated recognition of certain asset retirement obligations when a fair value of such obligation can be estimated. This statement becomes effective for the Company in the fourth quarter of 2005. The Company is currently evaluating the effect of adoption of this statement. (3) STOCK BASED COMPENSATION As of March 31, 2005, the Company has seven active stock-based employee compensation plans in effect. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. In May 2003, the Chief Executive Officer was granted 150,000 incentive stock appreciation rights. In the fourth quarter 2003 these rights vested and, as such, the employee is entitled to a cash settlement or the equivalent value of Cambrex stock representing the difference in value between the closing price of Cambrex stock on the day of the grant, which was $19.30, and the closing price of Cambrex stock on the day the rights are exercised. These rights terminate one year after the employee's retirement. These rights will be marked to market until the rights are exercised or expire with the amount being recorded as compensation expense or benefit in the applicable period. In the first quarter of 2005 and 2004, the Company recorded approximately $870 in compensation benefit and $245 in compensation expense, respectively.
Three Months Ended March 31, --------- 2005 2004 ---- ---- Net income, as reported ................. $ 4,090 $ 7,017 Add: stock based compensation included in reported net income ...... (650) 483 Deduct: stock-based compensation expenses determined using fair value method ............................... (729) (1,617) --------- --------- Proforma net income ..................... $ 2,711 $ 5,883 Earnings per share: Basic - as reported .................. $ 0.16 $ 0.27 Basic - proforma ..................... $ 0.10 $ 0.23 Diluted - as reported ................ $ 0.15 $ 0.26 Diluted - proforma ................... $ 0.10 $ 0.22
6 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (4) GOODWILL AND INTANGIBLE ASSETS 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 evaluates 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 three months ended March 31, 2005, are as follows:
Human Bioproducts Biopharma Health Segment Segment Segment Total ------- ------- ------- ----- Balance as of January 1, 2005 ... $ 55,306 $ 76,618 $ 44,351 $ 176,275 Final Purchase Price Payment and Adjustment for Genolife acquisition ............ 1,286 0 0 1,286 Cumulative Translation Effect ... (367) 0 (1,835) (2,202) --------- --------- --------- --------- Balance as of March 31, 2005 .... $ 56,225 $ 76,618 $ 42,516 $ 175,359 ========= ========= ========= =========
Other intangible assets that are not subject to amortization, consist of the following:
As of As of March 31, December 31, 2005 2004 ---- ---- Proprietary Process ... $ 1,675 $ 1,675 Trademarks ............ 33,898 33,898 --------- --------- Total ............. $ 35,573 $ 35,573 ========= =========
Other intangible assets, which will continue to be amortized, consist of the following:
As of March 31, As of December 31, 2005 2004 ---- ---- Patents $ 5,632 $ 5,792 Proprietary Process ........... 9,284 8,189 Supply Agreements ............. 2,110 2,110 Trademarks .................... 1,384 1,384 Unpatented Technology ......... 5,912 5,912 Other ......................... 2,464 2,674 Fully Amortized Assets* ....... 2,883 2,883 -------- -------- Total ...................... 29,669 28,944 -------- -------- Accumulated Amortization ...... (10,603) (10,136) -------- -------- Net ........................... $ 19,066 $ 18,808 ======== ========
7 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (4) GOODWILL AND INTANGIBLE ASSETS - (CONTINUED) *This category includes certain fully amortized patents, proprietary process and non-compete agreements. Amortization expense for the quarters ended March 31, 2005 and 2004 were $539 and $472, respectively. The expected amortization expense related to intangible assets in the future is as follows: For the year ended December 31, 2005....... $2,230 For the year ended December 31, 2006....... $2,173 For the year ended December 31, 2007....... $2,130 For the year ended December 31, 2008....... $1,848 For the year ended December 31, 2009....... $1,687
(5) INCOME TAXES The Company's domestic net deferred tax assets at March 31, 2005 were primarily associated with net operating loss carryforwards, foreign tax credits, research and experimentation tax credits and alternative minimum tax credits, which are evaluated quarterly to assess the likelihood of realization. The realization of these assets is ultimately dependent upon generating future taxable income or implementing tax planning strategies prior to expiration of those assets. Since September 30, 2003 the Company has maintained a full valuation allowance against its domestic net deferred tax assets and will continue to do so until an appropriate level of domestic profitability is sustained or tax strategies can be developed that would enable the Company to conclude that it is more likely than not that a portion of the domestic net deferred assets would be realized. If the Company continues to report pre-tax losses in the United States, income tax benefits associated with those losses will not be recognized and, therefore, those losses would not be reduced by such income tax benefits. Additionally, should domestic losses continue, it is possible that tax planning strategies preserving certain domestic tax assets could be deemed inadequate, resulting in additional valuation allowances in the future. The carryforward periods for foreign tax credits, research and experimentation tax credits, net operating losses, and the federal alternative minimum tax credits are 10 years, 20 years, 20 years and an indefinite period, respectively. As such, improvements in domestic pre-tax income in the future may result in these tax benefits ultimately being realized. However, there is no assurance that such improvements will be achieved. Within discontinued operations, the Company has also not recorded any benefit related to the domestic loss generated by the operation or sale of Rutherford Chemicals for the same reasons as those identified above. On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the "Act"). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the Act. The Company is evaluating whether, and to what extent, it may repatriate foreign earnings that have not yet been remitted to the U.S. 8 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (6) INVENTORIES Inventories are stated at the lower of standard cost, determined on a first-in, first-out basis, or market. Inventories at March 31, 2005 and December 31, 2004 consist of the following:
March 31, December 31, 2005 2004 --------- ------------ Finished goods ... $48,383 $45,002 Work in process .. 25,150 23,658 Raw materials .... 18,566 17,222 Supplies ......... 4,776 5,157 ------- ------- Total ......... $96,875 $91,039 ======= =======
(7) LONG-TERM DEBT Long-term debt at March 31, 2005 and December 31, 2004 consists of the following:
March 31, December 31, 2005 2004 --------- ------------ Bank credit facilities .. $ 128,800 $ 120,000 Senior notes ............ 100,000 100,000 Capitalized leases ...... 6,934 7,280 Notes payable ........... 268 307 --------- --------- Subtotal ............. 236,002 227,587 Less: current portion .. (1,400) (1,400) --------- --------- Total ................ $ 234,602 $ 226,187 ========= =========
The Company met all bank covenants for the first three months of 2005 and the full year 2004. 9 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (8) DISCONTINUED OPERATIONS - SALE OF RUTHERFORD CHEMICALS On November 10, 2003 the Company completed the sale of Rutherford Chemicals. The agreement specified proceeds for the sale of $55,000 in cash at closing, a $2,000 subordinated 12% interest bearing note payable in full in 5 1/2 years from the closing date, and an $8,000 performance-based cash earn-out if certain future operating profit targets are achieved in each of the next 3 years. These terms resulted in a write-down of assets to estimated fair value of approximately $53,098 which is based on the selling price, including fees associated with the transaction. The Company has not included any of the performance based cash earn-out in the computation of the $53,098 loss and income from discontinued operations will be recorded in future periods if the Company receives any payments under the earn-out arrangement. In the first quarter of 2004, the Company finalized the post closing working capital adjustment. This adjustment, along with legal and other charges associated with the sale, resulted in an additional $742 charge to discontinued operations in the first quarter 2004. This loss was not tax effected as more fully explained in Note #5. In accordance with the sale agreement, the Company has retained certain liabilities of the Rutherford Chemicals business including existing general litigation matters, including the Vitamin B-3 matter, pre-closing environmental liabilities and post retirement benefits and pension liabilities. See Note #14. (9) COMPREHENSIVE INCOME The following table shows the components of comprehensive loss for the three months ended March 31, 2005 and 2004:
For the three months ended March 31, --------- 2005 2004 -------- -------- Net income ............................................... $ 4,090 $ 7,017 Foreign currency translation ............................. (14,911) (10,778) Unrealized loss on hedging contracts ..................... (708) (953) Unrealized (gain)/loss on available for sale securities .. (65) 24 Minimum pension liability ................................ -- (2,822) -------- -------- Total ................................................. $(11,594) $ (7,512) ======== ========
10 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (10) OTHER REVENUE Other revenue of $2,460 and $3,042 in the first quarter of 2005 and 2004, respectively, consists primarily of realized gains/losses on foreign currency hedge contracts, foreign exchange transaction gains/losses and freight billings. With respect to the foreign currency hedge contracts, the Company enters into such contracts to reduce exposures to market risks resulting from fluctuations in foreign exchange rates. The Company does not enter into financial instruments for trading or speculative purposes. (11) RETIREMENT PLANS Domestic Pension Plans The Company maintains two U.S. defined-benefit pension plans which cover substantially all eligible employees: (1) the Nepera Hourly Pension Plan (the "Nepera Plan") which covers the union employees at the Harriman, New York plant, and (2) the Cambrex Pension Plan (the "Cambrex Plan") which covers all other eligible employees. The components of net periodic pension cost for the Company's domestic plans for the three months ended March 31, 2005 and 2004 are as follows
March 31, March 31, 2005 2004 ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ............................ $ 688 $ 581 Interest cost ........................... 791 731 Expected return on plan assets .......... (735) (639) Amortization of prior service cost ...... 11 11 Recognized actuarial loss ............... 113 129 ----- ----- Net periodic benefit cost ............... $ 868 $ 813 ===== =====
The Company expects to contribute $500 in cash to its two U.S. defined-benefit pension plans in 2005. The Company has two Supplemental Executive Retirement Plans (SERP) for key executives. These plans are non-qualified and unfunded. The components of net periodic pension cost for the Company's SERP Plans for the three months ended March 31, 2005 and 2004 are as follows:
March 31, March 31, 2005 2004 ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ............................ $ 56 $ 52 Interest cost ........................... 108 107 Amortization of unrecognized transition obligation ............... 25 25 Amortization of prior service cost ...... 1 1 Recognized actuarial loss ............... 10 12 ------- ------- Net periodic benefit cost................ $ 200 $ 197 ======= =======
11 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (11) RETIREMENT PLANS - (CONTINUED) International Pension Plans Certain foreign subsidiaries of the Company maintain pension plans for their employees that conform to the common practice in their respective countries. Based on local laws and customs, some of those plans are not funded. For those plans that are funded, the amount in the trust supporting the plan is actuarially determined, and where applicable, in compliance with local statutes. The components of net periodic pension cost for the Company's international plans for the three months ended March 31, 2005 and 2004 are as follows:
March 31, March 31, 2005 2004 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ............................ $ 302 $ 173 Interest cost ........................... 282 234 Expected return on plan assets .......... (92) (45) Amortization of unrecognized transition benefit ................... (13) (10) Recognized actuarial loss ............... 59 19 Amortization of prior service cost ...... (2) 15 ------- ------- Net periodic benefit cost................ $ 536 $ 386 ======= =======
The Company expects to contribute approximately $669 in cash to its international pension plans in 2005. (12) OTHER POSTRETIREMENT BENEFITS Cambrex provides postretirement health and life insurance benefits ("postretirement benefits") to all eligible retired employees. Employees who retire at or after age 55 with ten years of service are eligible to participate in the postretirement benefit plans. The Company's responsibility for such premiums for each plan participant is based upon years of service subject to an annual maximum of one thousand dollars. Such plans are self-insured and are not funded. Effective January 1, 2003, the Company made significant changes to these benefits affecting current and future retirees, both in reducing the level of benefits and reducing the subsidy the Company provides. Certain subsidiaries and all employees hired after December 31, 2002 (excluding those covered by collective bargaining) are not eligible for these benefits. The components of net periodic pension cost for the three months ended March 31, 2005 and 2004 are as follows:
March 31, March 31, 2005 2004 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost of benefits earned.......... $ 15 $ 13 Interest cost............................ 38 37 Actuarial loss recognized 29 29 Amortization of unrecognized prior service cost.................................... (38) (38) ------- ------- Total periodic postretirement benefit cost $ 44 $ 41 ======= =======
12 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) SEGMENT INFORMATION The Company classifies its business units into three reportable segments: Bioproducts, consisting of research products and other therapeutic application products, Biopharma, consisting of contract biopharmaceutical process development and manufacturing services and Human Health, consisting of active pharmaceutical ingredients and pharmaceutical intermediates produced under Food and Drug Administration cGMP for use in the production of prescription and over-the-counter drug products and other fine custom chemicals derived from organic chemistry. Information as to the operations of the Company in each of its business segments is set forth below based on the nature of the products and services offered. Cambrex evaluates performance based on gross profit and operating profit. Operating profit is most similar to income from continuing operations and a reconciliation is included below. Intersegment sales are not material. The Company allocates certain corporate expenses to each of the segments. No customer accounted for more than 10% of gross sales in the three months ended March 31, 2005. One customer, a distributor representing multiple customers, accounted for 10.6% of gross sales in the three months ended March 31, 2004. Following is a summary of business segment information for the following dates:
Three months ended March 31, ------------------------- 2005 2004 ---------- ---------- Gross Sales: Bioproducts ....................... $ 39,919 $ 34,521 Biopharma ......................... 7,707 9,119 Human Health ...................... 62,836 69,909 --------- --------- $ 110,462 $ 113,549 ========= ========= Gross Profit: Bioproducts ....................... $ 22,135 $ 18,397 Biopharma ......................... (2,057) 450 Human Health ...................... 23,184 26,624 --------- --------- $ 43,262 $ 45,471 ========= ========= Operating Profit: Bioproducts ....................... $ 9,646 $ 8,936 Biopharma ......................... (4,912) (2,260) Human Health ...................... 12,309 15,335 Reconciling items-Corporate ....... (6,136) (6,857) --------- --------- Total Operating Profit ............ $ 10,907 $ 15,154 Interest Expense, net ............. $ 2,730 $ 2,929 Other Expense, net ................ 190 127 Taxes ............................. 3,897 4,339 --------- --------- Income from continuing operations . $ 4,090 $ 7,759 ========= ========= Capital Spending: Bioproducts ....................... $ 2,937 $ 961 Biopharma ......................... 1,406 2,836 Human Health ...................... 4,254 3,265 Corporate ......................... 449 162 --------- --------- $ 9,046 $ 7,224 ========= =========
13 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) SEGMENT INFORMATION (CONTINUED)
Three months ended March 31, ------------------- 2005 2004 ------- ------- Depreciation: Bioproducts .... $ 1,494 $ 1,350 Biopharma ...... 946 1,482 Human Health ... 6,563 7,103 Corporate ...... 402 340 ------- ------- $ 9,405 $10,275 ======= ======= Amortization: Bioproducts .... $ 422 $ 358 Biopharma ...... 108 108 Human Health ... 9 6 ------- ------- $ 539 $ 472 ======= =======
March 31, December 31, 2005 2004 -------- -------- Total Assets: Bioproducts $225,936 $220,791 Biopharma 132,989 134,591 Human Health 390,955 399,538 Corporate 34,046 37,065 -------- -------- $783,926 $791,985 ======== ========
(14) 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. The Company continually assesses all known facts and circumstances as they pertain to all legal and environmental matters and evaluates the need for reserves and/or disclosures as deemed necessary based on these facts and circumstances and as such facts and circumstances develop. Environmental In connection with laws and regulations pertaining to the protection of the environment, the Company and/or its subsidiaries is a party to several environmental proceedings and remediation investigations and cleanups and, along with other companies, has been named a "potentially responsible party" for certain waste disposal sites ("Superfund sites"). Additionally, as discussed in the "Sale of Rutherford Chemicals" section of this Note, the Company has retained the liability for certain environmental proceedings, associated with the Rutherford Chemicals business. 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 resolution of such matters often spans several years and frequently involves regulatory oversight and/or adjudication. Additionally, many remediation requirements are not fixed and are likely to be affected by future technological, site, and regulatory developments. Consequently, the ultimate extent of liabilities with respect to such matters, as well as the timing of cash disbursements cannot be determined with certainty. 14 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (14) CONTINGENCIES (CONTINUED) In matters where the Company has been able to reasonably estimate its liability, the Company has accrued for the estimated costs associated with the study and remediation of Superfund sites not owned by the Company and the Company's current and former operating sites. These accruals were $5,279 and $5,570 at March 31, 2005 and December 31, 2004, respectively. The decrease in the accrual is due to currency fluctuation of $172, and payments of $119. Based upon currently available information and analysis, the Company's current accrual represents management's best estimate of what it believes are the probable and estimable costs associated with environmental proceedings including amounts for legal and investigation fees where remediation costs may not be estimable at the reporting date. As described below, the Company expects to receive information in the near future on three matters that could impact the Company's current assessment of its probable and estimable costs and as such may require an adjustment to the reserves. As a result of the sale of the Bayonne, New Jersey facility (see "Sale of Rutherford Chemicals" section of this Note), an obligation to investigate site conditions and conduct required remediation under the New Jersey Industrial Site Recovery Act was triggered and the Company has retained the responsibility for such obligation. The Company completed a Preliminary Assessment (PA) of the Site and submitted the PA to the New Jersey Department of Environmental Protection. The PA identified potential areas of concern based on historical operations and proposed certain sampling at the Site. The Company has reserved for the costs of the sampling. The results of the sampling will be used to develop an estimate of the Company's future liability for remediation costs, if required. We expect the sampling to commence within the next few months. In March 2000, the Company completed the acquisition of the Cambrex Profarmaco Landen facility in Belgium. At the time of acquisition, Cambrex was aware of certain site contamination and recorded a reserve for the estimated costs of remediation. This property has been the subject of an extensive on-going environmental investigation. The investigation has been completed with no change to the reserve warranted based on the information developed through the investigation. The health risk assessment related to the site contamination is on-going and is expected to be completed in the near future. The Company's Cosan subsidiary conducted manufacturing operations in Clifton, New Jersey from 1968 until 1979. In 1997, Cosan entered into an Administrative Consent Order with the State of New Jersey Department of Environmental Protection. Under the Administrative Consent Order, Cosan is required to complete an investigation of the Clifton site conditions and conduct remediation as may be necessary. The investigation of site conditions continues and is expected to be completed in the near future. The results of the investigation will enable the Company to estimate its liability, if any. In February 2005, the New Jersey Federal District Court ruled that a lawsuit against Cosan by the owners of property adjacent to the Clifton location could be placed on the active calendar. The outcome of this matter could also affect the reserves. The Company is involved in other matters where the range of liability is not reasonably estimable at this time and it is not determinable when information will become available to provide a basis for recording an accrual, should an accrual be required. If any of the Company's environmental matters are resolved in a more unfavorable manner than presently estimated, these matters either individually or in the aggregate, could have a material adverse effect on the Company's financial condition, operating results and cash flows when resolved in a future reporting period. 15 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (14) CONTINGENCIES (CONTINUED) Litigation and Other Matters Mylan Laboratories In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently known as Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants (along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America, Inc., Profarmaco's distributor in the United States) in a proceeding instituted by the Federal Trade Commission ("FTC") in the United States District Court for the District of Columbia (the "District Court"). Suits were also commenced by several State Attorneys General. The suits alleged violations of the Federal Trade Commission Act arising from exclusive license agreements between Profarmaco and Mylan covering two active pharmaceutical ingredients ("APIs"). The FTC and Attorneys General's suits were settled in February 2001, with Mylan (on its own behalf and on behalf of Profarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan, Profarmaco and Cambrex agreeing to monitor certain future conduct. The same parties including 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 the APIs in generic form, making allegations similar to those raised in the FTC's complaint and seeking various forms of relief including treble damages. In April 2003, Cambrex reached an agreement with Mylan under which Cambrex would contribute $12,415 to the settlement of litigation brought by a class of direct purchasers. In exchange, Cambrex and Profarmaco received from Mylan a release and full indemnity against future costs or liabilities in related litigation brought by purchasers, as well as potential future claims related to this matter. In accordance with the agreement approximately $6,015 has been paid through March 31, 2005, with the remaining $6,400 to be paid over the next four years. Cambrex recorded an $11,342 charge (discounted to the present value due to the five year pay-out) in the first quarter of 2003 as a result of this settlement. As of March 31, 2005 the outstanding balance for this liability was $5,956. Vitamin B-3 On May 14, 1998, the Company's subsidiary, Nepera, which formerly operated the Harriman facility and manufactured and sold 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. In 2000, Nepera reached agreement with the Government as to its alleged role in Vitamin B-3 violations from 1992 to 1995. The Canadian government claimed similar violations. All government suits in the U.S. and Canada have now been concluded. 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. The actions seek injunctive relief and unspecified but substantial damages. Several actions have been concluded during 2003 and 2004 with all amounts paid from reserves established in this matter. Additional settlements are being discussed in several more indirect purchaser cases and we believe that current reserves are sufficient to complete the settlements. Litigation in the United States under the U.S. antitrust laws was commenced some years ago by a group of European purchasers. On motion by the Vitamin B-3 defendants, the District Court dismissed the litigation under the long-standing rule that foreign purchasers cannot sue in U.S. courts under U.S. antitrust statutes. Thereafter, the Federal Circuit Court for the District of Columbia reversed the District Court's decision. The Vitamin B-3 defendants, supported by the U.S. Department of Justice, appealed to the United States Supreme Court and oral arguments were heard on April 29, 2004. In June 2004, the United States Supreme Court ruled that foreign purchasers could not sue in U.S. courts under U.S. antitrust statutes if the conduct at issue resulted in purely foreign harm. However, the Court left 16 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (14) CONTINGENCIES (CONTINUED) open potential claims where foreign injuries suffered by foreign plaintiffs were dependent upon domestic harm resulting from conduct that violates the U.S. antitrust laws. The Supreme Court remanded the matter to the Circuit Court for briefing on the issue of whether Plaintiffs preserved such a claim in the underlying proceedings, in which case a hearing on the claim would proceed in District Court. This proceeding is on-going and there has been no decision from the Court at this time. The balance of the reserves recorded within accrued liabilities related to this matter was $3,023 as of March 31, 2005. Any adjustments to this accrual will be recorded as part of discontinued operations. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business on November 10, 2003. Under the agreement for the sale, the Company provided standard representations and warranties and included various covenants concerning the business, operations, liabilities and financial condition of the Rutherford Chemicals business. Most of such representations and warranties will survive for a period of thirty days after the Buyer's preparation of its audited financial statements for year-end 2004. Therefore, claims for breaches of such representations would have to be brought during that time frame. Certain specified representations and warranties and covenants, such as those relating to employee benefit matters and certain environmental matters, will survive for longer periods and claims under such representations, warranties and covenants could be brought during such longer periods. Under the sale agreement, the Company has indemnified the Buyer for breaches of representations, warranties and covenants. Indemnifications for certain but not all representations and warranties are subject to a deductible of $750 and a cap at 25 percent of the purchase price. On March 31, 2005, the Company received a claim by the purchasers of the Rutherford Chemicals business claiming breach of certain representations, warranties and covenants contained in the October 2003 Purchase Agreement. In early April the Company responded rejecting the claim. Thereafter, the purchasers submitted an amended claim. The amended claim alleges breaches of representations, warranties and covenants covering each of the five operating sites sold pursuant to the October 2003 Purchase Agreement and are related primarily to facility structures, utilities and equipment and alleges damages of $26,407. To the extent the alleged damages arise from breaches of representations and warranties, the claim is subject to a cap of between approximately $14,000 and 16,250, depending on whether certain contingent payments are made, and is subject to the deductible of $750 which is the responsibility of the purchasers. While the Company continues its evaluation of the claim, management currently believes that the claim is without merit and will vigorously defend against the claim. As such, the Company has no reserves related to this matter. Under the agreement for sale, the Company has retained the liabilities associated with existing general litigation matters related to Rutherford Chemicals, including Vitamin B-3 as stated above. With respect to certain pre-closing environmental matters, the Company retains the responsibility for: (i) certain existing matters including violations, environmental testing for the New York facility incinerator and off-site liabilities; and (ii) completing the on-going remediation at the New York facility. Further, as a result of the sale of the Bayonne, New Jersey facility, the obligation to investigate site conditions and conduct required remediation under the provisions of the New Jersey Industrial Site Recovery Act was triggered; and the Company has retained the responsibility for completion of any such investigation and remediation. With respect to all other pre-closing environmental liabilities, whether known or unknown, the Buyer is responsible for the management of potential future matters; however, the Buyer and the Company may share the costs of associated remediation with respect to such potential future matters, subject to certain limitations defined in the agreement for sale. The Company has accrued for exposures which are deemed probable and estimable. 17 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (14) CONTINGENCIES (CONTINUED) Class Action Matter In October 2003, the Company was notified of a securities class action lawsuit filed against Cambrex and five former and current Company officers. Five class action suits were filed with the New Jersey Federal District Court. In January 2004, the Court consolidated the cases, designated the lead plaintiff and selected counsel to represent the class. An amended complaint was filed on March 30, 2004. The lawsuit has been brought as a class action in the names of purchasers of the Company's common stock from October 21, 1998 through July 25, 2003. The complaint alleges that the Company failed to disclose in timely fashion the January 2003 accounting restatement and subsequent SEC investigation, as well as the loss of a significant contract at the Baltimore facility. The Company filed a motion to dismiss in May 2004. Thereafter the plaintiff filed a reply brief. The Company responded and is awaiting a decision from the Court. The Company currently considers the complaints to be without merit and will vigorously defend against them. As such, the Company has recorded no reserves related to this matter. Securities and Exchange Commission The Securities and Exchange Commission ("SEC") is currently conducting an investigation into the Company's inter-company accounting procedures from the period 1997-2001. The investigation began in the first half of 2003 after the Company voluntarily disclosed certain matters related to inter-company accounts for the five-year period ending December 31, 2001 that resulted in the restatement of the Company's financial statements for those years. To Cambrex's knowledge, the investigation is limited to this inter-company accounting matter, and the Company does not expect further revisions to its historical financial statements relating to these issues. The Company is fully cooperating with the SEC. Other The Company has commitments incident to the ordinary course of business including corporate guarantees of financial assurance obligations under certain environmental laws for remediation, closure and/or third party liability requirements of certain of its subsidiaries and a former operating location; contract provisions for indemnification protecting its customers and suppliers against third party liability for manufacture and sale of Company products that fail to meet product warranties and contract provisions for indemnification protecting licensees against intellectual property infringement related to licensed Company technology or processes. Additionally, as permitted under Delaware law, the Company has agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a Director and Officer insurance policy that covers a portion of any potential exposure. 18 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (14) CONTINGENCIES (CONTINUED) The Company currently believes the estimated fair value of its indemnification agreements is not significant based on currently available information, and as such, the Company has no liabilities recorded for these agreements as of March 31, 2005. In addition to the matters identified above, Cambrex's subsidiaries are party to a number of other proceedings. While it is not possible to predict with certainty the outcome of the Company's litigation matters and various other lawsuits and contingencies, it is the opinion of management based on information currently available that the ultimate resolution of these matters should not have a material adverse effect on the Company's results of operations, cash flows and financial position. These matters, if resolved in an unfavorable manner, could have a material effect on the operating results and cash flows when resolved in a future reporting period. 19 CAMBREX CORPORATION AND SUBSIDIARIES (dollars in thousands, except share data) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF FIRST QUARTER 2005 VERSUS FIRST QUARTER 2004 The following table show the gross sales of the Company's three segments, in dollars and as a percentage of the Company's total gross sales for the quarters ended March 31, 2005 and 2004.
Quarter Ended March 31, ---------------------------------------------- 2005 2004 -------------------- -------------------- $ % $ % -------- ------- -------- ------- Bioproducts $ 39,919 36.1 $ 34,521 30.4 Biopharma 7,707 7.0 9,119 8.0 Human Health 62,836 56.9 69,909 61.6 -------- ------- -------- ------- Total gross sales $110,462 100.0% $113,549 100.0% ======== ======= ======== =======
The following table shows the gross profit of the Company's three product segments for the first quarter 2005 and 2004.
2005 2004 ---------------------- --------------------- Gross Gross Gross Gross Profit $ Margin % Profit $ Margin % -------- -------- -------- -------- Bioproducts $ 22,135 55.4% $ 18,397 53.3% Biopharma (2,057) (26.7) 450 4.9 Human Health 23,184 36.9 26,624 38.1 -------- -------- Total $ 43,262 39.2% $ 45,471 40.0% ======== ========
Gross sales in the first quarter 2005 decreased 2.7% to $110,462 from $113,549 in the first quarter 2004. Increased sales in the Bioproducts segment were offset by lower sales in the Biopharma and Human Health segments. Gross sales were favorably impacted 2.3% in the first quarter 2005 versus the first quarter 2004 due to the exchange rates reflecting the weakness in the U.S. dollar primarily versus the Euro and Swedish Krona. Gross profit in the first quarter 2005 was $43,262 compared to $45,471 in the first quarter 2004. Gross margin percentage decreased to 39.2% from 40.0% in the first quarter 2004, reflecting lower margins in the Biopharma and Human Health segments partially offset by higher margins in the Bioproducts segment. Foreign currency fluctuations negatively impacted gross margins by 0.4 percentage points. 20 RESULTS OF OPERATIONS (CONTINUED) The following table shows gross sales by geographic area for the three months ended March 31, 2005 and 2004:
March 31, March 31, 2005 2004 ---- ---- North America $ 49,398 $ 55,564 Europe 53,848 50,177 Asia 4,914 4,356 Other 2,302 3,452 -------- -------- Total $110,462 $113,549 ======== ========
Bioproducts Segment gross sales of $39,919 were $5,398 or 15.6% above the first quarter 2004. Bioproducts sales were favorably impacted 1.9% due to exchange rates reflecting a weaker U.S. dollar in the first quarter 2005 versus 2004. The sales increase, before the impact of foreign currency, reflects higher sales in both the research products and therapeutic applications categories. Increased research products sales primarily reflects higher sales of cell biology, serum and assays products due to stronger demand and higher pricing in Europe. The increase in therapeutic applications sales primarily reflects higher cell therapy sales due to the timing of shipments and the addition of new customers and higher media sales reflecting increased pricing and demand. Bioproducts segment gross margins increased to 55.4% in the first quarter of 2005 from 53.3% in the first quarter 2004 primarily due to higher sales volume and mix, lower inventory reserves, increased pricing in most product categories, favorable impact of foreign currency and lower bad debt reserves due to favorable collections partially offset by higher costs for raw materials. Biopharma Segment gross sales of $7,707 were $1,412 or 15.5% below the first quarter 2004 reflecting lower suite fees and process development in our biopharmaceutical manufacturing business driven by the completion or timing of projects. Foreign currency had no impact on Biopharma sales. Biopharma segment gross margins decreased to (26.7)% in the first quarter of 2005 from 4.9% in the first quarter of 2004 driven by lower revenues, unfavorable mix, under absorption of fixed overheads and higher production costs due to a new 2800L bioreactor being placed into service. Human Health Segment gross sales of $62,836 were $7,073 or 10.1% below the first quarter of 2004. Human Health sales were favorably impacted 2.8% due to exchange rates reflecting a weaker U.S. dollar. Excluding the currency impact, the decrease in sales reflects the loss of supply arrangements for an intermediate used in antihistamines and a local anaesthetic, lower shipments of an Alzheimer treatment API due to the launch of the product in 2004 which required higher inventory levels and lower sales of certain other APIs, intermediates and other fine chemicals due to pricing pressures and timing. These sales were partially offset by higher sales of custom development products and central nervous system APIs. Human Health segment gross margins decreased to 36.9% in the first quarter of 2005 from 38.1% in the first quarter of 2004 due to pricing pressures on APIs and other fine custom chemicals, unfavorable overhead absorption and unfavorable impact of foreign currency partially offset by favorable product mix and lower variable production costs. 21 RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative expenses of $26,497 or 24.0% as a percentage of gross sales in the first quarter 2005 decreased from $27,437 or 24.2% in the first quarter 2004. Sales and marketing expenses were relatively flat compared to the first quarter 2004. Administration expenses decreased primarily due to the valuation of stock appreciation rights and legal costs partially offset by higher regulatory compliance costs associated with the Sarbanes-Oxley Act and the impact of currency translation due to the weaker U.S. dollar. Research and development expenses of $5,858 were 5.3% of gross sales in the first quarter of 2004 compared to $4,743 or 4.2% of gross sales in the first quarter 2004. The increase reflects investments in new product technologies, increased spending on therapeutic applications, higher custom development costs and the impact of foreign currency exchange. Operating profit in the first quarter 2005 was $10,907 compared to $15,154 in the first quarter 2004. The results reflect lower gross margins in the Biopharma and Human Health segments partially offset by higher margins in the Bioproducts segment. The 2004 results include $2,863 of non-recurring income due to the early termination of a Bioproducts customer contract and an unrelated $1,000 non-recurring charge associated with the reorganization and related workforce reductions at a European facility. Net interest expense of $2,730 in the first quarter 2005 decreased $199 from the first quarter 2004 primarily reflecting lower interest rates partially offset by higher average debt. The average interest rate was 5.3% in the first quarter 2005 versus 5.8% in the first quarter 2004. The effective tax rate for the first quarter 2005 was 48.8% compared to 35.9% in the first quarter 2004. The increase in the effective tax rate in the first quarter 2005 compared to the first quarter 2004 is due to the geographic mix of income earned in each quarter. Since September 30, 2003 the Company has maintained a full valuation allowance against the Company's domestic net deferred tax assets and will continue to do so until an appropriate level of domestic profitability is sustained or tax strategies can be developed that would enable the Company to conclude that it is more likely than not that a portion of the domestic net deferred assets would be realized. If the Company continues to report pre-tax losses in the United States, income tax benefits associated with those losses will not be recognized and, therefore, those losses would not be reduced by such income tax benefits. Additionally, should domestic losses continue, it is possible that certain tax planning strategies preserving certain domestic tax assets could be deemed inadequate, resulting in additional valuation allowances in the future. The carryforward periods for foreign tax credits, research and experimentation tax credits, net operating losses, and the federal alternative minimum tax credits are 10 years, 20 years, 20 years and an indefinite period, respectively. As such, improvements in domestic pre-tax income in the future may result in these tax benefits ultimately being realized. However, there is no assurance that such improvements will be achieved. Income from continuing operations in the first quarter of 2005 was $4,090 or $0.15 per diluted share versus $7,759, or $0.29 per diluted share in the same period a year ago. The Company sold its Rutherford Chemical business in November 2003. In the first quarter of 2004, the Company recorded a post closing working capital adjustment and other expenses associated with Rutherford Chemicals resulting in a loss from discontinued operations of $742 or $0.03 per share. Net income in the first quarter of 2005 was $4,090, or $0.15 per diluted share versus $7,017, or $0.26 per diluted share in the same period a year ago. 22 RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $157 in the first quarter of 2005. Cash provided by operating activities of $7,967 and cash generated from financing activities of $7,778 was used to fund investing activities of $11,689. During the three months ended March 31, 2005, the Company generated cash flows from operations totaling $7,967, a decrease of $15,851 versus the same period a year ago. This decrease in cash flows is due primarily to lower net income, an increase in inventories due to increased production and the timing of shipments, significant collections of receivables outstanding at the end of 2003 and receipt of customer advances during the first quarter 2004 and timing of tax and other payments compared to prior year. Capital expenditures from continuing operations were $9,046 in the first three months of 2005 as compared to $7,224 in the first three months 2004. Part of the funds in 2005 were used for a suite expansion at Biopharma manufacturing plants, cell therapy manufacturing capabilities at the Bioproducts facility in Walkersville, MD, new research and development labs at Milan, Italy and capital improvements to existing facilities. The Company also invested $2,643 for certain acquisitions and other intangibles in the first quarter of 2005 versus $412 in the first quarter of 2004. Cash flows generated in financing activities in the first three months of 2005 of $7,778 includes a net increase in debt of $8,427 partially offset by payment of dividends of $792. In the first three months of 2004 the Company repaid $7,830 of debt. Proceeds from the exercise of stock options were $32 in the first quarter of 2005 compared to $3,929 in the first quarter of 2004. During the first three months of 2005 and 2004, 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. 23 FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under The Securities Exchange Act of 1934, including, without limitation, statements regarding expected performance, especially expectations with respect to sales, research and development expenditures, earnings per share, capital expenditures, acquisitions, divestitures, collaborations, or other expansion opportunities. These statements may be identified by the fact that they use words such as "expects," "anticipates," "intends," "estimates," "believes" or similar expressions in connection with any discussion of future financial and operating performance. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-Q. The forward-looking statements contained herein are based on current plans and expectations and involve risks and uncertainties that could cause actual outcomes and results to differ materially from current expectations including, but not limited to, global economic trends, pharmaceutical outsourcing trends, competitive pricing or product developments, government legislation and/or regulations (particularly environmental issues), tax rate, technology, manufacturing and legal issues, changes in foreign exchange rates, performance of minority investments, uncollectable receivables, loss on disposition of assets, cancellation or delays in renewal of contracts, lack of suitable raw materials or packaging materials and the risks and other factors described under the caption "Risk Factors That May Affect Future Results" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 24 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES With the participation of the Company's Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the Company's `disclosure controls and procedures' (as defined in the Rules 13a-15(e) under the Securities Exchange Act of 1934 (the `Exchange Act') as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to provide reasonable assurance that the Company is able to meet the objective of filing reports under the Exchange Act that contain disclosure which is recorded, processed, summarized and reported pursuant to the disclosure requirements and within the time periods specified in the rules and forms of the Commission. Based on such evaluation, including consideration of the matter discussed below, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level at March 31, 2005. CHANGES IN CONTROLS AND PROCEDURES There were no significant changes in the Company's internal controls, or in other factors that could significantly affect these internal controls, subsequent to the evaluation performed as of December 31, 2004. 25 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS. Purchases of equity securities by the issuer and affiliated purchasers.
(d) Maximum Number (c) Total Number of (or Approximate Dollar Shares (or Units) Value) of Shares (or (a) Total Number (b) Average Purchased as Part of Units) that May Yet Be of Shares (or Price Paid per Publicly Announced Purchased Under the Period Units) Purchased Share (or Unit) Plans or Programs Plans or Programs - ------ ---------------- --------------- ----------------- ----------------- January 1-31, 2005 -- -- -- 580,700 February 1-28, 2005 -- -- -- 580,700 March 1-31, 2005 -- -- -- 580,700 Total -- -- --
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS. 1. At the Annual Meeting of Stockholders held on April 28, 2005, four Directors in Class III were elected to hold office as Directors of the Company until the 2008 Annual Meeting of Stockholders.
Nominees Votes For Votes Withheld -------- --------- -------------- William B. Korb 24,674,427 434,709 James A. Mack 24,617,653 491,483 John R. Miller 24,131,648 977,488 Peter Tombros 24,604,093 505,043
2. Also, the Stockholders voted for the appointment of PricewaterwaterhouseCoopers LLP as the Company's Registered Independent Public Accounting Firm for 2005.
Votes For Votes Against Votes Abstained Unvoted --------- ------------- --------------- ------- 24,886,165 213,800 9,170 --
ITEM 6. EXHIBITS a) Exhibits 1. Exhibit 31.1 - CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 2. Exhibit 31.2 - CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 3. Exhibit 32.1 - CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 4. Exhibit 32.2 - CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 26 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/ Luke M. Beshar ------------------------------ Luke M.Beshar Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as the Registrant's Principal Financial Officer) Dated: May 6, 2005 27 EX-31.1 2 y08778exv31w1.txt CERTIFICATION EXHIBIT 31.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, John R. Leone, 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 periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John R. Leone ------------------------------ John R. Leone, President Dated: May 6, 2005 and Chief Executive Officer 28 EX-31.2 3 y08778exv31w2.txt CERTIFICATION EXHIBIT 31.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Luke M. Beshar, 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 periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Luke M. Beshar ------------------------------ Luke M. Beshar Executive Vice President and Dated: May 6, 2005 Chief Financial Officer 29 EX-32.1 4 y08778exv32w1.txt CERTIFICATION EXHIBIT 32.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Cambrex Corporation (the "Company") on form 10-Q for the period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Leone, President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 6, 2005 /s/ John R. Leone ------------------------ John R. Leone, President and Chief Executive Officer 30 EX-32.2 5 y08778exv32w2.txt CERTIFICATION EXHIBIT 32.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Cambrex Corporation (the "Company") on form 10-Q for the period ending March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Luke M. Beshar, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 6, 2005 /s/ Luke M. Beshar ------------------------------ Luke M. Beshar Executive Vice President and Chief Financial Officer 31 -----END PRIVACY-ENHANCED MESSAGE-----