-----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, AoZkLfHTmNHc/4pXJoVGSiLNQiCVQZF0xr6E33ic/6jsgO74B1peXG4rUjINlM/0 PPWkuBpiI2NIWWHnqTl1+g== 0000950123-05-013102.txt : 20051104 0000950123-05-013102.hdr.sgml : 20051104 20051104164358 ACCESSION NUMBER: 0000950123-05-013102 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051104 DATE AS OF CHANGE: 20051104 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: 051180869 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 y14373e10vq.txt 10-Q 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, 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 October 31, 2005, there were 26,674,828 shares outstanding of the registrant's Common Stock, $.10 par value. CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended September 30, 2005 Table of Contents
Page No. -------- Part I Financial information Item 1. Financial Statements (Unaudited) Consolidated balance sheets as of September 30, 2005 and December 31, 2004 2 Consolidated income statements for the three months and nine months ended September 30, 2005 and 2004 3 Consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004 4 Notes to unaudited consolidated financial statements 5-20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21-29 Item 4. Controls and Procedures 30 Part II Other information Item 1. Legal Proceedings 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 4. Matters Submitted to a Vote of Securities Holders 31 Item 6. Exhibits 31 Signatures 32
Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except share data)
September 30, December 31, 2005 2004 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ........................... $ 32,760 $ 91,532 Trade receivables, net .............................. 63,793 68,370 Inventories, net .................................... 101,716 91,039 Deferred tax assets ................................. 4,806 2,605 Prepaid expenses and other current assets ........... 21,896 20,825 -------- -------- Total current assets ............................. 224,971 274,371 Property, plant and equipment, net ..................... 258,446 280,790 Goodwill ............................................... 172,471 176,275 Other intangible assets, net ........................... 52,854 54,381 Other assets ........................................... 5,550 6,168 -------- -------- Total assets ..................................... $714,292 $791,985 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 34,746 $ 38,552 Accrued liabilities ................................. 48,925 51,504 Short-term debt and current portion of long-term debt ............................................. 2,072 1,400 -------- -------- Total current liabilities .............................. 85,743 91,456 Long-term debt ......................................... 183,257 226,187 Deferred tax liabilities ............................... 20,383 21,686 Other non-current liabilities .......................... 57,863 61,340 -------- -------- Total liabilities ................................ $347,246 $400,669 -------- -------- Stockholders' equity: Common stock, $.10 par value; authorized 100,000,000, issued 28,942,241 and 28,825,603 shares at respective dates ................................. 2,894 2,883 Additional paid-in capital .......................... 216,958 213,120 Retained earnings ................................... 184,550 175,804 Treasury stock, at cost 2,438,253 and 2,593,129 shares at respective dates ....................... (20,725) (21,991) Deferred compensation ............................... (3,833) (1,982) Accumulated other comprehensive (loss)/income ....... (12,798) 23,482 -------- -------- Total stockholders' equity ....................... 367,046 391,316 -------- -------- Total liabilities and stockholders' equity ....... $714,292 $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 Nine months ended September 30, September 30, ------------------- -------------------- 2005 2004 2005 2004 -------- -------- -------- --------- Gross sales ................................... $104,500 $ 99,250 $331,133 $ 321,750 Commissions & allowances ................... 1,031 620 3,696 2,278 -------- -------- -------- --------- Net sales ..................................... 103,469 98,630 327,437 319,472 Other revenues ............................. 1,116 1,706 5,827 6,545 -------- -------- -------- --------- NET REVENUES .................................. 104,585 100,336 333,264 326,017 Cost of goods sold ............................ 67,763 61,142 212,910 199,346 -------- -------- -------- --------- GROSS PROFIT .................................. 36,822 39,194 120,354 126,671 Operating expenses: Selling, general and administrative expenses ................. 25,825 25,668 77,640 77,530 Research and development expenses .......... 4,862 4,520 16,601 13,936 Goodwill impairment ........................ -- 48,720 -- 48,720 Other, net ................................. -- -- -- (1,863) -------- -------- -------- --------- Total operating expenses ................ 30,687 78,908 94,241 138,323 OPERATING PROFIT/(LOSS) ....................... 6,135 (39,714) 26,113 (11,652) Other expenses: Interest expense, net ...................... 2,801 2,854 8,282 8,471 Other (income)/expense ..................... (25) (209) 72 (61) -------- -------- -------- --------- Income/(loss) from continuing operations before income taxes ............................... 3,359 (42,359) 17,759 (20,062) Provision for income taxes ................. 3,407 2,502 6,637 10,701 -------- -------- -------- --------- (LOSS)/INCOME FROM CONTINUING OPERATIONS ...... $ (48) $(44,861) $ 11,122 $ (30,763) DISCONTINUED OPERATIONS Loss from discontinued operations ............. -- (236) -- (978) -------- -------- -------- --------- Net (loss)/income ............................. $ (48) $(45,097) $ 11,122 $ (31,741) ======== ======== ======== ========= Basic earnings per share: (Loss)/income from continuing operations ... $ (0.00) $ (1.72) $ 0.42 $ (1.18) Loss from discontinued operations .......... -- (0.01) -- (0.04) -------- -------- -------- --------- Net (loss)/income .......................... $ (0.00) $ (1.73) $ 0.42 $ (1.22) Diluted earnings per share: (Loss)/income from continuing operations ... $ (0.00) $ (1.72) $ 0.42 $ (1.18) Loss from discontinued operations .......... -- (0.01) -- (0.04) -------- -------- -------- --------- Net (loss)/income .......................... $ (0.00) $ (1.73) $ 0.42 $ (1.22) Weighted average shares outstanding: Basic ...................................... 26,418 26,109 26,389 26,074 Effect of dilutive stock options ........... -- -- 161 -- -------- -------- -------- --------- Diluted .................................... 26,418 26,109 26,550 26,074 Cash Dividends paid per share .............. $ 0.03 $ 0.03 $ 0.09 $ 0.09 ======== ======== ======== =========
See accompanying notes to unaudited consolidated financial statements. 3 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine months ended September 30, -------------------- 2005 2004 --------- -------- Cash flows from operating activities: Net income/(loss) .................................. $ 11,122 $(31,741) Depreciation and amortization ...................... 29,312 30,775 Stock based compensation included in net income .... 25 312 Goodwill impairment ................................ -- 48,720 Deferred income tax provision ...................... -- 468 Allowance for doubtful accounts .................... 870 (364) Inventory reserve .................................. 4,719 2,708 Changes in assets and liabilities: Receivables ..................................... (1,336) 1,997 Inventories ..................................... (22,733) (10,556) Prepaid expenses and other current assets ....... (3,789) (3,248) Accounts payable and accrued liabilities ........ 1,139 4,515 Other non-current assets and liabilities ........ 1,018 (4,175) Discontinued operations: Changes in operating assets and liabilities ..... -- (1,073) --------- -------- Net cash provided by operating activities ............. 20,347 38,338 --------- -------- Cash flows from investing activities: Capital expenditures ............................... (27,987) (27,749) Other investing activities ......................... 1,303 (337) --------- -------- Net cash used in investing activities ................. (26,684) (28,086) --------- -------- Cash flows from financing activities: Dividends paid ..................................... (2,376) (2,330) Net increase in short-term debt .................... 636 126 Long-term debt activity (including current portion): Borrowings ...................................... 124,129 64,750 Repayments ...................................... (166,958) (56,767) Proceeds from stock options exercised .............. 1,521 4,005 Purchase of treasury stock ......................... (75) (219) --------- -------- Net cash (used in)/provided by financing activities ... (43,123) 9,565 --------- -------- Effect of exchange rate changes on cash ............... (9,312) (350) --------- -------- Net (decrease)/increase in cash and cash equivalents .. (58,772) 19,467 --------- -------- Cash and cash equivalents at beginning of period ...... 91,532 64,294 --------- -------- Cash and cash equivalents at end of period ............ $ 32,760 $ 83,761 ========= ========
See accompanying notes to unaudited consolidated financial statements. 4 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per-share data) (1) BASIS OF PRESENTATION Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and its 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, except as otherwise described herein, 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 and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made in prior year amounts to conform to the current year presentation. (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Inventory Costs In November 2004, the Financial Accounting Standards Board ("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. 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. The Company will adopt SFAS 123R effective January 1, 2006 and is in the process of reviewing the implementation and determining its transition methodology. As discussed in Note 4, during the second quarter 2005 the Company accelerated the vesting of options with an exercise price greater than or equal to $18.675 which will eliminate approximately $9,211 of expense which would have been recognized in 2006 and beyond under SFAS No 123R. 5 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except per-share data) (2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED) Conditional Asset Retirement Obligations In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). This Statement clarifies the meaning of the term "conditional 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. FIN 47 requires the accelerated recognition of certain asset retirement obligations when the fair value of such obligation can be estimated. FIN 47 becomes effective for the Company in the fourth quarter of 2005. The Company is currently evaluating the effect of adoption of this Statement. (3) WEIGHTED AVERAGE SHARES OUTSTANDING
Three months ended Nine months ended September 30, September 30, ------------------ ----------------- 2005 2004 2005 2004 ------ ------ ------ ------ Weighted average shares outstanding: Basic ................................. 26,418 26,109 26,389 26,074 Effect of dilutive stock options ...... -- -- 161 -- ------ ------ ------ ------ Diluted ............................... 26,418 26,109 26,550 26,074
In the three months ended September 30, 2005 and 2004, 131 and 243 shares, respectively, were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. In the nine months ended September 30, 2004, 357 shares were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. (4) STOCK BASED COMPENSATION At September 30, 2005, the Company has seven active stock-based employee compensation plans in effect. The Company applies the provisions of APB Opinion No. 25 and related Interpretations in accounting for its stock-based compensation plans. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) amended by FAS 148 establishes financial accounting and reporting standards for stock-based employee compensation plans. The Company has adopted the disclosure only provisions available under SFAS 123. Accordingly, no compensation has been recognized for stock option plans under SFAS 123. On June 1, 2005, the Company accelerated the vesting of stock options held by all current employees and all executive officers having an exercise price of $18.675 or greater granted under The 1996 Performance Stock Option Plan, The 1998 Stock Option Plan, The 2000 Non-Executive Stock Option Plan, The 2001 Performance Stock Option Plan, The 2003 Performance Stock Option Plan and The 2004 Omnibus Incentive Plan. Except for the 2000 Non-Executive Stock Option Plan (for which shareholder approval was not required), the Plans identified above were approved by the Company's shareholders. Options to purchase approximately 2,000,000 shares of the Company's common stock were subject to the acceleration. The Company has imposed a holding period that will require all employees and executive officers to refrain from selling shares acquired upon the exercise of these options until the date on which the exercise would have been permitted under the option's original vesting terms or, if earlier, the expiration date due to retirement. 6 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except per-share data) (4) STOCK BASED COMPENSATION (CONTINUED) The acceleration eliminates future compensation expense the Company would otherwise recognize in its consolidated statement of operations with respect to these options once the Statement of Financial Accounting Standards No. 123(R) "Share-Based Payment", issued by the FASB is implemented for reporting periods beginning January 1, 2006. Cambrex senior executives participate in a long-term incentive plan which rewards achievement of long-term strategic goals with restricted stock units. Awards are made annually to key executives and vest in one-third increments on the first, second and third anniversaries of the grant. On the third anniversary of the grant, restrictions on sale or transfer are removed and shares are issued to executives. In the event of termination of employment, the participant is entitled to the vested portion of the restricted stock units and forfeits the remaining amount; the three-year restriction remains in place. For the three and nine months ended September 30, 2005, the Company recorded $320 and $1,195 respectively, in compensation expense for this plan. For the three and nine months ended September 30, 2004 the Company recorded $395 and $810 respectively, in compensation expense for this plan. Shares are held in trust for the restricted stock grants. In May 2003, the former Chief Executive Officer ("CEO") was granted 150,000 incentive stock appreciation rights. In the fourth quarter 2003 these rights vested and, as such, the former CEO is entitled to a cash settlement 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. The former CEO retired on April 27, 2005. These rights terminate one year from this retirement date. 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 three and nine months ended September 30, 2005, the Company recorded $0 and $1,170, respectively, in compensation benefit. In the three and nine months ended September 30, 2004, the Company recorded $492 and $498, respectively in compensation benefit. The following table illustrates the effect on net (loss)/income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation, including the pro forma expense recognized in conjunction with the acceleration of options on June 1, 2005.
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2005 2004 2005 2004 ------- -------- ------- -------- Net (loss)/income, as reported ................. $ (48) $(45,097) $11,122 $(31,741) Add: stock based compensation expense/ (benefit) included in reported net (loss)/ income ...................................... 320 (97) 25 312 Deduct: stock-based compensation expenses determined using fair value method ...................................... 853 1,594 16,859 3,801 ------- -------- ------- -------- Proforma net loss .............................. $ (581) $(46,788) $(5,712) $(35,230) Proforma weighted average shares outstanding: Basic ....................................... 26,418 26,109 26,389 26,074 Diluted ..................................... 26,418 26,109 26,389 26,074
7 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (4) STOCK BASED COMPENSATION (CONTINUED) Earnings per share: Basic - as reported..... $(0.00) $(1.73) $ 0.42 $(1.22) Basic - proforma........ $(0.02) $(1.79) $(0.22) $(1.35) Diluted - as reported... $(0.00) $(1.73) $ 0.42 $(1.22) Diluted - proforma...... $(0.02) $(1.79) $(0.22) $(1.35)
The effect of stock options would be anti-dilutive under the FAS 123 calculation and is therefore excluded. (5) GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the nine months ended September 30, 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 Translation effect ................ (857) -- (4,413) (5,270) Purchase price adjustment for Genolife ....................... 1,466 -- -- 1,466 ------- ------- ------- -------- Balance as of September 30, 2005 .. $55,915 $76,618 $39,938 $172,471 ======= ======= ======= ========
Other intangible assets that are not subject to amortization, consist of the following:
As of As of September 30, December 31, 2005 2004 ------------- ------------ Proprietary Process .. $ 2,052 $ 1,675 Trademarks ........... 33,898 33,898 ------- ------- Total ............. $35,950 $35,573 ======= =======
Other intangible assets, which continue to be amortized, consist of the following:
AS OF SEPTEMBER 30, 2005 -------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Product Technology .. $12,486 $(3,436) $ 9,050 Patents ............. 5,605 (1,585) 4,020 Supply Agreements ... 2,110 (1,097) 1,013 License Agreement ... 2,005 (288) 1,717 Other ............... 1,981 (877) 1,104 ------- ------- ------- Total ............ $24,187 $(7,283) $16,904 ======= ======= =======
8 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (5) GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
AS OF DECEMBER 31, 2004 -------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Product Technology .. $13,230 $(2,574) $10,656 Patents ............. 5,433 (1,199) 4,234 Supply Agreements ... 2,110 (936) 1,174 License Agreement ... 836 (65) 771 Trademarks .......... 785 (236) 549 Other ............... 2,057 (633) 1,424 ------- ------- ------- Total ............ $24,451 $(5,643) $18,808 ======= ======= =======
Amortization expense for the three months and nine months ended September 30, 2005 was $511 and $1,718, respectively. The expected amortization expense related to intangible assets is as follows: For the year ended December 31, 2005 ............... $2,125 For the year ended December 31, 2006 ............... $2,046 For the year ended December 31, 2007 ............... $1,994 For the year ended December 31, 2008 ............... $1,734 For the year ended December 31, 2009 ............... $1,552
The company experienced a decline in profitability during 2005 within the Biopharma segment and at two reporting units within the Human Health segment, with approximately $76 million and $10 million of goodwill, respectively. In November 2005, a customer in the Biopharma segment announced that its drug, of which the Company expected to be a primary supplier in the future, failed to meet its primary endpoint in its confirmatory Phase III clinical trial. The Company's goodwill impairment analysis, to be performed during the fourth quarter, will include the declines in profitability during 2005 and the uncertainty of the future impact of the Biopharma customer announcement and increase the potential for future tangible and intangible asset impairment charges. (6) INCOME TAXES The tax provision in the third quarter 2005 increased to 101.4% compared to - -5.9% in the third quarter of 2004. The tax provision in the nine months ended September 30, 2005 increased to 37.4% compared to -53.3% in the nine months ended September 30, 2004, primarily due to the geographic mix of income. The Company's domestic net deferred tax assets at September 30, 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 9 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (6) INCOME TAXES (CONTINUED) 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 June 2, 2005, the Company adopted a Domestic Reinvestment Plan ("DRP") as described under Section 965 of the Internal Revenue Code introduced by the American Jobs Creation Act of 2004. The DRP states that the Company may repatriate up to $209,000 and invest in permitted investments. For the three and nine months ended September 30, 2005, the Company partially executed its DRP by repatriating $4,687 and $54,687, respectively, in the form of dividends from its foreign subsidiaries. Accordingly, an additional tax expense of $58 and $291 was recorded through the three and nine months ended September 30, 2005. By virtue of the dividend, the Company reduced its domestic deferred tax asset related to net operating loss carryforwards by $36,466, and its alternative minimum tax asset by $554 with corresponding adjustments to the full valuation allowances previously recorded against these assets. The Company also utilized $1,351 of currently generated Foreign Tax Credits as allowed under Section 965 of the Internal Revenue Code. The Company continues to evaluate repatriating further dividends and will take into consideration additional guidance forthcoming from the Internal Revenue Service. If the Company repatriates remaining available earnings and profits of its foreign subsidiaries of approximately $37,000, it would record an additional tax expense of approximately $196. (7) INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market. Inventories at September 30, 2005 and December 31, 2004 consist of the following:
September 30, December 31, 2005 2004 ------------- ------------ Finished goods ......... $ 47,109 $45,002 Work in process .. .. .. 30,491 23,658 Raw materials .......... 19,241 17,222 Supplies ............... 4,875 5,157 -------- ------- Total ............... $101,716 $91,039 ======== =======
10 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (8) LONG-TERM DEBT Long-term debt at September 30, 2005 and December 31, 2004 consists of the following:
September 30, December 31, 2005 2004 ------------- ------------ Bank credit facilities .... $ 78,000 $120,000 Senior notes .............. 100,000 100,000 Capitalized leases ........ 6,411 7,280 Notes payable ............. 312 307 -------- -------- Subtotal ............... 184,723 227,587 Less: current portion ..... (1,466) (1,400) -------- -------- Total .................. $183,257 $226,187 ======== ========
The Company met all bank covenants for the first nine months of 2005 and 2004. (9) COMPREHENSIVE INCOME The following table shows the components of comprehensive loss for the three and nine months ended September 30, 2005 and 2004:
For the three months For the nine months ended September 30, ended September 30, -------------------- ------------------- 2005 2004 2005 2004 ----- -------- -------- -------- Net (loss)/income .......................................... $ (48) $(45,097) $ 11,122 $(31,741) Foreign currency translation ............................ 82 6,256 (34,815) (5,550) Unrealized (loss)/gain on hedging contracts ............. (628) 352 (1,368) 922 Unrealized gain/(loss) on available for sale securities.. 38 16 (97) -- Minimum pension liability ............................... -- (15) -- (2,851) ----- -------- -------- -------- Total ................................................ $(556) $(38,488) $(25,158) $(39,220) ====== ========= ========= =========
(10) 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 formerly owned Harriman, New York plant, and (2) the Cambrex Pension Plan (the "Cambrex Plan") which covers all other eligible employees. Generally, all employees hired after December 31, 2002 are not eligible for these benefits. 11 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (10) RETIREMENT PLANS (CONTINUED) The components of net periodic pension cost for the Company's domestic plans for the three and nine months ended September 30, 2005 and 2004 are as follows:
Three Three Nine Nine months months months months ended ended ended Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost .......................... $ 688 $ 581 $ 2,064 $ 1,743 Interest cost ......................... 791 731 2,373 2,193 Expected return on plan assets ........ (735) (650) (2,205) (1,949) Amortization of prior service cost .... 11 11 33 33 Recognized actuarial loss ............. 113 129 339 387 ----- ----- ------- ------- Net periodic benefit cost ............. $ 868 $ 802 $ 2,604 $ 2,407 ===== ===== ======= =======
The Company contributed $900 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 and nine months ended September 30, 2005 and 2004 are as follows:
Three Three Nine Nine months months months months ended ended ended Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost .......................... $ 56 $ 52 $168 $156 Interest cost ......................... 108 107 324 321 Amortization of unrecognized transition obligation .............. 25 25 75 75 Amortization of prior service cost .... 1 1 3 3 Recognized actuarial loss ............. 10 12 30 36 ---- ---- ---- ---- Net periodic benefit cost ............. $200 $197 $600 $591 ==== ==== ==== ====
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 in compliance with local statutes, where applicable. 12 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (10) RETIREMENT PLANS (CONTINUED) The components of net periodic pension cost for the Company's international plans for the three and nine months ended September 30, 2005 and 2004 are as follows:
Three Three Nine Nine months months months months ended ended ended Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost .......................... $302 $217 $ 906 $ 651 Interest cost ......................... 282 222 846 732 Expected return on plan assets ........ (92) (71) (276) (213) Amortization of unrecognized transition benefit ............................ (13) (10) (39) (30) Recognized actuarial loss ............. 59 19 177 57 Amortization of prior service cost .... (2) 7 (6) 71 ---- ---- ------ ------ Net periodic benefit cost ............. $536 $384 $1,608 $1,268 ==== ==== ====== ======
The Company expects to contribute approximately $669 in cash to its international pension plans in 2005. (11) OTHER POSTRETIREMENT BENEFITS Cambrex provides postretirement health and life insurance benefits ("postretirement benefits") to certain 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. Certain subsidiaries and all employees hired after December 31, 2002 are not eligible for these benefits. The components of net periodic benefit cost for the three and nine months ended September 30, 2005 and 2004 are as follows:
Three Three Nine Nine months months months months ended ended ended Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost of benefits earned ....... $ 15 $ 13 $ 45 $ 39 Interest cost ......................... 38 37 114 111 Actuarial loss recognized ............. 29 29 87 87 Amortization of unrecognized prior service cost ....................... (38) (38) (114) (114) ---- ---- ----- ----- Total periodic postretirement benefit cost ............................... $ 44 $ 41 $ 132 $ 123 ==== ==== ===== =====
(12) SEGMENT INFORMATION The Company classifies its business units into three reportable segments: Bioproducts, consisting of research products and therapeutic application products, Biopharma, consisting of contract biopharmaceutical process development and manufacturing services and Human Health, consisting of active pharmaceutical 13 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (12) SEGMENT INFORMATION (CONTINUED) ingredients and pharmaceutical intermediates produced under U.S. Food and Drug Administration current Good Manufacturing Practices (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. Intersegment sales are not material. The Company allocates certain corporate expenses to each of the segments. One customer accounted for 11.3% of consolidated gross sales in the third quarter 2005. No customer accounted for greater than 10% of consolidated sales in the third quarter 2004. No customer accounted for greater than 10% of consolidated sales in the first nine months of 2005. One customer, a distributor representing multiple customers, accounted for 10.9% of consolidated gross sales for the nine months 2004. Following is a summary of business segment information for the following dates:
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Gross sales: Bioproducts .................... $ 35,729 $ 33,958 $113,638 $102,190 Biopharma ...................... 8,385 11,375 27,747 31,739 Human Health ................... 60,386 53,917 189,748 187,821 -------- -------- -------- -------- $104,500 $ 99,250 $331,133 $321,750 ======== ======== ======== ======== Gross profit: Bioproducts .................... $ 18,481 $ 18,632 $ 59,952 $ 55,676 Biopharma ...................... (2,137) 1,892 (4,800) 3,303 Human Health ................... 20,478 18,670 65,202 67,692 -------- -------- -------- -------- $ 36,822 $ 39,194 $120,354 $126,671 ======== ======== ======== ======== Operating profit/(loss): Bioproducts .................... $ 5,024 $ 6,379 $ 20,499 $ 21,872 Biopharma ...................... (4,368) (49,247) (12,545) (53,065) Human Health ................... 11,343 9,146 34,373 37,503 Corporate ...................... (5,864) (5,992) (16,214) (17,962) -------- -------- -------- -------- Total operating profit/(loss) .. $ 6,135 $(39,714) $ 26,113 $(11,652) ======== ======== ======== ======== Capital spending: Bioproducts .................... $ 2,365 $ 2,592 $ 7,946 $ 6,809 Biopharma ...................... 1,531 2,015 3,721 7,749 Human Health ................... 5,977 4,813 15,228 12,595 Corporate ...................... 37 191 1,092 596 -------- -------- -------- -------- $ 9,910 $ 9,611 $ 27,987 $ 27,749 ======== ======== ======== ========
14 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (12) SEGMENT INFORMATION (CONTINUED) Depreciation: Bioproducts .................... $1,467 $1,300 $ 4,448 $ 4,022 Biopharma ...................... 1,250 899 3,419 3,338 Human Health ................... 6,114 6,960 18,836 21,015 Corporate ...................... 84 340 891 1,020 ------ ------ ------- ------- $8,915 $9,499 $27,594 $29,395 ====== ====== ======= ======= Amortization: Bioproducts .................... $ 413 $ 342 $ 875 $ 1,030 Biopharma ...................... 88 108 813 324 Human Health ................... 10 8 30 26 ------ ------ ------- ------- $ 511 $ 458 $ 1,718 $ 1,380 ====== ====== ======= =======
September 30, December 31, 2005 2004 ------------- ------------ Total assets: Bioproducts .................... $227,824 $220,791 Biopharma ...................... 134,195 134,591 Human Health ................... 324,989 399,538 Corporate ...................... 27,284 37,065 -------- -------- $714,292 $791,985 ======== ========
(13) 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. 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 $6,604 and $6,247 at September 30, 2005 and December 31, 2004, respectively. The increase in the accrual is due to estimated remediation 15 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (13) CONTINGENCIES (CONTINUED) costs at the Clifton site (see below) based on information developed during the third quarter of 2005 of $1,300 offset by a decrease in a reserve at an international site of $207, currency fluctuation of $507 and payments of $299. 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 has recently received or expects to receive information in the near future on two matters that have and could further 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 of the Site and submitted the preliminary assessment to the New Jersey Department of Environmental Protection ("NJDEP"). The preliminary assessment identified potential areas of concern based on historical operations and proposed certain sampling at the Site. The Company completed the sampling and determined that another phase of sampling was necessary to determine the extent of contamination and any necessary remediation. The results of this phase of sampling, and any additional sampling deemed necessary, will be used to develop an estimate of the Company's future liability for remediation costs, if required. The Company will submit its plan for the next phase of sampling to the NJDEP later this year. 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. During the third quarter of 2005, information was developed in the following matter which caused the Company to increase its related reserves by $1,300. The Company's Cosan subsidiary conducted manufacturing operations in Clifton, New Jersey from 1968 until 1979. This operating site was moved to another location prior to Cambrex purchasing the business and was never operated by Cambrex. In 1997, Cosan entered into an Administrative Consent Order with the NJDEP. 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 was completed during the third quarter of 2005. The Company submitted the results of the investigation and a proposed remedial action plan to the NJDEP. The increase in the reserves is based on the proposed remedial action plan. 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 16 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (in thousands, except share and per-share data) (13) CONTINGENCIES (CONTINUED) 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. 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 $7,615 has been paid through September 30, 2005, with the remaining $4,800 to be paid over the next three 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 September 30, 2005 the outstanding balance for this liability was $4,465. 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, 2004 and 2005 with all amounts paid from reserves established in this matter. The balance of the reserves recorded within accrued liabilities related to this matter was $1,725 as of September 30, 2005. We believe that current reserves are sufficient to complete the settlements. 17 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) 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 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 and remanded the matter to the Circuit Court for further proceedings. In June 2005, the District Court's finding against the plaintiffs was affirmed and the matter dismissed. We believe this matter is concluded, however, the plaintiffs have the right to request that the Supreme Court review the decision. 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 survived for a period of thirty days after the Purchasers of the Rutherford Chemicals ("Purchasers") business 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, warranties and covenants, such as those relating to employee benefit matters and certain environmental matters, 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 claiming breach of certain representations, warranties and covenants contained in the October 2003 Purchase Agreement. In April 2005 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 would be 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. In May 2005, the Company responded to the Purchasers and rejected the claim entirely. 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. Additionally, in September 2005, the Company received a request for indemnity (September Notice) from the Purchasers related to an arbitration claim filed by a Rutherford customer ("Customer"). The arbitration claim arises from a claimed breach of a Supply Agreement that was assigned to and assumed by the Purchasers pursuant to the Rutherford Chemicals Purchase Agreement. Thereafter, we were also served with an arbitration claim by the Customer related to the same matter. In the arbitration claim, Rutherford's customer claims $30,000 in damages arising from Rutherford's breach of the Supply Agreement. The Purchasers claim that the September notice amends the earlier claims that they filed in March and April 2005 and that the Customer's claimed breach of the Supply Agreement should be treated as part of a breach of a representation, warranty or covenant set forth in the earlier notices. Since the Supply Agreement was assigned to and assumed by the Purchasers, we believe we are not a proper party to this matter and are working with the Customer to be 18 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) dismissed from the Customer's arbitration claim. On October 3, 2005, the Company rejected Rutherford's claim for indemnity under the September Notice in its entirety. 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. On October 25, 2005, the Company received a notice from the Purchasers; which summarized the claims previously received in March and April 2005 (see above), provided the Purchaser's response to the Company's April and May rejection of the earlier notices, and set forth additional claims for environmental matters related to the Rutherford Chemicals Business, most of which relate to the former Harriman location. Management is in the process of evaluating this Notice, but currently believes the claims are without merit, and as such the Company has established no reserves for 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, and as discussed in the Environmental Section above, 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. 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. On October 27, 2005, the Court denied the Company's Motion to Dismiss. The Company continues to believe that the complaints are 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 19 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) 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. Baltimore Litigation In 2001, the Company acquired the biopharmaceutical manufacturing business in Baltimore. Sellers filed suit against the Company alleging that the Company made false representations during the negotiations on which the Sellers relied in deciding to sell the Business and that Cambrex breached its obligation to pay additional consideration as provided in the Purchase Agreement which was contingent on the performance of the purchased Business. Management believes the matter to be without merit and has been vigourously defending the suit. 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. 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 September 30, 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. 20 CAMBREX CORPORATION AND SUBSIDIARIES (in thousands, except per-share data) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THIRD QUARTER 2005 VERSUS THIRD QUARTER 2004 The following table shows 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 September 30, 2005 and 2004.
Quarter Ended September 30, ---------------------------------- 2005 2004 ---------------- --------------- $ % $ % -------- ----- ------- ----- Bioproducts ... $ 35,729 34.2% $33,958 34.2% Biopharma ..... 8,385 8.0 11,375 11.5 Human Health .. 60,386 57.8 53,917 54.3 -------- ----- ------- ----- Total ...... $104,500 100.0% $99,250 100.0% ======== ===== ======= =====
The following table shows the gross profit of the Company's three product segments for the third quarter 2005 and 2004.
Quarter Ended September 30, ----------------------------------------- 2005 2004 ------------------- ------------------- Gross Gross Gross Gross Profit $ Profit % Profit $ Profit % -------- -------- -------- -------- Bioproducts ... $18,481 51.7% $18,632 54.9% Biopharma ..... (2,137) (25.5) 1,892 16.6 Human Health .. 20,478 33.9 18,670 34.6 ------- ------- Total ...... $36,822 35.2% $39,194 39.5% ======= =======
Gross sales in the third quarter 2005 increased 5.3% to $104,500 from $99,250 in the third quarter 2004 due to stronger sales in the Bioproducts and Human Health segments partially offset by lower sales in the Biopharma segment. Gross sales were unfavorably impacted 0.6% due to exchange rates reflecting a stronger U.S. dollar compared to the Euro and Swedish Krona in the third quarter of 2005 versus the third quarter 2004. Gross profit in the third quarter of 2005 was $36,822 compared to $39,194 in 2004. Gross margin percentage decreased to 35.2% in the third quarter of 2005 from 39.5% in the third quarter of 2004. The reduced gross margin percentage reflects lower margins in all business segments. The following table shows sales by geographic area for the three months ended September 30, 2005 and 2004:
Three Months Ended September 30, -------------------------------- 2005 2004 -------- ------- North America .. $ 46,157 $54,667 Europe ......... 50,738 36,892 Asia ........... 5,419 4,675 Other .......... 2,186 3,016 -------- ------- Total ....... $104,500 $99,250 ======== =======
21 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THIRD QUARTER 2005 VERSUS THIRD QUARTER 2004 (CONTINUED) The Bioproducts Segment gross sales in the third quarter 2005 of $35,729 were $1,771 or 5.2% above the third quarter 2004. The Bioproducts segment sales were unfavorably impacted 0.2% due to exchange rates reflecting a stronger U.S. dollar in the third quarter 2005 versus 2004. The sales increase, excluding currency, reflects higher sales in both the research products and therapeutic applications categories. The opening of an Australian sales office, the expansion of sales workforce in Europe, the 2004 acquisition of a rapid microbial detection (RMD) business in Europe and stronger demand in North America resulted in higher therapeutic applications sales, particularly for testing, process development and fill and finish services. New customers drove the higher revenues from testing services partially offset by lower sales of cell therapy services mainly due to client project timing. Increased research products sales primarily reflects higher sales of cell biology products, due to increased sales and marketing efforts and higher pricing. Bioproducts gross margins decreased to 51.7% in the third quarter 2005 from 54.9% in the third quarter 2004 primarily due to higher production costs, higher allowances for doubtful accounts in 2005 versus favorable collection experience in 2004 and the unfavorable impact of foreign currency, partially offset by favorable sales volume and pricing. The Biopharma Segment gross sales in the third quarter 2005 of $8,385 were $2,990 or 26.3% below the third quarter 2004 reflecting lower suite and labor revenues partially offset by higher process development revenue and reimbursed materials. Foreign currency had no impact on the Biopharma segment. Biopharma gross margins decreased to (25.5%) in the third quarter of 2005 from 16.6% in the third quarter of 2004. This decline is mainly driven by lower revenues and higher production costs related to a new 2800 liter suite placed into service in the first quarter 2005. The Human Health Segment gross sales in the third quarter 2005 of $60,386 were $6,469 or 12.0% above the third quarter 2004. Human Health sales were unfavorably impacted 1.0% due to exchange rates reflecting a stronger U.S. dollar in the third quarter 2005 versus 2004. Stronger demand for a gastro-intestinal API, an end-stage kidney treatment API, nicotine polacrilex resin (used in smoking cessation products), feed additives and fentanyl were partially offset by lower shipments of central nervous system APIs, the unfavorable impact of foreign currency and lower amphetamine sales. Human Health gross margins decreased to 33.9% in the third quarter of 2005 from 34.6% in the third quarter of 2004 while gross profit, in dollars, increased $1,808 to $20,478. Additionally, foreign currency unfavorably impacted gross margins by 1.4 percentage points and gross profit by approximately $1,000. The increase in gross profit dollars is due to higher sales volume while the decrease in the gross margin percentage was driven by higher manufacturing costs, offset by favorable product mix. Selling, general and administrative expenses of $25,825 or 24.7% of gross sales in the third quarter 2005 increased from $25,668, or 25.9% in the third quarter 2004. The increase in expense is due primarily to a charge related to an environmental remediation reserve associated with an idle facility, additional sales and marketing personnel and higher spending for advertising and promotions partially offset by lower professional fees and other cost reductions. Research and development expenses of $4,862 were 4.7% of gross sales in the third quarter 2005, compared to $4,520 or 4.5% of gross sales in the third quarter 2004. The increase in expense primarily reflects investments in new product technologies within the Bioproducts segment. In the third quarter of 2004, the Company recorded a non-cash impairment charge of $48,720 to reduce the carrying value of goodwill in the Biopharma segment to its estimated fair value. 22 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF THIRD QUARTER 2005 VERSUS THIRD QUARTER 2004 (CONTINUED) Operating profit in the third quarter of 2005 was $6,135 compared to an operating loss of $39,714 in the third quarter of 2004. Net interest expense of $2,801 in the third quarter 2005 was relatively flat compared to $2,854 in the third quarter of 2004 primarily reflecting higher interest rates offset by lower average debt. The average interest rate was 5.8% in the third quarter of 2005 versus 5.5% in the third quarter 2004. The tax provision in the third quarter 2005 increased to 101.4% compared to - -5.9% in the third quarter of 2004 primarily due to the geographic mix of income. Beginning September 30, 2003 the Company has maintained a full valuation allowance on its domestic net deferred tax assets. Accordingly, for the nine months ended September 30, 2005 a full valuation allowance of the Company's domestic net deferred tax assets generated during the nine months of 2005 was recorded. The Company will continue to record a full valuation allowance on its domestic net deferred tax assets 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. Net loss from continuing operations in the third quarter of 2005 was $48, or $0.00 per diluted share, versus $44,861, or $1.72 per diluted share in the same period a year ago. In the fourth quarter 2003, the Company completed the sale of the Rutherford Chemicals business and as a result the business is classified as a discontinued operation for all periods presented. In the third quarter of 2004, the Company recorded an additional $236 charge to discontinued operations due primarily to revised estimates of environmental liabilities related to Rutherford Chemicals. COMPARISON OF FIRST NINE MONTHS 2005 VERSUS FIRST NINE MONTHS 2004 The following table shows the gross sales of the Company's three segments, in dollars and as a percentage of the Company's total gross sales for the nine months ended September 30, 2005 and 2004.
Nine Months Ended September 30, ----------------------------------- 2005 2004 ---------------- ---------------- $ % $ % -------- ----- -------- ----- Bioproducts ........ $113,638 34.3% $102,190 31.7% Biopharma .......... 27,747 8.4 31,739 9.9 Human Health ....... 189,748 57.3 187,821 58.4 -------- ----- -------- ----- Total ........... $331,133 100.0% $321,750 100.0% ======== ===== ======== =====
23 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS 2005 VERSUS FIRST NINE MONTHS 2004 (CONTINUED) The following table shows the gross profit of the Company's three product segments for the nine months ended September 30, 2005 and 2004.
Nine Months Ended September 30, ----------------------------------------- 2005 2004 ------------------- ------------------- Gross Gross Gross Gross Profit $ Profit % Profit $ Profit % -------- -------- -------- -------- Bioproducts ........ $ 59,952 52.8% $ 55,676 54.5% Biopharma .......... (4,800) (17.3) 3,303 10.4 Human Health ....... 65,202 34.4 67,692 36.0 -------- -------- Total ........... $120,354 36.3% $126,671 39.4% ======== ========
Gross sales for the first nine months of 2005 increased 2.9% to $331,133 from $321,750 in the first nine months of 2004. Increased sales in the Bioproducts and Human Health segments were partly offset by lower sales in the Biopharma segment. Gross sales were favorably impacted 1.3% due to exchange rates reflecting a weaker U.S. dollar in the first nine months of 2005 versus the first nine months of 2004. Gross profit in the first nine months of 2005 was $120,354 compared to $126,671 in the first nine months of 2004. Gross margin percentage decreased to 36.3% in the first nine months of 2005 from 39.4% in the first nine months of 2004. The reduced gross margin percentage reflects lower margins in all business segments. The following table shows sales by geographic area for the nine months ended September 30, 2005 and 2004:
Nine Months Ended September 30, ------------------------------- 2005 2004 -------- -------- North America ...... $150,587 $165,307 Europe ............. 158,731 134,745 Asia ............... 14,879 12,573 Other .............. 6,936 9,125 -------- -------- Total ........... $331,133 $321,750 ======== ========
The Bioproducts Segment gross sales in the first nine months of 2005 of $113,638 were $11,448 or 11.2% above the first nine months of 2004. The Bioproducts segment sales were favorably impacted 1.2% due to exchange rates reflecting a weaker U.S. dollar in the first nine months of 2005 versus 2004. The sales increase, excluding currency, primarily reflects higher sales in both the research products and therapeutic applications categories including cell therapy, cell biology, rapid microbial detection, testing services, serum, media and assays due to stronger demand, higher pricing and the addition of new customers. Bioproducts gross margins decreased to 52.8% in the first nine months of 2005 from 54.5% in the first nine months of 2004 primarily due to higher bad debt expenses and higher manufacturing costs, partially offset by increased sales volume and pricing across most product categories in addition to favorable impact of foreign currency. The Biopharma Segment gross sales in the first nine months of 2005 of $27,747 were $3,992 or 12.6% below the first nine months of 2004 reflecting lower suite revenue partially offset by higher labor fees, reimbursed materials and process development. Foreign currency had no impact on the Biopharma segment. 24 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS 2005 VERSUS FIRST NINE MONTHS 2004 (CONTINUED) Biopharma gross margins decreased to (17.3%) in the first nine months of 2005 from 10.4% in the first nine months of 2004 primarily due to lower revenues, a higher percentage of revenues from reimbursed materials which have virtually no profit margin and higher production costs. The Human Health Segment gross sales for the first nine months of 2005 of $189,748 were $1,927 or 1.0% above the first nine months of 2004. Human Health sales were favorably impacted 1.6% due to exchange rates reflecting a weaker U.S. dollar in the first nine months 2005 versus 2004. Excluding currency, the decrease resulted from lower sales of a gastrointestinal API and crop additive, both due to loss of business, lower shipments of an API to treat Alzheimer's disease due to the launch of the product in 2004 which required higher inventory levels, lower sales of certain cardiovascular APIs due to reduced volumes resulting from increased competition and lower sales of certain other central nervous system APIs due to reduced volumes. These lower sales were partially offset by stronger demand for nicotine polacrilex resin (used in smoking cessation products), higher sales of a gastrointestinal API and higher sales of an API used to treat end stage kidney disease due to increased volume. Human Health gross margins decreased to 34.4% in the first nine months of 2005 from 36.0% in the first nine months of 2004 due to pricing pressures on certain APIs, unfavorable overhead absorption, higher production costs and unfavorable impact of foreign currency. Selling, general and administrative expenses of $77,640 or 23.4% of gross sales in the first nine months of 2005 is relatively flat compared to $77,530, or 24.1% in the first nine months of 2004. Administration expenses slightly increased driven by higher sales and marketing expenses within the Bioproducts segment and higher environmental costs related to an inactive company partially offset by lower valuation of stock appreciation rights and lower legal costs. Research and development expenses of $16,601 were 5.0% of gross sales in the first nine months of 2005, compared to $13,936 or 4.3% of gross sales in the first nine months of 2004. The increase in expense primarily reflects investments in new product technologies within the Bioproducts segment. In the third quarter of 2004, the Company recorded a non-cash impairment charge of $48,720 to reduce the carrying value of goodwill in the Biopharma segment, to its estimated fair value. Operating profit in the first nine months of 2005 was $26,113 compared to an operating loss of $11,652 in the first nine months of 2004. The first nine months of 2005 results include a $1,300 charge for an environmental remediation reserve at an inactive facility. The first nine months of 2004 results include $2,863 of income due to the early termination of a Bioproducts customer contract and an unrelated $1,000 charge associated with the reorganization and related workforce reductions at a European facility. These 2004 items are recorded as other, net operating expenses. Net interest expense of $8,282 in the first nine months of 2005 decreased $189 from the first nine months of 2004 primarily reflecting lower interest rates partially offset by higher average debt. The average interest rate was 5.5% in the first nine months of 2005 versus 5.6% in the first nine months of 2004. The tax provision for the first nine months of 2005 increased to 37.4% compared to -53.3% in the first nine months of 2004 primarily due to a $3,151 ($0.12/per diluted share) reduction in tax reserves primarily related to a Swedish tax matter that was decided favorably during the second quarter 2005. Excluding the impact of the Swedish tax matter, the tax provision would have been $9,788 in the first nine months of 2005. 25 RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF FIRST NINE MONTHS 2005 VERSUS FIRST NINE MONTHS 2004 (CONTINUED) Beginning September 30, 2003 the Company has maintained a full valuation allowance on its domestic net deferred tax assets. Accordingly, for the nine months ended September 30, 2005 a full valuation allowance of the Company's domestic net deferred tax assets generated during the nine months of 2005 was recorded. The Company will continue to record a full valuation allowance on its domestic net deferred tax assets 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 nine months of 2005 was $11,122, or $0.42 per diluted share, versus a loss from continuing operations of $30,763, or $1.18 per diluted share in the same period a year ago. In the fourth quarter 2003, the Company completed the sale of the Rutherford Chemicals business and as a result the business is classified as a discontinued operation for all periods presented. In the first quarter of 2004, the Company concluded its negotiations of the post-closing working capital adjustment and recorded a $742 charge to discontinued operations to reflect the change in the adjustment, along with legal and other expenses related to the sale of Rutherford Chemicals. In the third quarter of 2004, the Company recorded an additional $236 charge to discontinued operations due primarily to revised estimates of environmental liabilities related to Rutherford Chemicals. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased $58,772 in the first nine months of 2005. The stronger U.S. dollar negatively impacted the translated cash balances by $9,312 in the first nine months of 2005. During the nine months ended September 30, 2005, the Company generated cash flows from operations totaling $20,347, a decrease of $17,991 versus the same period a year ago. The decrease in cash flows generated from operations in the first nine months of 2005 versus the first nine months of 2004 is due primarily to a decrease in net income, excluding the goodwill impairment, an increase in inventories resulting from increased production based on forecasted requirements and an increase in prepaids mainly due to prepayments of insurance. These decreases were partially offset by the timing of foreign tax payments and of payments made to Rutherford Chemicals in 2004. Capital expenditures from continuing operations were $27,987 in the first nine months of 2005 as compared to $27,749 in 2004. Part of the funds in 2005 were used for suite expansions at Biopharma manufacturing plants, cell therapy manufacturing capabilities at a Bioproducts facility, a new warehouse at a Human Health facility and capital improvements to existing facilities. In 2004, the funds were primarily used for a suite expansion at a Biopharma manufacturing plant, cell therapy manufacturing capabilities at a Bioproducts facility and new research and development labs at a Human Health facility. 26 RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) During the first nine months of 2005, the Company repatriated $54,687 as a dividend from its foreign subsidiaries pursuant to the American Jobs Creation Act of 2004. The Company used the repatriated cash to pay down domestic debt. The Company continues to evaluate further repatriation of dividends. Cash flows used in financing activities in the first nine months of 2005 of $43,123 include net pay down of debt of $42,193 and dividends paid of $2,376 partially offset by proceeds from stock options exercised of $1,521. In the first nine months of 2004 the Company borrowed $8,109 of debt, generated proceeds from the exercise of stock options of $4,005 and paid dividends of $2,330. During the first nine months of 2005 and 2004, 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. On October 7, 2005, the Company entered into a five-year $277.5 million Senior Revolving Credit Facility. The Company borrowed $78.4 million under the facility and used the funds to pay down all outstanding borrowings under the previously existing facility which would have expired in November of 2006. The previously existing credit facility was terminated upon origination of the new facility. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are those which we believe require the most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company bases its estimates on historical experience and on other various assumptions that are deemed reasonable by management under each applicable circumstance. Actual results or amounts could differ from estimates and the differences could have a material impact on the consolidated financial statements. A discussion of our critical accounting policies, the underlying judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions, is as follows: Revenue Recognition Revenues in our Bioproducts and Human Health segments are generally recognized when title to products and risk of loss are transferred to customers. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations. Sales terms to certain customers include remittance of discounts if certain conditions are met. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates and estimated returns at the time of sale based on the terms of agreements with customers and historical experience and recognizes revenue net of these estimated costs which are classified as allowances and rebates. Some contracts in our Bioproducts and Biopharma segments are based on time and materials and revenue for those are recognized as services are performed. The Biopharma segment also utilizes contracts that contain milestone based payments. The Company utilizes the EITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts" model for recording revenue from these contracts. Under this method, revenue is based on the cost of efforts (since contract commencement) up to the reporting date, divided by the total estimated contractual cost (from the contract commencement to the end of the development arrangement), multiplied by the total expected contractual payments under the arrangement. However, revenue is limited to the amount of nonrefundable cash payments received or contractually receivable at the reporting date. 27 RESULTS OF OPERATIONS (CONTINUED) CRITICAL ACCOUNTING POLICIES (CONTINUED) In each of our segments we have certain contracts that contain multiple deliverables. These deliverables often include process development services and commercial production. The Company follows the guidance contained in EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables". Revenue for each element is recognized when delivered to the customer based on the fair value of the element as determined based on sales price when sold separately. Amounts billed in advance are recorded as deferred revenue on the balance sheet. Asset Valuations and Review for Potential Impairments In accordance with FAS 144, our review of long-lived assets, principally fixed assets and other amortizable intangibles requires us to estimate the undiscounted future cash flows generated from these assets, whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. If undiscounted cash flows are less than carrying value, the long-lived assets are written down to fair value which equals the discounted cash flows. Our review of the carrying value of goodwill and indefinite lived intangibles is done annually or whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable in accordance with FAS 142 utilizing a two-step process. In the first step, the fair value of the reporting units is determined using a discounted cash flow model and compared to the carrying value. If such analysis indicates that impairment may exist, we then estimate the fair value of the other assets and liabilities utilizing appraisals and discounted cash flow analyses to calculate an impairment charge. The determination of fair value for both FAS 144 and FAS 142 is judgmental in nature and involves the use of significant estimates and assumptions, including projected future cash flows, discount rates, determination of appropriate market comparables and perpetual growth rates. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge. The company experienced a decline in profitability during 2005 within the Biopharma segment and at two reporting units within the Human Health segment, with approximately $76 million and $10 million of goodwill, respectively. In November 2005, a customer in the Biopharma segment announced that its drug, of which the Company expected to be a primary supplier in the future, failed to meet its primary endpoint in its confirmatory Phase III clinical trial. The Company's goodwill impairment analysis, to be performed during the fourth quarter, will include the declines in profitability during 2005 and the uncertainty of the future impact of the Biopharma customer announcement and increase the potential for future tangible and intangible asset impairment charges. Environmental and Litigation Contingencies The Company periodically assesses the potential liabilities related to any lawsuits or claims brought against us. See Note 13 in the accompanying financial statements for a discussion of our current environmental and litigation matters, reserves recorded and our position with respect to any related uncertainties. While it is typically very difficult to determine the timing and ultimate outcome of these actions, the Company uses its best judgment to determine if it is probable that the Company will incur an expense related to a settlement for such matters and whether a reasonable estimation of such probable loss, if any, can be made. If probable and estimable, the Company accrues for the costs of clean-up, settlements and legal fees. If the aggregate amount of the liability and the timing of the payment are fixed or reasonably determinable, the Company discounts the amount to reflect the time value of money. Given the inherent uncertainty related to the eventual outcome of litigation and environmental matters, it is possible that all or some of these matters may be resolved for amounts materially different from any provisions that the Company may have made with respect to their resolution. 28 RESULTS OF OPERATIONS (CONTINUED) CRITICAL ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company applies an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon the Company's assessment that it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to utilize the deferred tax asset. In the event the Company determines that future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. When assessing the valuation allowance, the Company takes into account certain tax planning strategies. The Company's valuation allowances primarily relate to net operating loss carryforwards, foreign tax credits, and alternative minimum tax credits in the U.S., where profitability is uncertain and net operating loss carryforwards in certain state and foreign jurisdictions with little or no history of generating taxable income. Employee Benefit Plans The Company provides a range of benefits to employees and retired employees, including pensions, post-retirement, post employment and health care benefits. The Company records annual amounts relating to these plans based on calculations, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates, and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of the modifications is generally recorded and amortized over future periods. The Company believes that the assumptions utilized for recording obligations under its plans are reasonable. 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, cash repatriation pursuant to the American Jobs Creation Act of 2004, 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, interest 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. 29 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 Securities and Exchange 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 September 30, 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, during the current quarter. 30 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES ITEM 1 LEGAL PROCEEDINGS In mid-2004 the United States Environmental Protection Agency conducted a hazardous waste inspection of the Company's Charles City facility. Thereafter the Agency, notified the facility of several alleged violations of the hazardous waste laws related to management of hazardous waste and requested additional information related to the alleged violations. The company responded and provided information which questioned the conclusion that the violations occurred. Nevertheless, the Agency concluded that several violations existed at the time of the inspection, and on October 3, 2005 issued the facility an order and penalty assessment in the amount of $189,000. On October 31, 2005, the Company filed a request for a hearing and an informal conference. See the Contingency Footnote above for other Legal Proceedings. 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 Unit) (a) Total Number (b) Average Price Purchased as Part of that May Yet Be of Shares (or Paid per Share Publicly Announced Purchased Under the Period Units) Purchased (or Units) Plans or Programs Plans or Programs - ------ ---------------- ----------------- -------------------- ------------------------- July 1-31, 2005 -- -- -- 580,700 August 1-31, 2005 -- -- -- 580,700 September 1-30, 2005 -- -- -- 580,700 --- --- --- Total -- -- --
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS. Refer to Form 10Q for quarterly period ended March 31, 2005. ITEM 6. 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. 31 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: November 4, 2005 32 EX-31.1 2 y14373exv31w1.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 consolidated 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 and Chief Executive Officer Dated: November 4, 2005 33 EX-31.2 3 y14373exv31w2.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(s) 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 consolidated 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 Chief Financial Officer Dated: November 4, 2005 34 EX-32.1 4 y14373exv32w1.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 September 30, 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: November 4, 2005 /s/ John R. Leone ---------------------------------------- John R. Leone, President and Chief Executive Officer 35 EX-32.2 5 y14373exv32w2.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 September 30, 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: November 4, 2005 /s/ Luke M. Beshar ---------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer 36 -----END PRIVACY-ENHANCED MESSAGE-----