-----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, BRcVQitNn3IbJELeidchvSsRR+VonAHXbXiCvD1kza2Z7DapV//DtL2h2At5P53o +JAXGRmDhKYuB/jzVrO1oA== 0000950123-06-007461.txt : 20060607 0000950123-06-007461.hdr.sgml : 20060607 20060607173000 ACCESSION NUMBER: 0000950123-06-007461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060607 DATE AS OF CHANGE: 20060607 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: 06892248 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 y22042e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2006 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer"in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]. No [X]. As of May 31, 2006, there were 26,840,591 shares outstanding of the registrant's Common Stock, $.10 par value. CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended March 31, 2006 Table of Contents
Page No. -------- Part I Financial information Item 1. Financial Statements (Unaudited) Consolidated balance sheets as of March 31, 2006 and December 31, 2005 2 Consolidated income statements for the three months ended March 31, 2006 and 2005 3 Consolidated statements of cash flows for the three months ended March 31, 2006 and 2005 4 Notes to unaudited consolidated financial statements 5 - 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 - 27 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 28 Part II Other information Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Changes in Securities and Use of Proceeds 29 Item 4. Matters Submitted to a Vote of Securities Holders 29 Item 6. Exhibits 29 Signatures 30
Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except share data)
March 31, December 31, 2006 2005 --------- ------------ ASSETS Current assets: Cash and cash equivalents ............................. $ 23,681 $ 45,932 Trade receivables, net ................................ 70,297 74,425 Inventories, net ...................................... 105,785 93,617 Prepaid expenses and other current assets ............. 12,034 15,552 -------- -------- Total current assets ............................... 211,797 229,526 Property, plant and equipment, net ....................... 232,504 229,410 Goodwill ................................................. 97,216 96,368 Other intangible assets, net ............................. 50,860 51,183 Other assets ............................................. 5,543 5,985 -------- -------- Total assets ....................................... $597,920 $612,472 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................... $ 39,804 $ 38,813 Accrued expenses and other current liabilities ........ 48,661 51,819 Short-term debt and current portion of long-term debt.. 1,622 1,514 -------- -------- Total current liabilities .......................... 90,087 92,146 Long-term debt ........................................... 168,136 186,819 Deferred tax liabilities ................................. 29,151 28,543 Other non-current liabilities ............................ 63,015 61,713 -------- -------- Total liabilities .................................. 350,389 369,221 -------- -------- Stockholders' equity: Common stock, $.10 par value; authorized 100,000,000 issued 29,187,241 and 29,118,141 shares at respective dates ................................... 2,919 2,912 Additional paid-in capital ............................ 218,908 217,105 Retained earnings ..................................... 59,964 62,170 Treasury stock, at cost; 2,433,990 and 2,443,313 shares at respective dates ......................... (20,200) (20,768) Accumulated other comprehensive loss .................. (14,060) (18,168) -------- -------- Total stockholders' equity ......................... 247,531 243,251 -------- -------- Total liabilities and stockholders' equity ......... $597,920 $612,472 ======== ========
See accompanying notes to unaudited consolidated financial statements. 2 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands, except per-share data)
Three months ended March 31, ------------------- 2006 2005 -------- -------- Gross sales ............................................... $119,607 $110,462 Allowances and rebates ................................. 899 989 -------- -------- Net sales ................................................. 118,708 109,473 Other revenues ......................................... 1,080 2,460 -------- -------- Net revenues .............................................. 119,788 111,933 Cost of goods sold ........................................ 74,868 68,671 -------- -------- Gross profit .............................................. 44,920 43,262 Operating expenses: Selling, general and administrative expenses ........... 28,193 26,497 Research and development expenses ...................... 5,988 5,858 -------- -------- Total operating expenses ............................ 34,181 32,355 Operating profit .......................................... 10,739 10,907 Other expenses: Interest expense, net .................................. 7,353 2,730 Other expense, net ..................................... 22 190 -------- -------- Income before income taxes ................................ 3,364 7,987 Provision for income taxes ............................. 4,541 3,897 -------- -------- (Loss)/earnings before cumulative effect of a change in accounting principle ................................... $ (1,177) $ 4,090 Cumulative effect of a change in accounting principle ..... (228) -- -------- -------- Net (loss)/income ......................................... $ (1,405) $ 4,090 ======== ======== Basic earnings per share: (Loss)/earnings before cumulative effect of a change in accounting principle ............................. $ (0.04) $ 0.16 Cumulative effect of a change in accounting principle .. (0.01) -- -------- -------- Net (loss)/income ...................................... $ (0.05) $ 0.16 Diluted earnings per share: (Loss)/earnings before cumulative effect of a change in accounting principle ............................. $ (0.04) $ 0.15 Cumulative effect of a change in accounting principle .. (0.01) -- -------- -------- Net (loss)/income ...................................... $ (0.05) $ 0.15 Weighted average shares outstanding: Basic .................................................. 26,661 26,346 Effect of dilutive stock options ....................... -- 284 -------- -------- Diluted ................................................ 26,661 26,630 Cash dividends paid per share ............................. $ 0.03 $ 0.03 ======== ========
See accompanying notes to unaudited consolidated financial statements. 3 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three months ended March 31, -------------------- 2006 2005 --------- -------- Cash flows from operating activities: Net (loss)/income ........................................ $ (1,405) $ 4,090 Cumulative effect of a change in accounting principle .... 228 -- Depreciation and amortization ............................ 8,611 9,944 Acquired in-process research and development ............. 1,445 -- Write-off of debt origination fees ....................... 463 -- Stock based compensation ................................. 377 (650) Deferred income taxes .................................... 29 -- Allowance for doubtful accounts .......................... 512 384 Inventory reserves ....................................... (69) 1,706 Loss on sale of property, plant and equipment ............ 152 115 Changes in assets and liabilities: Receivables ........................................... 4,417 (1,074) Inventories ........................................... (10,857) (10,527) Prepaid expenses and other current assets ............. 3,800 1,628 Accounts payable and other current liabilities ........ (2,328) (477) Other non-current assets and liabilities .............. 558 2,943 --------- -------- Net cash provided by operating activities ................ 5,933 8,082 --------- -------- Cash flows from investing activities: Capital expenditures ..................................... (8,499) (9,046) Acquired in-process research and development ............. (1,338) -- Other investing activities ............................... (41) (2,758) --------- -------- Net cash used in investing activities .................... (9,878) (11,804) --------- -------- Cash flows from financing activities: Dividends paid ........................................... (801) (792) Net increase in short-term debt .......................... 457 -- Long-term debt activity (including current portion): Borrowings ............................................ 127,200 24,814 Repayments ............................................ (146,985) (16,387) Proceeds from stock options exercised .................... 1,003 32 Other financing activities ............................... (1) 111 --------- -------- Net cash (used in)/provided by financing activities ... (19,127) 7,778 --------- -------- Effect of exchange rate changes on cash ..................... 821 (4,213) --------- -------- Net decrease in cash and cash equivalents ................... (22,251) (157) Cash and cash equivalents at beginning of period ............ 45,932 91,532 --------- -------- Cash and cash equivalents at end of period .................. $ 23,681 $ 91,375 ========= ========
See accompanying notes to unaudited consolidated financial statements. 4 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) (1) BASIS OF PRESENTATION Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and subsidiaries. The accompanying unaudited consolidated financial statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments which are of a normal and recurring nature, 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, 2005. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to 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 FAS 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 amends guidance to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), which under some circumstances ARB No. 43 stated "may be so abnormal as to require treatment as current period charges." 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 the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facility. This statement was effective on January 1, 2006 and was not material to the Company's financial position or results of operations. Share-Based Payment The Company adopted FAS 123(R) "Share-Based Payment" ("FAS 123(R)") effective January 1, 2006 using the modified prospective transition method. 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. This statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. During 2005 all out-of-the-money unvested options outstanding as well as all out-of-the-money options granted during 2005 were fully vested by the Compensation Committee of the Board of Directors. This represents approximately 2,650,000 options which resulted in the acceleration of pro forma compensation expense of $12,711 in 2005. The purpose of the accelerated vesting was to eliminate compensation expense in the income statement that the Company would otherwise have recorded with respect to these accelerated options subsequent to the January 1, 2006 effective date of FAS 123(R). The Company is also required to measure stock appreciation rights ("SARs") at fair market value. Prior to adopting FAS 123(R), the SARs were recorded at the intrinsic value. As a result of adopting FAS 123(R), the Company recorded $228 in compensation expense as a cumulative effect of a change in accounting principle during the first quarter of 2006. 5 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (3) ACQUISITIONS On February 2, 2006, the Company acquired Cutanogen Corporation for a purchase price of $1,445 which was paid at closing with additional purchase price payments of up to $4,800 subject to the achievement of certain regulatory and commercial milestones. Cutanogen Corporation is a privately-held biotechnology company that focuses on products used to treat patients with severe burns. Cutanogen's product, PermaDerm(TM) cultured skin, is the first multi-layered product that combines autologous epidermal and dermal layers of the skin in a product for severe burns that is pliable and grows with the patient, a particular advantage when a burn patient is a child. The Company expensed the purchase price payment and will continue to expense all additional payments prior to regulatory approval of the product as in-process research and development. At acquisition, Cutanogen was a development stage company, as it had no long-lived assets, revenues or employees. Cutanogen will be reported as part of the Bioproducts segment. (4) STOCK BASED COMPENSATION The Company adopted FAS 123(R) effective January 1, 2006 using the modified prospective transition method. Prior to January 1, 2006, the company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation cost associated with stock options was recognized in the financial results for the quarter ended March 31, 2005, as all the options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The first quarter of 2006 does not include compensation cost for options granted prior to January 1, 2006 as all options outstanding prior to January 1, 2006 were fully vested as of December 31, 2005. On March 31, 2006, the Company had seven active stock-based employee compensation plans in effect. The Company also had outstanding at March 31, 2006 SARs and restricted stock as described below. Beginning January 1, 2006, the Company recognizes compensation costs for stock option awards to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value per share for the stock options granted to employees during the quarter ended March 31, 2006 was $8.15. Stock option values were estimated using a 0.55% dividend yield, expected volatility of 38.27% and a risk-free interest rate of 4.42%. The Company's stock options are not publicly traded, therefore, expected volatilities are based on historical volatility of the Company's stock. The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bond whose maturity period approximates the option's expected term. The expected term of 4.75 years was utilized based on Staff Accounting Bulletin No. 107, "Share-Based Payment" "simplified" method for determining the expected term of stock options. Assumptions used in estimating the fair value of stock options granted in the first quarter 2006 are consistent with the assumptions used prior to the adoption of FAS 123(R) with the exception of the expected life. As a result of using the "simplified" method, the expected life was shortened by 1.25 years. FAS 123(R) requires companies to estimate the expected forfeitures for all unvested awards and record compensation costs only for those awards that are expected to vest. As of March 31, 2006, the total compensation cost related to unvested stock option awards granted to employees but not yet recognized was immaterial. The cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 3.8 years. The amount of stock based compensation costs related to stock options recorded in the first quarter 2006 was negligible and would not have changed earnings per share as a result of adopting FAS 123(R) on January 1, 2006. 6 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (4) STOCK BASED COMPENSATION (CONTINUED) 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 or retirement, the participant is entitled to the vested portion of the restricted stock units and forfeits the remaining amount; the three-year sale and transfer restriction remains in place. In the event of death or permanent disability, all shares vest and the deferred sales restriction lapses. These awards are classified as equity awards as defined in FAS 123(R). Historically, only senior executives participated in this plan. As of January 1, 2006, certain other employees are eligible to receive restricted stock as part of a redesigned stock-based compensation plan. For the quarters ended March 31, 2006 and 2005, the Company recorded $159 and $220 respectively, in compensation expense for this plan. As of March 31, 2006, the total compensation cost related to unvested restricted stock granted but not yet recognized was $1,939. The cost will be amortized on a straight line basis over the remaining vesting period. At March 31, 2006, the Company has outstanding 150,000 fully-vested cash-settled incentive SARs at a price of $19.30. These SARs are classified as liability awards and, as such, will be recorded at fair value until the rights are exercised or expire with the amount being recorded as compensation expense or benefit in the applicable period. Fair market value was estimated using a 0.55% dividend yield, expected volatility of 38.77% and risk-free rate of 4.75%. For the quarters ended March 31, 2006 and 2005 the Company recorded $218, at fair market value, and ($870), at intrinsic value, respectively, in compensation expense/(benefit). In addition, during the first quarter of 2006, the Company recorded $228 in compensation expense as a cumulative effect of a change in accounting principle in accordance with FAS 123(R). Under FAS 123(R), the Company is required to measure the SARs at fair market value. Prior to adopting FAS 123(R), the SARs were measured at the intrinsic value. The following table is a summary of the Company's stock option activity issued to employees and related information:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING NUMBER OF EXERCISE CONTRACTUAL OPTIONS SHARES PRICE TERM - ------- --------- --------- ----------- Outstanding at January 1, 2006 4,021,247 $26.60 4.63 Granted 2,250 $21.71 Exercised (79,600) $14.48 Forfeited or expired (56,033) $22.96 --------- Outstanding at March 31, 2006 3,887,864 $26.90 4.41 ========= Exercisable at March 31, 2006 3,885,614 $26.90 4.41
The aggregate intrinsic value for all stock options exercised during the first quarters of 2006 and 2005 were $435 and $21, respectively. 7 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (4) STOCK BASED COMPENSATION (CONTINUED) A summary of the Company's nonvested restricted stock as of March 31, 2006 and changes during the three months ended March 31, 2006 is presented below:
WEIGHTED- NUMBER OF AVERAGE GRANT- NONVESTED RESTRICTED STOCK SHARES DATE FAIR VALUE - -------------------------- --------- --------------- Nonvested at January 1, 2006 69,756 $24.30 Granted 63,005 $21.71 Vested during period (30,306) $24.64 Forfeited (5,462) $21.71 ------- Nonvested at March 31, 2006 96,993 $22.66 =======
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 as amended by FAS 148, Accounting for Stock-Based Compensation, to stock-based employee compensation in the first quarter 2005. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized ratably to expense over the option's vesting periods.
Three Months Ended March 31, 2005 --------------- Net income, as reported ............... $4,090 Add: stock based compensation included in reported net income .... (650) Deduct: stock-based compensation expenses determined using fair value method ............................. (729) ------ Proforma net income ................... $2,711 Earnings per share: Basic - as reported ................ $ 0.16 Basic - proforma ................... $ 0.10 Diluted - as reported .............. $ 0.15 Diluted - proforma ................. $ 0.10
8 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (5) GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the three months ended March 31, 2006, are as follows:
Human Bioproducts Biopharma Health Segment Segment Segment Total ----------- --------- ------- ------- Balance as of January 1, 2006 $56,642 $8,863 $30,863 $96,368 Translation effect 206 -- 642 848 ------- ------ ------- ------- Balance as of March 31, 2006 $56,848 $8,863 $31,505 $97,216 ======= ====== ======= =======
Other intangible assets that are not subject to amortization, consist of the following:
As of As of March 31, December 31, 2006 2005 --------- ------------ Trademarks $33,898 $33,898 Proprietary Process 2,052 2,052 ------- ------- Total $35,950 $35,950 ======= =======
Other intangible assets, which will continue to be amortized, consist of the following:
As of March 31, 2006 -------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Product Technology $12,400 $(4,476) $ 7,924 Patents 5,774 (2,210) 3,564 Supply Agreements 2,110 (1,207) 903 License Agreement 2,005 (449) 1,556 Other 2,034 (1,071) 963 ------- ------- ------- Total $24,323 $(9,413) $14,910 ======= ======= =======
As of December 31, 2005 -------------------------------------------- Gross Carrying Accumulated Net Carrying Amount Amortization Amount -------------- ------------ ------------ Product Technology $12,326 $(4,257) $ 8,069 Patents 5,685 (2,097) 3,588 Supply Agreements 2,110 (1,152) 958 License Agreement 2,005 (401) 1,604 Other 1,974 (960) 1,014 ------- ------- ------- Total $24,100 $(8,867) $15,233 ======= ======= =======
Amortization expense for the quarters ended March 31, 2006 and 2005 was $488 and $539, respectively. 9 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (5) GOODWILL AND INTANGIBLE ASSETS (CONTINUED) The expected amortization expense related to intangible assets in the future is as follows: For the year ended December 31, 2006 .. $1,925 For the year ended December 31, 2007 .. $1,895 For the year ended December 31, 2008 .. $1,779 For the year ended December 31, 2009 .. $1,510 For the year ended December 31, 2010 .. $1,319
(6) INCOME TAXES The effective tax rate for the first quarter 2006 was 135.0% compared to 48.8% in the first quarter 2005. The tax provision in the first quarter 2006 increased to $4,541 compared to $3,897 in the first quarter of 2005. This change is due to the geographic mix of pre-tax earnings. The Company's domestic net deferred tax assets at March 31, 2006 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. During the fourth quarter of 2005 the Company recorded a $16,926 increase to the valuation allowance to write down the carrying value of deferred tax assets related to certain domestic indefinite-lived intangible assets that had been previously preserved by tax planning strategies. During the first quarter of 2006 the Company recorded an increase of $188 to its deferred tax liabilities relating to its domestic indefinite lived assets. 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. The carryforward periods for foreign tax credits, research and experimentation tax credits, net operating losses, and the federal alternative minimum tax credits are 5 - 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. (7) NET INVENTORIES Inventories are stated at the lower of standard cost, determined on a first-in, first-out basis, or market. Net inventories at March 31, 2006 and December 31, 2005 consist of the following:
March 31, December 31, 2006 2005 --------- ------------ Finished goods ... $ 48,488 $46,134 Work in process .. 31,157 24,615 Raw materials .... 22,549 18,159 Supplies ......... 3,591 4,709 -------- ------- Total ......... $105,785 $93,617 ======== =======
10 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (8) LONG-TERM DEBT Long-term debt at March 31, 2006 and December 31, 2005 consists of the following:
March 31, December 31, 2006 2005 --------- ------------ Bank credit facilities .. $163,273 $ 81,943 Senior notes ............ -- 100,000 Capitalized leases ...... 5,696 6,056 Notes payable ........... 285 291 -------- -------- Subtotal ............. $169,254 $188,290 Less: current portion ... 1,118 1,471 -------- -------- Total ................ $168,136 $186,819 ======== ========
In January 2006, the Company elected to prepay the senior notes with funds provided by borrowing under the 5-Year Syndicated Senior Revolving Credit Facility. An expense of $5,272 was recorded related to a make-whole payment of $4,809 paid to the senior note holders concurrent with the January 2006 payment, and the related acceleration of $463 of unamortized origination fees. The Company is required to provide financial statements to its lenders under the 5-Year Agreement within 60 days after its fiscal quarter-end. The Company has received a waiver from its lenders through June 29, 2006 relating to this requirement for the quarter ended March 31, 2006. (9) COMPREHENSIVE INCOME The following table shows the components of comprehensive income/(loss) for the three months ended March 31, 2006 and 2005:
For the three months ended March 31, -------------------- 2006 2005 ------ -------- Net (loss)/income $(1,405) $ 4,090 Foreign currency translation 3,740 (14,911) Unrealized gain/(loss) on hedging contracts, net of tax 124 (708) Unrealized gain/(loss) on available for sale securities, net of tax 244 (65) ------ -------- Total $2,703 $(11,594) ====== ========
(10) RETIREMENT PLANS Domestic Pension Plans The Company maintains two U.S. defined-benefit pension plans which cover all eligible employees: the Nepera Hourly Pension Plan which covers the union employees at the Harriman, New York plant, and the Cambrex Pension Plan which covers all other eligible employees. 11 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (10) RETIREMENT PLANS (CONTINUED) The components of net periodic pension cost for the Company's domestic plans for the three months ended March 31, 2006 and 2005 are as follows:
March 31, March 31, 2006 2005 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ........................ $ 729 $ 688 Interest cost ....................... 858 791 Expected return on plan assets ...... (746) (735) Amortization of prior service cost .. 11 11 Recognized actuarial loss ........... 180 113 ------ ----- Net periodic benefit cost ........... $1,032 $ 868 ====== =====
The Company expects to contribute $4,250 in cash to its two U.S. defined-benefit pension plans in 2006. The Company has two Supplemental Executive Retirement Plans ("SERP") for key executives. These plans are non-qualified and unfunded. The components of net periodic pension cost for the Company's SERP Plans for the three months ended March 31, 2006 and 2005 are as follows:
March 31, March 31, 2006 2005 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ........................................ $ 55 $ 56 Interest cost ....................................... 113 108 Amortization of unrecognized transition obligation .. 26 25 Amortization of prior service cost .................. 1 1 Recognized actuarial loss ........................... 18 10 ---- ---- Net periodic benefit cost ........................... $213 $200 ==== ====
International Pension Plans Certain foreign subsidiaries of the Company maintain pension plans for their employees that conform to the common practice in their respective countries. Based on local laws and customs, some of those plans are not funded. For those plans that are funded, the amount in the trust supporting the plan is actuarially determined, and where applicable, in compliance with local statutes. 12 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (10) RETIREMENT PLANS (CONTINUED) The components of net periodic pension cost for the Company's international plans for the three months ended March 31, 2006 and 2005 are as follows:
March 31, March 31, 2006 2005 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost ................................. $ 344 $ 302 Interest cost ................................ 260 282 Expected return on plan assets ............... (102) (92) Amortization of unrecognized net obligation .. (8) (13) Recognized actuarial loss .................... 17 59 Amortization of prior service cost ........... 33 (2) ----- ----- Net periodic benefit cost .................... $ 544 $ 536 ===== =====
The Company expects to contribute approximately $548 in cash to its international pension plans in 2006. (11) OTHER POSTRETIREMENT BENEFITS Cambrex provides post-retirement health and life insurance benefits ("post-retirement benefits") to all eligible retired employees. Employees who retire at or after age 55 with fifteen years of service are eligible to participate in the postretirement benefit plans. Certain subsidiaries and all employees hired after December 31, 2002 (excluding those covered by collective bargaining) are not eligible for these benefits. The Company's responsibility for such premiums for each plan participant is based upon years of service. Such plans are self-insured and are not funded. Effective January 1, 2006, the Cambrex Retiree Medical Plan no longer provides prescription coverage to retirees or dependents age 65 or older. The components of net periodic pension cost for the three months ended March 31, 2006 and 2005 are as follows:
March 31, March 31, 2006 2005 --------- --------- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 16 $ 15 Interest cost 34 38 Actuarial loss recognized 33 29 Amortization of unrecognized prior service cost (45) (38) ---- ---- Total periodic postretirement benefit cost $ 38 $ 44 ==== ====
13 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (12) SEGMENT INFORMATION The Company classifies its business units into three reportable segments: Bioproducts, consisting of research products and services and therapeutic applications, Biopharma, consisting of biopharmaceutical process development and manufacturing services and Human Health, consisting of active pharmaceutical ingredients and pharmaceutical intermediates produced under Food and Drug Administration cGMP for use in the production of prescription and over-the-counter drug products and other fine custom chemicals derived from organic chemistry. Information as to the operations of the Company in each of its business segments is set forth below based on the nature of the products and services offered. Cambrex evaluates performance based on gross profit and operating profit. Inter-segment sales are not material. The Company allocates certain corporate expenses to each of the segments. No customer accounted for more than 10% of consolidated gross sales in the three months ended March 31, 2006 and 2005. The Company currently has a long-term sales contract that accounts for more than 10% of Human Health segment sales for the three months ended March 31, 2006 and 2005 that is scheduled to expire at the end of 2008. There is no guarantee that this contract will be renewed. The following is a summary of business segment information:
Three months ended March 31, ------------------- 2006 2005 -------- -------- Gross Sales: Bioproducts .......................... $ 41,341 $ 39,919 Biopharma ............................ 13,804 7,707 Human Health ......................... 64,462 62,836 -------- -------- $119,607 $110,462 ======== ======== Gross Profit: Bioproducts .......................... $ 22,867 $ 22,135 Biopharma ............................ 1,013 (2,057) Human Health ......................... 21,040 23,184 -------- -------- $ 44,920 $ 43,262 ======== ======== Operating Profit: Bioproducts .......................... $ 6,868 $ 9,646 Biopharma ............................ (1,462) (4,912) Human Health ......................... 11,593 12,309 Corporate ............................ (6,260) (6,136) -------- -------- $ 10,739 $ 10,907 ======== ========
14 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (12) SEGMENT INFORMATION (CONTINUED)
Three months ended March 31, ------------------ 2006 2005 ------ ------ Capital Expenditures: Bioproducts .......................... $2,921 $2,937 Biopharma ............................ 847 1,406 Human Health ......................... 4,716 4,254 Corporate ............................ 15 449 ------ ------ $8,499 $9,046 ====== ====== Depreciation: Bioproducts .......................... $1,630 $1,494 Biopharma ............................ 895 946 Human Health ......................... 5,348 6,563 Corporate ............................ 250 402 ------ ------ $8,123 $9,405 ====== ====== Amortization: Bioproducts .......................... $ 406 $ 422 Biopharma ............................ 72 108 Human Health ......................... 10 9 ------ ------ $ 488 $ 539 ====== ======
March 31, December 31, 2006 2005 --------- ------------ Total Assets: Bioproducts .......................... $236,057 $231,965 Biopharma ............................ 54,031 58,652 Human Health ......................... 295,393 301,771 Corporate ............................ 12,439 20,084 -------- -------- $597,920 $612,472 ======== ========
(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 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 ("PRP") 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 15 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) 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 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 $6,762 and $6,413 at March 31, 2006 and December 31, 2005, respectively. The increase in the accrual is primarily due to an increase in the reserve for the Clifton, NJ site and the Bayonne, NJ site of $425 and $112, respectively, partially offset by payments of $277 and currency fluctuation of $86. 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 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 sampling of such areas commenced. The Company has completed a second phase of sampling and determined that a third phase of sampling is necessary to determine the extent of contamination and any necessary remediation. The results of the completed and proposed 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 submitted its plan for the third phase of sampling to the NJDEP during the fourth quarter of 2005. The sampling will commence in the next few months. In March 2000, the Company completed the acquisition of the Cambrex Profarmaco Landen facility in Belgium. At the time of acquisition, Cambrex was aware of certain site contamination and recorded a reserve for the estimated costs of remediation. This property has been the subject of an extensive on-going environmental investigation. The investigation has been completed and the Company concluded that no change to the reserve was necessary 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, and the results of such assessment may affect the reserves. The Company's Cosan subsidiary conducted manufacturing operations in Clifton, New Jersey from 1968 until 1979. Prior to the acquisition by the Company, the operations were moved to another location and thereafter Cambrex purchased the business. 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 extent of the contamination related to the Clifton site and conduct remediation as may be necessary. During the third quarter of 2005, the Company completed the investigation related to the Clifton site, which extends to adjacent properties. The results of the investigation caused the Company to increase 16 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) its related reserves by $1,300. The Company submitted the results of the investigation and proposed remedial action plan to the NJDEP. The increase in the reserves in the third quarter of 2005 is based on the proposed remedial action plan. In February 2005, the New Jersey Federal District Court ruled that a lawsuit claiming property damages against Cosan by the owners of contaminated property adjacent to the Clifton location could be placed on the active calendar. To avoid the expense and uncertainty of trial, the parties have reached an agreement to settle this matter. Under the settlement, which is not yet finalized, Cosan will pay the property owner $425 and reserves have been adjusted accordingly. In mid-2004 the United States Environmental Protection Agency ("USEPA") conducted a hazardous waste inspection of the Company's Charles City facility. Thereafter, the USEPA 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 USEPA 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. On October 31, 2005 the Company filed a request for a hearing and an informal conference to discuss settlement. Settlement discussions are on-going as we prepare for the hearing. In March 2006, the Company received notice from the USEPA that two former operating subsidiaries are considered PRPs at the Berry's Creek Superfund Site, Bergen County, New Jersey. Our operating companies are among many other PRPs that were listed in the notice. Pursuant to the notice the PRPs have been asked to perform a remedial investigation and feasibility study of the Berry's Creek Site. The Company has met with the other PRPs. Both operating companies joined the groups of PRPs and filed a joint response to the USEPA agreeing to jointly negotiate to conduct or fund (along with other PRPs) an appropriate remedial investigation and feasibility study of the Berry's Creek Site. At this time it is too early to predict the extent of any liabilities, consequently we have not recorded any reserves for this matter. The Company is involved in other matters where the range of liability is not reasonably estimable at this time and it is not determinable when information will become available to provide a basis for recording an accrual, should an accrual be required. If any of the Company's environmental matters are resolved in a more unfavorable manner than presently estimated, these matters either individually or in the aggregate, could have a material adverse effect on the Company's financial condition, operating results and cash flows when resolved in a future reporting period. 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 APIs. The FTC and Attorneys' General 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. 17 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) 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 $7,615 has been paid through March 31, 2006, 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 March 31, 2006 the outstanding balance for this liability was $4,574. Vitamin B-3 In May 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 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. All cases have been settled within established reserve amounts. Settlement documents will be finalized and payments will be made during the next several months. The balance of the reserves recorded within accrued liabilities related to this matter was $1,603 as of March 31, 2006. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business in November 2003. Under the agreement for the sale ("Purchase Agreement"), the Company provided standard representations and warranties and included various covenants concerning the business, operations, liabilities and financial condition of the Rutherford Chemicals business ("Rutherford Business"). Most of such representations and warranties survived for a period of thirty days after the preparation of the audited financial statements for year-end 2004 by the purchasers of the Rutherford Business ("Buyers"). Therefore, claims for breaches of such representations had to be brought during such 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 Purchase 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. 18 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) Under the Purchase Agreement, the Company has retained the liabilities associated with existing general litigation matters related to Rutherford Chemicals. 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 within Rutherford Chemicals, 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. In March 2005, the Company received a claim from the Buyers claiming breach of certain representations, warranties and covenants contained in the Purchase Agreement. In April 2005, the Company responded rejecting the claim. Thereafter, the Buyers 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 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 Buyers. In May 2005, the Company responded to the Buyers and rejected the claim entirely. In September 2005, the Company received a request for indemnity ("September Notice") from the Buyers related to an arbitration claim filed by a Rutherford Business customer ("Customer"). The arbitration claim arises from a claimed breach of a supply agreement that was assigned to and assumed by the Buyers pursuant to the Purchase Agreement. Thereafter, the Company was also served with an arbitration claim by the Customer related to the same matter. In the arbitration claim, the Customer claims $30,000 in damages arising from Buyers' breach of the supply agreement. The Buyers claim that the September Notice amends the earlier claims that they filed in March and April 2005, as discussed above, 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. The supply agreement was assigned to and assumed by the Buyers, and the Company has now been dismissed from the Customer's arbitration claim. In October 2005, the Company rejected the Buyers' claim for indemnity under the September Notice in its entirety. In October 2005, the Company received a notice from the Buyers ("October Notice") that summarized the claims previously received in March and April 2005, and included the Buyers' response to the Company's April and May rejection of the earlier notices. The October Notice also set forth additional claims for environmental matters related to the Rutherford Business that relate to environmental matters at each of the five operating sites sold pursuant to the Purchase Agreement. In December 2005 the Buyers added two additional environmental claims related to the former operating sites ("December Notices"). The Company has now responded to the October and December Notices disputing the environmental claims on various grounds, including that the Company believes most claims relate to Buyers' obligations under the Purchase Agreement. The Company also requested additional information because some environmental 19 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) claims may be covered by sections of the Purchase Agreement where the parties share liability concerning such matters. In April 2006, the Company received a summons and complaint (the "Complaint") from the Buyers, which was filed in the Supreme Court of the State of New York, County of New York. The Complaint seeks indemnification, declaratory and injunctive relief for alleged (i) breaches of representations, warranties and covenants covering each of the former operating sites related to facility structures, utilities and equipment included in the March, April and October Notices mentioned above and the allegedly related breach of the Customer Supply Agreement arising from a breach of warranty at the Harriman facility included in September Notice mentioned above (collectively Equipment Matters); and (ii) claims related to environmental matters at each of the five operating locations, most of which related to the former Harriman location included in the October Notice and December Notices mentioned above (collectively "Environmental Matters"). The Company continues its evaluation of Buyers' allegations and intends to defend itself against these claims vigorously. The Company continues to believe that the Equipment Matters are without merit. Further, the Company continues to believe that based on current information the majority of the Environmental Matters are either Buyers' responsibility or without merit and the remaining are otherwise not reasonably estimable at this time. As such the Company has recorded no reserves for this matter. 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 (the "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 in March 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. In October 2005, the Court denied the Company's Motion to Dismiss against the Company and two current Company officers. The Company has reached its deductible under its insurance policy and further costs, expenses and any settlement is expected to be paid by the Company's insurers. 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 SEC is currently conducting an investigation into the Company's inter-company accounting procedures from the period 1997 through 2001. The investigation began in the first half of 2003 after the Company voluntarily disclosed certain matters related to inter-company accounts for the five-year period ending December 31, 2001 that resulted in the restatement of the Company's financial statements for those years. To the Company'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. 20 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (dollars in thousands, except share data) (13) CONTINGENCIES (CONTINUED) Baltimore Litigation In 2001, the Company acquired the biopharmaceutical manufacturing business in Baltimore (the "Baltimore Business"). The sellers of the Baltimore Business 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 the Company breached its obligation to pay additional consideration as provided in the purchase agreement which was contingent on the performance of the Baltimore Business. Management believes the matter to be without merit and has been vigorously 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 March 31, 2006. 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. 21 CAMBREX CORPORATION AND SUBSIDIARIES (dollars in thousands, except share data) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW The Company's business consists of three segments - Bioproducts, Biopharma and Human Health. The Bioproducts segment consists of research products and services and therapeutic applications. The Biopharma segment consists of the Company's biopharmaceutical process development and manufacturing business. The Human Health segment is primarily comprised of active pharmaceutical ingredients derived from organic chemistry and pharmaceutical intermediates. During the first quarter 2006, Cambrex achieved varying levels of success in its business segments. Bioproducts has a robust pipeline of new products with several major product launches planned for the remainder of the year. Sales growth in Human Health is strong and custom development projects are expected to increase significantly this year. Biopharma had one of its best quarters since 2003 and continues to build its project pipeline. The following significant events occurred during the first quarter 2006 which affected reported results: - - A $5,272 charge recorded within interest expense due to the pre-payment of a portion of the Company's long-term debt. - - A $1,445 charge recorded within research and development expenses due to the acquisition of Cutanogen. - - A $1,020 charge recorded within administrative expenses for the costs related to the previously announced evaluation of strategic alternatives to enhance shareholder value. RESULTS OF OPERATIONS COMPARISON OF FIRST QUARTER 2006 VERSUS FIRST QUARTER 2005 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 March 31, 2006 and 2005:
Quarter Ended March 31, ----------------------------------- 2006 2005 ---------------- ---------------- $ % $ % -------- ----- -------- ----- Bioproducts................ $ 41,341 34.6% $ 39,919 36.1% Biopharma.................. 13,804 11.5 7,707 7.0 Human Health............... 64,462 53.9 62,836 56.9 -------- ----- -------- ----- Total gross sales....... $119,607 100.0% $110,462 100.0% ======== ===== ======== =====
22 RESULTS OF OPERATIONS (CONTINUED) The following table shows the gross profit of the Company's three product segments for the first quarter 2006 and 2005:
2006 2005 ------------------------------- ------------------------------- Gross Profit $ Gross Margin % Gross Profit $ Gross Margin % -------------- -------------- -------------- -------------- Bioproducts......... $22,867 55.3% $22,135 55.4% Biopharma........... 1,013 7.3 (2,057) (26.7) Human Health........ 21,040 32.6 23,184 36.9 ------- ------- Total............ $44,920 37.6% $43,262 39.2% ======= =======
Gross sales in the first quarter 2006 increased 8.3% to $119,607 from $110,462 in the first quarter 2005. Sales increased in all segments. Gross sales were unfavorably impacted 4.9% in the first quarter 2006 versus the first quarter 2005 due to strengthening of the U.S. dollar primarily versus the euro and Swedish krona. Gross profit in the first quarter 2006 was $44,920 compared to $43,262 in the first quarter 2005. Gross margin percentage decreased to 37.6% from 39.2% in the first quarter 2005, reflecting lower margins in the Human Health and Bioproducts segments partially offset by higher margins in the Biopharma segment. Foreign currency fluctuations negatively impacted gross margins by 0.6 percentage points. The following table shows gross sales by geographic area for the three months ended March 31, 2006 and 2005:
March 31, March 31, 2006 2005 --------- --------- North America $ 54,580 $ 49,398 Europe 57,889 53,848 Asia 4,401 4,914 Other 2,737 2,302 -------- -------- Total $119,607 $110,462 ======== ========
Bioproducts Segment gross sales of $41,341 were $1,422 or 3.6% above the first quarter 2005. Bioproducts sales were unfavorably impacted 3.7% due to strength in the U.S. dollar primarily against the euro in the first quarter 2006 versus 2005. Research Products gross sales of $20,705 were $706 or 3.5% above the first quarter 2005 due primarily to increased sales in cell biology products and higher cell culture media product sales. Therapeutic Applications gross sales of $20,636 were $716 or $3.6% above the first quarter of 2005 due to higher sales of endotoxin detection products, cell culture media products due to increased volume in Europe and cell therapy services resulting largely from the addition of new customers. Bioproducts segment gross margins decreased to 55.3% in the first quarter of 2006 from 55.4% in the first quarter of 2005. Higher sales volume in most product categories and increased pricing were offset by an unfavorable impact due to exchange rates, higher bad debt expense and unfavorable product mix. 23 RESULTS OF OPERATIONS (CONTINUED) Biopharma Segment gross sales of $13,804 were $6,097 or 79.1% above the first quarter 2005 reflecting higher suite fees and reimbursed materials partially offset by lower fees for labor and process development in our biopharmaceutical manufacturing business. Suite fee revenues of $5,200 were recorded in first quarter 2006 resulting from the shipments of all remaining inventories to a client that terminated their project due to their unfavorable regulatory developments during clinical trials in the fourth quarter of 2005. Foreign currency had no impact on Biopharma sales. Biopharma segment gross margins increased to 7.3% in the first quarter of 2006 from (26.7)% in the first quarter of 2005 driven by higher revenues, partially offset by higher production costs. Human Health Segment gross sales of $64,462 were $1,626 or 2.6% above the first quarter of 2005. Human Health sales were unfavorably impacted 6.3% due to exchange rates. Sales of Active Pharmaceutical Ingredients ("APIs") of $50,696 were $1,940 or 4.0% above the first quarter of 2005 primarily due to increased sales of a gastrointestinal API partially offset by lower pricing. Sales of nicotine polacrilex resin (used in smoking cessation products) also increased. Partially offsetting these increases are lower sales of certain central nervous system and cardiovascular generic APIs due to increased competition and continued pricing pressures. Sales of Pharmaceutical Intermediates of $6,553 were $324 or 4.7% below the first quarter of 2005. Sales of Other Human Health products of $7,213 were flat compared to first quarter of 2005. Human Health segment gross margins decreased to 32.6% in the first quarter of 2006 from 36.9% in the first quarter of 2005 due to pricing pressures on APIs and an unfavorable impact of foreign currency partially offset by favorable sales volume and product mix and lower variable production costs. Selling, general and administrative expenses of $28,193 or 23.6% of gross sales in the first quarter 2006 increased from $26,497 or 24.0% of gross sales in the first quarter 2005. Sales and marketing expenses increased compared to the first quarter 2005 primarily due to an increase in personnel and promotion costs within the Bioproducts segment partially offset by the impact of currency translation due to the stronger U.S. dollar. Administration expenses increased primarily due to costs associated with the strategic alternatives process partially offset by the impact of currency translation, lower personnel and legal costs. Research and development expenses of $5,988 were 5.0% of gross sales in the first quarter of 2006 compared to $5,858 or 5.3% of gross sales in the first quarter 2005. Excluding the impact of the Cutanogen acquisition, the decrease is due to the reduction of corporate personnel, lower labor costs and the impact of currency translation. Operating profit in the first quarter 2006 was $10,739 compared to $10,907 in the first quarter 2005. The results reflect lower gross margins in the Human Health and Bioproducts segments. Net interest expense of $7,353 in the first quarter 2006 increased $4,623 from the first quarter 2005. The Company incurred costs of $5,272 associated with the prepayment of Senior Notes. Excluding this charge, net interest expense decreased $649 primarily reflecting lower average debt and lower average interest rates. The average interest rate was 5.2% in the first quarter 2006 versus 5.3% in the first quarter 2005. 24 RESULTS OF OPERATIONS (CONTINUED) The effective tax rate for the first quarter 2006 was 135.0% compared to 48.8% in the first quarter 2005. The tax provision in the first quarter 2006 increased to $4,541 compared to $3,897 in the first quarter of 2005. This change is due to the geographic mix of pre-tax earnings. The Company's domestic net deferred tax assets at March 31, 2006 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. During the fourth quarter of 2005 the Company recorded a $16,926 increase to the valuation allowance to write down the carrying value of deferred tax assets related to certain domestic indefinite-lived intangible assets that had been previously preserved by tax planning strategies. During the first quarter of 2006 the Company recorded an increase of $188 to its deferred tax liabilities relating to its domestic indefinite lived assets. 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. The carryforward periods for foreign tax credits, research and experimentation tax credits, net operating losses, and the federal alternative minimum tax credits are 5 - 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)/income in the first quarter of 2006 was $(1,405) or $(0.05) per diluted share versus $4,090, or $0.15 per diluted share in the same period a year ago. Net loss for the first quarter 2006 includes a cumulative effect of a change in accounting principle of ($228), or ($0.01) per diluted share as described above. In November 2004, the FASB published FAS 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 amends guidance to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), which under some circumstances ARB No. 43 stated "may be so abnormal as to require treatment as current period charges." 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 the allocation of fixed production overheads to the cost of conversion be based on the normal capacity of the production facility. This statement was effective on January 1, 2006 and was not material to the Company's financial position or results of operations. Prior to January 1, 2006, the company accounted for stock option plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the financial results for the quarter ended March 31, 2005, as all the options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R) ("FAS 123 (R)") "Share-Based Payment, using the modified-prospective-transition method. Under this transition, compensation cost recognized in the first quarter of 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006 and all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R). The first quarter of 2006 does not include compensation cost for share-based payments granted prior to January 1, 2006, as all options outstanding prior to January 1, 2006 were fully vested as of December 31, 2005. Results of prior periods have not been restated. 25 RESULTS OF OPERATIONS (CONTINUED) Assumptions used in estimating the fair value of stock options granted in the first quarter 2006 are consistent with the assumptions used prior to the adoption of FAS 123(R) with the exception of the expected life. The expected term of 4.75 years was utilized based on Staff Accounting Bulletin No. 107, "Share-Based Payment" "simplified" method for determining the expected term of stock options. As a result of using the "simplified" method, the expected life was shortened by 1.25 years. FAS 123(R) requires companies to estimate the expected forfeitures for all unvested awards and record compensation costs only for those awards that are expected to vest. As of March 31, 2006, the total compensation cost related to unvested stock option awards granted to employees but not yet recognized was immaterial. The cost will be amortized on a straight-line basis over the remaining weighted average vesting period of 3.8 years. The amount of stock based compensation costs related to stock options recorded in the first quarter 2006 was immaterial and would not have changed reported net income or earnings per share as a result of adopting FAS 123(R) on January 1, 2006. At March 31, 2006, the Company has outstanding 150,000 fully-vested cash-settled incentive stock appreciation rights (SARs) at a price of $19.30. These SARs are classified as liability awards and, as such, will be recorded at fair value until the rights are exercised or expire with the amount being recorded as compensation expense or benefit in the applicable period. For the quarters ended March 31, 2006 and 2005 the Company recorded $218, at fair market value, and ($870), at intrinsic value, respectively, in compensation expense/(benefit). In addition, the Company also recorded $228 in compensation expense as a cumulative effect of a change in accounting principle in accordance with FAS 123(R). Under FAS 123(R), the Company is required to measure the SARs at fair market value. Prior to adopting FAS 123(R), the SARs were measured at the intrinsic value. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 2006, cash and cash equivalents on hand decreased $22,251. During the three months ended March 31, 2006, the Company generated cash flows from operations totaling $5,933, a decrease of $2,149 versus the same period a year ago. This decrease in cash flows is due primarily to lower net income and the timing of payments related to trade payables partially offset by an increase in the collections of receivables compared to prior year. Capital expenditures were $8,499 in the first three months of 2006 as compared to $9,046 in the first three months of 2005. Part of the funds in 2006 were used for cell therapy manufacturing capabilities at the Bioproducts facility in Walkersville, MD, a new warehouse and API purification and finishing facility in Milan, Italy and capital improvements to existing facilities. Cash flows used in financing activities in the first three months of 2006 of $19,127 includes a net decrease in debt of $19,328 and payment of dividends of $801. The first three months of 2005 include a net increase in debt of $8,427 partially offset by payment of dividends of $792. During the first three months of 2006 and 2005, the Company paid cash dividends of $0.03 per share. Management believes that existing sources of capital, together with cash flows from operations, will be sufficient to meet foreseeable cash flow requirements. 26 FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under The Securities Exchange Act of 1934, including, without limitation, statements regarding expected performance, especially expectations with respect to sales, research and development expenditures, earnings per share, capital expenditures, acquisitions, divestitures, collaborations, or other expansion opportunities. These statements may be identified by the fact that they use words such as "expects," "anticipates," "intends," "estimates," "believes" or similar expressions in connection with any discussion of future financial and operating performance. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-Q. The forward-looking statements contained herein are based on current plans and expectations and involve risks and uncertainties that could cause actual outcomes and results to differ materially from current expectations including, but not limited to, global economic trends, pharmaceutical outsourcing trends, competitive pricing or product developments, government legislation and/or regulations (particularly environmental issues), tax rate, 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, the possibility that the value of the acquisition of PermaDerm cultured skin may not be realized or that our plans to obtain a Humanitarian Device Exemption, completion of clinical trials and commercialization of PermaDerm cultured skin in the United States may not be successful, and the Company's ability to receive regulatory approvals for its products. 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. For further details and a discussion of these and other risks and uncertainties, investors are cautioned to review the Cambrex 2005 Annual Report on Form 10-K, including the Forward-Looking Statement section therein, and other filings with the US Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in our exposure to market risk during the first quarter of 2006. For a discussion of the Company's exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," contained in the Company's Annual Report on Form 10-K for the period ended December 31, 2005. 27 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We have carried out an evaluation under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006. Our evaluation included consideration of the continuing material weakness in our internal control over the accounting for income taxes as disclosed under Item 9A Controls and Procedures in our 2005 Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, at the reasonable assurance level, as of March 31, 2006. Notwithstanding the material weakness, the Company's management has concluded that the financial statements included in this Form 10-Q are a fair presentation in all material respects the Company's financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the quarter ended March 31, 2006. 28 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES ITEM 1 LEGAL PROCEEDINGS See the discussion under Part I, Item 1, Note 13 to the Consolidated Financial Statements. ITEM 1A RISK FACTORS There have been no material changes to our risk factors and uncertainties during the first quarter of 2006. For a discussion of the Risk Factors, refer to Part I, Item 1A, "Risk Factors," contained in the Company's Annual Report on Form 10-K for the period ended December 31, 2005. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS. None. ITEM 6. EXHIBITS 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. 29 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: June 7, 2006 30 EX-31.1 2 y22042exv31w1.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, James A. Mack, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cambrex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ James A. Mack ---------------------------------------- James A. Mack Chairman of the Board of Directors, President and Chief Executive Officer Dated: June 7, 2006 EX-31.2 3 y22042exv31w2.txt CERTIFICATION EXHIBIT 31.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Luke M. Beshar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Cambrex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Luke M. Beshar ---------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Dated: June 7, 2006 EX-32.1 4 y22042exv32w1.txt CERTIFICATION EXHIBIT 32.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Cambrex Corporation (the "Company") on form 10-Q for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James A. Mack, Chairman of the Board of Directors, 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: June 7, 2006 /s/ James A. Mack ---------------------------------------- James A. Mack Chairman of the Board of Directors, President and Chief Executive Officer EX-32.2 5 y22042exv32w2.txt CERTIFICATION EXHIBIT 32.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Quarterly Report of Cambrex Corporation (the "Company") on form 10-Q for the period ending March 31, 2006, 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: June 7, 2006 /s/ Luke M. Beshar ---------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----