-----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, DvuOGBKGtRK82W1y+pEgNwV6AprqXx1MrYn0ZaNtXaJmRs38neExC5xmAGq7Xcbe EYYJ4NfHnM/3StboUZGJyA== 0000950123-98-009902.txt : 19981116 0000950123-98-009902.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950123-98-009902 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMBREX CORP CENTRAL INDEX KEY: 0000820081 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 222476135 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10638 FILM NUMBER: 98747568 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 CAMBREX CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission file number 1-10638 CAMBREX CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 22-2476135 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073 (Address of principal executive offices) (201) 804-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 1, 1998, there were 24,367,252 shares outstanding of the registrant's Common Stock, $.10 par value. 2 CAMBREX CORPORATION AND SUBSIDIARIES Form 10-Q For The Quarter Ended September 30, 1998 Table of Contents Page No. -------- Part I Financial information Item 1. Financial Statements Condensed consolidated balance sheets as of September 30, 1998 and December 31, 1997 2 Condensed consolidated income statements for the three months and nine months ended September 30, 1998 and 1997 3 Condensed consolidated statements of comprehensive income for the three months and nine months ended September 30, 1998 and 1997 4 Condensed consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997 5 Notes to condensed consolidated financial statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 18 Part II Other information Item 4. Matters Submitted to a Vote of Securities Holders 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 Exhibit 27 - Financial Data Schedule 21 3 Part I - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands, except share data)
September 30, December 31, 1998 1997 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ............................. $ 41,164 $ 21,469 Trade accounts receivable, less allowances for doubtful accounts of $1,276 and $1,705, respectively ......... 61,961 55,733 Other Receivables ..................................... 14,192 6,150 Inventories, net ...................................... 107,417 91,733 Deferred tax assets ................................... 7,123 5,947 Prepaid expenses and other current assets ............. 5,461 3,622 --------- --------- Total current assets ................................ 237,318 184,654 Property, plant and equipment, net ....................... 251,207 237,342 Intangible assets, net ................................... 129,504 127,003 Other assets ............................................. 3,173 3,427 --------- --------- Total assets ........................................ $ 621,202 $ 552,426 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .............. $ 70,192 $ 58,471 Income taxes payable .................................. 9,363 4,857 Short-term debt ....................................... 2,321 3,597 Current portion of long-term debt ..................... 610 986 --------- --------- Total current liabilities ........................... 82,486 67,911 Long-term debt ........................................... 199,747 194,325 Deferred tax liabilities ................................. 50,473 43,436 Other noncurrent liabilities ............................. 22,595 20,800 --------- --------- Total liabilities ................................... 355,301 326,472 --------- --------- Stockholders' equity: Common stock, $.10 par value; issued 26,410,624 and 25,934,574 shares, respectively* .................. 2,638 1,295 Additional paid-in capital ............................ 158,400 154,406 Retained earnings ..................................... 122,938 96,027 Additional minimum pension liability .................. (186) -- Treasury stock, at cost; 2,085,372 and 2,081,122 shares, respectively* .............................. (9,775) (9,458) Shares held in trust, at cost; 354,111 and 360,554 shares, respectively* .............................. (1,233) (1,275) Cumulative other comprehensive income ................. (6,881) (15,041) --------- --------- Total stockholders' equity .......................... 265,901 225,954 --------- --------- Total liabilities and stockholders' equity .......... $ 621,202 $ 552,426 ========= =========
- -------------- * Shares and per share data reflect adjustments for a two-for-one stock split in the form of a dividend of one new share for each share held, paid on June 25, 1998. See accompanying notes to condensed consolidated financial statements. 2 4 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands, except per-share data)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Gross sales .......................... $ 104,423 $ 82,638 $ 334,366 $ 276,552 Commissions & freight ............ 1,361 1,546 4,442 5,470 Sales, returns and allowances ..... 476 382 813 1,252 --------- --------- --------- --------- Net sales ............................ 102,586 80,710 329,111 269,830 Other revenues .................... 5,364 655 15,945 2,148 --------- --------- --------- --------- Net revenues ......................... 107,950 81,365 345,056 271,978 Cost of goods sold ................... 69,111 56,807 219,446 189,611 --------- --------- --------- --------- Gross Profit ......................... 38,839 24,558 125,610 82,367 Operating expenses: Selling, general and administrative expenses ........................ 18,556 11,556 56,560 38,137 Research and development .......... 3,307 2,418 10,502 7,057 Restructuring charge .............. 1,400 -- 1,400 -- --------- --------- --------- --------- Total operating expenses ........ 23,263 13,974 68,462 45,194 --------- --------- --------- --------- Operating profit ..................... 15,576 10,584 57,148 37,173 Other (income) expenses: Interest expense - net ............ 2,209 525 7,879 2,763 Other (income)/expense - net ...... 364 (966) 206 (586) --------- --------- --------- --------- Income before income taxes ........... 13,003 11,025 49,063 34,996 Provision for income taxes ........ 4,152 3,494 20,183 11,165 --------- --------- --------- --------- Net income ........................... $ 8,851 $ 7,531 $ 28,880 $ 23,831 ========= ========= ========= ========= Weighted average shares outstanding:* Basic ............................. 24,288 23,658 24,119 23,546 Effect of dilutive stock options .. 1,195 1,152 1,258 649 --------- --------- --------- --------- Diluted ........................... 25,483 24,810 25,377 24,195 Earnings per share of common stock and common stock equivalents:* Basic ............................. $ 0.36 $ 0.32 $ 1.20 $ 1.02 ========= ========= ========= ========= Diluted ........................... $ 0.35 $ 0.30 $ 1.14 $ 0.98 ========= ========= ========= =========
- -------------- * Share and per share data reflect adjustments for a two-for-one stock split in the form of a dividend of one new share for each share held, paid on June 25, 1998. See accompanying notes to condensed consolidated financial statements. 3 5 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (in thousands)
Three months ended Nine months ended September 30, September 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net income ....................... $ 8,851 $ 7,531 $ 28,880 $ 23,831 Other comprehensive income/(loss): Foreign currency translation adjustments* .................. 7,112 (877) 8,160 (19,355) -------- -------- -------- -------- Comprehensive income/(loss) ...... $ 15,963 $ 6,654 $ 37,040 $ 4,476 ======== ======== ======== ========
- ------------ * The Company does not provide for U.S. income taxes on foreign currency translation adjustments because it does not provide for such taxes on undistributed earnings of foreign subsidiaries. See accompanying notes to condensed consolidated financial statements. 4 6 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine months ended September 30, ------------------------ 1998 1997 --------- --------- Cash flows from operating activities: Net income ......................................... $ 28,880 $ 23,831 Depreciation and amortization ...................... 30,192 22,450 Deferred income taxes .............................. 5,863 1,366 Changes in assets and liabilities (net of assets and liabilities acquired): Receivables, net ............................... (13,377) 6,502 Inventories .................................... (11,431) (7,276) Prepaid expenses and other current assets ...... (1,818) (148) Accounts payable and accrued liabilities ....... 7,798 (5,862) Income taxes payable ........................... 4,174 1,004 Other noncurrent assets and liabilities ........ 1,591 (324) --------- --------- Net cash provided by operating activities ........ 51,872 41,543 --------- --------- Cash flows from investing activities: Capital expenditures ............................... (30,596) (25,395) Acquisition of businesses (net of cash acquired) ... (15,199) (111,400) Other investing activities ......................... 1,923 -- --------- --------- Net cash used in investing activities ............ (43,872) (136,795) --------- --------- Cash flows from financing activities: Dividends .......................................... (1,927) (1,762) Net (decrease) increase in short-term debt ......... (1,528) (752) Long-term debt activity (including current portion): Borrowings ....................................... 34,100 224,000 Repayments ....................................... (29,124) (104,861) Proceeds from the issuance of common stock ......... 5,238 3,289 Proceeds from the sale of treasury stock ........... (218) 379 --------- --------- Net cash provided by financing activities ........ 6,541 120,293 --------- --------- Effect of exchange rate changes on cash ............... 5,154 (2,668) --------- --------- Net increase in cash and cash equivalents ............. 19,695 22,373 Cash and cash equivalents at beginning of period ...... 21,469 7,353 --------- --------- Cash and cash equivalents at end of period ............ $ 41,164 $ 29,726 ========= ========= Supplemental disclosure: Interest paid (net of capitalized interest) ........ $ 10,182 $ 4,166 Income taxes paid .................................. $ 12,548 $ 2,820 Depreciation expense ............................... $ 23,102 $ 18,477
See accompanying notes to condensed consolidated financial statements. 5 7 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per-share amounts) (1) Basis of Presentation Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and subsidiaries. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments, consisting of only normal recurring accruals, 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, 1997. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the full year. (2) Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or market and include material, labor, and overhead. Inventories at September 30, 1998 and December 31, 1997 consist of the following:
September 30, December 31, 1998 1997 -------- -------- Finished goods ......................... $ 50,444 $ 42,974 Work in process ........................ 29,170 25,217 Raw materials .......................... 22,588 18,254 Fuel oil and supplies .................. 5,215 5,288 -------- -------- Total ............................. $107,417 $ 91,733 ======== ========
(3) Stock Split On May 28, 1998, the Board of Directors of Cambrex Corporation approved a two-for-one stock split of the Company's Common Stock, $0.10 par value. All share and per share data, including stock option plan information, have been adjusted to reflect the impact of the two-for-one stock split. The effect of the split was presented within stockholders' equity at June 30, 1998 by transferring the par value for the additional shares issued from additional paid-in capital to common stock. 6 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (4) Mergers and Acquisitions (a) On January 9, 1998, Cambrex acquired substantially all of the assets of the chiral intermediate business of Celgene Corporation (hereinafter renamed Chiragene). The total purchase price was $11,328, which has been accounted for using the purchase method of accounting and has resulted in residual goodwill of $5,032 to be amortized over 15 years. The purchase agreement included a payment of $7,500 at closing, plus an additional $78 in acquisition expenses, as well as minimum future royalties of $3,750 based upon sales, which are payable over the next five years. In addition, the Company may be required to pay additional consideration of up to $3,700 based upon future revenues of the business. On January 9, 1998, the Company borrowed $8,200 from the existing Credit Agreement with Chase Manhattan Bank, of which $7,500 was used to finance the acquisition of Chiragene. The proforma information has not been included in these financial statements, as it was deemed to be immaterial. (b) On May 12, 1998, Cambrex completed the acquisition of certain assets of the biopharmaceutical manufacturing and distribution business of Boehringer Ingelheim Bioproduct Partnership (BIBP) for $3,871, including acquisition costs of $621. The assets acquired include a state-of-the-art cell culture and media manufacturing facility in Verviers, Belgium, and inventory for certain cell culture, endotoxin detection and molecular biology products. The acquisition has been accounted for as a purchase transaction in which the purchase price has been allocated to the fair value of assets and liabilities acquired. The majority of the acquisition was funded through cash reserves. The proforma information has not been included in these financial statements, as it was deemed to be immaterial. (5) Future Impact of Recent Accounting Pronouncements Statement of Financial Accounting Standards No. 132 "Employers' Disclosures About Pensions and Other Postretirement Benefits" changes current financial statement disclosure requirements from those that were required under Financial Accounting Standard No. 87, "Employers' Accounting for Pension," Financial Accounting Standard No. 88, "Employers' Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefit Other Pensions." The Company will adopt this standard in the fourth quarter of 1998. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in an asset's, liability's or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be 7 9 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (5) Future Impact of Recent Accounting Pronouncements (continued) offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the period in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. The Company has not yet determined the impact that the adoption of SFAS 133 will have on its earnings, comprehensive income or statement of financial position. (6) Long-term Debt Long-term debt at September 30, 1998 and December 31, 1997 consists of the following:
September 30, December 31, 1998 1997 -------- -------- Bank credit facilities ................... $198,100 $192,600 Capital lease ............................ 58 100 Notes payable ............................ 2,199 2,611 -------- -------- Subtotal ............................ 200,357 195,311 Less: current portion ................... 610 986 -------- -------- Total ............................... $199,747 $194,325 ======== ========
The Company met all the bank covenants for the first nine months of 1998. (7) Segment Information Following is a summary of business segment information as of September 30, 1998: GROSS SALES Biotechnology ............................................. $ 48,506 Pharmaceutical and fine chemicals ......................... 285,860 -------- $334,366 ======== OPERATING PROFIT Biotechnology ............................................. $ 6,567 Pharmaceutical and fine chemicals ......................... 50,581 -------- $ 57,148 ========
8 10 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (7) Segment Information (continued)
NET INCOME Biotechnology ............................................ $ 1,505 Pharmaceutical and fine chemicals ........................ 27,375 -------- $ 28,880 ======== INDENTIFIABLE ASSETS Biotechnology ............................................. $158,896 Pharmaceutical and fine chemicals ......................... 440,637 Corporate ................................................. 21,669 -------- $621,202 ========
(8) Contingencies Refer to Form 10-K for the fiscal year ended December 31, 1997, for disclosure of existing contingencies related to environmental issues. 9 11 CAMBREX CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) RESULTS OF OPERATIONS COMPARISON OF THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997 The results for the third quarter of 1998 were above the same period a year ago due to increased sales of Active Pharmaceutical Ingredients, Organic Intermediates and Performance Enhancers, improved gross margins, the effect of the addition of BioWhittaker in the fourth quarter of 1997, and other revenues of $4,400 for royalties earned in the third quarter of 1998. Partially offsetting this income was a restructuring charge of $1,400. The effective tax rate for the quarter ended September 1998 was 32%, consistent with the third quarter in 1997. Increased selling, general and administrative expense are directly related to the addition of BioWhittaker, added research and development activities, and the restructuring charge. The following table shows the gross sales of the Company's six product categories included in two product segments: Biotechnology and Pharmaceutical and fine chemicals. The table is presented in dollars and as a percentage of the Company's total gross sales, as well as the net revenues and gross profit for the third quarter 1998 and 1997.
Third Quarter Ended September 30 --------------------------------------- 1998 1997 ----------------- ----------------- $ % $ % -------- ----- -------- ----- Biotechnology ......................... $ 16,504 15.8%$ -- -- -------- ----- -------- ----- Pharmaceutical and fine chemicals: Active pharmaceutical ingredients . $ 27,146 26.0% $ 25,985 31.4% Pharmaceutical intermediates ...... 16,749 16.1 18,743 22.7 Organic intermediates ............. 13,607 13.0 10,722 13.0 Performance enhancers ............. 19,036 18.2 15,811 19.1 Polymer systems ................... 11,381 10.9 11,377 13.8 -------- ----- -------- ----- Total Pharmaceutical and fine chemicals $ 87,919 84.2% $ 82,638 100.0% -------- ----- -------- ----- Total gross sales ............... $104,423 100.0% $ 82,638 100.0% ======== ===== ======== ===== Total net revenues .............. $107,950 $ 81,365 ======== ======== Total gross profit .............. $ 38,839 $ 24,558 ======== ========
The following table shows the gross sales and gross profit of the Company's six product categories included in two product segments, and gross profit as a percentage of each product category, for the third quarter 1998 and 1997. 10 12 RESULTS OF OPERATIONS (continued)
Gross Gross Gross Sales Profit $ Profit % ----- -------- -------- 1998 Biotechnology:.............................. $ 16,504 $ 7,907 47.9% -------- -------- ------ Pharmaceutical and fine chemicals: Active pharmaceutical ingredients ...... $ 27,146 $ 16,256 59.9% Pharmaceutical intermediates ........... 16,749 4,644 27.7 Organic intermediates .................. 13,607 2,455 18.0 Performance enhancers .................. 19,036 4,213 22.1 Polymer systems ........................ 11,381 3,364 29.6 -------- -------- ------ Total pharmaceutical and fine chemicals .... $ 87,919 $ 30,932 35.2% -------- -------- ------ Total ................................. $104,423 $ 38,839 37.2% ======== ======== ======
Gross Gross Gross Sales Profit $ Profit % ----- -------- -------- 1997 Biotechnology: ............................. $ -- $ -- --% -------- -------- ------ Pharmaceutical and fine chemicals: Active pharmaceutical ingredients ...... $ 25,985 $ 10,375 39.9% Pharmaceutical intermediates ........... 18,743 5,216 27.8 Organic intermediates .................. 10,722 969 9.0 Performance enhancers .................. 15,811 4,521 28.6 Polymer systems ........................ 11,377 3,477 30.6 -------- -------- ------ Total pharmaceutical and fine chemicals .... $ 82,638 $ 24,558 29.7% -------- -------- ------ Total ................................. $ 82,638 $ 24,558 29.7% ======== ======== ======
Gross sales in the third quarter 1998 increased 26% to $104,423 compared to $82,638 in the third quarter 1997. The increase included the benefit of the BioWhittaker acquisition with sales of $16,504, as well as growth in the Active Pharmaceutical Ingredients, (up 4.5%), Organic Intermediates, (up 26.9%) and Performance Enhancers (up 20.4%). Polymer Systems were at the same level as 1997 and Pharmaceutical Intermediates were down 10.6%. Cambrex's results include other revenue of $4,400 for royalties earned in the third quarter of 1998, related to a license agreement signed in late 1997 with a major customer for the use of intellectual property. This is a multi-year agreement and is expected to result in additional royalties in future quarters, although the amounts will be smaller. Biotechnology includes the sales from BioWhittaker of $16,504. This category consists principally of cell culture products, including living cell cultures, cell culture media and cell culture media supplements, as well as endotoxin detection products. Third quarter 1998 sales from cell culture products were $10,591 and sales from endotoxin detection products were $5,029. 11 13 RESULTS OF OPERATIONS (continued) Active pharmaceutical ingredients of $27,146 were $1,161 (5%) above the third quarter 1997 due to increased shipments of central nervous system products, including a new product produced in our Zeeland, Michigan pilot plant ($0.5 million). Products used as anti-infectives increased primarily due to continued new sales of an anti-bacterial product which had no sales in 1997. Also contributing to the increased active pharmaceuticals were sales of a new product used in the treatment of prostate cancer. Partially offsetting these increases were lower sales of a preparation used as an anti-ulcerative due to a change in customer order pattern. Pharmaceutical intermediates of $16,749 were $1,994 (11%) down from the third quarter 1997 primarily due to reduced sales of x-ray contrast media products, a customer reducing inventories, and another customer deciding to manufacture themselves. Additionally, a product used for a protease inhibitor in the treatment of AIDS was adversely affected by the timing of product orders. Offsetting these reductions were $1.2 million in increases in various new products. Organic intermediates of $13,607 were $2,885 (27%) above the third quarter 1997 due to increased demand for feed additive products. The third quarter experienced a strong increase in sales of feed grade Vitamin B3 products, used to enhance growth rate and weight in farm animals. This increase is primarily attributed to unusually high shipments in the second quarter 1997 to a customer before prices increased in July 1997 which had resulted in low third quarter 1997 sales. Another feed additive, 3-Nitro, for use in the poultry industry had a strong quarter compared to the third quarter 1997 when equipment replacement projects in 1997 lowered production. Performance enhancers of $19,036 were $3,225 (20%) above the third quarter 1997. Sales of THPE, a polycarbonate additive, increased due to a customer's timing of production campaigns and growth in their export markets. Specialty additives also increased due to continued strong demand for castor oil products. Polymer systems of $11,381 were at the same level as the third quarter 1997 with increased demand for products to the telecommunications market offsetting lower demand for a monomer used in high performance plastics due to the order pattern of a key customer. Export sales from U.S. businesses of $15,235 in the third quarter 1998 compared to $9,100 in the third quarter 1997. International sales from our European operations totaled $35,955 for the same period in 1998 as compared with $36,165 in 1997. Total gross profit of $38,839 increased by $14,281, or 58.2%, from the third quarter 1997 due mainly to the inclusion of the Biotechnology Segment, and the effect of royalty income of $4,400. The gross margin for all categories excluding the royalty income was 33.0%, up from 29.7% for the third quarter 1997. Excluding the contribution of the high margin Biotechnology Segment and the effect of royalty income, the gross margin percentage improved to 30.2%. The reduced gross margin in the Performance Enhancers category was due to higher sales of low margin commodity castor oil. The gross margin for the active pharmaceutical ingredients (excluding the royalty income) was 43.7% versus 39.9% in 1997 due to the general mix of bulk active sales. 12 14 RESULTS OF OPERATIONS (continued) Selling, general and administrative, research and development expenses, and the restructuring charge as a percentage of gross sales was 22.3%, up from 16.9% in the third quarter 1997. The third quarter 1998 expense of $23,263 included the $1,400 restructuring charge, $6,442 in expenses for our Biotechnology Segment acquired in the fourth quarter 1997, and $700 in expenses for the Chiragene facility acquired in the first quarter 1998. Excluding these expenses, the percent to gross sales (excluding the biotechnology and Chiragene sales) was 16.8%, the same level as the third quarter 1997. The restructuring charge of $1.4 million includes the non-recurring costs resulting from the consolidation of administrative and management functions within the Pharmaceutical and Fine Chemicals group, the Specialty Chemicals group and Corporate headquarters, which resulted in the reduction of 44 employees. These costs are primarily related to severance paid to terminated employees. Certain actions were taken in the third quarter for the acquisition reorganization plan at our BioWhittaker facility of approximately $1.4 million for the termination of 28 employees. This plan was part of the final purchase accounting adjustments made in the third quarter 1998. In addition, BioWhittaker favorably concluded a patent infringement dispute and will receive a cash payment of approximately $5.4 million. This settlement, as well as the settlement of other acquisition contingencies of approximately $1.6 million, are part of the final purchase accounting adjustments made in the third quarter 1998. As a result of finalizing the purchase accounting, the net impact on goodwill, including the tax effect, was a reduction of approximately $896. Net interest expense of $2,209 reflected an increase of $1,684 from 1997. This increase was due to the financing of the acquisition of BioWhittaker and Chiragene. The average interest rate was 6.5% in the third quarter 1998 versus 6.9% for the same period in 1997. Other expense of $364 for the quarter ended September 30, 1998 was $1,330 higher than the $966 of other income in the third quarter 1997. The third quarter 1997 included a one-time gain of $0.9 million on a foreign currency denominated loan. The provision for income taxes for the second quarter resulted in an effective rate of 31.9% versus 32.0% for the comparable period in 1997. The Company's third quarter net income increased 18% to $8,851 compared with a net income of $7,531 in 1997. 13 15 RESULTS OF OPERATIONS (continued) COMPARISON OF FIRST NINE MONTHS OF 1998 VERSUS FIRST NINE MONTHS OF 1997 Results in the first nine months of 1998 were above the comparable 1997 period due to the increase in sales, royalty income, improved gross profit margins, and the positive effect of the acquisition of BioWhittaker. Sales increased by $57,814 in 1998 to $334,366, which included $48,506 in sales from BioWhittaker, compared to the same period a year ago. The effect of foreign currency exchange rates negatively impacted sales by $1,934 in the first nine months of 1998 versus 1997. The following table shows the gross sales of the Company's six product categories included in two product segments: Biotechnology and Pharmaceutical and fine chemicals. The table is presented in dollars and as a percentage of the Company's total gross sales, as well as the net revenues and gross profit for the first nine months of 1998 and 1997.
Nine Months Ended September 30, -------------------------------------- 1998 1997 ------------------ ----------------- $ % $ % -------- ----- -------- ----- Biotechnology ......................... $ 48,506 14.5% $ -- -- -------- ----- -------- ----- Pharmaceutical and fine chemicals: Active pharmaceutical ingredients . $ 87,855 26.3% $ 80,371 29.1% Pharmaceutical intermediates ...... 57,285 17.1 57,092 20.6 Organic intermediates ............. 48,456 14.5 52,337 18.9 Performance enhancers ............. 56,521 16.9 52,445 19.0 Polymer systems ................... 35,743 10.7 34,307 12.4 -------- ----- -------- ----- Total Pharmaceutical and fine chemicals $285,860 85.5% $276,552 100.0% -------- ----- -------- ----- Total gross sales ............... $334,366 100.0% $276,552 100.0% ======== ===== ======== ===== Total net revenues .............. $345,056 $271,978 ======== ======== Total gross profit .............. $125,610 $ 82,367 ======== ======== Gross Profit % of Gross Sales ......... 37.6% 29.8% ======== ========
Biotechnology sales of $48,506 includes $32,214 from cell culture products and $13,715 from endotoxin detection products. Active pharmaceutical ingredients of $87,855 were up 9.3% over the first nine months of 1997 due to increased anti-infective, central nervous and diuretics products. Pharmaceutical intermediates of $57,285 are at the same level as the first nine months of 1997 with increased health related products offsetting the lower X-ray contrast media. Organic intermediates of $48,456 decreased 7.4% from the first nine months of 1997 due to reduced demand for crop protection products directly related to the economic conditions in Asia, and loss of a customer in our pigments business. These reductions have been partially offset by feed additives products, with increased sales of feed grade Vitamin B3 and 3-Nitro. 14 16 RESULTS OF OPERATIONS (continued) Performance enhancers of $56,521 increased 7.8% with increases in our Specialty Additives, Catalyst and Polymer products. Polymer systems of $35,743 were up 4.2% due to increased demand for a monomer used in high performance plastics and a strong third quarter for the telecommunications products. Export sales from U.S. businesses of $46,518 in the first nine months of 1998 compared to $32,411 in 1997. International sales from our European operations totaled $122,299 for the first nine months of 1998 compared to $115,859 in 1997. Total gross profit of $125,610 was $43,243 above 1997 due mainly to the inclusion of the Biotechnology Segment, and the effect of royalty income of $13,900. The gross margin for all product categories excluding the royalty income was 33.4%, up from 29.8% for the first nine months of 1997. Excluding the effect of the high margin Biotechnology Segment and the royalty income, the gross margin percentage was 30.8% for the first nine months of 1998. Selling, general and administrative and research and development expenses as a percentage of gross sales was 20.5% in the first nine months of 1998, up from 16.3% in 1997. The increase is mainly due to the inclusion in 1998 of the Biotechnology Segment acquired in the fourth quarter 1997, Chiragene acquired in January 1998 and the third quarter 1998 restructuring charge of $1.4 million. Excluding the Biotechnology Segment and the restructuring charge, the percent to gross sales was 16.5%. The average interest rate was 6.5% in the first nine months 1998 versus 7.2% in 1997. The first nine months of 1998 included a one-time charge of $3,420 in income taxes for the Italian Substitute Tax election, which was made in the second quarter of 1998. This election allows previously non-deductible goodwill of Cambrex's Italian subsidiary, Profarmaro, S.r.l., to be deducted. This one-time charge will have a total future tax benefit in the years 1999 to 2004 of approximately $8,000. The provision for income taxes for the first nine months resulted in an effective rate of 34% (excluding the Italian Tax) versus 32% in 1997. The restructuring charge of $1.4 million includes the non-recurring costs resulting from the consolidation of administrative and management functions within the Pharmaceutical and Fine Chemicals group, the Specialty Chemicals group and Corporate headquarters which resulted in the reduction of 44 employees. These costs are primarily related to severance paid to terminated employees. Certain actions were taken in the third quarter for the acquisition reorganization plan at our BioWhittaker facility of approximately $1.4 million for the termination of 28 employees. This plan was part of the final purchase accounting adjustments made in the third quarter 1998. In addition, BioWhittaker favorably concluded a patent infringement dispute and will receive a cash payment of approximately $5.4 million. This settlement, as well as the settlement of other acquisition contingencies of approximately $1.6 million, are part of the final purchase accounting 15 17 RESULTS OF OPERATIONS (continued) adjustments made in the third quarter 1998. As a result of finalizing the purchase accounting, the net impact on goodwill, including the tax effect, was a reduction of approximately $896. The Company's net income for the first nine months of 1998 increased 21% to $28,880 compared with a net income of $23,831 in 1997. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 1998, the Company generated cash flows from operations totaling $51,872, an increase of $10,329 over the same period a year ago. This increase in cash flows is due primarily to increased revenues, as well as increased current liabilities and income taxes payable. The increase in the cash balance for the first nine months 1998 was $19,695. Capital expenditures were $30,596 in the first nine months of 1998 as compared to $25,395 in the first nine months of 1997. The major portion of the funds were used for plant upgrades including additional batch still capabilities at our facility in Harriman, NY, the purchase of additional land and building adjacent to the factory in Paullo, Italy, as well as various other costs incurred for plant upgrade. Nepera has also begun construction on a new Niacinimide (Vitamin B3) plant which is expected to lower operating/production costs. Funds were also used for new business projects including the completion of two new pilot plants incorporating cGMP capabilities at two locations, new production capabilities in Bayonne, NJ, and a new office at our facility in Sweden. Proceeds from issuance of common stock of $5,238 increased sharply in the first nine months of 1998, due mostly to the exercise of stock options by a Company executive who recently retired. During the first nine months of 1998, the Company paid cash dividends of $0.08 per share. The Company's primary market risk relates to exposure to foreign currency exchange rate fluctuations on transactions entered into by our foreign operations which are primarily denominated in the U.S. dollar, Deutsche mark and British pound sterling. The Company uses foreign currency forward exchange and put and call option contracts to mitigate the effect of short-term foreign exchange rate movements on the Company's operating results. The notional amount of these contracts is $21,105 which the Company estimates to be approximately 40% of the foreign currency exposure during the period covered resulting in a deferred currency gain of $367 at September 30, 1998. An additional $2,321 of the foreign currency exposure is protected through export financing. 16 18 YEAR 2000 The Year 2000 issue arose as the result of existing computer programs that use only the last two digits to refer to a year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not corrected, many computer applications could fail or create erroneous results. Management has initiated a Company-wide program to prepare all our business computer systems, technical infrastructure and end user computing applications, or information technology systems ("IT"), for the year 2000. In addition, we will review the Supply Chain, Manufacturing, Environmental Operations and Research and Development facilities, or non-IT systems. The key objectives are to protect Cambrex against operational failures, demonstrate "due care" to mitigate any potential legal liability, and prepare contingency plans to help ensure our continued operation. During the fourth quarter of 1998, the Company is in the process of identifying a full time Year 2000 Program Manager in order to develop a comprehensive program covering all relevant areas of exposure. We will complete an assessment of Cambrex's 2000 Program by the first quarter 1999, complete appropriate verification and validation testing by the second quarter 1999 and implement corrective actions and retest as required from the second quarter to fourth quarter 1999. The company believes that its information technology systems are already year 2000 compliant, due mostly to recent upgrades that were not the result of year 2000 issues. These upgrades include the implementation of the RenCS based financial and operating system at all locations, except BioWhittaker and our Italian subsidiary, who have programs in place to complete Year 2000 upgrades. An effectiveness assessment of this system is currently being done. We are also in the process of implementing a new Human Resource/Payroll System for our U.S. operations that was targeted for replacement for reasons other than Year 2000 issues. This system, which is 2000 compatible, will be operational as of January 1999 for all U.S. sites except BioWhittaker (by June 1999). Assessments of the Company's non-IT systems have been started; the implications and costs of which cannot be reasonably estimated at this time. Although they are not expected to be material, the Company is in the process of estimating these costs. Compliance letters have also been sent to third parties such as major inventory and technical suppliers. The Company believes that there may be a risk to itself, to customers, and to suppliers of possible failures of systems that are not under its direct control, including financial and government institutions, and transportation, utility and some other suppliers. Although no assurance can be given, the Company presently believes the Year 2000 issue will not pose significant operational problems for the Company's information and non-information systems as so modified and converted. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the results of operations, cashflows and financial position of the Company. The Company does not currently have a contingency plan, but anticipates having all contingency actions identified by the second quarter 1999. 17 19 YEAR 2000 (continued) This year 2000 discussion contains forward looking statements based, in part, on assumptions such as the following: that the manufacturers of the Company's computer systems and software have correctly represented the year 2000 status of their products; that the Company's own investigation, remediation, and testing are successful. This discussion, and other forward-looking statements made in this quarterly report, are based on current expectations and are subject to the risks and uncertainties detailed in the Company's 1997 Form 10-K filing with the Securities and Exchange Commission. Actual results in the future may differ from those projected. 18 20 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES Item 4. Matters Submitted to a Vote of Securities Holders. Refer to Form 10-Q for the quarterly period ended March 31, 1998. Item 6. Exhibits and Reports on Form 8-K a) The exhibits filed as part of this report are listed below. Exhibit No. Description 27 Financial Data Schedule. b) Reports on Form 8-K The registrant filed the following reports on Form 8-K during the second quarter of the year ended December 31, 1998. Date of Report Items Reported July 10, 1998 Two-for-One Stock Split 19 21 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/Douglas MacMillan -------------------------------- Douglas MacMillan Vice President (On behalf of the Registrant and as the Registrant's Principal Financial Officer) Date: November 12, 1998 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 SEP-30-1998 41,164 0 63,237 1,276 107,417 237,318 407,415 156,208 621,202 82,486 199,747 0 0 2,638 263,263 621,202 329,111 345,056 219,446 68,462 762 0 7,879 49,063 20,183 28,880 0 0 0 28,880 1.20 1.14
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