-----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, BTenCHiZYNilztaJG6qCKmmSy25fS/LDbAFWQCGRd+csUMA7tzhVk0+l5qYbuhdM /EVD7RsEf1+M0OpeRSXP0w== 0000950123-99-004722.txt : 19990517 0000950123-99-004722.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950123-99-004722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99624129 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 CONFORMED UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 1999 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 May 1, 1999, there were 24,555,310 shares outstanding of the registrant's Common Stock, $.10 par value. 2 CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended March 31, 1999 Table of Contents Page No. -------- Part I Financial Information Item 1. Financial Statements Condensed consolidated balance sheets as of March 31, 1999 and December 31, 1998 2 Condensed consolidated income statements for the three months ended March 31, 1999 and 1998 3 Condensed consolidated statements of comprehensive income for the three months ended March 31, 1999 and 1998 4 Condensed consolidated statements of cash flows for the three months ended March 31, 1999 and 1998 5 Notes to condensed consolidated financial statements 6 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 17 Part II Other Information Item 4. Matters Submitted to a Vote of Securities Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit 27 - Financial Data Schedule 20 3 Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands)
March 31, December 31, 1999 1998 --------- --------- (unaudited) ASSETS Current assets: Cash and cash equivalents ............................. $ 19,452 $ 48,527 Trade receivables, less allowances of $1,055 and $1,550 69,781 56,964 Other receivables ..................................... 7,934 7,689 Inventories, net ...................................... 102,923 100,245 Deferred tax assets ................................... 11,759 11,759 Prepaid expenses and other current assets ............. 7,677 6,342 --------- --------- Total current assets ................................ 219,526 231,526 Property, plant and equipment, net ....................... 274,524 255,016 Intangible assets, net ................................... 134,061 126,995 Other assets ............................................. 3,518 3,517 --------- --------- Total assets ........................................ $ 631,629 $ 617,054 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .............. $ 70,271 $ 63,467 Income taxes payable .................................. 7,463 8,733 Short-term debt ....................................... 3,356 2,451 Current portion of long-term debt ..................... 563 578 --------- --------- Total current liabilities ........................... 81,653 75,229 Long-term debt ........................................... 195,844 191,372 Deferred tax liabilities ................................. 54,817 52,183 Other noncurrent liabilities ............................. 21,451 21,010 --------- --------- Total liabilities ................................... 353,765 339,794 --------- --------- Stockholders' equity: Common stock, $.10 par value; issued 26,642,579 and 26,573,324 shares at respective dates ............. 2,661 2,655 Additional paid-in capital ............................ 163,941 163,525 Retained earnings ..................................... 141,916 132,471 Treasury stock, at cost; 2,099,239 and 2,081,099 shares at respective dates ......................... (10,232) (9,841) Accumulated other comprehensive income/(loss) ......... (20,422) (11,550) --------- --------- Total stockholders' equity .......................... 277,864 277,260 --------- --------- Total liabilities and stockholders' equity .......... $ 631,629 $ 617,054 ========= =========
See accompanying notes to condensed consolidated financial statements. 2 4 CAMBREX CORPORATION AND SUBSIDIARIES Condensed Consolidated Income Statements (unaudited) (in thousands, except per share amounts)
Three months ended March 31, -------------------------- 1999 1998 --------- --------- Gross sales ................................... $ 117,519 $ 113,770 Commissions & freight ..................... 1,323 1,585 Sales, returns and allowances .............. (106) 154 --------- --------- Net sales ..................................... 116,302 112,031 Other revenues ............................. 1,097 1,571 --------- --------- Net revenues .................................. 117,399 113,602 Cost of goods sold ............................ 76,896 74,652 --------- --------- Gross profit .................................. 40,503 38,950 Operating expenses: Selling, general and administrative expenses ................................. 19,480 18,221 Research and development ................... 3,609 3,313 --------- --------- Total operating expenses ................. 23,089 21,534 Operating profit .............................. 17,414 17,416 Other (income) expenses: Interest expense, net ...................... 2,177 2,955 Other (income)/expense, net ................ 43 175 --------- --------- Income before income taxes .................... 15,194 14,286 Provision for income taxes ................. 5,014 5,143 --------- --------- Net income .................................... $ 10,180 $ 9,143 ========= ========= Weighted average shares outstanding: Basic ...................................... 24,533 23,910 Effect of dilutive stock options ........... 851 1,142 --------- --------- Diluted .................................... 25,384 25,052 Earnings per share of common stock and common stock equivalents: Basic ...................................... $ 0.41 $ 0.38 ========= ========= Diluted .................................... $ 0.40 $ 0.36 ========= ========= Cash dividends paid per share ................. $ 0.03 $ 0.025 ========= =========
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 March 31, ----------------------- 1999 1998 -------- -------- Net income ....................................... $ 10,180 $ 9,143 Other comprehensive income/(loss): Foreign currency translation adjustments* .... (8,872) (1,381) -------- -------- Comprehensive income/(loss) ...................... $ 1,308 $ 7,762 ======== ========
- --------- * 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)
Three months ended March 31, ---------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net income ........................................... $ 10,180 $ 9,143 Depreciation and amortization ........................ 10,324 10,264 Deferred income tax provision ........................ 944 403 Changes in assets and liabilities (net of assets and liabilities acquired): Receivables, net ................................... (9,599) (10,002) Inventories ........................................ 1,988 (4,392) Prepaid expenses and other current assets ....... (1,260) (747) Accounts payable and accrued liabilities ........ 9,413 (221) Income taxes payable ............................ (462) 4,825 Other noncurrent assets and liabilities ......... (529) 3,869 -------- -------- Net cash provided by operating activities .......... 20,999 13,142 -------- -------- Cash flows from investing activities: Capital expenditures ................................. (6,230) (6,632) Acquisition of businesses (net of cash acquired) ..... (37,336) (11,328) Other investing activities ........................... (745) (270) -------- -------- Net cash used in investing activities .............. (44,311) (18,230) -------- -------- Cash flows from financing activities: Dividends ............................................ (735) (596) Net increase (decrease) in short-term debt ........... 1,145 (1,059) Long-term debt activity (including current portion): Borrowings ......................................... 5,500 20,700 Repayments ......................................... (6,401) (7,137) Proceeds from the issuance of common stock ........... 476 1,797 (Purchase of) Proceeds from the sale of treasury stock (446) 284 -------- -------- Net cash (used in) provided by financing activities............................... (461) 13,989 --------- -------- Effect of exchange rate changes on cash ................. (5,302) (1,854) -------- -------- Net increase in cash and cash equivalents ............... (29,075) 7,047 Cash and cash equivalents at beginning of period ........ 48,527 21,469 -------- -------- Cash and cash equivalents at end of period .............. $ 19,452 $ 28,516 ======== ======== Supplemental disclosure: Interest paid (net of capitalized interest) .......... $ 2,135 $ 3,885 Income taxes paid .................................... $ 3,879 $ 293 Depreciation expense ................................. $ 8,184 $ 7,550
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, 1998. All diluted earnings per share are computed on the basis of the weighted average shares of common stock outstanding plus common equivalent shares arising from the effect of dilutive stock options, using the treasury stock method. The results of operations for the three months ended March 31, 1999 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. Inventories at March 31, 1999 and December 31, 1998 consist of the following:
March 31, December 31, 1999 1998 -------- -------- Finished goods ................... $ 51,624 $ 54,264 Work in process .................. 25,307 20,177 Raw materials .................... 20,780 20,105 Fuel oil and supplies ............ 5,212 5,699 -------- -------- Total ....................... $102,923 $100,245 ======== ========
(3) Mergers and Acquisitions On March 12, 1999, Cambrex announced the purchase of the Irotec Laboratories Ltd. ("Irotec"), a supplier of active pharmaceutical ingredients (APIs) located in Cork, Ireland. Cambrex paid approximately $35 million for the business, net of cash acquired, which was financed through the Company's cash reserves. The acquisition has been accounted for under the purchase method and as such, the purchase price has been allocated to the fair value of assets acquired and liabilities assumed. 6 8 Notes to Condensed Consolidated Financial Statements (continued) (3) Mergers and Acquisitions (continued) On January 4, 1999, the Company acquired Poietic Technologies, Inc. ("Poietics"), the leading supplier of normal human cells of hematopoietic origin. The Company paid $2.5 million cash and will pay future consideration based on the performance of the business. For the first quarter of 1999, the above acquisitions increased gross sales by $1,066, operating profit by $46, and had no impact on earnings per share. (4) Commitments On March 19, 1999, Cambrex announced that it had entered into a put option and call option pertaining to the stock of Conti BPC NV ("Conti"), a manufacturer and supplier of pharmaceutical intermediates and active pharmaceutical ingredients located in Landen, Belgium. Cambrex granted a put option for the stock of Conti that may be exercised from March 1, 2001 to March 1, 2002 to the seller. Simultaneously, Cambrex was granted a call option with terms similar to the put option by the seller. The price associated to the put and call options is approximately $7.5 million, subject to future working capital adjustments. (5) Income Taxes The provision for income taxes of March 31, 1999 resulted in an effective rate of 33% versus 36% at March 31, 1998. The decrease is mainly due to the effect of the Italian Substitute Tax Benefit, which was recorded in the second quarter of 1998 and will favorably impact the tax rate in 1999. This election allows previously non-deductible goodwill of Cambrex's Italian subsidiary, Profarmaco, S.r.l., to be deducted and will result in a total future tax benefit in the years 1999 to 2004 of approximately $8,000. (6) Long-term Debt Long-term debt at March 31, 1999 and December 31, 1998 consists of the following:
March 31, December 31, 1999 1998 -------- -------- Bank credit facilities ........... $189,100 $190,000 Capital lease .................... 47 49 Notes payable .................... 7,260 1,901 -------- -------- Subtotal ................. 196,407 191,950 Less: current portion ........... 563 578 -------- -------- Total ....................... $195,844 $191,372 ======== ========
The Company met all the bank covenants for the first three months of 1999. 7 9 Notes to Condensed Consolidated Financial Statements (continued) (7) Segment Information Following is a summary of business segment information for the following dates:
Three Months Ended March 31, ---------------------------- 1999 1998 -------- -------- Gross Sales: Human Health ............................. $ 55,645 $ 50,212 Biotechnology ............................ 17,619 15,536 Animal Health/Agriculture ................ 15,856 16,283 Specialty Business ....................... 28,399 31,739 -------- -------- $117,519 $113,770 ======== ======== Gross Profit: Human Health ............................. $ 21,570 $ 20,471 Biotechnology ............................ 9,075 8,340 Animal Health/Agriculture ................ 2,890 3,861 Specialty Business ....................... 6,968 6,278 -------- -------- $ 40,503 $ 38,950 ======== ======== Net Income: Biotechnology ............................ $ 470 $ 834 Human Health, Animal Health/Agriculture & Specialty Business .................... 9,710 8,309 -------- -------- $ 10,180 $ 9,143 ======== ======== Capital Spending: Biotechnology ............................ $ 484 $ 411 Human Health, Animal Health/Agriculture & Specialty Business .................... 5,746 6,221 -------- -------- $ 6,230 $ 6,632 ======== ======== Depreciation: Biotechnology ............................ $ 593 $ 421 Human Health, Animal Health/Agriculture & Specialty Business .................... 7,591 7,129 -------- -------- $ 8,184 $ 7,550 ======== ======== Amortization: Biotechnology ............................ $ 1,137 $ 1,122 Human Health, Animal Health/Agriculture & Specialty Business .................... 1,003 1,592 -------- -------- $ 2,140 $ 2,714 ======== ========
March 31, December 31, 1999 1998 -------- -------- Identifiable Assets: Biotechnology ............................ $ 27,689 $ 27,799 Human Health, Animal Health/Agriculture & Specialty Business .................... 239,651 227,217 -------- -------- $267,340 $255,016 ======== ========
8 10 Notes to Condensed Consolidated Financial Statements (continued) (8) Contingencies The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Environmental In connection with laws and regulations pertaining to the protection of the environment, the Company is a party to several environmental remediation investigations and cleanups and, along with other companies, has been named a "potentially responsible party" for certain waste disposal sites (Superfund sites). Each of these matters is subject to various uncertainties, and it is possible that some of these matters will be decided unfavorably against the Company. The Company had accruals, included in current accrued liabilities and other noncurrent liabilities, of $4,800 at March 31, 1999 and December 31, 1998 for costs associated with the study and remediation of Superfund sites and the Company's current and former operating sites for matters that are probable and reasonably estimable. After reviewing information currently available, management believes any amounts paid in excess of the accrued liabilities will not have a material effect on its financial position or results of operations. However, these matters, if resolved in a manner different from the estimates, could have a material adverse effect on financial condition, operating results and cash flows when resolved in a future reporting period. Litigation The Company and its subsidiary Profarmaco S.r.l. ("Profarmaco") were named as defendants in a proceeding instituted by the Federal Trade Commission ("FTC") on December 21, 1998, in the United States District Court for the District of Columbia. The complaint alleges that exclusive license agreements which Profarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering the drug master files for (and, therefore, the right to buy and use) two active pharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of an effort on Mylan's part to restrict competition in the supply of lorazepam and clorazepate and to increase the price charged for these products when Mylan sold them as generic pharmaceuticals. The complaint further alleges that these agreements violate the Federal Trade Commission Act, and that Mylan, Cambrex, Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor in the United States, engaged in an unlawful restraint of trade and conspired to monopolize and attempted to monopolize the markets for the generic pharmaceuticals incorporating the APIs. The FTC seeks a permanent injunction and other relief, including disgorgement of the profits generated through the licensing arrangements, which the FTC alleges to be in excess of $120,000 for all defendants. In accordance with the license agreement, the Company received royalties of approximately $19,300 for the year ended December 31, 1998. The first quarter 1998 included $1,000 in royalty income from Mylan. The royalty arrangements under the agreement have concluded, however, the Company sold these products on a non-exclusive basis in the first quarter 1999. 9 11 Notes to Condensed Consolidated Financial Statements (continued) (8) Contingencies (continued) A lawsuit making similar allegations against the Company and Profarmaco, and seeking injunctive relief and treble damages, has been filed by the Attorneys General of 31 states and the District of Columbia in the United States District Court for the District of Columbia on behalf of those states and persons in those states who were purchasers of the generic pharmaceuticals. The Company and Profarmaco have also been named in purported class action complaints brought by private plaintiffs in various state courts on behalf of purchasers of lorazepam and clorazepate in generic form, making allegations essentially similar to those raised in the FTC's complaint and seeking various forms of relief including treble damages. The Company believes that its licensing arrangements with Mylan are in accordance with regulatory requirements and will vigorously defend the FTC's actions and various other lawsuits and class actions. However, the Company and Mylan have terminated the exclusive licenses to the drug master files. The future royalty arrangements under the agreements have concluded as of December 31, 1998. In entering these licensing arrangements, the Company elected not to raise the price of its products and had no control or influence over the pricing of the final generic product forms by Mylan. On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and seller of niacinamide (Vitamin B3), received a Federal Grand Jury subpoena for the production of documents relating to the pricing and possible customer allocation with regard to that product. The Company understands that the subpoena was issued as part of the Federal Government's ongoing antitrust investigation into various business practices in the vitamin industry generally. The Company and Nepera have been cooperating fully with the government's investigation. While it is not possible to predict with certainty the outcome of the FTC action and various other lawsuits and class actions, it is the opinion of management that the ultimate resolution of these proceedings should not have a material adverse affect on the Company's results of operations, cash flows and financial position. These matters, if resolved in a unfavorable manner, could have a material affect on the operating results of cash flows when resolved in a future reporting period. 10 12 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 First Quarter 1999 versus First Quarter 1998 The results for the first quarter of 1999 were above the same period a year ago due to increased sales in the Biotechnology and Human Health Segments, improved gross profit, lower interest costs and a reduced tax rate. The effective tax rate for the quarter ended March 1999 was 33%, versus 36% in the first quarter 1998. The increases in selling, general and administrative expense were in sales and marketing costs for the Biotechnology Segment in Europe and the U.S. The increased research and development occurred in the Biotechnology and Human Health Segments. The following tables show the gross sales of the Company's four segments, in dollars and as a percentage of the Company's total gross sales for the quarters ended March 31, 1999 and 1998.
First Quarter Ended March 31, ----------------------------------------- 1999 1998 ------------------ ------------------ $ % $ % --------- ------ --------- ------ Human Health........................ $ 55,645 47.3% $ 50,212 44.1% Biotechnology....................... 17,619 15.0 $ 15,536 13.7 Animal Health/Agriculture........... 15,856 13.5 16,283 14.3 Specialty Business.................. $ 28,399 24.2 $ 31,739 27.9 --------- ------ --------- ------ Total gross sales ............ $117,519 100.0% $113,770 100.0% ======== ====== ======== ====== Total net revenues............ $117,399 $113,602 ======== ======== Total gross profit............ $ 40,503 $ 38,950 ======== ========
The following table shows the gross sales and gross profit of the Company's four product segments and gross profit as a percentage of each product segment for the first quarter 1999 and 1998.
Gross Gross Gross Sales Profit $ Profit % -------- -------- -------- 1999 Human Health ...................... $ 55,645 $ 21,570 38.8% Biotechnology ..................... 17,619 9,075 51.5 Animal Health/Agriculture ......... 15,856 2,890 18.2 Specialty Business ................ 28,399 6,968 24.5 -------- -------- ---- Total ....................... $117,519 $ 40,503 34.5% ======== ======== ====
11 13 Results of Operations (continued)
Gross Gross Gross Sales Profit $ Profit % -------- -------- -------- 1998 Human Health........................ $ 50,212 $ 20,471 40.8% Biotechnology....................... 15,536 8,340 53.7 Animal Health/Agriculture........... 16,283 3,861 23.7 Specialty Business.................. 31,739 6,278 19.8 -------- -------- ---- Total......................... $113,770 $ 38,950 34.2% ======== ======== ====
Gross sales in the first quarter 1999 increased 3.3% to $117,519 from $113,770 in the first quarter 1998. The Human Health and Biotechnology product segments increased compared to the first quarter 1998 and more than offset decreases in the Animal Health/Agriculture products and Specialty Business. The foreign currency translation adjustments decreased by $8,872 to a negative $18,391. This decrease is attributable primarily to significant exchange rate fluctuations in the Italian lira against the U.S. dollar in the first quarter 1999. The exchange rate declined from 1648.94 lira to the dollar at December 31, 1998 to 1793.51 lira to the dollar at March 31, 1999, a decline of 8%. There were also fluctuations in the Italian lira between average rates and month end rates in the first quarter 1999 which had an effect on the foreign currency translation adjustment. The Human Health Segment gross sales of $55,645 were $5,433 (11%) above the first quarter 1998. Gross sales were above the prior year due to strong demand for our gastro-intestinal products used for treating ulcerative colitis and increased shipments of active ingredients used in central nervous system drugs, as well as to increased shipments from our chiral intermediates business (now Chiragene). Partially offsetting these increases was the absence of shipments of an advanced intermediate used in the production of a protease inhibitor for the treatment of AIDS due to a buildup of inventory by the customer. The BioTechnology Segment gross sales of $17,619 were $2,083 (13%) above the first quarter 1998. This increase was primarily due to the additional sales of endotoxin detection and cells culture products generated by our European subsidiary acquired in May 1998. The Animal Health/Agriculture Segment gross sales of $15,856 in the first quarter 1999 were $427 (3%) below the first quarter 1998. The first quarter experienced a decrease in sales of Vitamin B3 products, used to enhance growth rate and weight in farm animals, due to price decreases and a product not being available for shipment due to scheduling. Agricultural Intermediate sales used for crop protection were up due to new applications by a customer. Animal Health product sales were down due to slower exports made by a major customer caused by the economic slowdown in Pacific Rim countries. The Specialty Business Segment gross sales of $28,399 decreased $3,340 (11%) below the first quarter 1998 reflecting lower sales of THPE, a specialty polymer used as a cross-linking agent to improve the performance of polycarbonate resins, reduced specialty additives sales to Pacific Rim countries, reduced pigment shipments in Europe, and reduced demand in the Far East for a monomer used in high performance plastics. 12 14 Results of Operations (continued) Export sales from U.S. businesses of $17,349 in the first quarter 1999 increased 17% from the first quarter 1998. International sales from our European operations totaled $48,936 for the first quarter of 1999 as compared with $43,405 in 1998, an increase of 13%. The gross profit in the first quarter 1999 was $40,503 compared to $38,950 in 1998. The increase was due to the higher sales in Human Health and Biotechnology and improved Specialty Business gross margin percent. The gross margin was 34.5% versus 34.2% in the first quarter 1998. The gross margin percent for the Human Health Segment was impacted by no shipments of an advanced intermediate for an AIDS drug, sales of which exceeded $3,000 in the first quarter 1998. The Animal Health/Agriculture Segment gross margin was negatively affected by pricing decreases in crop protection products compared to the first quarter 1998. The Specialty Business gross margin improved due to improved plant efficiencies and the general mix of sales. The first quarter 1998 included $1,000 in royalty income from Mylan Laboratories for the use of intellectual property related to three pharmaceutical ingredients. The royalty arrangements under the agreements have concluded. The Company sold these products on a non-exclusive basis in first quarter 1999. Selling, general and administrative expenses as a percentage of gross sales was 16.5% in the first quarter 1999, up from 16.0% in the first quarter 1998. The increase is mainly due to the higher sales and marketing expense resulting from building the Biotechnology and Human Health Segment business, and the additional selling expense associated with the European Biotechnology acquisition completed in the second quarter 1998. Research and development expenses of $3,609 were 3.1% of gross sales in the first quarter 1999, and represented a 9% increase from 1998. This increase was due to the acquisition of Poietics in the Biotechnology segment and higher spending by our European facilities. The operating profit in the first quarter 1999 was $17,414, which was equal to 1998, with a higher gross profit being offset by the increased sales and marketing expenses. Net interest expense of $2,177 in the first quarter 1999 reflected a decrease of $778 from 1998. The decrease was due to a reduced outstanding loan balance. The average interest rate was 6.0% in the first quarter 1999 versus versus 6.4% in 1998. 13 15 Results of Operations (continued) Other expense of $43 for the first quarter 1999 compares to $175 for 1998. The provision for income taxes for the first quarter 1999 resulted in an effective rate of 33% versus 36% in 1998. The decrease was mainly due to the effect of the Italian Substitute Tax Benefit, which was recorded in the second quarter 1998 and will favorably impact the tax rate in 1999. The Company's net income for the first quarter 1999 increased 11.3% to $10,180 compared with a net income of $9,143 in the first quarter 1998. Liquidity and Capital Resources During the three months ended March 31, 1999, the Company generated cash flows from operations totaling $20,999, an increase of $7,857 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 reduced inventories. The decrease in the cash balance for the three months 1999 was $29,075, primarily due to the acquisition of Irotec for $34,836, net of cash acquired. Capital expenditures were $6,230 in the first three months of 1999 as compared to $6,632 in the first three months of 1998. Funds were used for new production capabilities in Bayonne, NJ, and the start of construction of a new Niacinimide (Vitamin B3) plant which is expected to lower operating/production costs. During the first three months of 1999, the Company paid cash dividends of $0.03 per share. The Company's primary market risk relates to exposure to foreign currency exchange rate fluctuations on transactions entered into by our international operations which are primarily denominated in the U.S. dollar, Swedish krona and Italian lira. The Company currently uses foreign currency forward exchange contracts to mitigate the effect of short-term foreign exchange rate movements on the Company's operating results. The net notional amount of these contracts is $28,318 which the Company estimates to be approximately 63% of the foreign currency exposure during the period covered resulting in a deferred currency loss of $734 at March 31, 1999. Management believes that existing sources of capital, together with cash flows from operations, will be sufficient to meet foreseeable cash flow requirements. 14 16 Year 2000 Update The ability of computers, software or any equipment utilizing micro-processors to properly recognize and process data information at the turn of the century is commonly referred to as a Year 2000 ("Y2K") compliance issue. To minimize the risk of unplanned interruptions, the Company is using a multi-step approach in conducting its year 2000 project. These steps are as follows: Hardware/Software Inventory and Assessment: Documenting the hardware and software used by Cambrex and assigning a impact level to the business, if the item fails due to Y2K related problems. Hardware/Software Verification and Validation: Documenting the Compliance status of hardware and software used by Cambrex and performing test to validate compliance for critical systems. Supplier/Customer Verification: Surveying suppliers and customers on their Y2K compliance readiness and assessing their responses and taking corrective action. Implementation and Testing: Remediation of systems found not to be Y2K compliant. Most Cambrex systems are purchased third party packages and therefore are typically upgraded, replaced or retired. Contingency Plans: Development of plans to perform alternate activities or steps for critical systems or for systems that will not be Y2K compliant by January 1, 2000. An estimate of completion for these steps is as follows:
% Completion --------------------------------- Actual Plan -------- ----------------------- 3/99 6/99 9/99 12/99 --------------------------------- Hardware/Software Inventory and Assessment .................... 90% 100% 100% 100% Hardware/Software Verification and Validation .................... 70% 100% 100% 100% Supplier/Customer Verification ... 70% 90% 100% 100% Implementation and Testing ....... 50% 80% 90% 100% Contingency Plans ................ 10% 40% 90% 100%
The Company approaches its Y2K compliance issue by categorizing its dependencies into two sections: Internal systems (Information Technology ("IT") systems and Non-IT systems), and External systems of suppliers and customers. Generally, internal systems identified as non-Y2K compliant will be replaced or modified (reprogrammed, upgraded, etc.). Many of the internal non-compliant systems were targeted for replacement for reasons other than Y2K issues as the benefits of newer technology had already created an economic business case for action. Replacement solution costs will be capitalized as permitted by applicable accounting standards whereas the cost of modification solutions will generally be expensed as repairs. External systems will be monitored with the cooperation of our suppliers and customers. 15 17 Year 2000 Update (continued) Internal Systems a) IT systems - These systems include internal applications software such as finance, manufacturing (purchasing, product costing, production reporting, maintenance, and planning and scheduling) and logistics (distribution planning and customer order entry). All internal IT systems have been inventoried and assessed and remediated where necessary for Y2K compliance and are now being tested. The Company anticipates its internal IT will be Y2K compliant by the end of 1999. b) Non-IT systems - These systems are used for process monitoring and control, laboratory measurement and analysis, waste treatment control, and in other plant operations. These systems include embedded chip technology such as programmable logic controllers and related hardware/software; and personal computers and related software. All internal non-IT systems have been inventoried and assessed for Y2K compliance and those which require modification are being remediated. This remediation, or where necessary replacement, will be completed by mid-1999. Testing will be completed on all systems by the end of the third quarter 1999. External systems External systems include systems of customers and suppliers. The Company is in the process of understanding the extent to which it is vulnerable to the Y2K issues of its customers and suppliers. The Company has identified and contacted third parties whose systems would have a significant negative impact on operations if not Y2K compliant, and is in the process of assessing the systems of these third parties. The Company expects to complete its assessment and to have developed requisite action plans with respect to these findings by mid-1999. The Company will also develop contingency plans during the third and fourth quarters of 1999 for all critical systems and key suppliers in the event an internal or external system that is believed to be compliant fails. The dates on which the Company plans to complete any necessary Y2K modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. The Company believes its most reasonably likely worst case scenario in the event of the failure to correct a material Y2K compliance problem, internal or external, could result in an interruption in, or a failure of, certain normal business activities or operations. While management is not aware of such problems, such failures, if they occur, could have a material adverse impact on the operations of the Company. The Company believes that with the implementation of new business systems and completion of the Y2K project as scheduled, the possibility of significant interruptions of normal operations will be reduced. 16 18 Year 2000 Update (continued) The estimated total cost of implementing Y2K solutions is approximately $8,500. The total amount expended through December 1997 was $6,000 with an additional spending of approximately $1,900 occurring in 1998. With regard to the $7,900 expended through 1998, approximately $700 has been expensed and $7,200 has been expensed and capitalized in accordance with applicable accounting standards. The Company has spent approximately $100 in the first quarter 1999 and expects to spend an additional $500 by year end. Forward-Looking Statements This document contains forward-looking statements. Investors should be aware of factors that could cause Cambrex actual results to vary materially from those projected in the forward-looking statements. These factors include, but are not limited to, global economic trends; competitive pricing or product development activities; markets, alliances, and geographic expansions developing differently than anticipated; government legislation and/or regulation (particularly on environmental issues); and technology, manufacturing and legal issues; and the factors disclosed in the Year 2000 Update. 17 19 PART II - OTHER INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES Item 4. Matters Submitted to a Vote of Securities Holders. 1. At the annual meeting of stockholders held on April 22, 1999, William B. Korb, James A. Mack, John R. Miller, and Dean P. Phypers were elected to hold office as directors in Class III of the Company until the 2000 annual meeting of stockholders. 2. In addition, the stockholders voted for the appointment of PricewaterhouseCoopers LLP as the Company's independent accountants for 1999. Of the 22,454,531 shares represented at the meeting, 22,425,967 votes were cast in favor the appointment of PricewaterhouseCoopers LLP as auditors, 22,117 were cast against and 6,447 abstained. 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 no reports on Form 8-K during the first quarter of the year ended March 31, 1999. 18 20 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: May 13, 1999 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 MAR-31-1999 19,433 0 70,836 1,055 102,923 219,526 443,281 168,757 631,629 81,653 195,844 2,661 0 0 275,203 631,629 116,302 117,399 76,896 23,089 43 0 2,177 15,194 5,014 10,180 0 0 0 10,180 0.41 0.40
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