-----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, OVlc1eqJ5QzQlQ8zKXjoHOmpga/IOvQdxW3TfWMd5kt2ZJLCyhcOgYlAgs2i+DJV ily1Er9tIc4PocJTZl6fLA== 0000950123-99-007523.txt : 19990813 0000950123-99-007523.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950123-99-007523 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: 99685006 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 June 30, 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 August 1, 1999, there were 24,582,810 shares outstanding of the registrant's Common Stock, $.10 par value. 2 CAMBREX CORPORATION AND SUBSIDIARIES FORM 10-Q For The Quarter Ended June 30, 1999 Table of Contents
Page No. -------- Part I Financial information Item 1. Financial Statements Condensed consolidated balance sheets as of June 30, 1999 and December 31, 1998 2 Condensed consolidated income statements for the three months and six months ended June 30, 1999 and 1998 3 Condensed consolidated statements of comprehensive income for the three months and six months ended June 30, 1999 and 1998 4 Condensed consolidated statements of cash flows for the six months ended June 30, 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 - 19 Part II Other information Item 4. Matters Submitted to a Vote of Securities Holders 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Exhibit 27 - Financial Data Schedule 22
3 Part 1 - FINANCIAL INFORMATION CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 1999 1998 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents ......................... $ 22,954 $ 48,527 Trade receivables, net ............................ 76,795 56,964 Other receivables ................................. 5,015 7,689 Inventories, net .................................. 98,699 100,245 Deferred tax assets ............................... 11,759 11,759 Prepaid expenses and other current assets ......... 8,475 6,342 --------- --------- Total current assets .......................... 223,697 231,526 Property, plant and equipment, net .................... 270,700 255,016 Intangible assets, net ................................ 130,206 126,995 Other assets .......................................... 3,543 3,517 --------- --------- Total assets .................................. $ 628,146 $ 617,054 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .......... $ 73,169 $ 63,467 Income taxes payable .............................. 4,114 8,733 Short-term debt ................................... 549 2,451 Current portion of long-term debt ................. 550 578 --------- --------- Total current liabilities ..................... 78,382 75,229 Long-term debt ........................................ 193,165 191,372 Deferred tax liabilities .............................. 54,141 52,183 Other noncurrent liabilities .......................... 21,219 21,010 --------- --------- Total liabilities ............................. 346,907 339,794 --------- --------- Stockholders' equity: Common stock, $.10 par value; issued 26,675,549 and 26,573,324 shares at respective dates ......... 2,664 2,655 Additional paid-in capital ........................ 164,244 163,525 Retained earnings ................................. 153,105 132,471 Treasury stock, at cost; 2,099,239 and 2,081,099 shares at respective dates ..................... (10,232) (9,841) Accumulated other comprehensive income/(loss) ..... (28,542) (11,550) --------- --------- Total stockholders' equity .................... 281,239 277,260 --------- --------- Total liabilities and stockholders' equity .... $ 628,146 $ 617,054 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 2 4 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (unaudited) (in thousands, except per-share data)
Three months ended Six months ended June 30, June 30, ---------------------- --------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Gross sales ................................. $ 123,642 $ 116,173 $ 241,161 $ 229,943 Commissions & freight ...................... 1,679 1,495 3,000 3,081 Sales, returns and allowances ........... 621 183 515 337 --------- --------- --------- --------- Net sales ................................... 121,342 114,495 237,646 226,525 Other revenues .......................... 1,312 9,009 2,408 10,581 --------- --------- --------- --------- NET REVENUES ................................ 122,654 123,504 240,054 237,106 Cost of goods sold .......................... 79,795 75,683 156,692 150,335 --------- --------- --------- --------- GROSS PROFIT ................................ 42,859 47,821 83,362 86,771 Operating expenses: Selling, general and administrative ..... 19,817 19,783 39,297 38,004 Research and development ................ 3,291 3,882 6,900 7,195 --------- --------- --------- --------- Total operating expenses .............. 23,108 23,665 46,197 45,199 OPERATING PROFIT ............................ 19,751 24,156 37,165 41,572 Other (income) expenses: Interest expense, net ................... 2,050 2,586 4,227 5,540 Other (income)/expense, net ............. 125 (203) 168 (28) --------- --------- --------- --------- Income before income taxes .................. 17,576 21,773 32,770 36,060 Provision for income taxes .............. 5,650 10,887 10,665 16,031 --------- --------- --------- --------- NET INCOME .................................. $ 11,926 $ 10,886 $ 22,105 $ 20,029 ========= ========= ========= ========= Weighted average shares outstanding: Basic ................................... 24,564 24,154 24,549 24,033 Effect of dilutive stock options ........ 934 1,394 893 1,289 --------- --------- --------- --------- Diluted ................................. 25,498 25,548 25,442 25,322 Earnings per share of common stock and common stock equivalents: Basic ................................... $ 0.49 $ 0.45 $ 0.90 $ 0.83 ========= ========= ========= ========= Diluted ................................. $ 0.47 $ 0.43 $ 0.87 $ 0.79 ========= ========= ========= ========= Cash dividends paid per share ............... $ 0.03 $ 0.025 $ 0.06 $ 0.05 ========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 3 5 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCONE (unaudited) (in thousands)
Three months ended Six months ended June 30, June 30, --------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net income .................................. $ 11,926 $ 10,886 $ 22,105 $ 20,029 Other comprehensive income/(loss): Foreign currency translation adjustments* (8,120) 2,429 (16,992) 1,048 -------- -------- -------- -------- Comprehensive income/(loss) ................. $ 3,806 $ 13,315 $ 5,113 $ 21,077 ======== ======== ======== ========
- --------- * 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 unaudited condensed consolidated financial statements. 4 6 CAMBREX CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Six months ended June 30, --------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net income ............................................ $ 22,105 $ 20,029 Depreciation and amortization ......................... 20,237 20,061 Deferred income tax provision ......................... 269 874 Changes in assets and liabilities (net of assets and liabilities acquired): Receivables, net .................................. (14,343) (15,908) Inventories ....................................... 5,028 (10,047) Prepaid expenses and other current assets ........ (2,103) (606) Accounts payable and accrued liabilities ......... 16,561 10,102 Income taxes payable ............................. (3,420) 5,431 Other noncurrent assets and liabilities .......... 1,786 3,877 -------- -------- Net cash provided by operating activities ......... 46,120 33,813 -------- -------- Cash flows from investing activities: Capital expenditures .................................. (14,302) (17,311) Acquisition of businesses (net of cash acquired) ...... (37,336) (15,199) Other investing activities ............................ (528) 1,445 -------- -------- Net cash used in investing activities ............. (52,166) (31,065) -------- -------- Cash flows from financing activities: Dividends ............................................. (1,471) (1,200) Net (decrease) increase in short-term debt ............ (1,693) 340 Long-term debt activity (including current portion): Borrowings ........................................ 6,000 24,600 Repayments ........................................ (9,554) (20,197) Proceeds from the issuance of common stock ............ 781 4,174 (Purchase of) Proceeds from the sale of treasury stock (446) 180 -------- -------- Net cash (used in) provided by financing activities (6,383) 7,897 -------- -------- Effect of exchange rate changes on cash ................... (13,144) (107) -------- -------- Net (decrease) increase in cash and cash equivalents ...... (25,573) 10,538 Cash and cash equivalents at beginning of period .......... 48,527 21,469 -------- -------- Cash and cash equivalents at end of period ................ $ 22,954 $ 32,007 ======== ======== Supplemental disclosure: Interest paid (net of capitalized interest) ........... $ 4,392 $ 6,938 Income taxes paid ..................................... $ 12,373 $ 8,710 Depreciation expense .................................. $ 16,012 $ 15,273
See accompanying notes to unaudited condensed consolidated financial statements. 5 7 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 and six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. (2) INVENTORIES Inventories at June 30, 1999 and December 31, 1998 consist of the following:
June 30, December 31, 1999 1998 --------- -------- Finished goods................ $ 46,945 $ 54,264 Work in process............... 27,159 20,177 Raw materials................. 19,678 20,105 Fuel oil and supplies......... 4,917 5,699 --------- -------- Total..................... $ 98,699 $100,245 ========= ========
(3) 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 $34 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. 6 8 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) 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 three and six months ended June 30, 1999, the above acquisitions increased gross sales by $6,340 and $7,406, respectively, operating profit by $1,134 and $1,180, respectively, net income by $582 and $583, respectively, and earnings per share by $0.02 (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 $5 million, subject to future working capital adjustments. (5) INCOME TAXES The provision for income taxes of June 30, 1999 resulted in an effective rate of 33% versus 45% at June 30, 1998. The decrease is mainly due to the effect of the Italian Substitute Tax Election, which was recorded in the second quarter of 1998. This election caused the provision for income tax to increase by $3,420 in 1998, but 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 $8,000. Excluding the Italian Substitute Tax, the effective tax rate would have been 35% in 1998. (6) LONG-TERM DEBT Long-term debt at June 30, 1999 and December 31, 1998 consists of the following:
June 30, December 31, 1999 1998 --------- ------------ Bank credit facilities..................$ 186,100 $ 190,000 Capital lease............................ 46 49 Notes payable............................ 7,569 1,901 --------- --------- Subtotal............................ 193,715 191,950 Less: current portion................. 550 578 --------- --------- Total............................ $ 193,165 $ 191,372 ========= =========
The Company met all the bank covenants for the first six months of 1999. 7 9 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) SEGMENT INFORMATION Following is a summary of business segment information for the following dates:
Three months ended Six months ended June 30, June 30, --------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Gross Sales: Human Health ..................... $ 59,065 $ 52,951 $ 114,710 $ 103,163 Biotechnology .................... 17,353 16,466 34,972 32,002 Animal Health/Agriculture ........ 15,666 13,889 31,522 30,172 Specialty Business ............... 31,558 32,867 59,957 64,606 --------- --------- --------- --------- $ 123,642 $ 116,173 $ 241,161 $ 229,943 ========= ========= ========= ========= Gross Profit: Human Health ..................... $ 23,513 $ 28,799 $ 45,083 $ 49,270 Biotechnology .................... 8,078 7,458 17,153 15,798 Animal Health/Agriculture ........ 3,514 3,022 6,404 6,883 Specialty Business ............... 7,754 8,542 14,722 14,820 --------- --------- --------- --------- $ 42,859 $ 47,821 $ 83,362 $ 86,771 ========= ========= ========= ========= Net Income: Biotechnology .................... $ (209) $ 675 $ 261 $ 1,509 Human Health, Animal Health/ Agriculture & Specialty Business 12,135 10,211 21,844 18,520 --------- --------- --------- --------- $ 11,926 $ 10,886 $ 22,105 $ 20,029 ========= ========= ========= ========= Capital Spending: Biotechnology .................... $ 469 $ 793 $ 953 $ 1,204 Human Health, Animal Health/ Agriculture & Specialty Business 7,603 9,807 13,349 16,028 --------- --------- --------- --------- $ 8,072 $ 10,600 $ 14,302 $ 17,232 ========= ========= ========= ========= Depreciation: Biotechnology .................... $ 245 $ 456 $ 838 $ 877 Human Health, Animal Health/ Agriculture & Specialty Business 7,583 7,267 15,174 14,396 --------- --------- --------- --------- $ 7,828 $ 7,723 $ 16,012 $ 15,273 ========= ========= ========= ========= Amortization: Biotechnology .................... $ 1,136 $ 1,076 $ 2,273 $ 2,198 Human Health, Animal Health/ Agriculture & Specialty Business 949 998 1,952 2,590 --------- --------- --------- --------- $ 2,085 $ 2,074 $ 4,225 $ 4,788 ========= ========= ========= =========
June 30, December 31, 1999 1998 --------- --------- Identifiable Assets: Biotechnology ..................... $ 27,566 $ 27,799 Human Health, Animal Health/ Agriculture & Specialty Business 243,134 227,217 --------- --------- $ 270,700 $ 255,016 ========= =========
8 10 NOTES TO UNAUDITED 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 $4,500 at June 30, 1999, and $4,800 at 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 second quarter 1998 included $8,500 in royalty income from Mylan. The royalty arrangements under the agreement have concluded, however, and the Company sold these products on a non-exclusive basis in 1999. 9 11 NOTES TO UNAUDITED 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 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. (9) SUBSEQUENT EVENTS On July 12, 1999, Cambrex acquired FMC Corporation's Bio Products business for approximately $38 million, of which $31 million was financed through the Company's revolving credit agreement and $7 million through the Company's cash reserves. The acquisition includes two operating facilities located in Rockland, Maine and Copenhagen, Denmark, and a number of U.S. and foreign patents associated with the business. The acquisition will be accounted for under the purchase method of accounting. 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 SECOND QUARTER 1999 VERSUS SECOND QUARTER 1998 The results for the second quarter of 1999 were above the same period a year ago due to increased sales in the Human Health, Biotechnology and Animal Health/Agriculture Segments, as well as lower administrative expenses, lower interest costs and a reduced tax rate. The effective tax rate for the quarter ended June 1999 was 32%, versus 34% in the second quarter 1998. (Excluding the effect of the Italian Tax election of $3,420). 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 June 30, 1999 and 1998.
Quarter Ended June 30, ----------------------------------------------------- 1999 1998 ----------------------- ----------------------- $ % $ % -------- ----- -------- ----- Human Health ............ $ 59,065 47.7% $ 52,951 45.6% Biotechnology ........... 17,353 14.0 16,466 14.2 Animal Health/Agriculture 15,666 12.7 13,889 11.9 Specialty Business ...... 31,558 25.6 32,867 28.3 -------- ----- -------- ----- Total gross sales . $123,642 100.0% $116,173 100.0% ======== ===== ======== =====
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 second quarter 1999 and 1998.
Gross Gross Gross Sales $ Profit $ Profit % -------- -------- -------- 1999 Human Health ............................ $ 59,065 $ 23,513 39.8% Biotechnology ........................... 17,353 8,078 46.6 Animal Health/Agriculture ............... 15,666 3,514 22.4 Specialty Business ...................... 31,558 7,754 24.6 -------- -------- -------- Total ............................. $123,642 $ 42,859 34.7% ======== ======== ======== Gross Gross Gross Sales $ Profit $ Profit % -------- -------- -------- 1998 Human Health ............................ $ 52,951 $ 28,799 54.4% Biotechnology ........................... 16,466 7,458 45.3 Animal Health/Agriculture ............... 13,889 3,022 21.8 Specialty Business ...................... 32,867 8,542 26.0 -------- -------- -------- Total ............................. $116,173 $ 47,821 41.2% ======== ======== ========
11 13 RESULTS OF OPERATIONS (CONTINUED) Gross sales in the second quarter 1999 increased 6.4% to $123,642 from $116,173 in the second quarter 1998. Sales in the Human Health, Biotechnology and Animal Health/Agriculture product segments increased compared to the second quarter 1998 and more than offset the decrease in the Specialty Business segment. The foreign currency translation adjustments decreased by $8,120 to a negative $28,542 from March 31, 1999. This decrease is attributable primarily to significant exchange rate fluctuations in the Italian lira against the U.S. dollar in the second quarter 1999. The exchange rate declined from 1,793.51 lira to the dollar at March 31, 1999 to 1,877.60 lira to the dollar at June 30, 1999, a decline of 5%. There were also fluctuations in the Italian lira between average rates and month end rates in the second quarter 1999 which had an effect on the foreign currency translation adjustment. The Swedish Krona and British Pound Sterling each decreased approximately 3% in the second quarter. The Human Health Segment gross sales of $59,065 were $6,114 (12%) above the second quarter 1998. Gross sales were above the prior year due to increased demand for generic pharmaceuticals used in gastro-intestinal, endocrine and central nervous system preparations, as well as new products and sales generated by our acquisition of Irotec in Ireland in March 1999. 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, which had $2,500 in sales in the second quarter 1998. The Biotechnology Segment gross sales of $17,353 were $887 (5%) above the second quarter 1998 from increased shipments of endotoxin detection and cell culture products, partially offset by reduced sales of lower margin serum products. Sales were also impacted by a temporary halt in shipments of a cell product used by a major customer. The Animal Health/Agriculture Segment gross sales of $15,666 in the second quarter 1999 were $1,777 (13%) above the second quarter 1998. The second quarter increase was due to sales of an agricultural intermediate which is being used in a new crop protection application. Animal Health product sales were affected by slower exports made by a major customer caused by the continued economic slowdown in Pacific Rim countries. The Specialty Business Segment gross sales of $31,558 decreased $1,309 (4%) below the second quarter 1998 reflecting lower sales of products to the photography market and reduced demand for an engineering plastics monomer due to continued softness in Far East markets. Encapsulants used in the telecommunications market increased due to orders from new customers. Export sales from U.S. businesses of $14,085 in the second quarter 1999 decreased 14% from the second quarter 1998. International sales from our European operations totaled $50,288 for the second quarter of 1999 as compared with $42,939 in 1998, an increase of 17%. 12 14 RESULTS OF OPERATIONS (CONTINUED) The gross profit in the second quarter 1999 was $42,859 compared to $47,821 in 1998. Second quarter 1998 included $8,500 of royalty income. This royalty income ended in December 1998 with the termination of the exclusive portion of the License Agreement with Mylan Laboratories. The gross margin was 34.7% in the second quarter 1999 versus 41.2% in 1998 (without the royalty income the gross margin in 1998 was 33.8%). The gross margin percent for the Human Health Segment was impacted by no royalty income in 1999 versus the $8,500 in 1998. Without the royalty income the second quarter 1998 gross margin for Human Health would have been 38.3% compared with 39.8% in the second quarter 1999. The second quarter 1998 included $8,500 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 the second quarter 1999. Selling, general and administrative expenses as a percentage of gross sales was 16.0% in the second quarter 1999, down from 17.0% in the second quarter 1998. The decrease was mainly due to the lower administrative expenses at the corporate group and additional expense reduction at some of the specialty chemical sites. These decreases more than offset increased sales and marketing expenses resulting from building the Biotechnology and Human Health Segments. Research and development expenses of $3,291 were 2.7% of gross sales in the second quarter 1999, and represented a 15% decrease from 1998. This decrease was due to reduced research costs at our Zeeland, Michigan site and reduced corporate sponsored R&D activities with outside organizations. The operating profit in the second quarter 1999 was $19,751, compared to $24,156 in 1998. The second quarter 1998 operating profit included $8,500 in royalty income, which was ended as of December 31, 1998. Net interest expense of $2,050 in the second quarter 1999 reflected a decrease of $536 from 1998 as the result of a reduction in the outstanding loan balance and a lower interest rate. The average interest rate was 5.8% in the second quarter 1999 versus versus 6.5% in 1998. Other expense of $125 for the second quarter 1999 was $328 higher than the $203 in other income in 1998. The second quarter 1998 included gains on foreign exchange at our Italian subsidiary. The provision for income taxes for the second quarter 1999 resulted in an effective rate of 32.1% versus 34.3% in 1998 (excluding the effect of the Italian Tax Election of $3,420) The decrease in the 1999 rate was mainly due to the effect of the Italian Substitute Tax Benefit, and Research and Development credits. The Company's net income for the second quarter 1999 increased 9.6% to $11,926 compared with a net income of $10,886 in the second quarter 1998. 13 15 COMPARISON OF FIRST SIX MONTHS OF 1999 VERSUS FIRST SIX MONTHS OF 1998 Results in the first half of 1999 were above the comparable 1998 period due to the increase in sales in the Human Health and Biotechnology product Segments, lower administrative expenses, lower interest costs and a reduced tax rate. Sales increased by $11,218 (5%) in 1999 to $241,161 compared to the same period a year ago. The effect of foreign currency exchange rates negatively impacted sales by $600 in the first half of 1999 versus 1998. The following table shows the gross sales of the Company's four segments 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 half 1999 and 1998.
Six Months Ended June 30, ------------------------------------------------------ 1999 1998 ------------------------ ------------------------ $ % $ % -------- -------- -------- -------- Human Health ............ $114,710 47.6% $103,163 44.9% Biotechnology ........... 34,972 14.5 32,002 13.9 Animal Health/Agriculture 31,522 13.1 30,172 13.1 Specialty Business ...... 59,957 24.8 64,606 28.1 -------- -------- -------- -------- Total gross sales . $241,161 100.0% $229,943 100.0% ======== ======== ======== ========
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 six months 1999 and 1998.
Gross Gross Gross Sales $ Profit $ Profit % -------- -------- -------- 1999 Human Health ............................ $114,710 $ 45,083 39.3% Biotechnology ........................... 34,972 17,153 49.0 Animal Health/Agriculture ............... 31,522 6,404 20.3 Specialty Business ...................... 59,957 14,722 24.6 -------- -------- -------- Total ............................. $241,161 $ 83,362 34.6% ======== ======== ======== Gross Gross Gross Sales $ Profit $ Profit % -------- -------- -------- 1998 Human Health ............................ $103,163 $ 49,270 47.8% Biotechnology ........................... 32,002 15,798 49.4 Animal Health/Agriculture ............... 30,172 6,883 22.8 Specialty Business ...................... 64,606 14,820 22.9 -------- -------- -------- Total ............................. $229,943 $ 86,771 37.7% ======== ======== ========
14 16 RESULTS OF OPERATIONS (CONTINUED) Gross sales in the first half 1999 increased 4.9% to $241,161 from $229,943 in the first half 1998. Sales in the Human Health, Biotechnology and Animal Health/Agriculture product segments increased compared to the first half 1998 and more than offset the decrease in the Specialty Business segment. The foreign currency translation adjustments decreased by $16,992 to a negative $28,542 from December 31, 1998. This decrease is attributable primarily to significant exchange rate fluctuations in the Italian lira against the U.S. dollar in the first half 1999. The exchange rate declined from 1,648.94 lira to the dollar at December 31, 1999 to 1,877.60 lira to the dollar at June 30, 1999, a decline of 14%. There were also fluctuations in the Italian lira between average rates and month end rates in the first half 1999 which had an effect on the foreign currency translation adjustment. The Swedish Krona and British Pound Sterling each decreased approximately 5% in the first half. The Human Health Segment gross sales of $114,710 were $11,547 (11%) above the first half of 1998 due primarily to generic pharmaceuticals used in gastro-intestinal and central nervous system preparations, new products, and sales generated by the acquisition of Irotec in Ireland in March 1999. This Segment has been adversely affected by no shipments of an advanced intermediate used in the production of a protease inhibitor for the treatment of AIDS, which had $6,100 in sales in the first half of 1998. The Biotechnology Segment gross sales of $34,972 were $2,970 (9%) above the first half of 1998 due to increased shipments of endotoxin detection and cell culture products. Sales were negatively impacted by a temporary halt in shipments of a cell product used by a major customer. The Animal Health/Agriculture Segment gross sales of $31,522 were $1,350 (4%) above the first half of 1998. This increase was mainly due to new applications by a customer for crop protection. Animal Health product sales were affected by slower exports made by a major customer caused by the continued economic slowdown in Pacific Rim countries. The Specialty Business Segment gross sales of $59,957 were $4,649 (7%) below the first half of 1998 due to reduced demand for an engineering plastics monomer reflecting continued softness in Far East markets. Encapsulants used in telecommunications increased due to orders from new customers. Export sales from U.S. businesses of $31,434 in the first half of 1999 compared to $32,261 in 1998. International sales from our European operations totaled $99,224 for the first six months of 1999 compared to $86,344 in 1998. Total gross profit of $83,362 was $3,409 below 1998 due mainly to the effect of royalty income of $9,500 in the first half of 1998. The gross margin for the first half of 1999 was 34.6% versus 37.7% in 1998. Excluding the royalty income, the gross margin in 1998 was 33.6%. 15 17 RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative and research and development expenses as a percentage of gross sales was 19.2% in the first half of 1999, down from 19.7% in 1998. The decrease is mainly due to reduced administrative costs at the corporate group and a reorganization at some of the specialty chemical sites which was started in 1998. Increases in marketing and sales was due to added promotional and compensation expenses attributed to upgrading biotechnology marketing efforts in the U.S. and Europe. The average interest rate was 5.9% in the first half of 1999 versus 6.4% in 1998. The provision for income taxes for the first half resulted in an effective rate of 32.5% versus 35% in 1998 (excluding the Italian Tax Election). The first half 1998 included a one-time charge of $3,420 in income taxes for the Italian Tax Election. This election allows previously non-deductible goodwill of Cambrex's Italian subsidiary, Profarmaco, 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 Company's net income for the first six months of 1999 increased 10% to $22,105 compared with a net income of $20,029 in 1998. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1999, the Company generated cash flows from operations totaling $46,120, an increase of $12,307 over the same period a year ago. This increase in cash flows is due primarily to increased revenues, as well as a working capital reduction program. The decrease in the cash balance for the six months 1999 was $25,573, primarily due to the acquisition of Irotec for $34,836, net of cash acquired. Capital expenditures were $14,302 in the first six months of 1999 as compared to $17,311 in the six 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 six months of 1999, the Company paid cash dividends of $0.06 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 $33,939 which the Company estimates to be approximately 69% of the foreign currency exposure during the period covered resulting in a deferred currency loss of $1,358 at June 30, 1999. 16 18 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) In January 1999, Cambrex acquired Poietic Technologies, Inc. for $2,500 cash and in March 1999, the Company purchased Irotec Laboratories Ltd. for approximately $34,000, which was financed through the Company's cash reserves. In July 1999, the Company completed the acquisition of FMC Corporation's Bio Products business for approximately $38,000, of which $31,000 was financed through the Company's revolving credit agreement and $7,000 through the Company's cash reserves. Management believes that existing sources of capital, together with cash flows from operations, will be sufficient to meet foreseeable cash flow requirements. 17 19 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 tests 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 ------ ----------------- 6/99 9/99 12/99 ------ ------ ------- Hardware/Software Inventory and Assessment............................. 99% 100% 100% Hardware/Software Verification and Validation........................ 85% 100% 100% Supplier/Customer Verification......... 95% 100% 100% Implementation and Testing............. 80% 90% 100% Contingency Plans...................... 20% 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. 18 20 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 will be remediated 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 has completed its assessment and expects to have developed requisite action plans with respect to these findings by the end of the third quarter 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 a new business systems and completion of the Y2K project as scheduled, the possibility of significant interruptions of normal operations will be reduced. 19 21 YEAR 2000 UPDATE (CONTINUED) The Company expects the costs directly associated with its Y2K efforts to approximate $8,500 of which approximately $8,150 has been spent to date. The cost estimates do not include additional costs that may be incurred as a result of the failure of third parties to become Y2K compliant or costs to implement any contingency plans. 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. 20 22 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, 1999. ITEM 5 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 second quarter of the year ended June 30, 1999. 21 23 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: August 11, 1999 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1999 JUN-30-1999 22,954 0 77,709 914 98,699 223,697 445,065 174,365 628,146 78,382 193,165 0 0 2,664 278,575 628,146 237,646 240,054 156,692 46,197 168 0 4,227 32,770 10,665 22,105 0 0 0 22,105 0.90 0.87
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