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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from________ to ________
Commission file number 1-10638
CAMBREX CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-2476135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073
--------------------------------------------------------
(Address of principal executive offices)
(201) 804-3000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of July 31, 2003, there were 25,719,317 shares outstanding of the
registrant's Common Stock, $.10 par value.
CAMBREX CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended June 30, 2003
Table of Contents
Page No.
--------
Part I Financial information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
June 30, 2003 and December 31, 2002 2
Condensed consolidated income statements
for the three months and six months ended June 30, 2003 and 2002 3
Condensed consolidated statements of cash flows
for the six months ended June 30, 2003 and 2002 4
Notes to condensed consolidated financial statements 5 - 19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20 - 26
Item 4. Controls and Procedures 27
Part II Other information
Item 4. Matters Submitted to a Vote of Securities Holders 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Part I - FINANCIAL INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
June 30, December 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 41,311 $ 33,296
Trade receivables, net ............................. 79,813 79,571
Inventories, net ................................... 108,613 109,832
Deferred tax assets ................................ 31,627 35,612
Prepaid expenses and other current assets .......... 21,110 17,447
--------- ------------
Total current assets ........................... 282,474 275,758
Property, plant and equipment, net .................... 317,464 310,501
Goodwill .............................................. 217,061 214,354
Other intangible assets, net .......................... 52,988 53,398
Other assets .......................................... 13,395 13,517
--------- ------------
Total assets ................................... $ 883,382 $ 867,528
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........... $ 88,820 $ 89,018
Short-term debt and current portion of
Long-term debt ................................. 3,450 2,364
--------- ------------
Total current liabilities ............................. 92,270 91,382
Long-term debt ........................................ 247,657 267,434
Deferred tax liabilities .............................. 52,630 52,630
Other non-current liabilities ......................... 51,907 43,400
--------- ------------
Total liabilities .............................. 444,464 454,846
--------- ------------
Stockholders' equity:
Common stock, $.10 par value; issued 28,356,564 and
28,323,059 shares at respective dates ......... 2,836 2,832
Additional paid-in capital ........................ 203,363 201,883
Retained earnings ................................. 274,621 265,774
Treasury stock, at cost 2,637,247 and 2,494,803
shares at respective dates ..................... (22,201) (19,841)
Accumulated other comprehensive loss .............. (19,701) (37,966)
--------- ------------
Total stockholders' equity .................... 438,918 412,682
--------- ------------
Total liabilities and stockholders' equity .... $ 883,382 $ 867,528
========= ============
See accompanying notes to unaudited condensed consolidated
financial statements.
2
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,
------------------------ ------------------------
2003 2002 2003 2002
---- ---- ---- ----
Gross sales .......................... $ 136,363 134,263 $ 276,283 266,718
Commissions & allowances .......... 1,427 564 2,516 2,032
--------- --------- --------- ---------
Net sales ............................ 134,936 133,699 273,767 264,686
Other revenues .................... 2,067 1,168 5,040 2,736
--------- --------- --------- ---------
NET REVENUES ......................... 137,003 134,867 278,807 267,422
Cost of goods sold ................... 92,824 81,827 184,943 164,688
--------- --------- --------- ---------
GROSS PROFIT ......................... 44,179 53,040 93,864 102,734
Operating expenses:
Selling, general and
administrative expenses ......... 25,831 24,593 53,889 47,201
Research and development expenses . 5,014 4,692 9,656 8,627
Legal settlement (Note 13) ........ - - 11,342 -
--------- --------- --------- ---------
Total operating expenses ......... 30,845 29,285 74,887 55,828
OPERATING PROFIT ..................... 13,334 23,755 18,977 46,906
Other (income) expenses:
Interest expense, net ............. 2,689 2,852 5,023 5,779
Other income, net ................. (235) (953) (114) (987)
--------- --------- --------- ---------
Income before income taxes ........... 10,880 21,856 14,068 42,114
Provision for income taxes ........ 2,829 5,683 3,658 10,950
--------- --------- --------- ---------
NET INCOME ........................... $ 8,051 $ 16,173 $ 10,410 $ 31,164
========= ========= ========= =========
Weighted average shares outstanding:
Basic ............................. 25,732 25,991 25,792 25,944
Effect of dilutive stock options .. 241 653 300 662
--------- --------- --------- ---------
Diluted ........................... 25,973 26,644 26,092 26,606
Earnings per share of common stock and
common stock equivalents:
Basic ............................. $ 0.31 $ 0.62 $ 0.40 $ 1.20
========= ========= ========= =========
Diluted ........................... $ 0.31 $ 0.61 $ 0.40 $ 1.17
========= ========= ========= =========
Cash dividends paid per share ........ $ 0.03 $ 0.03 $ 0.06 $ 0.06
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated
financial statements.
3
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended
June 30,
------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income ............................................... $ 10,410 $ 31,164
Depreciation and amortization ............................ 22,265 18,208
Deferred income tax provision ............................ 3,985 849
Changes in assets and liabilities:
Provision for legal settlement, net of cash payments.. 7,013 -
Investment impairment ................................ - 2,500
Receivables, net ..................................... 2,347 (5,217)
Inventories .......................................... 4,969 (3,112)
Prepaid expenses and other current assets ............ 501 (720)
Accounts payable and accrued liabilities ............. (3,317) (2,049)
Income taxes payable ................................. (4,795) 3,256
Other non-current assets and liabilities ............. 1,934 2,099
--------- ---------
Net cash provided by operating activities ............ 45,312 46,978
--------- ---------
Cash flows from investing activities:
Capital expenditures ..................................... (20,977) (22,039)
Insurance settlement proceeds ............................ 3,785 -
Other investing activities ............................... 229 586
--------- ---------
Net cash used in investing activities ................. (16,963) (21,453)
--------- ---------
Cash flows from financing activities:
Dividends ................................................ (1,563) (1,555)
Net increase (decrease) in short-term debt ............... 960 (796)
Long-term debt activity (including current portion):
Borrowings ............................................ 217,565 22,450
Repayments ............................................ (237,420) (30,118)
Proceeds from stock options exercised .................... 92 3,867
Purchase of treasury stock ............................... (2,420) -
--------- ---------
Net cash used in financing activities ................. (22,786) (6,152)
--------- ---------
Effect of exchange rate changes on cash ..................... 2,452 2,976
--------- ---------
Net increase in cash and cash equivalents ................... 8,015 22,349
Cash and cash equivalents at beginning of period ............ 33,296 23,696
--------- ---------
Cash and cash equivalents at end of period .................. $ 41,311 $ 46,045
========= =========
See accompanying notes to unaudited condensed consolidated
financial statements.
4
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 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, 2002.
The results of operations for the three months and six months ended
June 30, 2003 are not necessarily indicative of the results to be expected for
the full year.
Certain reclassifications have been made in prior year amounts to
conform to the current year presentation.
(2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Asset Retirement Obligations
In June 2001, The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). The standard requires that legal
obligations associated with the retirement of tangible long-lived assets be
recorded at fair value when incurred and was adopted by the Company on January
1, 2003. Adoption of SFAS 143 did not have any effect on the Company's
consolidated financial position or results of operations.
Rescission of FAS No. 4, 44 and 64, Amendment of FAS 13, and Technical
Corrections as of April 2002:
In May 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS 13,
and Technical Corrections as of April 2002" ("SFAS 145"). The statement rescinds
SFAS 4 (as amended by SFAS 64), which required extraordinary item treatment for
gains and losses on extinguishments of debt, and SFAS 44, which does not affect
the Company. Additionally, the statement amends certain provisions of SFAS 13
and other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of SFAS 145 related to extinguishments of debt are
effective for the Company beginning January 1, 2003, and all other provisions
are effective for transactions occurring or financial statements issued on or
after May 5, 2002. Adoption of SFAS 145 did not have any effect on the Company's
consolidated financial position or results of operations.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement of Financial Accounting
Standard No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement
eliminates the definition and requirements for recognition of exit costs in
Issue 94-3, and requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS 146 also
establishes that fair value is the objective for initial measurement of the
liability. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Any
charges associated with future restructuring programs will be recorded in
accordance with SFAS 146. This will spread the recognition of the restructuring
expenses over a number of accounting periods as compared to EITF 94-3.
Accounting for Stock-Based Compensation - Transition and Disclosure
In December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). This Statement provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employees compensation from the intrinsic method. SFAS 148 also
amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB 25. SFAS 148's amendment of the transition and
annual disclosure requirements of SFAS 123 are effective for fiscal years ending
after December 15, 2002. The Company has adopted the disclosures provision of
SFAS 148 as of December 31, 2002, and will continue to use the intrinsic value
method of APB 25. The Company is currently considering the alternatives provided
within SFAS 148 for future periods.
Amendment of Statement 133 on Derivative Instruments and Hedging
Activities
On April 30, 2003 the Financial Accounting Standards Board issued SFAS
149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" which amends SFAS 133. This Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristics of a derivative, it also clarifies when a derivative contains a
financing component and amends the definition of an underling to conform it to
language used in FASB Interpretation No. 45. This statement is effective for
contracts entered into or modified after June 30, 2003, except for those
provisions of this Statement that relate to SFAS 133 implementation issues that
have been effective for fiscal quarters that began prior to June 15, 2003. The
Company does not anticipate any effect of the Company's consolidated financial
position or results of operations due to the adoption of SFAS 149.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(2) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No.150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 specifies that instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify them as
liabilities. This statement requires that mandatory redeemable financial
instruments, obligations to repurchase the issuer's equity shares by
transferring assets, and certain obligations to issue a variable number of
shares be classified as liabilities. SFAS 150 is effective at the beginning of
the first interim period beginning after June 15, 2003. Adoption of this
Statement is not expected to have a material impact on the Company's results.
Guarantor's Accounting and Disclosure Requirements for Guarantees
In November 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The required disclosures
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of FIN 45 did not have any effect on the
Company's consolidated financial position or results of operations.
Consolidation of Variable Interest Entities
In January 2003, FIN No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46") was issued. The interpretation provides guidance on
consolidating variable interest entities and applies immediately to variable
interests created after January 31, 2003. The guidelines of the interpretation
will become applicable for the Company in its third quarter 2003 financial
statements for variable interest entities created before February 1, 2003. The
interpretation requires variable interest entities to be consolidated if the
equity investment at risk is not sufficient to permit an entity to finance its
activities without support from other parties or the equity investors lack
certain specified characteristics. The Company has reviewed FIN 46 and
determined its impact will not have any material accounting or disclosure
requirement under the provisions of the interpretation.
Accounting for Revenue Arrangements with Multiple Deliverables
In January 2003, the Emerging Issues Task Force ("EITF") released EITF
00-21: "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 clarifies the timing and recognition of revenue from certain transactions
that include the delivery and performance of multiple products or services. EITF
00-21 is effective for revenue arrangements entered into during fiscal periods
beginning after June 15, 2003. The Company is in compliance with this EITF.
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(3) STOCK BASED COMPENSATION:
At June 30, 2003, the Company has seven active stock-based employee
compensation plans currently in effect. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------------------------- --------------------------
Net income, as reported ............. $ 8,051 $ 16,173 $ 10,410 $ 31,164
Deduct: stock-based compensation
expenses determined using fair value
method, net of tax effects ......... (966) (376) (1,728) (715)
--------- ---------- ---------- ----------
Proforma net income ................. $ 7,085 $ 15,797 $ 8,682 $ 30,449
Earnings per share:
Basic - as reported ................ $ 0.31 $ 0.62 $ 0.40 $ 1.20
Basic - proforma ................... $ 0.28 $ 0.61 $ 0.34 $ 1.17
Diluted - as reported .............. $ 0.31 $ 0.61 $ 0.40 $ 1.17
Diluted - proforma ................. $ 0.27 $ 0.59 $ 0.33 $ 1.14
The pro forma compensation expense, net of tax, of $966 and $376 for
the quarters ended June 30, 2003 and 2002, respectively, was calculated based on
the fair value of each option primarily using the Black-Scholes option-pricing
model for non-performance options and a path dependent model for performance
options, with the following assumptions for 2003 and 2002, respectively: (i)
average dividend yield of 0.46% and 0.27% (ii) expected volatility of 41.42% and
34.39%, (iii) risk-free interest rate ranging from 2.75% to 3.38% and 4.30% to
4.97% and (iv) expected life of 6-7 years.
The pro forma compensation expense, net of tax, of $1,728 and $715 for
the six months ended June 30, 2003 and 2002, respectively, was calculated based
on the fair value of each option primarily using the Black-Scholes
option-pricing model for non-performance options and a path dependent model for
performance options, with the following assumptions for 2003 and 2002,
respectively: (i) average dividend yield of 0.41% and 0.27% (ii) expected
volatility of 40.10% and 34.02%, (iii) risk-free interest rate ranging from
2.75% to 3.81% and 4.25% to 4.97% and (iv) expected life of 6-7 years.
In May 2003, the Chief Executive Officer was granted 150,000 incentive
stock appreciation rights. These rights vest upon the employee's retirement and
if Cambrex stock trades at an average price of $25 or higher for 20 consecutive
days prior to his retirement. If the rights vest, the employee is entitled to a
cash settlement or the equivalent value of Cambrex stock representing the
difference in value between the closing price of Cambrex stock on the day of the
grant, which was $19.30, and the closing price of Cambrex stock on the day the
rights are exercised. These rights terminate one year after the employee's
retirement. Since the vesting of these stock appreciation rights are contingent
on the future performance of Cambrex stock, no expense has been recorded as of
June 30, 2003. Once the rights vest, this arrangement will be marked to market
and expensed over the remaining estimated future service period.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(4) GOODWILL AND INTANGIBLE ASSETS:
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" in
the first quarter of fiscal 2002. The Company has established reporting units
based on its current segment structure for purposes of testing goodwill for
impairment. Goodwill has been assigned to the reporting units to which the value
of the goodwill relates. The Company will evaluate goodwill and other intangible
assets at least on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable based on
the estimated future cash flows.
The changes in the carrying amount of goodwill for the quarter ended
June 30, 2003, are as follows:
Rutherford
Biosciences Human Health Chemicals
Segment Segment Segment Total
----------- ------------ ---------- ---------
Balance as of January 1, 2003........... $ 177,646 $ 36,708 $ - $ 214,354
Purchase Accounting Adjustments
for Contingent Payments............... 188 - - 188
Cumulative Translation Effect........... 411 2,108 - 2,519
----------- ------------ ---------- ---------
Balance as of June 30, 2003............. $ 178,245 $ 38,816 $ - $ 217,061
=========== ============ ========== =========
Other intangible assets that are not subject to amortization, consist
of the following:
As of As of
June 30, December
2003 31, 2002
----------- --------
Proprietary Process....................... $ 1,675 $ 1,675
License Agreements........................ 2,989 2,989
Trademarks................................ 34,397 34,397
----------- --------
Total $ 39,061 $ 39,061
=========== ========
Other intangible assets, which will continue to be amortized, consist
of the following:
As of As of
June 30, 2003 December 31,
Gross 2002
Carrying Gross Carrying
Amount Amount
------------- --------------
Patents.......................... $ 2,766 $ 2,589
Proprietary Process.............. 5,841 5,841
Supply Agreements................ 2,110 2,100
Trademarks....................... 785 785
Unpatented Technology............ 5,438 5,490
Fully Amortized Assets*.......... 12,347 12,347
Other............................ 904 1,235
------------- --------------
Total 30,191 30,387
------------- --------------
Accumulated Amortization......... (16,264) (16,050)
------------- --------------
Net $ 13,927 $ 14,337
============= ==============
*This category includes certain fully amortized patents, proprietary
process and non-compete agreements.
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(4) GOODWILL AND INTANGIBLE ASSETS: (CONTINUED)
Amortization expense for the quarter and six months ended June 30, 2003
was $353 and $744, respectively.
The expected amortization expense related to intangible assets in the
future is as follows:
For the year ended December 31, 2003........................... $1,488
For the year ended December 31, 2004........................... $1,333
For the year ended December 31, 2005........................... $1,308
For the year ended December 31, 2006........................... $1,298
For the year ended December 31, 2007........................... $1,287
(5) INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Inventories at June 30, 2003 and December 31, 2002 consist of the
following:
June 30, December 31,
2003 2002
-------- ------------
Finished goods............................................ $ 51,406 $ 55,372
Work in process........................................... 27,447 24,997
Raw materials............................................. 24,830 24,638
Supplies.................................................. 4,930 4,825
-------- ------------
Total................................................. $108,613 $ 109,832
======== ============
(6) LONG-TERM DEBT
Long-term debt at June 30, 2003 and December 31, 2002 consists of the
following:
June 30, December 31,
2003 2002
-------- ------------
Bank credit facilities................................... $164,775 $ 257,350
Senior notes............................................. 75,000 -
Other.................................................... 9,226 12,448
-------- ------------
Subtotal.............................................. 249,001 269,798
Less: current portion.................................... (1,344) (2,364)
-------- ------------
Total................................................. $247,657 $ 267,434
======== ============
During June 2003, the Company borrowed $75,000 in a private offering.
The debt consists of 7 year guaranteed senior Notes due in June 2010 and
interest payments are due semi-annually at a rate of 5.31%. The Notes rank equal
with the Company's other senior indebtedness. The funds were used primarily to
pay down existing bank debt and provide Cambrex with longer term fixed debt.
The Company met all the bank covenants for the first six months of
2003.
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(7) RESTRUCTURING AND OTHER CHARGES
In 2002, Cambrex completed its plan to realign its businesses, and at
that time, the Company recorded net special pre-tax charges of $15,087. These
charges include: Rutherford Chemicals fixed asset impairments of $7,689, closure
costs for a small manufacturing facility at one of the Rutherford Chemicals
sites of $1,800, inventory write-downs of $586 (included in cost of sales), a
goodwill impairment for Rutherford Chemicals of $3,962, and severance costs of
$1,050. These charges were recorded in the second half of 2002.
The fixed asset impairments relate to certain assets at a Rutherford
Chemicals domestic site, and were based on an assessment completed in the third
quarter that indicated the return on investment was below management's
expectations. As a result, an impairment charge was recorded reflecting the
asset value associated with the exit of a product line. The closure costs relate
to another domestic Rutherford Chemicals facility and include asset write-downs,
disposal, and other related costs.
Severance charges, which apply to a Rutherford Chemicals domestic site
and the Corporate office, relate to the termination of approximately 19
employees. As of January 31, 2003, all these employees have been terminated.
The accrual balance related to the 2002 actions for severance and other
costs included above was approximately $1,900 and $2,600 at June 30, 2003 and
December 31, 2002, respectively.
The following table displays the activity related to the 2002
restructuring accruals through June 30, 2003 (in millions):
2002 2003
Activity Activity
------------------------------- -----------------------------
December June
31, 2002 30, 2003
Total Non-Cash Cash Reserve Cash Reserve
Charges Write-offs Payments Balance Payment Balance
------- ---------- -------- -------- ------- --------
Restructuring, Impairments
and Other Charges:
Fixed asset impairments ........ $ 7.7 $ (7.7) $ - $ - $ - $ -
Goodwill impairment ............ 4.0 (4.0) - - - -
Employee severance ............. 1.0 - - 1.0 (0.4) 0.6
Facility closure costs ......... 1.8 - (0.2) 1.6 (0.3) 1.3
------- ---------- -------- -------- ------- --------
Total restructuring, impairments
and other charges .......... 14.5 (11.7) (0.2) 2.6 (0.7) 1.9
Inventory write-offs ........... 0.6 (0.6) - - - -
------- ---------- -------- -------- ------- --------
Total .......................... $ 15.1 $ (12.3) $ (0.2) $ 2.6 $ (0.7) $ 1.9
======= ========== ======== ======== ======= ========
Facility closure costs are expected to be paid by year end 2003.
Severance costs are expected to be paid within the next 2 years.
For discussion of the $11,342 Mylan Laboratories legal settlement
charge recorded in the first quarter 2003, see Note 13.
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(8) SUBSEQUENT EVENT - AGREEMENT TO SELL RUTHERFORD CHEMICALS
Effective January 1, 2002, the operating units that primarily produce
specialty and fine chemicals and animal health and agriculture products were
combined under a new business unit, Rutherford Chemicals, Inc. Rutherford
Chemicals, Inc. includes CasChem, Inc., Bayonne, New Jersey; Heico Chemicals,
Inc., Delaware Water Gap, Pennsylvania; Nepera, Inc., Harriman, New York;
Zeeland Chemicals, Inc., Zeeland, Michigan; and Seal Sands Chemicals, Limited,
Middlesbrough, United Kingdom. In the fourth quarter 2002, the Company announced
that it had engaged a financial advisor to assist the Company in investigating
strategic alternatives for the Rutherford Chemicals segment. The financial
advisor contacted certain parties regarding the Rutherford Chemicals business.
Subsequently, certain parties began due diligence procedures and one party was
ultimately provided a period of exclusivity for this due diligence process. As
of June 30, 2003 the Company completed its on-going assessment of the status of
Rutherford Chemicals and determined, at that date, the Rutherford Segment would
remain in the Company's continuing operations. On July 31, 2003 the Company's
Board of Directors approved a proposed sale of the Rutherford business to this
party. On August 7, 2003, the Company announced that an agreement to sell
Rutherford Chemicals for approximately $64 million had been signed with this
party. The terms result in a loss on sale of approximately $50 million,
including fees associated with the transaction, subject to working capital and
other adjustments through the date of closing. This loss has not been tax
affected due to the level of domestic earnings, which includes this loss, being
insufficient to support realization of such benefit at this time. Although
certain contingencies exist which could result in the sale not being
consummated, management expects to close the sale within 45 to 65 days of the
date of the agreement. As a result of the signing of this agreement, the
Rutherford Chemicals Segment will be considered discontinued operations as of
the date of the agreement and will be reported as such in the third quarter
2003.
The following table shows the carrying amount of the assets and
liabilities of the segment to be sold as of June 30, 2003 and December 31, 2002:
June 30, December
2003 31, 2002
-------- --------
Assets:
Accounts receivable, net ................. $ 19,684 $ 21,317
Inventories, net ......................... 33,013 35,188
Other current assets ..................... 914 1,773
Property, plant and equipment, net ....... 63,800 70,557
Intangibles, net ......................... 3,488 3,488
Other assets ............................. 374 374
-------- --------
121,273 132,697
Liabilities:
Accounts payable and accrued liabilities.. 11,604 14,532
-------- --------
Net assets held for sale ................. $109,669 $118,165
======== ========
The Company performed an asset impairment assessment of the long-lived
assets in the Rutherford Chemical segments as of June 30, 2003. The Company used
a probability-weighted undiscounted cash flow model to test for recoverability.
This probability assessment was made as of June 30, 2003 and considered all
facts and circumstances available at that date, which included the possibility
of a sale. The assessment did not result in any impairment loss.
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(9) COMPREHENSIVE INCOME
Comprehensive Income for the three and six months ended June 30, 2003
was $20,371 and $28,675 respectively. The amounts for the same period in 2002
were $35,617 and $51,532, respectively. The decrease in the second quarter 2003
versus 2002 is due primarily to lower net income and lower foreign currency
translation. The decrease in the six months ended June 30, 2003 versus the same
period a year ago is due primarily to lower net income and lower net unrealized
gains on hedging contracts.
(10) OTHER INCOME AND EXPENSES, NET
Other income, net was $235 and $953 for the quarters ending June 30,
2003 and 2002, respectively. The second quarter 2002 included an impairment
charge of $2,500 related to a prior investment of $3,089 in an emerging
technology company. The company, in which the investment is held, had
experienced significant financial difficulties. Valuation information was
received in the second quarter 2002 which enabled Cambrex to estimate a decline
in the market value of the company. Based upon further information received in
the third quarter 2002, Cambrex wrote off the remaining value of the investment.
Other income in 2002 also included a favorable arbitration award of $3,760
related to disputes concerning certain Rutherford Chemicals toll manufacturing
and licensed product line agreements.
(11) OTHER REVENUE
Other revenue consists primarily of gains/losses on foreign currency
hedge contracts, foreign exchange transaction gains/losses and freight billings.
The increase in Other Revenue in the second quarter 2003 over second quarter
2002 primarily reflects currency gains on foreign currency contracts in 2003
versus currency losses on contracts in 2002. With respect to the foreign
currency hedge contracts, the Company enters into such contracts to reduce
exposures to market risks resulting from fluctuations in foreign exchange rates.
The Company does not enter into financial instruments for trading or speculative
purposes.
(12) SEGMENT INFORMATION
The Company is reporting four operating segments, Human Health,
Biosciences, Rutherford Chemicals and All Other. The Human Health segment
includes Active Pharmaceutical Ingredients and Pharmaceutical Intermediates
produced under Food and Drug Administration cGMP for use in the production of
prescription and over-the-counter drug products, and imaging chemicals used in
x-ray media. The Biosciences segment consists of cell culture and endotoxin
detection products, electrophoresis and chromatography products and contract
biopharmaceutical manufacturing. The Rutherford Chemicals segment consists of
Vitamin B-3 used in feed additives, Agricultural Intermediates used in crop
protection, Performance Enhancing Chemicals used in photography, pigments,
specialty polymers, fuel/oil additives, catalysts, and other specialty
additives, Polymer Systems products used in coatings, telecommunications,
electronics and engineering plastics and Personal Care ingredients. The All
Other segment includes Specialty and Fine Chemicals and Animal and Health
Products not manufactured at the Rutherford Chemicals facilities. The Company
allocates certain Corporate expenses and interest to each of its subsidiaries.
The interest allocation is based on 12% of subsidiary working capital and 9% of
net property, plant and equipment. No customer accounts for more than 10% of
consolidated revenues.
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(12) SEGMENT INFORMATION (CONTINUED)
Following is a summary of business segment information for the
following dates:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Gross Sales:
Human Health ................ $ 57,809 $ 55,915 $ 113,232 $ 112,135
Biosciences ................. 38,488 40,298 82,593 77,493
Rutherford Chemicals ........ 33,311 31,884 68,036 65,145
All Other ................... 6,755 6,166 12,422 11,945
--------- --------- --------- ---------
$ 136,363 $ 134,263 $ 276,283 $ 266,718
========= ========= ========= =========
Gross Profit:
Human Health ................ $ 22,727 $ 24,582 $ 45,996 $ 50,428
Biosciences ................. 16,614 21,310 38,554 38,958
Rutherford Chemicals ........ 3,423 6,290 7,111 11,464
All Other ................... 1,415 858 2,203 1,884
--------- --------- --------- ---------
$ 44,179 $ 53,040 $ 93,864 $ 102,734
========= ========= ========= =========
Operating Profit*:
Human Health and All Other .. $ 17,070 $ 18,674 $ 34,138 $ 39,668
Biosciences ................. 4,122 9,633 13,434 16,048
Rutherford Chemicals ........ 199 2,656 897 4,808
Corporate ................... (8,057) (7,208) (29,492) (13,618)
--------- --------- --------- ---------
Total Operating Profit ...... $ 13,334 $ 23,755 $ 18,977 $ 46,906
========= ========= ========= =========
Reconciliation to Net Income:
Interest Expense, net ....... $ 2,689 $ 2,852 $ 5,023 $ 5,779
Other (Income), net ......... (235) (953) (114) (987)
Taxes ....................... 2,829 5,683 3,658 10,950
--------- --------- --------- ---------
Net Income .................. $ 8,051 $ 16,173 $ 10,410 $ 31,164
========= ========= ========= =========
Capital Spending:
Human Health and All Other .. $ 3,469 $ 6,945 $ 6,797 $ 13,230
BioSciences ................. 5,287 1,297 11,723 3,143
Rutherford Chemicals ........ 902 689 1,882 5,593
Corporate ................... 336 16 575 73
--------- --------- --------- ---------
$ 9,994 $ 8,947 $ 20,977 $ 22,039
========= ========= ========= =========
*The operating segments include charges for certain corporate
allocations reflecting services provided. Unallocated corporate spending is
included in "Corporate."
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(12) SEGMENT INFORMATION (CONTINUED)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Depreciation:
Human Health and All Other.. $ 6,205 $ 4,556 $ 12,098 $ 8,906
BioSciences ................ 1,796 1,434 3,526 2,467
Rutherford Chemicals ....... 2,637 2,559 5,249 5,104
Corporate .................. 324 477 648 954
--------- --------- --------- ---------
$ 10,962 $ 9,026 $ 21,521 $ 17,431
========= ========= ========= =========
Amortization:
Human Health and All Other.. $ 3 $ 3 $ 6 $ 6
BioSciences ................ 350 384 738 771
Rutherford Chemicals ....... - - - -
--------- --------- --------- ---------
$ 353 $ 387 $ 744 $ 777
========= ========= ========= =========
June 30, December 31,
2003 2002
--------- ------------
Total Assets:
Human Health and All Other................. $ 328,185 $ 308,572
Biosciences................................ 366,457 360,713
Rutherford Chemicals....................... 126,588 139,101
Corporate.................................. 62,152 59,142
--------- ------------
$ 883,382 $ 867,528
========= ============
(13) CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. The Company continually assesses all known facts and
circumstances as they pertain to all legal and environmental matters and
evaluates the need for reserves and/or disclosures as deemed necessary based on
these facts and circumstances.
While it is not possible to predict with certainty the outcome of the
litigation and other matters discussed below and various other lawsuits, 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.
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(13) CONTINGENCIES (CONTINUED)
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 other non-current liabilities of
$4,731 and $4,542 at June 30, 2003 and December 31, 2002, respectively, 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. The increase in the accrual is due to currency fluctuation
of $280, partially offset by $91 in payments. These reserve amounts include a
$3,000 estimated liability that was included in accounts payable and accrued
liabilities at December 31, 2002. Based on currently available information and
analysis, the Company's accrual represents management's best estimate of what it
believes are the reasonably possible environmental cleanup related costs of a
non-capital nature. 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. (currently known as
Cambrex Profarmaco Milano S.r.l.) 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 alleged
that exclusive license agreements which Cambrex Profarmaco Milano S.r.l. 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 alleged that the agreements violated the
Federal Trade Commission Act, and that Mylan, Cambrex, Cambrex Profarmaco
Milano, S.r.l., and Gyma Laboratories of America, Inc., Cambrex Profarmaco
Milano S.r.l'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. A lawsuit making
similar allegations against the same parties including the Company and Cambrex
Profarmaco Milano S.r.l., and seeking injunctive relief and treble damages, was
filed by the Attorneys General of 31 states 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 same parties including the Company and Cambrex Profarmaco Milano
S.r.l. 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.
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(13) CONTINGENCIES (CONTINUED)
Litigation (continued)
On February 9, 2001, a federal court in Washington, DC entered an Order
and Stipulated Permanent Injunction as part of a settlement of the FTC and
Attorneys General's suits. Under these settlement documents Mylan agreed to pay
over $140,000 on its own behalf and on behalf of most of the other defendant
companies including Cambrex and Cambrex Profarmaco Milano S.r.l. In the Order
and Injunction, the settling defendants also agreed to monitor certain future
conduct. The private litigation continues.
The Company strongly believes that its licensing arrangements with
Mylan are in accordance with regulatory requirements. However, the Company and
Mylan terminated the exclusive licenses to the drug master files 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 its final generic product. Mylan had been fully covering the costs for the
defense and indemnity of Cambrex and Cambrex Profarmaco Milano S.r.l. under
certain obligations set forth in the license agreements. Cambrex agreed to cover
separate legal defense costs incurred for Cambrex and Cambrex Profarmaco Milano
S.r.l. on a going forward basis beginning August 1, 2000.
On April 7, 2003, Cambrex reached an agreement with Mylan Laboratories
under which Cambrex would contribute $12,415 to the settlement of consolidated
litigation brought by a class of direct purchasers. In exchange, Cambrex and its
operating subsidiary, Cambrex Profarmaco Milano S.r.l., received from Mylan a
release and full indemnity against future costs or liabilities in related
litigation brought by purchasers, as well as potential future claims related to
this matter. Approximately $4,415 was paid in April 2003 in accordance with the
agreement, with the remaining $8,000 to be paid over the next five years.
Cambrex recorded an $11,342 charge (discounted to the present value due to the
five year pay-out) in the first quarter of 2003 as a result of this settlement.
As of June 30, 2003, the outstanding balance for this liability was $7,013.
On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and
seller of niacinamide Vitamin B-3, received a Federal Grand Jury subpoena for
the production of documents relating to the pricing and possible customer
allocation with regard to that product. The Company understands that the
subpoena was issued as part of the Federal Government's ongoing anti-trust
investigation into various business practices in the vitamin industry generally.
In the fourth quarter of 1999, the Company reached a settlement with the
Government concerning Nepera's alleged role in Vitamin B-3 violations from 1992
to 1995. On October 13, 2000, the Government settlement was finalized with
Nepera entering into a voluntary plea agreement with the Department of Justice.
Under this agreement, Nepera entered a plea of guilty to one count of price
fixing and market allocation of Vitamin B-3 from 1992 to 1995 in violation of
section one of the Sherman Act and agreed to pay a fine of $4,000. Under the
plea agreement, Nepera was placed on probation for one year, which has ended.
The fine was paid in February 2001. Nepera has been named as a defendant, along
with several other companies, in a number of private civil actions brought on
behalf of alleged purchasers of Vitamin B-3.
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(13) CONTINGENCIES (CONTINUED)
Environmental (continued)
An accrual of $6,000 was recorded in the fourth quarter 1999 to cover
the anticipated government settlements, related litigation, and legal expenses.
Based on discussions with various plaintiffs counsel, as well as current
estimates of expenditures for legal fees, an additional accrual of $4,400 was
established in the fourth quarter of 2001. The Company believed that the current
reserves would be sufficient to cover resolution of the remaining related
litigation matters. However, during 2002, based on information developed during
the year, the Company determined that the remaining litigation matters would be
more costly than previously anticipated. Therefore, during 2002, the Company
increased reserves by $10,000. The balance of this accrual as of June 30, 2003
was approximately $7,867. This accrual has been recorded in accounts payable and
accrued liabilities.
During February 1999, the Company's Charles City facility (CCC) sold
several batches of 5-NIPA, an x-ray contrast media raw material, to
Mallinckrodt, Inc. In April 1999, Mallinckrodt verbally notified CCC that some
of the 5-NIPA batches appeared to be out of specification. CCC requested that
Mallinckrodt cease production and return the product for refund or replacement.
CCC's quality control tests indicated that the material met the agreed
specification, but CCC was ready to issue a credit to Mallinckrodt upon return
of the questionable material. Nevertheless, it appears that Mallinckrodt
continued to use the material.
In August 1999, Mallinckrodt issued CCC a schedule that summarized the
total costs allegedly incurred by Mallinckrodt related to the questionable
5-NIPA in the amount of approximately $4.8 million. On July 13, 2000,
Mallinckrodt sent CCC a letter claiming that CCC breached its supply agreement
by delivering contaminated 5-NIPA to Mallinckrodt and claiming damages for its
costs. We responded that, among other things, CCC delivered in-specification
material and did not breach the supply agreement. On October 2, 2000,
Mallinckrodt filed suit in United States District Court in St. Louis, Missouri
alleging, among other things, that CCC breached the Supply Agreement and
claiming significant damages. On December 27, 2000, we filed our answer, denying
Mallinckrodt's claims.
Mediation has been held but has been unsuccessful to date; the
discovery process has progressed slowly but is now nearly complete. The next
mediation session has been scheduled for August 26, 2003, and a September 8,
2003 trial date has been set. Primex, our insurance carrier, has become involved
in the matter and will send a representative to the August mediation. The
Company continues to evaluate the matter as it proceeds toward mediation and
trial. The Company's reserves and available insurance coverage are believed to
be adequate to meet any settlement or judgment in the matter.
Other
The Company has a $5,000 investment in a privately owned, emerging
biotechnology company that has therapeutic products in various stages of
clinical trials. The investment is monitored on a continual basis to evaluate
whether any changes in value become other than temporary. No impairment has been
recognized.
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(13) CONTINGENCIES (CONTINUED)
Other (continued)
The Company enters into standard indemnification agreements in the
ordinary course of business including contract provisions for indemnification
protecting its customers and suppliers, etc. against third party liability for
manufacture and sale of Company products that fail to meet product
specifications and contract provisions for indemnification protecting licensees
against intellectual property infringement related to licensed Company
technology or processes. Due to the lack of historical obligations related to
these items and the existence of associated insurance coverage, the Company has
no liabilities recorded for these items as of June 30, 2003.
As permitted under Delaware law, the Company has agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we have a Director
and Officer insurance policy that covers a portion of any potential exposure.
The Company believes the estimated fair value of these indemnification
agreements is minimal, and as such, the Company has no liabilities recorded for
these agreements as of June 30, 2003.
The Securities and Exchange Commission is currently conducting an
investigation into the Company's previously announced inter-company accounting
matter. The investigation began earlier this year after the Company voluntarily
disclosed certain discrepancies related to inter-company accounts for the five
year period ending December 31, 2001 that resulted in the restatement of the
Company's financial statements for those years. To Cambrex's knowledge, the
investigation is limited to this inter-company accounting matter, and the
Company does not expect further revisions to its historical financial statements
relating to these discrepancies. The Company is fully cooperating with the SEC.
19
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 2003 VERSUS SECOND QUARTER 2002
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, 2003 and 2002.
Quarter Ended June 30,
-----------------------------------------
2003 2002
------------------ ------------------
$ % $ %
-------- ----- -------- -----
Human Health ......... $ 57,809 42.4% $ 55,915 41.6%
Biosciences .......... 38,488 28.2 40,298 30.0
Rutherford Chemicals.. 33,311 24.4 31,884 23.8
All Other ............ 6,755 5.0 6,166 4.6
-------- ----- -------- -----
Total gross sales $136,363 100.0% $134,263 100.0%
======== ===== ======== =====
The following table shows the gross sales and gross profit of the Company's four
product segments for the second quarter 2003 and 2002.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2003
Human Health ......... $ 57,809 $ 22,727 39.3%
Biosciences .......... 38,488 16,614 43.2
Rutherford Chemicals.. 33,311 3,423 10.3
All Other ............ 6,755 1,415 20.9
-------- --------
Total ............ $136,363 $ 44,179 32.4%
======== ========
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2002
Human Health ......... $ 55,915 $ 24,582 44.0%
Biosciences .......... 40,298 21,310 52.9
Rutherford Chemicals.. 31,884 6,290 19.7
All Other ............ 6,166 858 13.9
-------- --------
Total ............ $134,263 $ 53,040 39.5%
======== ========
Gross sales in the second quarter 2003 increased 1.6% to $136,363 from $134,263
in the second quarter 2002. Increased sales in the Human Health, Rutherford
Chemicals and All Other segments were partly offset by lower sales in the
Biosciences segment. Gross sales were favorably impacted 6.7% due to exchange
rates reflecting a weaker U.S. dollar in the second quarter of 2003 versus the
second quarter 2002.
20
RESULTS OF OPERATIONS (CONTINUED)
The Human Health Segment gross sales of $57,809 were $1,894 or 3.4% above the
second quarter 2002. Human Health sales were favorably impacted 11.2% due to
exchange rates reflecting a weaker U.S. dollar in the first quarter 2003 vs.
2002. Excluding the currency impact, the decline results from lower sales of
generic amphetamines which were introduced in 2002 for use in treatment of
attention deficit disorder, reflecting qualification batches needed in 2002 and
a slower than expected market introduction; lower shipments of cardiovascular
API's due primarily to the loss of a U.S. customer, timing of shipments and
lower prices in Europe; lower central nervous system API's due to timing of
shipments and pricing pressures; and reduced pricing and market share of certain
x-ray products. Partly offsetting these decreases were higher sales of
gastrointestinal active pharmaceutical ingredients primarily reflecting higher
U.S. demand in support of a new dosage formulation for a major customer,
increased new pharmaceutical product introductions to support customer clinical
activities and higher sales of an antihistamine intermediate product delayed in
2002 due to customer supply issues. In addition, a shipment of an anti-infective
was made during the quarter, which did not occur last year due to timing of
customer demand.
The Biosciences Segment gross sales of $38,488 were $1,810 or 4.5% lower than
second quarter 2002. The Biosciences segment sales were favorably impacted 4.6%
due to exchange rates reflecting a weaker U.S. dollar in the first quarter 2003
vs. 2002. The sales decrease primarily reflects reduced plant utilization in our
facilities providing contract manufacturing services driven by the previously
announced loss of a biopharmaceutical customer whose product failed to receive
FDA approval, and changes in terms of an existing contract. These decreases were
partly offset by increased media, serum and human cell therapy product sales
reflecting higher pricing and demand, and other cell culture products due to
increased demand from existing customers and addition of new customers
reflecting the continued improvement in product supply and quality.
Rutherford Chemicals Segment gross sales of $33,311 in the second quarter 2003
increased $1,427 or 4.5% versus the second quarter 2002. Rutherford Chemicals
sales in the quarter were favorably impacted 1.8% due to foreign currency. The
increase reflects higher engineering plastic polymer sales due to increased
demand, higher feed additives due to increased pricing and product availability,
and higher personal care products due to higher demand overseas. These increases
were partly offset by reduced agricultural intermediate sales due to timing of
campaigns and lower photographic demand versus last year.
The All Other Segment gross sales of $6,755 were up $589 or 9.6% from the second
quarter 2002 reflecting higher crop protection sales due to the successful
introduction of new higher capacity production equipment and higher animal feed
additive sales due primarily to timing of customer demand.
Export sales from U.S. businesses of $14,790 in the second quarter 2003
increased 21.6% from the second quarter 2002. International sales from our
European operations totaled $65,757 for the second quarter 2003 as compared with
$59,161 in 2002, an increase of 11.1%. The $136,363 of sales in the second
quarter of 2003 consisted of $70,018, $56,630, $6,895 and $2,820 to North
America, Europe, Asia and the rest of the world, respectively. The $134,263 of
sales in the second quarter of 2002 consisted of $79,280, $45,578, $6,292 and
$3,113 to North America, Europe, Asia and the rest of the world, respectively.
21
RESULTS OF OPERATIONS (CONTINUED)
Gross profit in the second quarter of 2003 was $44,179 compared to $53,040 in
2002. Gross margin decreased to 32.4% from 39.5% in the second quarter of 2002.
The 2002 gross margins include a $1,776 favorable impact of an insurance
settlement within the Rutherford Chemicals business, which increased the 2002
gross margin by 1.3 percentage points. This settlement is recorded within Cost
of goods sold. The reduced results reflect lower margins in the Biosciences,
Human Health and Rutherford Chemicals segments, partly offset by higher margins
in the All Other segment. The Biosciences segment margin decline primarily
reflects the lower plant utilization in the contract manufacturing sites, the
change in terms which reduced the price on an existing contract and additional
reserves established for certain outstanding customer accounts receivables,
partly offset by the favorable impact of cost reduction activities, increased
pricing in the cells and media product lines and favorable foreign currency
effects. Human Health segment margins decreased due to unfavorable product mix
and lower production volumes overseas, and continuing pricing pressures on
generic products partly offset by the favorable effects of hedge contract gains
and favorable translation. The hedge gains are reflected in Other Revenue.
Rutherford Chemicals margins decreased due to the favorable insurance settlement
included in the 2002 results, unfavorable product mix particularly in the
Pyridine market, and higher raw material costs. The All Other segment margins
increased primarily due to production efficiencies from higher volumes.
Selling, general and administrative expenses as a percentage of gross sales were
18.9% in the second quarter 2003, compared to 18.3% in the second quarter 2002.
This increase reflects higher sales and marketing costs due to the impact of
foreign currency exchange and investments in the Biosciences sales force.
Administrative costs were flat due to cost saving initiatives and lower
management incentives which were offset by higher pension expenses, regulatory
compliance costs associated with the Sarbanes-Oxley Act and unfavorable foreign
currency impact.
Research and development expenses of $5,014 were 3.7% of gross sales in the
second quarter 2003, compared to $4,692 or 3.5% of gross sales in 2002. The
increase primarily reflects spending on development of a new endotoxin detection
product and foreign currency exchange.
The operating profit in the second quarter 2003 was $13,334 compared to $23,755
in 2002. The results reflect the reduced gross margins and higher operating
expenses. In addition, the 2002 results include a $1,776 favorable insurance
settlement within the Rutherford Chemicals business.
Net interest expense of $2,689 in the second quarter 2003 decreased $163 from
2002 primarily reflecting lower average debt balances and interest rates. The
average interest rate was 4.10% in the second quarter 2003 versus 4.36% in 2002.
The effective tax rate for the second quarter 2003 and 2002 was 26.0%.
The net income in the second quarter of 2003 was $8,051, or $0.31 per diluted
share versus $16,173, or $0.61 per diluted share in the same period a year ago.
22
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF SIX MONTHS 2003 VERSUS SIX MONTHS 2002
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 first
half 2003 and 2002.
Six Months Ended June 30
-----------------------------------------
2003 2002
------------------ ------------------
$ % $ %
-------- ----- -------- -----
Human Health ......... $113,232 41.0% $112,135 42.0%
Biosciences .......... 82,593 29.9 77,493 29.1
Rutherford Chemicals.. 68,036 24.6 65,145 24.4
All Other ............ 12,422 4.5 11,945 4.5
-------- ----- -------- -----
Total gross sales $276,283 100.0% $266,718 100.0%
======== ===== ======== =====
The following table shows gross sales and gross profit of the Company's four
segments for the first half 2003 and 2002.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2003
Human Health ......... $113,232 $ 45,996 40.6%
Biosciences .......... 82,593 38,554 46.7
Rutherford Chemicals.. 68,036 7,111 10.5
All Other ............ 12,422 2,203 17.7
-------- --------
Total .......... $276,283 $ 93,864 34.0%
======== ========
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2002
Human Health ......... $112,135 $ 50,428 45.0%
Biosciences .......... 77,493 38,958 50.3
Rutherford Chemicals.. 65,145 11,464 17.6
All Other ............ 11,945 1,884 15.8
-------- --------
Total .......... $266,718 $102,734 38.5%
======== ========
Gross sales for the first six months of 2003 increased 3.6% to $276,283 from
$266,718 in the first six months of 2002. Sales in all four segments increased
compared to 2002. Gross sales were favorably impacted 6.3% due to exchange rates
reflecting a weaker U.S. dollar in the first six months of 2003 versus the same
period in 2002.
The Human Health Segment gross sales for the first six months of $113,232 were
$1,097 or 1.0% above the first six months 2002. Human Health sales were
favorably impacted 10.7% due to exchange rates reflecting a weaker U.S. dollar
in the first six months 2003 versus 2002. Excluding the currency impact, the
decrease results from lower sales of central nervous system API's due to lower
worldwide demand and pricing pressures; lower shipments of cardiovascular API's
due primarily to the loss of a U.S. customer, timing of shipments and lower
prices in Europe; lower sales of generic amphetamines which were introduced in
2002 for use in treatment of attention deficit disorder, reflecting
qualification batches needed in 2002 and a slower than expected market
introduction. Partly offsetting these decreases were higher sales of
gastrointestinal API's primarily reflecting higher U.S. demand in support of a
new dosage formulation for a major customer and increased new pharmaceutical
product introductions to support customer clinical activities.
23
RESULTS OF OPERATIONS (CONTINUED)
The Biosciences Segment gross sales for the first six months of $82,593 were
$5,100 or 6.6% higher than the first six months 2002. The Biosciences segment
sales were favorably impacted 4.2% due to exchange rates reflecting a weaker
U.S. dollar in the first six months 2003 versus 2002. The sales increase
primarily reflects higher sales of media, serum and human cell therapy products
reflecting higher pricing and demand, higher sales of other cell culture
products due to increased demand reflecting the continued improvement in product
supply and quality versus the competition and increased sales of endotoxin
detection products reflecting the introduction of FDA compliant software in July
2002. These increases were partly offset by the divestiture of the In Vitro
Diagnostics business in early 2002.
Rutherford Chemicals Segment gross sales of $68,036 in the first six months 2003
increased $2,891 or 4.4% versus the first six months 2002. Rutherford Chemicals
sales in the first six months were favorably impacted 1.7% due to foreign
currency. The increase reflects higher personal care products sales due to
increased demand overseas, higher feed additives due to increased pricing and
product availability, and higher engineering plastic polymer sales due to
increased demand. These increases were partly offset by reduced agricultural
intermediate sales due to timing of campaigns.
The All Other Segment gross sales of $12,422 were up $477 or 4.0% from the first
six months 2002 reflecting higher crop protection sales due to the successful
introduction of new higher capacity production equipment partially offset by
lower animal feed additives due primarily to timing of customer demand.
Export sales from U.S. businesses of $28,679 in the first six months of 2003
increased 17.0% from the first six months of 2002. International sales from our
European operations totaled $130,994 for the first six months of 2003 as
compared with $119,095 in 2002, an increase of 10.0%. The $276,283 of sales in
the first six months of 2003 consisted of $145,884, $111,233, $13,545 and $5,621
to North America, Europe, Asia and the rest of the world, respectively. The
$266,718 of sales in the first six months of 2002 consisted of $156,814,
$92,419, $11,694 and $5,791 to North America, Europe, Asia and the rest of the
world, respectively.
Gross profit for the first six months of 2003 was $93,864 compared to $102,734
in 2002. Gross margin decreased to 34.0% from 38.5% in the first six months of
2002. The 2002 gross margins include a $1,776 favorable impact of an insurance
settlement within the Rutherford Chemicals business, which increased the 2002
gross margin by 0.6 percentage points. This settlement is recorded within Cost
of goods sold. The results reflect lower margins in the Human Health, Bioscience
and Rutherford Chemicals segments, partly offset by higher margins in the All
Other segment. Human Health segment margins decreased due to lower production
volumes and unfavorable product mix overseas, and pricing pressures on generic
products partly offset by the favorable effects of hedge contract gains and
favorable translation due to the weak U.S. dollar. The hedge gains are reflected
in Other revenue. The bioscience segment margin decline primarily reflects
change in terms which reduced the price on an existing contract and additional
reserves established for certain outstanding customer accounts receivables,
partly offset by increased pricing in the cells and media product lines and
favorable foreign currency effects. Rutherford Chemicals margins decreased due
to the favorable insurance settlement included in the 2002 results, unfavorable
product mix particularly in the Pyridine market, and higher raw material costs.
The All Other segment margins increased primarily due to production efficiencies
from higher volumes.
Selling, general and administrative expenses of $53,889 or 19.5% of gross sales
in the first six months 2003 increased from $47,201 or 17.7% in the same period
a year ago. Higher administration costs reflect higher pension expenses, the
costs incurred in the first six months 2003 for the internal investigation into
the restatement of results disclosed in the fourth quarter 2002, regulatory
compliance costs associated with the Sarbanes-Oxley Act and the impact of
currency translation due to the weaker U.S. dollar. Sales and marketing expenses
increased primarily due to the impact of foreign currency exchange and an
investment in the Biosciences sales force.
24
RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses of $9,656 were 3.5% of gross sales in the
first six months 2003, compared to $8,627 or 3.2% of gross sales in 2002. The
increase primarily reflects spending on development of a new endotoxin detection
product and foreign currency exchange.
The six months 2003 results include a pre-tax provision of $11,342 (discounted
to the present value of the five year pay-out) related to an agreement reached
with Mylan Laboratories under which Cambrex will contribute $12,415 to the
settlement of consolidated litigation brought by a class of direct purchasers.
Of this amount, $4,415 has been paid to date with the balance due in equal
installments over a five-year period. In exchange, Cambrex received from Mylan a
release and full indemnity against future costs or liabilities in related
litigation brought by the purchasers, as well as potential future claims related
to this matter.
The operating profit in the first six months of 2003 was $18,977 compared to
$46,906 in 2002. The results reflect the $11,342 pretax charge for the Mylan
settlement discussed above, reduced gross margins in the Human Health and
Rutherford segments and higher operating expenses. In addition, the 2002 results
include a $1,776 favorable insurance settlement within the Rutherford Chemicals
business.
Net interest expense of $5,023 in the first six months 2003 decreased $756 from
2002 primarily reflecting lower average debt balances and interest rates. The
average interest rate was 4.02% in the second quarter 2003 versus 4.24% in 2002.
The effective tax rate for the first six months 2003 and 2002 was 26.0%.
The net income in the first six months of 2003 was $10,410, or $0.40 per diluted
share versus $31,164, or $1.17 per diluted share in the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2003, the Company generated cash flows from
operations totaling $45,312 a decrease of $1,666 versus the same period a year
ago. This decrease in cash flows is due primarily to lower net income partially
offset by lower trade receivables due to better collections, and lower
inventories due to better inventory management.
Capital expenditures were $20,977 in the six months of 2003 as compared to
$22,039 in 2002. Part of the funds in 2003 were used for a facility expansion at
a Biopharmaceutical manufacturing plant in Baltimore, Maryland, expansion of
endotoxin detection and cell therapy manufacturing capabilities at a Bioscience
facility in Walkersville, Maryland as well as new small scale production
equipment for generic pharmaceuticals at the Charles City, Iowa facility.
Included in cash flows from investing activities is insurance proceeds of $3,785
to reimburse the Company for fire related damage to a Rutherford facility.
Cash flows used in financing activities of $22,786 include net repayment of debt
of $18,895, purchase of treasury stock of $2,420 and payment of dividends of
$1,563.
During June 2003, the Company borrowed $75,000 in a private offering. The debt
consists of 7 year guaranteed senior Notes due in June 2010 and interest
payments are due semi-annually at a rate of 5.31%. The Notes rank equal with the
Company's other senior indebtedness. The funds were used primarily to pay down
existing bank debt.
25
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the first six months of 2003 and 2002, the Company paid cash dividends of
$0.06 per share.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
As discussed in Note 8 to the accompanying financial statements, the Company
announced in the fourth quarter 2002 that it had engaged a financial advisor to
assist the Company in investigating strategic alternatives for the Rutherford
Chemicals segment. The financial advisor contacted certain parties regarding the
Rutherford Chemicals business. Subsequently, certain parties began due diligence
procedures and one party was ultimately provided a period of exclusivity for
this due diligence process. As of June 30, 2003, the Company completed its
on-going assessment of the status of Rutherford Chemicals and determined, at
that date, the Rutherford Segment would remain in the Company's continuing
operations. On July 31, 2003 the Company's Board of Directors approved a
proposed sale of the Rutherford business to this party. On August 7, 2003, the
Company announced that an agreement to sell Rutherford Chemicals for
approximately $64 million had been signed with this party. The terms result in a
loss on sale of approximately $50 million, including fees associated with the
transaction, subject to working capital and other adjustments through the date
of the closing. This loss has not been tax affected due to the level of domestic
earnings, which includes this loss, being insufficient to support realization of
such benefit at this time. Although certain contingencies exist which could
result in the sale not being consummated, management expects to close the sale
within 45 to 65 days from the date of the agreement. As a result of the signing
of this agreement, the Rutherford Chemicals Segment will be considered
discontinued operations as of the date of the agreement and will be reported as
such in the third quarter 2003.
In the second half of 2003, the Company will record a $3.5 million non-cash net
write down of certain deferred tax assets that were deemed unrealizable due to
the domestic net operating loss generated by the Rutherford sale.
FORWARD-LOOKING STATEMENTS
This document may contain "forward-looking statements" for the purposes of the
Securities and Exchange Commission's "safe harbor" provisions under the Private
Securities Litigation Reform Act of 1995 and Rule 3B-6 under the Exchange Act,
without limitation, statements regarding expected performance, especially
expectations with respect to sales, research and development expenditures,
earnings per share, capital expenditures, acquisitions, divestitures,
collaborations, or other expansion opportunities.
The forward-looking statements contained herein involve risks and uncertainties
that may cause results to differ materially from the Company's expectations
including but not limited to, global economic trends, pharmaceutical outsourcing
trends, competitive pricing or product developments, government legislation
and/or regulations (particularly environmental issues), technology,
manufacturing and legal issues, unfavorable results from FDA inspections, delays
in FDA approval of customers' new products, timing of shipments, changes in
foreign exchange rates, performance of minority investments, uncollectable
receivables, loss on disposition of assets, cancellation or delays in renewal of
contracts, and lack of suitable raw materials or packing materials.
26
ITEM 4. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures. The
Company's management, under the supervision of the Chief
Executive Officer and Chief Financial Officer, have evaluated
the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Rules 13a-14(c) and under the
Securities Exchange Act of 1934 (the "Exchange Act")) as of
the end of the period covered by this quarterly report. Based
on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure
controls and procedures were effective to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and
Exchange Commission.
b) Changes in internal controls. There were no significant
changes in the Company's internal controls over financial
reporting or in other factors that could significantly affect
these controls over financial reporting during the period
covered by this quarterly report. As disclosed in Note 2 in
the Company's 2002 Form 10-K, the Company restated its results
for prior periods due to certain discrepancies in the
inter-company accounts. Effective December 31, 2002, the
Company has implemented a revised policy and procedure with
respect to inter-company transactions and accounts to ensure
monthly reconciliations are performed.
27
PART II - OTHER INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS.
Refer to Form 10Q for quarterly period ended March 31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 31.1 - CEO Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - CFO Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - CEO Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - CFO Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
Report on Form 8-K filed on April 4, 2003 regarding a
reduction in the Company's 2003 earnings forecast and a
settlement and indemnity agreement with Mylan Laboratories.
Report on Form 8-K filed on April 25, 2003 regarding the first
quarter 2003 earnings release issued by Cambrex Corporation
dated April 24, 2003.
Report on Form 8-K filed on July 25, 2003 regarding the Second
quarter 2003 earnings release issued by Cambrex Corporation
dated July 24, 2003.
Report on Form 8-K filed on August 8, 2003 regarding the press
release announcing that Cambrex Corporation has entered into
an agreement to sell its Rutherford Chemicals business issued
by Cambrex Corporation dated August 7, 2003.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBREX CORPORATION
By /s/ Luke M.Beshar
-----------------------------------
Luke M.Beshar
Senior Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as the Registrant's Principal
Financial Officer)
Date: August 13, 2003
29