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CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 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 October 31, 2003, there were 25,793,317 shares outstanding of the
registrant's Common Stock, $.10 par value.
CAMBREX CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended September 30, 2003
Table of Contents
Page No.
--------
Part I Financial information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of September 30, 2003
and December 31, 2002 2
Condensed consolidated income statements for the three months and nine months
ended September 30, 2003 and 2002 3
Condensed consolidated statements of cash flows for the nine months ended
September 30, 2003 and 2002 4
Notes to condensed consolidated financial statements 5 - 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 23 - 30
Item 4. Controls and Procedures 31
Part II Other information
Item 4. Matters Submitted to a Vote of Securities Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33 - 39
PART 1 - FINANCIAL INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 41,835 $ 33,296
Trade receivables, net ............................ 54,681 58,132
Inventories, net .................................. 76,348 74,430
Deferred tax assets ............................... 21,433 35,612
Assets held for sale - short-term (Note 10) ....... 65,558 57,838
Prepaid expenses and other current assets ......... 25,790 16,450
------------- ------------
Total current assets .......................... 285,645 275,758
Property, plant and equipment, net ................... 256,221 239,944
Goodwill ............................................. 217,828 214,354
Other intangible assets, net ......................... 51,031 49,910
Assets held for sale - long-term (Note 10) ........... - 74,419
Other assets ......................................... 12,915 13,143
------------- ------------
Total assets .................................. $ 823,640 $ 867,528
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .......... $ 71,711 $ 74,486
Liabilities held for sale (Note 10) ............... 9,905 14,532
Short-term debt and current portion of
Long-term debt ................................ 2,299 2,364
------------- ------------
Total current liabilities ............................ 83,915 91,382
Long-term debt ....................................... 253,686 267,434
Deferred tax liabilities ............................. 52,984 52,630
Other non-current liabilities ........................ 52,599 43,400
------------- ------------
Total liabilities ............................. 443,184 454,846
------------- ------------
Stockholders' equity:
Common stock, $.10 par value; issued 28,359,564 and
28,323,059 shares at respective dates ......... 2,836 2,832
Additional paid-in capital ........................ 203,387 201,883
Retained earnings ................................. 209,422 265,774
Treasury stock, at cost 2,637,247 and 2,494,803
shares at respective dates ..................... (22,201) (19,841)
Accumulated other comprehensive loss .............. (12,988) (37,966)
------------- ------------
Total stockholders' equity .................... 380,456 412,682
------------- ------------
Total liabilities and stockholders' equity .... $ 823,640 $ 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 Nine months ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Gross sales ......................................... $ 95,179 $ 92,332 $ 303,526 $ 294,655
Commissions & allowances ......................... 691 1,224 2,891 2,926
--------- --------- --------- ---------
Net sales ........................................... 94,488 91,108 300,635 291,729
Other revenues ................................... 1,891 3,083 6,899 5,097
--------- --------- --------- ---------
NET REVENUES ........................................ 96,379 94,191 307,534 296,826
Cost of goods sold .................................. 58,747 49,542 183,170 161,393
--------- --------- --------- ---------
GROSS PROFIT ........................................ 37,632 44,649 124,364 135,433
Operating expenses:
Selling, general and
administrative expenses ....................... 23,592 22,510 72,936 64,594
Research and development expenses ................ 4,061 3,891 12,576 11,672
Restructuring and other charges .................. - 2,113 - 2,538
Legal settlement (Note 15) ....................... - - 11,342 -
--------- --------- --------- ---------
Total operating expenses ....................... 27,653 28,514 96,854 78,804
OPERATING PROFIT .................................... 9,979 16,135 27,510 56,629
Other (income) expenses:
Interest expense, net ............................ 3,251 2,877 8,301 8,673
Other (income), expense net ...................... (80) 865 (207) 3,453
--------- --------- --------- ---------
Income from continuing operations
before income taxes .............................. 6,808 12,393 19,416 44,503
Provision for income taxes ....................... 14,742 3,110 18,274 11,170
--------- --------- --------- ---------
(LOSS)/INCOME FROM CONTINUING OPERATIONS ............ $ (7,934) $ 9,283 $ 1,142 $ 33,333
DISCONTINUED OPERATIONS (NOTE 10)
Loss from discontinued operations before income taxes (56,777) (10,480) (55,316) (478)
Income tax benefit .................................. (264) (3,294) (138) (405)
--------- --------- --------- ---------
Loss on discontinued operations ..................... (56,513) (7,186) (55,178) (73)
--------- --------- --------- ---------
Net (loss)/income ................................... $ (64,447) $ 2,097 $ (54,036) $ 33,260
========= ========= ========= =========
Basic (loss)/earnings per share:
(Loss)/income from continuing operations ......... (0.31) 0.36 0.04 1.28
(Loss)/income from discontinued operations ....... (2.20) (0.28) (2.14) -
--------- --------- --------- ---------
Net (loss)/income ................................ (2.51) 0.08 (2.10) 1.28
Diluted (loss)/earnings per share:
(Loss)/income from continuing operations ......... (0.31) 0.35 0.04 1.25
(Loss)/income from discontinued operations ....... (2.20) (0.27) (2.12) -
--------- --------- --------- ---------
Net (loss) income ................................ (2.51) 0.08 (2.08) 1.25
Weighted average shares outstanding:
Basic ............................................ 25,721 26,012 25,769 25,967
Effect of dilutive stock options ................. - 711 263 698
--------- --------- --------- ---------
Diluted .......................................... 25,721 26,723 26,032 26,665
Cash dividends paid per share ....................... $ 0.03 $ 0.03 $ 0.09 $ 0.09
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended
September 30,
-----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net (loss) income .................................... $ (54,036) $ 33,260
Depreciation and amortization ........................ 26,216 22,410
Asset impairments and other charges .................. - 2,538
Investment impairment ................................ - 3,089
Deferred income tax provision ........................ 14,543 (809)
Changes in assets and liabilities:
Mylan settlement, net of cash payments ........... 7,013 -
Vitamin B-3 provision, net of cash payments ...... (4,890) 2,478
Receivables, net ................................. 6,525 6,118
Inventories ...................................... 2,814 (2,257)
Prepaid expenses and other current assets ........ (1,553) (6,411)
Accounts payable and accrued liabilities ......... (377) (145)
Income taxes payable ............................. (8,923) (1,767)
Other non-current assets and liabilities ......... 3,046 870
Discontinued operations:
Non-cash charges and changes in operating assets
and liabilities ............................ 7,115 14,529
Write-down of assets held for sale based on
expected selling price (Note 10) ........... 55,000 -
Asset impairments and other charges ............ - 6,887
--------- ---------
Net cash provided by operating activities ........ 52,493 80,790
--------- ---------
Cash flows from investing activities:
Capital expenditures ................................. (27,251) (27,797)
Other investing activities ........................... (2,249) 586
Discontinued operations - cash flows from
investing activities .............................. 720 (7,262)
--------- ---------
Net cash used in investing activities ................ (28,780) (34,473)
--------- ---------
Cash flows from financing activities:
Dividends ............................................ (2,316) (2,336)
Net increase (decrease) in short-term debt ........... 824 (2,658)
Long-term debt activity (including current portion):
Borrowings ....................................... 284,861 34,700
Repayments ....................................... (299,693) (49,836)
Proceeds from stock options exercised ................ 117 8,499
Purchase of treasury stock ........................... (2,420) (2,267)
--------- ---------
Net cash used in financing activities ............ (18,627) (13,898)
--------- ---------
Effect of exchange rate changes on cash ................. 3,453 2,739
--------- ---------
Net increase in cash and cash equivalents ............... 8,539 35,158
--------- ---------
Cash and cash equivalents at beginning of period ........ 33,296 23,696
--------- ---------
Cash and cash equivalents at end of period .............. $ 41,835 $ 58,854
========= =========
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 nine months ended
September 30, 2003 are not necessarily indicative of the results to be expected
for the full year.
In the third quarter 2003, the Company announced that an agreement to
sell the Rutherford Chemicals business had been signed and on November 10, 2003
the transaction was completed. As a result the business is being reported as a
discontinued operation for all periods presented.
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 affect the timing of the recognition of
restructuring expenses 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.
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 underlying 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.
Adoption of SFAS 149 did not have any effect on the Company's consolidated
financial position or results of operations.
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 did not have any effect 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 a material 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 fourth 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 September 30, 2003, the Company has nine active stock-based employee
compensation plans 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 Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net (loss)/income, as reported.................... $(64,447) $ 2,097 $(54,036) $ 33,260
Deduct: stock-based compensation
expenses determined using fair value
method, net of tax effects...................... (1,897) (474) (3,626) (1,189)
-------- -------- -------- --------
Proforma net (loss)/income........................ $(66,344) $ 1,623 $(57,662) $ 32,071
(Loss)/earnings per share:
Basic - as reported............................. $ (2.51) $ 0.08 $ (2.10) $ 1.28
Basic - proforma................................ $ (2.58) $ 0.06 $ (2.24) $ 1.24
Diluted - as reported........................... $ (2.51) $ 0.08 $ (2.08) $ 1.25
Diluted - proforma.............................. $ (2.58) $ 0.06 $ (2.22) $ 1.20
The pro-forma stock-based employee compensation expense, net of tax,
for continuing operations of $1,684 and $413 for the quarters ended September
30, 2003 and 2002, respectively, and for discontinued operations of $213 and
$61, 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 0.29% (ii) expected volatility of 45.69% and 35.56%, (iii) risk-free
interest rate of 3.48% and 3.13% to 3.97% and (iv) expected life of 6-7 years.
The pro-forma stock-based employee compensation expense, net of tax,
for continuing operations of $3,382 and $1,046 for the nine months ended
September 30, 2003 and 2002, respectively, and for discontinued operations of
$244 and $143, 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 0.29% (ii) expected volatility of 41.21% and 34.60%, (iii)
risk-free interest rate ranging from 2.75% to 3.81% and 3.13% to 4.97% and (iv)
expected life of 6-7 years.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(3) STOCK BASED COMPENSATION (CONTINUED)
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
September 30, 2003. Once the rights vest, this arrangement will be marked to
market and expensed over the remaining estimated future service period.
(4) EARNINGS PER SHARE
In the three months ended September 30, 2003, 278,000 stock options
were excluded from the computation of diluted earnings per share due to their
anti-dilutive effect.
(5) 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 evaluates 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 nine months
ended September 30, 2003, are as follows:
Human
Biosciences Health
Segment Segment Total
----------- ------- ---------
Balance as of January 1, 2003........... $ 177,646 $36,708 $ 214,354
Purchase Accounting Adjustments
for Contingent Payments.............. 188 - 188
Translation Effect......... 538 2,748 3,286
----------- ------- ---------
Balance as of September 30, 2003........ $ 178,372 $39,456 $ 217,828
=========== ======= =========
Other intangible assets that are not subject to amortization, consist
of the following:
As of As of
September 30, December 31,
2003 2002
------------- ------------
Proprietary Process........................ $ 1,675 $ 1,675
Trademarks................................. 33,898 33,898
------------- ------------
Total $ 35,573 $ 35,573
============= ============
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(5) GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
Other intangible assets, which will continue to be amortized, consist
of the following:
As of As of
September 30 December
2003 31, 2002
Gross Gross
Carrying Carrying
Amount Amount
------------ --------
Patents............................ $ 2,874 $ 2,589
Proprietary Process................ 5,841 5,841
Supply Agreements.................. 2,110 2,100
Trademarks......................... 785 785
Unpatented Technology.............. 5,438 5,490
Other.............................. 3,274 1,235
------------ --------
Total 20,322 18,040
Accumulated Amortization........... (4,864) (3,703)
------------ --------
Net $ 15,458 $ 14,337
============ ========
Amortization expense for the quarter and nine months ended September
30, 2003 was $399 and $1,143, respectively. Amortization expense for the quarter
and nine months ended September 30, 2002 was $380 and $1,157.
The expected amortization expense related to intangible assets in the
future is as follows:
For the year ended December 31, 2003........................... $ 1,629
For the year ended December 31, 2004........................... $ 1,591
For the year ended December 31, 2005........................... $ 1,566
For the year ended December 31, 2006........................... $ 1,556
For the year ended December 31, 2007........................... $ 1,545
(6) INCOME TAXES
The Company's domestic net deferred tax assets at September 30, 2003
were primarily associated with net operating loss carryforwards, foreign tax
credits, research and experimentation tax credits and alternative minimum tax
credits, which are evaluated quarterly to assess the likelihood of realization.
The realization of these assets is ultimately dependent upon generating future
domestic taxable income or implementing tax planning strategies prior to
expiration of those assets. After considering the losses generated by the sale
of Rutherford Chemicals and recent shifts in the geographic mix of income among
taxing jurisdictions, the Company determined that a valuation allowance was
necessary for all net domestic deferred tax assets, which totaled $16,700. Of
this $16,700 valuation allowance, $13,600 represents amounts recorded in the
third quarter, of which $12,800 is for continuing operations and $800 is for
discontinued operations. The Company has also recorded $3,100 in valuation
allowance for the nine months ended September 30, 2003 related to foreign tax
credits previously identified as being unlikely to be realized. If the Company
continues to report pre-tax losses in the United States, income tax benefits
associated with those losses will not be recognized and, therefore, those losses
would not be reduced by such income tax benefits. The carryforward periods for
foreign tax credits, research and experimentation tax credits, net operating
losses, and the federal alternative minimum tax credits are 5 years, 20 years,
20 years and an indefinite period, respectively. As such, improvements in
domestic pre-tax income in the future may result in these tax benefits
ultimately being realized. However, there is no assurance that such improvements
will be achieved.
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(6) INCOME TAXES (CONTINUED)
Within Discontinued Operations, the Company has also recorded a full
valuation allowance against the domestic loss generated by the sale of
Rutherford Chemicals for the same reasons as those identified above.
(7) INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Inventories at September 30, 2003 and December 31, 2002 consist of the
following:
September 30, December 31,
2003 2002
------------- ------------
Finished goods............................................ $ 36,854 $ 38,396
Work in process........................................... 19,906 16,601
Raw materials............................................. 16,023 16,026
Supplies.................................................. 3,565 3,407
------------- ------------
Total.................................................. $ 76,348 $ 74,430
============= ============
(8) LONG-TERM DEBT
Long-term debt at September 30, 2003 and December 31, 2002 consists of
the following:
September 30, December 31,
2003 2002
------------- ------------
Bank credit facilities.................................... $ 171,170 $ 257,350
Senior notes.............................................. 75,000 -
Other..................................................... 8,885 12,448
------------- ------------
Subtotal............................................... 255,055 269,798
Less: current portion.................................... (1,369) (2,364)
------------- ------------
Total.................................................. $ 253,686 $ 267,434
============= ============
During June 2003, the Company borrowed $75,000 in a private offering
consisting of 7 year guaranteed senior Notes due in June 2010 with interest
payments due semi-annually at an annual rate of 5.31%. During October 2003, the
Company borrowed an additional $25,000 in a private offering consisting of 10
year guaranteed senior Notes due in October 2013 with interest payments due
semi-annually at an annual rate of 7.05%. These 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 rate debt.
The Company met all bank covenants for the first nine months of 2003.
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(9) 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 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. Of these charges, $10,849 are recorded
in discontinued operations.
In the first nine months of 2002, $2,538 of this amount has been
recorded in continuing operations and $6,887 has been recorded in discontinued
operations. The remainder of the charges were recorded in the fourth quarter 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 2002 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 a domestic manufacturing 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 $1,610 and $2,600 at September 30, 2003
and December 31, 2002, respectively. All accrual balances for these periods
relate to continuing operations.
The following table displays the activity related to the 2002
restructuring accruals through September 30, 2003 (in millions):
2002 2003
Activity Activity
-------- --------
December September
31, 2002 30, 2003
Total Non-Cash Cash Reserve Cash Reserve
Charges Write-offs Payments Balance Payments 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 (0.5) 0.5
Facility closure costs ......... 1.8 - (0.2) 1.6 (0.5) 1.1
-------- -------- -------- -------- -------- --------
Total restructuring, impairments
and other charges ........ 14.5 (11.7) (0.2) 2.6 (1.0) 1.6
Inventory write-offs ........... 0.6 (0.6) - - - -
-------- -------- -------- -------- -------- --------
Total .......................... $ 15.1 $ (12.3) $ (0.2) $ 2.6 $ (1.0) $ 1.6
======== ======== ======== ======== ======== ========
Facility closure costs are expected to be paid by second quarter 2004.
Severance costs are expected to be paid by the end of fiscal 2004.
See Note 15 for discussion of legal settlement matters.
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(10) DISCONTINUED OPERATIONS - SALE OF 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.
On July 31, 2003 the Company's Board of Directors approved a proposed sale of
the Rutherford business and on August 7, 2003, the Company announced that an
agreement to sell the company had been signed. On October 17, 2003 the Company
announced an agreement which amended the terms of the original agreement and on
November 10, 2003 the sale was completed. The revised agreement specifies
proceeds for the sale of $55,000 in cash at closing, a $2,000 subordinated 12%
interest bearing note payable in full in 5 1/2 years from the closing date, and
an $8,000 performance-based cash earn-out as certain future operating profit
targets are achieved in each of the next 3 years. These terms result in a
write-down of assets to estimated fair value of approximately $55,000 which is
based on the selling price, including fees associated with the transaction,
subject to working capital and other adjustments through the date of closing.
The Company has not included any of the performance based cash earn-out in the
computation of the $55,000 loss and income for discontinued operations will be
recorded in future periods if the Company receives any payments under the
earn-out arrangement. This loss has not been tax affected as more fully
explained in Note 6.
Also, the Company retains the liabilities of the Rutherford Chemicals
business associated with existing general litigation matters, including Vitamin
B-3 reserves and pre-closing environmental liabilities. See Note 15 for further
discussion.
As a result of the signing of the agreement on August 7, 2003, and the
completion of the transaction on November 10, 2003, the business comprising the
Rutherford Chemicals Segment is being reported as a discontinued operation in
all periods presented.
The following table shows revenues and loss from the discontinued
operations:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------------ ------------------------
Revenues................................................... $ 29,460 $ 30,659 $ 97,397 $ 95,054
======== ======== ======== ========
Pre-tax loss from operations of
discontinued operations................................ $ (1,777) $(10,480) $ (316) $ (478)
Write-down to fair value based on
expected selling price ................................. (55,000) - (55,000) -
-------- -------- -------- --------
Loss from discontinued operations
before income taxes..................................... $(56,777) $(10,480) $(55,316) $ (478)
======== ======== ======== ========
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(10) DISCONTINUED OPERATIONS - SALE OF RUTHERFORD CHEMICALS (CONTINUED)
The following table shows the carrying amount of the assets and
liabilities of the segment to be sold as of September 30, 2003 and December 31,
2002:
September 30, December 31,
2003 2002
------------- ------------
Assets:
Accounts receivable, net ...................... $ 20,210 $ 21,439
Inventories, net .............................. 33,235 35,402
Other current assets .......................... 917 997
Property, plant and equipment, net* ........... 7,334 70,557
Intangibles, net .............................. 3,488 3,488
Other assets .................................. 374 374
-------- --------
Total Assets held for sale ................... 65,558 132,257
Liabilities:
Accounts payable and accrued liabilities....... 9,905 14,532
-------- --------
Net assets held for sale ...................... $ 55,653 $117,725
======== ========
* Property, plant and equipment, net includes a write-down of the assets to fair
value of $55,000, based on the selling price of Rutherford Chemicals.
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 as of June 30, 2003 did not result in any impairment
loss. As of September 30, 2003, the Rutherford Chemicals business is considered
Assets held for sale and as such, the Company reduced the assets to estimated
fair value and a loss of $55,000 was recorded.
(11) COMPREHENSIVE INCOME
Comprehensive (loss)/income for the three and nine months ended
September 30, 2003 was $(57,734) and $(29,058) respectively. The amounts for the
three and nine months ended September 30, 2002 were $(393) and $51,140,
respectively. The decrease in the third quarter and nine months ended September
30, 2003 versus the same periods in 2002 is due primarily to lower net income,
which includes the $55,000 write-down of assets to estimated fair value due to
the sale of Rutherford Chemicals, partially offset by higher foreign currency
translation adjustment.
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(12) OTHER INCOME AND EXPENSES, NET
Other income (expense) was $80 and $(865) for the quarters ending
September 30, 2003 and 2002, respectively and $207 and $(3,453) for the nine
months ended September 30, 2003, respectively. The third quarter 2002 expense
included an impairment charge of $589 and the nine months included an impairment
charge of $3,089 related to a prior investment 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.
(13) OTHER REVENUE
Other revenue consists primarily of gains/losses on foreign currency
hedge contracts, foreign exchange transaction gains/losses and freight billings.
The decrease in Other Revenue in the third quarter 2003 over third quarter 2002
primarily reflects a reduction of currency gains on foreign currency contracts
in 2003 versus 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.
(14) SEGMENT INFORMATION
The Company is reporting three operating segments, Human Health,
Biosciences, and All Other. The segment information excludes the Rutherford
Chemicals segment due to classification as discontinued operations. 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 All Other segment includes
Specialty and Fine Chemicals and Animal and Health Products. 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. One customer, a distributor representing
multiple customers, accounts for 10.7% of consolidated gross sales in the third
quarter 2003. No customer accounts for more than 10% of consolidated gross sales
in the nine months ended September 30, 2003.
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(14) SEGMENT INFORMATION (CONTINUED)
Following is a summary of business segment information for the
following dates:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Gross Sales:
Human Health............................... $ 51,190 $ 46,754 $164,423 $159,794
Biosciences................................ 38,287 42,027 120,880 119,366
All Other.................................. 5,702 3,551 18,223 15,495
-------- --------- -------- --------
$ 95,179 $ 92,332 $303,526 $294,655
======== ========= ======== ========
Gross Profit:
Human Health............................... $ 21,219 $ 21,164 67,036 $ 71,560
Biosciences................................ 15,578 22,481 54,132 61,439
All Other.................................. 835 1,004 3,196 2,434
-------- --------- -------- --------
$ 37,632 $ 44,649 $124,364 $135,433
======== ========= ======== ========
Operating Profit*:
Human Health and All Other................. $ 15,055 $ 13,384 $ 49,255 $ 52,125
Biosciences................................ 3,235 10,463 16,669 26,511
Corporate.................................. (8,311) (7,712) (38,414) (22,007)
-------- --------- -------- --------
Total Operating Profit..................... $ 9,979 $ 16,135 $ 27,510 $ 56,629
Reconciliation to (loss)/income from
Continuing Operations:
Interest Expense, net...................... $ 3,251 $ 2,877 $ 8,301 $ 8,673
Other Expense (Income),
Net................................. (80) 865 (207) 3,453
Income taxes............................... 14,742 3,110 18,274 11,170
-------- --------- -------- --------
(Loss)/income from
continuing operations................ $ (7,934) $ 9,283 $ 1,142 $ 33,333
======== ========= ======== ========
Capital Spending:
Human Health and All Other................. $ 3,833 $ 5,921 10,630 $ 19,151
BioSciences................................ 3,934 4,592 15,657 7,735
Corporate.................................. 389 838 964 911
-------- --------- -------- --------
$ 8,156 $ 11,351 $ 27,251 $ 27,797
======== ========= ======== ========
*The operating segments include charges for certain corporate allocations
reflecting services provided. Unallocated corporate spending is included
in "Corporate." Certain allocations previously charged from Corporate to
the Rutherford Chemicals businesses have been reclassified and are
included within Corporate for all periods presented.
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(14) SEGMENT INFORMATION (CONTINUED)
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Depreciation:
Human Health and All Other................. $ 6,332 $ 4,911 $ 18,422 $ 15,373
BioSciences................................ 1,843 1,981 5,377 4,448
Corporate.................................. 626 478 1,274 1,432
-------- --------- -------- --------
$ 8,801 $ 7,370 $ 25,073 $ 21,253
======== ========= ======== ========
Amortization:
Human Health and All Other................. $ 1 $ - $ 7 $ 6
BioSciences................................ 398 380 1,136 1,151
-------- --------- -------- --------
$ 399 $ 380 $ 1,143 $ 1,157
======== ========= ======== ========
September 30, December 31,
2003 2002
---- ----
Total Assets:
Human Health and All Other................. $ 329,860 $310,637
Biosciences................................ 369,057 360,713
Corporate.................................. 59,165 63,921
Assets Held for Sale....................... 65,558 132,257
--------- --------
$ 823,640 $867,528
========= ========
(15) 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.
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(15) 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
$4,671 and $4,542 at September 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 $208, partially offset by $79 in payments. These reserve amounts include a
$3,000 estimated liability that was previously presented in accounts payable and
accrued liabilities at December 31, 2002. Included in the liabilities mentioned
above are environmental liabilities discussed in the "Sale of Rutherford
Chemicals" section of this Note. Based on currently available information and
analysis, the Company's accrual represents management's best estimate of what it
believes are the probable 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
Mylan Laboratories
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.
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(15) 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 September 30, 2003, the outstanding balance for this liability was $7,100.
Vitamin B-3
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.
19
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(15) CONTINGENCIES (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 September 30,
2003 was approximately $5,500. This accrual has been recorded in accounts
payable and accrued liabilities.
Mallinckrodt
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 August
26, 2003 mediation was postponed until November 12, 2003. The September 8, 2003
trial date has been postponed to January 2004. Primex, our insurance carrier,
will send a representative to the November mediation. The Company continues to
evaluate the matter as it proceeds toward mediation and trial. The Company's
reserves of $560 and available insurance coverage are believed to be adequate to
meet any settlement or judgment in the matter.
Class Action Matter
The Company understands from law firm press releases that a number of
class action lawsuits have been commenced against the Company and certain former
and current Company officers; the Company has recently been served in the first
of such suits. The basis of the litigation is the alleged failure of the Company
to make timely disclosures of the SEC investigation (see below) and the loss of
a major contract earlier this year relating to bioproducts manufacture, which
allegedly harmed shareholders who traded in the Company stock during the periods
in question. The Company believes that these actions are without merit and
intends to defend them vigorously.
20
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(15) CONTINGENCIES (CONTINUED)
Sale of Rutherford Chemicals
As previously announced, the Company entered into an agreement for the
sale of its Rutherford Chemicals business. The transaction was completed on
November 10, 2003. Under the agreement for the sale the Company provided
standard representations and warranties concerning the business, operations,
liabilities and financial condition of the Rutherford Business. Most of such
representations and warranties will survive for a period of thirty days after
the Buyer's preparation of its audited financial statements for year-end 2004.
Therefore, claims for breaches of such representations would have to be brought
during that time frame. Certain specified representations and warranties, such
as those relating to employee benefit matters, will survive for longer periods.
Under the Agreement, the Company has indemnified the Buyer for breaches of
representations and warranties, such indemnification subject to a deductible and
a cap at a percentage of the purchase price.
The Company has retained the liabilities associated with existing
general litigation matters, including Vitamin B-3 as stated above. With respect
to certain pre-closing environmental matters, the Company retains the
responsibility for (i) certain existing matters; including violations and
off-site liabilities, (ii) completing the on-going remediation at the New York
facility, and (iii) compliance with the New Jersey Industrial Site Recovery Act
at the Bayonne, New Jersey facility. With respect to all other pre-closing
environmental liabilities, whether known or unknown, the Buyer is responsible
for the management of potential future matters; however, the Buyer and the
Seller will share the costs of associated remediation with respect to such
potential future matters, subject to certain limitations over the next ten
years.
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.
The Company enters into standard indemnification agreements in the
ordinary course of business including contract provisions for indemnification
protecting its customers and suppliers against third party liability for
manufacture and sale of Company products that fail to meet product
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 September 30, 2003.
21
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(in thousands, except per-share amounts)
(15) CONTINGENCIES (CONTINUED)
Other (continued)
The Securities and Exchange Commission ("SEC") 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.
22
CAMBREX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in thousands, except per-share amounts)
RESULTS OF OPERATIONS
COMPARISON OF THIRD QUARTER 2003 VERSUS THIRD QUARTER 2002
The following tables show the gross sales of the Company's three segments, in
dollars and as a percentage of the Company's total gross sales for the quarters
ended September 30, 2003 and 2002.
Quarter Ended September 30,
--------------------------------------------------
2003 2002
---------------------- --------------------
$ % $ %
-------- ----- -------- -----
Human Health......................................... $ 51,190 53.8% $ 46,754 50.6%
Biosciences.......................................... 38,287 40.2 42,027 45.5
All Other............................................ 5,702 6.0 3,551 3.9
-------- ----- -------- -----
Total gross sales ............................. $ 95,179 100.0% $ 92,332 100.0%
======== ===== ======== =====
The following table shows the gross sales and gross profit of the Company's
three product segments for the third quarter 2003 and 2002.
Gross Gross Gross
Sales Profit $ Profit %
----- -------- --------
2003
Human Health......................................... $ 51,190 $ 21,219 41.5%
Biosciences.......................................... 38,287 15,578 40.7
All Other............................................ 5,702 835 14.6
------- --------
Total.......................................... $ 95,179 $ 37,632 39.5%
======== ========
Gross Gross Gross
Sales Profit $ Profit %
----- -------- --------
2002
Human Health......................................... $ 46,754 $ 21,164 45.3%
Biosciences.......................................... 42,027 22,481 53.5
All Other............................................ 3,551 1,004 28.3
-------- --------
Total.......................................... $ 92,332 $ 44,649 48.4%
======== ========
Gross sales in the third quarter 2003 increased 3.1% to $95,179 from $92,332 in
the third quarter 2002. Increased sales in the Human Health, and All Other
segments were partly offset by lower sales in the Biosciences segment. Gross
sales were favorably impacted 5.0% due to exchange rates reflecting a weaker
U.S. dollar in the third quarter of 2003 versus the third quarter 2002.
The Human Health Segment gross sales of $51,190 were $4,436 or 9.5% above the
third quarter 2002. Human Health sales were favorably impacted 6.8% due to
exchange rates reflecting a weaker U.S. dollar in the third quarter 2003 versus
2002. The increase results from higher sales of central nervous system active
pharmaceutical ingredients ("API's") and cardiovascular API's, both due to
timing of shipments, higher sales of an advanced intermediate for an end-stage
renal disease due to higher demand. Partly offsetting these increases were lower
sales of gastrointestinal API's primarily due to a customer-delayed launch of a
new dosage size, lower sales of a generic pain management API due to pricing
pressure and lower demand and order timing for an antihistamine intermediate.
23
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THIRD QUARTER 2003 VERSUS THIRD QUARTER 2002 (CONTINUED)
The Biosciences Segment gross sales of $38,287 were $3,740 or 8.9% lower than
third quarter 2002. The Biosciences segment sales were favorably impacted 2.9%
due to exchange rates reflecting a weaker U.S. dollar in the third quarter 2003
vs. 2002. The sales decrease primarily reflects reduced volumes and suite
utilization in the biopharmaceutical manufacturing business driven by the
previously announced loss of a biopharmaceutical customer whose product failed
to receive FDA approval, changes in terms of an existing contract and completion
of other 2002 contracts that were only partially replaced. These decreases were
partly offset by higher sales in other Biosciences segment products including
cell therapy services, normal human cells and endotoxin detection products due
to increased pricing and demand.
The All Other Segment gross sales of $5,702 were up $2,151 or 60.6% from the
third quarter 2002 reflecting increased sales of feed additives due to higher
demand in the U.S. and increased crop protection product demand in Europe
partially offset by benefits in 2002 of a "take-or-pay" payment recognized in
the third quarter.
Export sales from U.S. businesses of $4,594 in the third quarter 2003 increased
5.7% from the third quarter 2002. International sales from our European
operations totaled $51,679 for the third quarter 2003 as compared with $48,587
in 2002, an increase of 6.4%. The $95,179 of sales in the third quarter of 2003
consisted of $51,026, $38,103, $3,836 and $2,214 to North America, Europe, Asia
and the rest of the world, respectively. The $92,332 of sales in the third
quarter of 2002 consisted of $52,456, $32,410, $4,536 and $2,930 to North
America, Europe, Asia and the rest of the world, respectively.
Gross profit in the third quarter of 2003 was $37,632 compared to $44,649 in
2002. Gross margin decreased to 39.5% from 48.4% in the third quarter of 2002.
The reduced results reflect lower margins in all three segments. The Biosciences
segment margin decline primarily reflects the lower suite utilization in the
biopharmaceutical manufacturing sites and the change in terms which reduced the
price on an existing contract, partly offset by increased volume and pricing in
other Bioscience segment product categories and favorable foreign currency
effects. Human Health segment margins decreased due to lower production volumes
overseas, continuing pricing pressures on generic products, inventory reserves
established on certain qualification batches in the U.S. and the unfavorable
impact of lower hedge contract gains, net of favorable foreign currency
translation, partly offset by higher production volumes and favorable product
mix. The All Other segment margins decreased primarily due to the favorable
impact of recognizing a "take-or-pay" payment in the third quarter of 2002
partially offset by increased production in 2003.
Selling, general and administrative expenses of $23,592 or 24.8% of gross sales
in the third quarter 2003 increased from $22,510, or 24.4% in the third quarter
2002. This increase is due primarily to the impact of foreign currency exchange,
higher pension expenses, regulatory compliance costs associated with the
Sarbanes-Oxley Act and legal fees associated with the previously disclosed
ongoing SEC investigation.
Research and development expenses of $4,061 were 4.3% of gross sales in the
third quarter 2003, compared to $3,891 or 4.2% of gross sales in 2002. The
increase primarily reflects investments in new product technologies for
endotoxin detection and molecular biology and the impact of foreign currency
exchange.
The operating profit in the third quarter 2003 was $9,979 compared to $16,135 in
2002. The results reflect the reduced gross margins and higher operating
expenses. In addition, the third quarter 2002 results include a $2,113 charge
for asset impairment and other charges related to the closure of a small
manufacturing facility.
24
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THIRD QUARTER 2003 VERSUS THIRD QUARTER 2002
Net interest expense of $3,251 in the third quarter 2003 increased $374 from
2002 primarily reflecting higher interest rates partially offset by lower
average debt. The average interest rate was 5.35% in the third quarter 2003
versus 4.50% in 2002.
The effective tax rate for the third quarter 2003 was 216.5% compared to 25.1%
in the third quarter 2002. The combination of a loss due to the sale of
Rutherford Chemicals, the Mylan settlement announced earlier in the year, and a
geographic shift of forecasted income resulted in approximately $12,800 of
domestic deferred tax assets being deemed unlikely to be realized, and as such,
a valuation allowances for this amount has been recorded against these assets in
the third quarter, and it is expected that approximately $700 will be recorded
in the fourth quarter. The deferred tax assets deemed unlikely to be realized
for financial reporting purposes include foreign tax credit carry-forwards,
carrying a five year life from inception, the tax benefit related to domestic
net operating losses from continuing operations and research and experimentation
tax credits that can be carried forward 20 years, and a credit related to a
federal alternative minimum tax that can be carried forward indefinitely. The
long carry-forward period for domestic net operating losses and the alternative
minimum credit and expected improvements in domestic continuing operations may
result in these tax benefits ultimately being realized, however, there can be no
assurance that such improvements will be achieved.
The (loss)/income from continuing operations in the third quarter of 2003 was
$(7,934), or $(0.31) per diluted share versus $9,283, or $0.35 per diluted share
in the same period a year ago. The 2003 loss from continuing operations includes
approximately $12,800 for the deferred tax valuation allowance discussed above.
The 2002 results include pre-tax charges of $2,113 for asset impairment and
other charges related to the closure of a small manufacturing facility and an
investment impairment charge of $589 recorded in Other expense.
In the third quarter 2003, the Company announced that an agreement to sell the
Rutherford Chemicals business had been signed and on November 10, 2003
transaction was completed. As a result the business is being reported as a
discontinued operation for all periods presented. The terms of sale result in a
write-down of assets to estimated fair value of approximately $55,000 which is
based on the selling price, including fees associated with the transaction,
subject to working capital and other adjustments through the date of closing. In
the third quarter 2003, loss on operations of discontinued operations, net of
tax, was $(56,513) compared to $(7,186) in the third quarter 2002. The third
quarter 2002 includes pre-tax charge of $6,000 for the Vitamin B-3 litigation
and a pre-tax charge of $6,887 for asset impairment and other charges. Third
quarter 2003 loss from discontinued operations increased due to the $55,000 loss
discussed above, lower sales of crop protection products due to timing of
campaigns and a decrease in margins due to unfavorable product mix and higher
energy and raw material prices partially offset by the 2002 special charges
discussed above.
The net/(loss) income in the third quarter of 2003 was $(64,447), or $(2.51) per
diluted share versus $2,097, or $0.08 per diluted share in the same period a
year ago.
25
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF NINE MONTHS 2003 VERSUS NINE MONTHS 2002
The following tables show the gross sales of the Company's three segments, in
dollars and as a percentage of the Company's total gross sales for the first
nine months 2003 and 2002.
Nine Months Ended September 30,
------------------------------------------
2003 2002
------------------- -------------------
$ % $ %
-------- -------- -------- --------
Human Health ..................... $164,423 54.2% $159,794 54.2%
Biosciences ...................... 120,880 39.8 119,366 40.5
All Other ........................ 18,223 6.0 15,495 5.3
-------- -------- -------- --------
Total gross sales .......... $303,526 100.0% $294,655 100.0%
======== ======== ======== ========
The following table shows gross sales and gross profit of the Company's three
segments for the first nine months of 2003 and 2002.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2003
Human Health ................................................... $164,423 $ 67,036 40.8%
Biosciences .................................................... 120,880 54,132 44.8
All Other ...................................................... 18,223 3,196 17.5
-------- --------
Total .................................................... $303,526 $124,364 41.0%
======== ========
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2002
Human Health .................................................... $159,794 $ 71,560 44.8%
Biosciences ..................................................... 119,366 61,439 51.5
All Other ....................................................... 15,495 2,434 15.7
-------- --------
Total ..................................................... $294,655 $135,433 46.0%
======== ========
Gross sales for the first nine months of 2003 increased 3.0% to $303,526 from
$294,655 in the first nine months of 2002. Sales in all three segments increased
compared to 2002. Gross sales were favorably impacted 6.9% due to exchange rates
reflecting a weaker U.S. dollar in the first nine months of 2003 versus the same
period in 2002.
The Human Health Segment gross sales for the first nine months of $164,423 were
$4,629 or 2.9% above the first nine months 2002. Human Health sales were
favorably impacted 9.5% due to exchange rates reflecting a weaker U.S. dollar in
the first nine months 2003 versus 2002. Excluding the currency impact, the
decrease results from reduced pricing and market share of certain X-ray
products, lower shipments of a respiratory API due to reduced demand in the
U.S., lower shipments of cardiovascular API's due primarily to the loss of a
U.S. customer, timing of shipments and lower prices in Europe and 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 an antihistamine intermediate due to order timing, higher
sales of central nervous system API's and a hypertension API due to increased
demand.
26
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF NINE MONTHS 2003 VERSUS NINE MONTHS 2002 (CONTINUED)
The Biosciences Segment gross sales for the first nine months of $120,880 were
$1,514 or 1.3% higher than the first nine months 2002. The Biosciences segment
sales were favorably impacted 3.8% due to exchange rates reflecting a weaker
U.S. dollar in the first nine months 2003 versus 2002. Excluding the currency
impact, the sales decrease primarily reflects reduced volumes and suite
utilization in the biopharmaceutical manufacturing business driven by the
previously announced loss of a biopharmaceutical customer whose product failed
to receive FDA approval, changes in terms of an existing contract and completion
of other 2002 contracts that were only partially replaced. These decreases were
partly offset by higher sales in other Bioscience segment products including
cell therapy services, normal human cells and endotoxin detection products due
to increased pricing and demand.
The All Other Segment gross sales of $18,223 were up $2,728 or 17.6% from the
first nine months 2002 reflecting higher crop protection sales due to the
successful introduction of new higher capacity production equipment and higher
animal feed additives due primarily to timing of customer demand partially
offset by benefits in 2002 of a "take-or-pay" payment recognized in the third
quarter.
Export sales from U.S. businesses of $16,214 in the first nine months of 2003
decreased 3.1% from the first nine months of 2002. International sales from our
European operations totaled $169,176 for the first nine months of 2003 as
compared with $155,697 in 2002, an increase of 8.7%. The $303,526 of sales in
the first nine months of 2003 consisted of $155,988, $128,926, $11,522 and
$7,090 to North America, Europe, Asia and the rest of the world, respectively.
The $294,655 of sales in the first nine months of 2002 consisted of $164,727,
$110,068, $11,816 and $8,044 to North America, Europe, Asia and the rest of the
world, respectively.
Gross profit for the first nine months of 2003 was $124,364 compared to $135,433
in 2002. Gross margin decreased to 41.0% from 46.0% in the first nine months of
2002. The results reflect lower margins in the Human Health and Bioscience
segments, partly offset by higher margins in the All Other segment. Human Health
segment margins decreased due to pricing pressures on generic products and lower
production volumes partly offset by favorable product mix and the favorable
effects of hedge contract gains and favorable translation due to the weak U.S.
dollar. The Bioscience segment margin decline primarily reflects the lower
volumes and suite utilization in the biopharmaceutical manufacturing sites,
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 volume and pricing in other Bioscience segment
product categories and favorable foreign currency. The All Other segment margins
increased primarily due to production efficiencies from higher volumes partially
offset by the favorable impact of recognizing a "take-or-pay" payment in the
third quarter 2002.
Selling, general and administrative expenses of $72,936 or 24.0% of gross sales
in the first nine months 2003 increased from $64,594 or 21.9% in the same period
a year ago. Higher administration costs reflect higher pension expenses,
regulatory compliance costs associated with the Sarbanes-Oxley Act, the costs
incurred for the ongoing SEC investigation into the restatement of results
disclosed in the fourth quarter 2002, 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.
27
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF NINE MONTHS 2003 VERSUS NINE MONTHS 2002 (CONTINUED)
Research and development expenses of $12,576 were 4.1% of gross sales in the
first nine months 2003, compared to $11,672 or 4.0% of gross sales in 2002. The
increase primarily reflects investments in new product technologies for
endotoxin detection and molecular biology and the impact of foreign currency
exchange.
The nine 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 nine months 2002 results include a pre-tax charge of $2,538
for asset impairment and other charges related to the closure of a small
manufacturing facility.
The operating profit in the first nine months of 2003 was $27,510 compared to
$56,629 in 2002. The results reflect the $11,342 pretax charge for the Mylan
settlement discussed above, reduced gross margins in the Human Health and
Biosciences segments and higher operating expenses.
Net interest expense of $8,301 in the first nine months 2003 decreased $372 from
2002 primarily reflecting lower average debt balances and interest rates. The
average interest rate was 3.93% in the second quarter 2003 versus 4.32% in 2002.
The effective tax rate for the first nine months 2003 was 94.1% compared to
25.1% for the first nine months of 2002. The combination of a loss due to the
sale of Rutherford Chemicals, the Mylan settlement announced earlier in the
year, and a geographic shift of forecasted income resulted in $12,800 of
domestic deferred tax assets being deemed unlikely to be realized, and as such,
a valuation allowances for this amount has been recorded against these assets in
the first nine months, and it is expected that approximately $700 will be
recorded in the fourth quarter. The deferred tax assets deemed unlikely to be
realized for financial reporting purposes include foreign tax credit
carry-forwards, carrying a five year life from inception, the tax benefit
related to domestic net operating losses from continuing operations and research
and experimentation tax credits that can be carried forward 20 years, and a
credit related to a federal alternative minimum tax that can be carried forward
indefinitely. The long carry-forward period for domestic net operating losses
and the alternative minimum credit and expected improvements in domestic
continuing operations may result in these tax benefits ultimately being
realized, however, no assurance that such improvements can be achieved.
The income from continuing operations in the first nine months of 2003 was
$1,142, or $0.04 per diluted share versus $33,333, or $1.25 per diluted share in
the same period a year ago. The 2003 income from continuing operations includes
approximately $16,600 charge for the deferred tax valuation allowance and
$11,342 pretax charge for the Mylan settlement both discussed above. The 2002
results include $2,538 of asset impairment and other charges related to the
closure of a small manufacturing facility and a $3,089 pre-tax charge for an
investment impairment recorded in Other expense.
28
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF NINE MONTHS 2003 VERSUS NINE MONTHS 2002 (CONTINUED)
In the third quarter 2003, the Company announced that an agreement to sell the
Rutherford Chemicals business had been signed and on November 10, 2003 the
transaction was completed. As a result the business is being reported as a
discontinued operation for all periods presented. The terms of sale result in a
write-down of assets to fair value of approximately $55,000 which is based on
the selling price, including fees associated with the transaction, subject to
working capital and other adjustments through the date of closing. In the first
nine months of 2003, loss on operations of discontinued operations, net of tax
was $(55,178) compared to $(73) in the first nine months of 2002. The first nine
months 2002 includes pre-tax charges of $6,000 for Vitamin B-3 litigation and
$6,887 for asset impairment and other charges, pretax benefits of $2,620 due to
a favorable insurance settlement and $3,760 for a favorable arbitration
settlement. In addition to the special items discussed above, the first nine
months 2003 loss from discontinued operations decreased due to unfavorable
product mix and higher energy and raw material prices.
The net (loss) income in the first nine months of 2003 was $(54,036), or $(2.08)
per diluted share versus $33,260, or $1.25 per diluted share in the same period
a year ago.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2003, the Company generated cash
flows from operations totaling $52,493 a decrease of $28,297 versus the same
period a year ago. This decrease in cash flows is due primarily to the lower net
income of the Company adjusted for non-cash items and the collection of a
Rutherford insurance claim receivable and arbitration award in 2002 that did not
repeat in 2003, partially offset by lower inventories due to better inventory
management.
Capital expenditures from continuing operations were $27,251 in the nine months
of 2003 as compared to $27,797 in 2002. Part of the funds in 2003 were used for
a suite expansion at a Biopharmaceutical manufacturing plant in Baltimore,
Maryland, suite expansion at a Biopharmaceutical manufacturing plant in
Hopkinton, Massachusetts, expansion of endotoxin detection and cell therapy
manufacturing capabilities at the Bioscience facility in Walkersville, Maryland
as well as new small scale production equipment for generic pharmaceuticals at
the Charles City, Iowa facility. Included in the first nine months of 2003
discontinued operations cash flows from investing activities is insurance
proceeds of $3,785 to reimburse the Company for fire related damage to a
Rutherford facility, partially offset by Rutherford facilities capital
expenditures.
Cash flows used in financing activities of $18,627 include net repayment of debt
of $14,008, purchase of treasury stock of $2,420 and payment of dividends of
$2,316.
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%. During October 2003, the
Company borrowed an additional $25,000 in a private offering. The debt consists
of 10 year guaranteed senior Notes due in October 2013 and interest payments are
due semi-annually at a rate of 7.05%. These Notes rank equal with the Company's
other senior indebtedness. The funds were used primarily to pay down existing
bank debt.
During the first nine months of 2003 and 2002, the Company paid cash dividends
of $0.09 per share.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
29
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, uncollectible
receivables, loss on disposition of assets, cancellation or delays in renewal of
contracts, and lack of suitable raw materials or packing materials. Investors
are cautioned to review risk factors in the Cambrex Annual Report on Form 10-K
and other filings with the Securities and Exchange Commission.
30
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.
31
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 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.
Report on Form 8-K filed on October 22, 2003 regarding the
press release announcing the Amendment to the August 7, 2003
Asset Purchase Agreement for Rutherford Chemicals.
Report on Form 8-K filed on October 24, 2003 regarding the
third quarter 2003 earnings released by Cambrex Corporation
dated October 23, 2003.
32
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: November 10, 2003
33