1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 1-10638
CAMBREX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-2476135
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073
(Address of principal executive offices)
(201) 804-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2001, there were 25,707,185 shares outstanding of the
registrant's Common Stock, $.10 par value.
2
CAMBREX CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended June 30, 2001
Table of Contents
Page No.
Part I Financial information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
June 30, 2001 and December 31, 2000 2
Condensed consolidated income statements for the
three and six months ended June 30, 2001 and 2000 3
Condensed consolidated statements of cash flows
for the six months ended June 30, 2001 and 2000 4
Notes to condensed consolidated financial statements 5 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 19
Part II Other information
Item 4. Matters Submitted to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
3
Part 1 - FINANCIAL INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except shares and per share data)
June 30, December 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 33,914 $ 21,721
Trade receivables, net .............................. 72,141 76,394
Inventories, net .................................... 118,423 107,616
Deferred tax assets ................................. 14,743 14,743
Prepaid expenses and other current assets ........... 16,470 12,380
--------- ------------
Total current assets ............................ 255,691 232,854
Property, plant and equipment, net ...................... 286,702 287,338
Intangible assets, net .................................. 260,244 149,199
Other assets ............................................ 12,761 11,709
--------- ------------
Total assets .................................... $ 815,398 $ 681,100
========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............ $ 63,105 $ 78,198
Income taxes payable ................................ 1,285 9,224
Short-term debt and current portion of
Long-term debt .................................. 4,693 1,484
--------- ------------
Total current liabilities ............................... 69,083 88,906
Long-term debt .......................................... 308,428 168,591
Deferred tax liabilities ................................ 62,515 61,531
Other noncurrent liabilities ............................ 24,856 24,451
--------- ------------
Total liabilities ............................... 464,882 343,479
--------- ------------
Stockholders' equity:
Common stock, $.10 par value; issued 27,920,898 and
27,443,170 shares at respective dates ........... 2,817 2,769
Additional paid-in capital .......................... 191,062 181,698
Retained earnings ................................... 241,984 214,269
Treasury stock, at cost 2,230,785 and 2,193,945
shares at respective dates ....................... (14,542) (13,010)
Accumulated other comprehensive loss ................ (70,805) (48,105)
--------- ------------
Total stockholders' equity ...................... 350,516 337,621
--------- ------------
Total liabilities and stockholders' equity ...... $ 815,398 $ 681,100
========= ============
See accompanying notes to unaudited condensed consolidated financial statements.
2
4
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
(in thousands, except per-share data)
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Gross sales ....................................................... $ 122,561 $ 127,472 $ 253,746 $ 256,458
Commissions & freight ......................................... 898 1,171 2,154 2,161
--------- --------- --------- ---------
Net sales ......................................................... 121,663 126,301 251,592 254,297
Other revenues ................................................ 375 648 1,723 2,190
--------- --------- --------- ---------
NET REVENUES ...................................................... 122,038 126,949 253,315 256,487
Cost of goods sold ................................................ 74,319 78,203 155,280 161,592
--------- --------- --------- ---------
GROSS PROFIT ...................................................... 47,719 48,746 98,035 94,895
Operating expenses:
Selling, general and administrative ........................... 20,596 20,875 44,052 41,852
Research and development ...................................... 4,721 3,504 9,317 7,235
--------- --------- --------- ---------
Total operating expenses .................................... 25,317 24,379 53,369 49,087
OPERATING PROFIT .................................................. 22,402 24,367 44,666 45,808
Other (income) expenses:
Interest expense, net ......................................... 2,147 3,146 4,285 6,022
Other (income)/expense, net ................................... (95) (142) (239) (90)
--------- --------- --------- ---------
Income before income taxes ........................................ 20,350 21,363 40,620 39,876
Provision for income taxes .................................... 5,496 7,157 11,374 13,358
--------- --------- --------- ---------
NET INCOME ........................................................ $ 14,854 $ 14,206 $ 29,246 $ 26,518
========= ========= ========= =========
Weighted average shares outstanding:
Basic ......................................................... 25,658 24,883 25,533 24,794
Effect of dilutive stock options .............................. 1,010 1,154 985 1,105
--------- --------- --------- ---------
Diluted ....................................................... 26,668 26,037 26,518 25,899
Earnings per share of common stock and common stock equivalents:
Basic ......................................................... $ 0.58 $ 0.57 $ 1.15 $ 1.07
========= ========= ========= =========
Diluted ....................................................... $ 0.56 $ 0.55 $ 1.10 $ 1.02
========= ========= ========= =========
Cash dividends paid per share ..................................... $ 0.03 $ 0.03 $ 0.06 $ 0.06
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
5
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended
June 30,
--------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income ............................................ $ 29,246 $ 26,518
Depreciation and amortization ......................... 23,584 23,722
Changes in assets and liabilities (net of assets and
liabilities acquired):
Receivables, net ................................. 1,487 (3,618)
Inventories ...................................... (14,503) (7,079)
Prepaid expenses and other current assets ........ (6,640) 116
Accounts payable and accrued liabilities ......... (17,274) 10,340
Income taxes payable ............................. (4,625) (3,469)
Other noncurrent assets and liabilities .......... 719 671
--------- ---------
Net cash provided by operating activities ......... 11,994 47,201
--------- ---------
Cash flows from investing activities:
Capital expenditures .................................. (15,293) (20,254)
Acquisition of businesses (net of cash acquired) ...... (120,392) (2,608)
Other investing activities ............................ (139) (815)
--------- ---------
Net cash used in investing activities ............. (135,824) (23,677)
--------- ---------
Cash flows from financing activities:
Dividends ............................................. (1,531) (1,482)
Net increase (decrease) in short-term debt ............ 3,468 (2,841)
Long-term debt activity (including current portion):
Borrowings ........................................ 249,490 28,300
Repayments ........................................ (121,724) (31,067)
Proceeds from the issuance of common stock ............ 9,412 4,401
Purchase of treasury stock ............................ (1,532) --
--------- ---------
Net cash provided by (used in) financing activities 137,583 (2,689)
--------- ---------
Effect of exchange rate changes on cash ................... (1,560) (7,518)
--------- ---------
Net increase in cash and cash equivalents ................. 12,193 13,317
Cash and cash equivalents at beginning of period .......... 21,721 39,796
--------- ---------
Cash and cash equivalents at end of period ................ $ 33,914 $ 53,113
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
6
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(1) BASIS OF PRESENTATION
Unless otherwise indicated, "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, 2000.
The results of operations for the three months and six months ended June
30, 2001 are not necessarily indicative of the results to be expected for the
full year.
(2) INVENTORIES
Inventories at June 30, 2001 and December 31, 2000 consist of the
following:
June 30, December 31,
2001 2000
-------- ------------
Finished goods ............................. $ 54,474 $ 44,437
Work in process ............................ 31,440 33,601
Raw materials .............................. 29,095 25,156
Fuel oil and supplies ...................... 3,414 4,422
-------- ------------
Total .................................. $118,423 $ 107,616
======== ============
(3) ACQUISITIONS
On June 4, 2001, Cambrex Corporation completed its acquisition of the Bio
Science Contract Production Corporation ("Seller") biopharmaceutical
manufacturing business in Baltimore, Maryland. The business involves the cGMP
manufacture of purified bulk biologics and pharmaceutical ingredients. Cambrex
Bio Science Inc., a Cambrex subsidiary, will operate the business. The total
purchase price was approximately $120 million in cash, which was funded by an
existing line of credit facility. Additional purchase price payments of up to
$25 million may be made depending on future business performance over the next
four years. The acquisition has been accounted for under the purchase method of
accounting. Assets acquired and liabilities assumed have been recorded at their
estimated fair values and are subject to adjustment when additional information
concerning asset and liability valuations is finalized. At the time of the
transaction, pending receipt of asset and liability appraisals, goodwill was
recorded at approximately $122 million, including incremental deal costs, and is
being amortized over 20 years.
5
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted (SFAS 133) Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative financial instruments. All derivatives are required to be recognized
at fair value on the balance sheet. The Company's policy is to enter into
forward exchange contracts and/or currency options to hedge foreign currency
transactions. This hedging strategy mitigates the impact of short-term foreign
exchange rate movements on the Company's operating results primarily in the
United Kingdom, Sweden and Italy. The Company's primary market risk relates to
exposures to foreign currency exchange rate fluctuations on transactions entered
into by these international operations which are denominated primarily in U.S.
dollars, Euros and British pound sterling. As a matter of policy, the Company
does not hedge to protect the translated results of foreign operations. The
Company's forward exchange contracts substantially offset gains and losses on
the transactions being hedged. The forward exchange contracts have varying
maturities with none exceeding twelve months. The Company makes net settlements
for forward exchange contracts at maturity, based upon negotiated rates at
inception of the contracts. The Company also enters into interest rate swap
agreements to reduce the impact of changes in interest rates on its floating
rate debt. The swap agreements are contracts to exchange floating rate for fixed
interest payments periodically over the life of the agreements without the
exchange of the underlying notional debt amounts.
All forward and swap contracts outstanding at January 1 and June 30, 2001
have been designated as cash flow hedges and accordingly, changes in the fair
value of derivatives are recorded each period in other comprehensive income.
Changes in the fair value of the derivative instruments reported in other
comprehensive income will be reclassified as earnings in the period in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current-period earnings
and is immaterial to the Company's financial results. Adoption of this statement
resulted in an after-tax reduction of other comprehensive income of $86. The
unrealized net loss recorded in comprehensive income, including the transition
adjustment at June 30, 2001, was $3,106. This amount will be reclassified into
earnings as the underlying forecasted transactions occur. All transition amounts
and the balance of unrealized losses included in comprehensive income at June
30, 2001 will be recognized in earnings over the next twelve months. The net
loss recognized in earnings related to foreign currency forward contracts during
the three and six months ended March 31 and June 30, 2001 was $1,106 and $2,293,
respectively. The net loss on interest rate swap contracts recognized in
interest expense was $57 and $153 for the three and six months ended March 31
and June 30, 2001, respectively.
(5) COMPREHENSIVE INCOME
Comprehensive Income for the three and six months ended March 31 and June
30, 2001 was $15,206 and $6,546, respectively. The amounts for the same period
in 2000 were $10,977 and $18,844, respectively. The reduction in 2001 versus
2000 is due primarily to foreign currency translation impacts and the adoption
of SFAS 133 (see Note 4).
6
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INSURANCE CLAIM
The Company experienced mechanical problems with a reactor located in one
of the Company's chemical facilities in both August and December 2000 which
resulted in extended plant downtime and interruption in product supply.
Consequently, sales and production of certain products were curtailed through
the first and second quarters 2001. Interim inspection and mechanical repairs
have been made to the reactor and the reactor is currently operating at reduced
capacity. A replacement reactor is being fabricated for installation in the
fourth quarter 2001.
The Company has incurred costs associated with the reactor replacement
and plant downtime that is in the process of being reviewed by the insurance
company. The Company currently estimates that the total amount of the claim will
be approximately $8.0 million. All costs incurred to date have been expensed as
incurred, unless capital in nature and subject to deductible levels. In
addition, the Company has begun to receive progress payments on the claim and it
is management's opinion, based upon a letter received documenting the review
performed and opinion of an independent insurance expert, that all costs
incurred will be covered under the Company's insurance policies. As such, a
receivable, which is reflected in Other Current Assets, has been recorded in the
amount of the costs incurred to date.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In July, 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.'s 141 "Business Combinations" (SFAS 141)
and 142 "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 addresses the accounting and reporting requirements for business
combinations. This Statement requires that all business combinations be
accounted for under the purchase method and also requires some additional
disclosures. SFAS 141 is effective for all business combinations completed after
June 30, 2001. Adoption of this Statement will have no impact on the Company's
results.
SFAS 142 addresses the accounting and reporting for goodwill and other
intangible assets. The Statement adopts a more aggregate view of goodwill and
bases the accounting for goodwill on the units of the combined entity into which
an acquired entity is integrated. Goodwill and intangible assets with indefinite
useful lives will not be amortized but rather will be tested for impairment at
least annually. Identifiable intangible assets that have finite lives will
continue to be amortized over their useful lives. SFAS 142 will be effective for
the Company on January 1, 2002; however, goodwill and intangibles acquired after
June 30, 2001 will be subject immediately to the provisions of this Statement.
The Company is currently evaluating the impact that adoption will have on its
annual results.
7
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) LONG-TERM DEBT
Long-term debt at June 30, 2001 and December 31, 2000 consists of the
following:
June 30, December 31,
2001 2000
-------- ------------
Bank credit facilities ..................... $294,500 $ 164,500
Other ...................................... 15,521 4,528
-------- ------------
Subtotal ............................... 310,021 169,028
Less: current portion ..................... 1,593 437
-------- ------------
Total .................................. $308,428 $ 168,591
======== ============
The Company met all the bank covenants for the first six months of 2001.
(9) SEGMENT INFORMATION
Following is a summary of business segment information for the following
dates:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Gross Sales:
Human Health ............... $ 62,871 $ 60,784 $127,819 $122,196
Biosciences ................ 27,564 24,423 54,890 49,627
Animal Health/Agriculture .. 12,630 15,148 28,649 27,307
Specialty and Fine Chemicals 19,496 27,117 42,388 57,328
-------- -------- -------- --------
Total ...................... $122,561 $127,472 $253,746 $256,458
======== ======== ======== ========
Gross Profit:
Human Health ............... $ 26,328 $ 25,042 $ 53,048 $ 49,589
Biosciences ................ 14,209 13,381 29,128 27,181
Animal Health/Agriculture .. 2,414 2,994 6,059 4,612
Specialty and Fine Chemicals 4,768 7,329 9,800 13,513
-------- -------- -------- --------
Total ...................... $ 47,719 $ 48,746 $ 98,035 $ 94,895
======== ======== ======== ========
8
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SEGMENT INFORMATION (CONTINUED)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net Income*:
Biosciences .................... $ 1,026 $ 1,541 $ 3,088 $ 3,321
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............... 13,828 12,665 26,158 23,197
------- ------- ------- -------
Total .......................... $14,854 $14,206 $29,246 $26,518
======= ======= ======= =======
* The Company allocates 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.
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
Capital Spending:
Biosciences .................... $ 869 $ 1,310 $ 1,636 $ 2,615
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............... 6,827 10,819 13,657 17,639
------- ------- ------- -------
Total .......................... $ 7,696 $12,129 $15,293 $20,254
======= ======= ======= =======
Depreciation:
Biosciences .................... $ 988 $ 1,179 $ 1,978 $ 1,952
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............... 7,973 8,303 15,834 16,568
------- ------- ------- -------
Total .......................... $ 8,961 $ 9,482 $17,812 $18,520
======= ======= ======= =======
Amortization:
Biosciences .................... $ 2,040 $ 1,342 $ 3,570 $ 2,908
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............... 1,072 760 2,202 2,294
------- ------- ------- -------
Total .......................... $ 3,112 $ 2,102 $ 5,772 $ 5,202
======= ======= ======= =======
June 30, December 31,
2001 2000
-------- ------------
Total Assets:
Biosciences .................................... $327,140 $ 190,770
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............................... 488,258 490,330
-------- ------------
Total .......................................... $815,398 $ 681,100
======== ============
9
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONTINGENCIES (CONTINUED)
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities.
Environmental
In connection with laws and regulations pertaining to the protection of
the environment, the Company is party to several environmental remediation
investigations and cleanups and, along with other companies, has been named a
"potentially responsible party" for certain waste disposal sites (Superfund
sites). Each of these matters is subject to various uncertainties, and it is
possible that some of these matters will be decided unfavorably against the
Company. The Company had accruals, included in current accrued liabilities and
other non-current liabilities of $1,450 at June 30, 2001 and $2,300 at December
31, 2000, 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. Based on currently available information and
analysis, the Company's accrual represents management's best estimate of what it
believes are the reasonably possible environmental cleanup related costs of a
non-capital nature. During the second quarter 2001, the Company reduced reserves
by approximately $850 as a result of revised estimates. After reviewing
information currently available, management believes any amounts paid in excess
of the accrued liabilities will not have a material effect on its financial
position or results of operations. However, these matters, if resolved in a
manner different from the estimates could have a material adverse effect on
financial condition, operating results and cash flows when resolved in a future
reporting period.
Litigation
The Company and its subsidiary, Profarmaco S.r.l. ("Profarmaco") were
named as defendants in a proceeding instituted by the Federal Trade Commission
("FTC") on December 21, 1998, in the United States District Court for the
District of Columbia. The complaint alleges that exclusive license agreements
which Profarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering
the drug master files for (and, therefore, the right to buy and use) two active
pharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of an
effort on Mylan's part to restrict competition in the supply of lorazepam and
clorazepate and to increase the price charged for these products when Mylan sold
them as generic pharmaceuticals. The complaint further alleges that these
agreements violate the Federal Trade Commission Act, and that Mylan, Cambrex,
Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor in
the United States, engaged in an unlawful restraint of trade and conspired to
monopolize and attempted to monopolize the markets for the generic
pharmaceuticals incorporating the APIs. In accordance with the license
agreement, the Company received royalties of approximately $19,300 and $1,000
for the years ended December 31, 1998 and 1997, respectively. A lawsuit making
similar allegations against the Company and Profarmaco, and seeking injunctive
relief and treble damages, has been filed by the Attorneys General of 31 states
in the United States District
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONTINGENCIES (CONTINUED)
Court for the District of Columbia on behalf of those states and persons in
those states who were purchasers of the generic pharmaceuticals.
The Company and Profarmaco have also been named in purported class action
complaints brought by private plaintiffs in various state courts on behalf of
purchasers of lorazepam and clorazepate in generic form, making allegations
essentially similar to those raised in the FTC's complaint and seeking various
forms of relief including treble damages.
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 has agreed to
pay over $140 million on its own behalf and on behalf of most of the other
defendant companies including Cambrex and Profarmaco. Recently, the federal
court granted preliminary approval of the settlement of the Attorneys General's
suits and a hearing has been set for November 29, 2001. In the Order and
Injunction, the settling defendants also agreed to monitor certain future
conduct.
The Company strongly believes that its licensing arrangements with Mylan
are in accordance with regulatory requirements and will vigorously defend the
various other lawsuits and class actions. However, the Company and Mylan have
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. Some private litigation will continue. Through August
1, 2000 Mylan had been fully covering the costs for the defense and indemnity of
Cambrex and Profarmaco under certain obligations set forth in the license
agreements. Beginning August 1, 2000 Cambrex agreed to cover separate legal
defense costs incurred for Cambrex and Profarmaco on a going forward basis.
These costs are not expected to be significant.
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 has 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 has agreed to pay a fine of $4,000. Nepera
was put on probation for one year. 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.
11
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) 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. The
balance of this accrual as of December 31, 2000 and June 30, 2001 was $5,301 and
$1,042, respectively, and is recorded in Accounts Payable and Accrued
Liabilities.
While it is not possible to predict with certainty the outcome of the
above litigation matters 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.
12
14
CAMBREX CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in thousands)
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER 2001 VERSUS SECOND QUARTER 2000
The earnings for the second quarter of 2001 were above the same period a year
ago due to increased sales in the Human Health and Biosciences Segments and
higher gross margin % on sales, partly offset by lower sales and margins in the
Animal Health/Agriculture and Specialty and Fine Chemicals segments. In
addition, lower interest expense and a reduced tax rate contributed to the
favorable results versus 2000.
The following tables show the gross sales of the Company's four segments, in
dollars and as a percentage of the Company's total gross sales for the quarters
ended June 30, 2001 and 2000.
Quarter Ended June 30,
------------------------------------------
2001 2000
------------------ ------------------
$ % $ %
-------- ----- -------- -----
Human Health ................... $ 62,871 51.3% $ 60,784 47.7%
Biosciences .................... 27,564 22.5 24,423 19.2
Animal Health/Agriculture ...... 12,630 10.3 15,148 11.9
Specialty and Fine Chemicals ... 19,496 15.9 27,117 21.2
-------- ----- -------- -----
Total gross sales ........ $122,561 100.0% $127,472 100.0%
======== ===== ======== =====
The following table shows the gross sales and profit of the Company's four
product segments for the second quarter 2001 and 2000.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2001
Human Health ............................. $ 62,871 $ 26,328 41.9%
Biosciences .............................. 27,564 14,209 51.5
Animal Health/Agriculture ................ 12,630 2,414 19.1
Specialty and Fine Chemicals ............. 19,496 4,768 24.5
-------- -------- ------
Total .............................. $122,561 47,719 39.0%
======== ======== ======
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2000
Human Health ........................... $ 60,784 $ 25,042 41.2%
Biosciences ............................ 24,423 13,381 54.8
Animal Health/Agriculture .............. 15,148 2,994 19.8
Specialty and Fine Chemicals ........... 27,117 7,329 27.0
-------- -------- --------
Total ............................ $127,472 $ 48,746 38.2%
======== ======== ========
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RESULTS OF OPERATIONS (CONTINUED)
Gross sales in the second quarter 2001 decreased 3.9% to $122,561 from $127,472
in the second quarter 2000. Sales in the Human Health and Biosciences Segments
increased compared to the second quarter 2000, but were more than offset by the
decreases in the Animal Health/Agricultural and Specialty and Fine Chemicals
Segments.
The effect of foreign currency exchange rates on gross sales for the second
quarter resulted in a negative impact on sales of $3,041 compared to the
corresponding period in 2000. Gross sales for 2001 would have been $125,602
using 2000 exchange rates compared to 2000 sales of $127,472.
The Human Health Segment gross sales of $62,871 were $2,087 (3.4%) above the
second quarter 2000. The sales growth in this segment would have been 7.1%
without the impact of the decline in European currencies. Gross sales were above
the prior year primarily due to sales generated by new products and strength in
certain pharmaceutical actives sold to generic customers. Partially offsetting
these increases were the reduced sales of a cardiovascular product in the
European markets due mainly to timing of shipments, a gastro-intestinal product
in the U.S. due to competitive pricing pressures, and reduced sales of a cough
suppressant intermediate due to new competition overseas.
The Bioscience Segment gross sales of $27,564 were $3,141 (12.8%) above the
second quarter 2000 primarily due to the acquisition of Bio Science Contract
Production Corporation in June 2001 and the strength of cell culture and
endotoxin detection products. The sales growth in the segment would have been
14.1% without the decline in European currencies. Base product sales increases
were due primarily to increased marketing efforts, as well as the timing of
shipments.
The Animal Health/Agriculture Segment gross sales of $12,630 in the second
quarter 2001 were $2,518 (16.6%) below the second quarter 2000. The second
quarter decrease was mainly due to reduced sales of feed additives. Lower
shipments of 3-cyanopyridine were due primarily to supply issues caused by the
previously announced reactor problems in one of the Company's chemical plants,
and lower 3-Nitro sales due to customer inventory build-ups.
The Specialty and Fine Chemicals Segment gross sales of $19,496 were $7,621
(28.1%) below the second quarter 2000 reflecting decreased sales of encapsulants
used in the telecommunications industry, coating additives (primarily castor oil
based) and performance enhancing products. Certain performance enhancing product
sales reductions are due to initiatives to reduce sales of lower margin products
and weak photographic demand. The reduced encapsulants and coating product sales
have been influenced by a general economic slowdown in those industries.
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16
RESULTS OF OPERATIONS (CONTINUED)
Export sales from U.S. businesses of $10,725 in the second quarter 2001
decreased 17.7% from $13,032 in the second quarter 2000. International sales
from our European operations totaled $61,137 for the second quarter of 2001 as
compared with $62,464 in 2000, a decrease of 2.1%.
The gross profit in the second quarter 2001 was $47,719 compared to $48,746 in
2000. The gross margin increased to 39.0% in the second quarter 2001 from 38.2%
in 2000. The increased gross profit margin % was driven by the Human Health
segment, which improved due to a strong product mix. The Biosciences segment
gross margin of 51.5% declined from 54.8% due primarily to lower production
levels and an inventory reduction strategy related to fetal bovine serum. The
Animal and Health/Agriculture and Specialty and Fine Chemical segments were
negatively affected by increased raw material and energy costs, as well as lower
production.
Selling, general and administrative expenses as a percentage of gross sales was
16.8% in the second quarter 2001, up from 16.3% in the second quarter 2000. The
second quarter 2001 included increased sales and marketing efforts and
amortization costs associated with acquisitions. These costs were offset by
lower administrative spending due to cost containment initiatives, reduced
environmental remediation estimates and timing of spending.
Research and development expenses of $4,721 were 3.9% of gross sales in the
second quarter 2001, and represented a 35% increase from 2000. This increase was
primarily due to strengthening of the R&D group in Biosciences and costs
associated with the expansion of the new research and development facility, the
Cambrex Centre of Technical Excellence.
The operating profit in the second quarter 2001 was $22,402, a decrease of 8.1%
compared to $24,367 in 2000 due mainly to the lower sales and gross margin % in
Animal Health/Agriculture and Specialty and Fine Chemicals segments and higher
amortization expense partly offset by increased Human Health and BioSciences
sales volume and improved Human Health gross margin %.
Net interest expense of $2,147 in the second quarter 2001 reflected a decrease
of $999 from 2000 as the result of lower average debt levels and a decline in
interest rates. The average interest rate was 5.19% in the second quarter of
2001 versus 6.53% in 2000.
The provision for income taxes for the second quarter 2001 resulted in an
effective rate of 27.0% as compared with 33.5% in the second quarter 2000
reflecting the impact of favorable tax audits, R&D tax credit programs and a
favorable geographic mix of income.
The Company's net income for the second quarter 2001 increased 4.6% to $14,854
compared with a net income of $14,206 in the second quarter 2000.
COMPARISON OF FIRST SIX MONTHS OF 2001 VERSUS FIRST SIX MONTHS OF 2000
Earnings in the first half of 2001 were above the comparable 2000 period due to
the increase in sales in the Human Health, Biosciences and Animal
Health/Agriculture Segments, and the higher gross margin on sales. In addition,
lower interest expense and a reduced tax rate contributed to the favorable
results versus 2000.
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17
RESULTS OF OPERATIONS (CONTINUED)
The following tables show the gross sales of the Company's four segments, in
dollars and as a percentage of the Company's total gross sales for the first
half 2001 and 2000.
Six Months Ended June 30
--------------------------------------------
2001 2000
------------------- -------------------
$ % $ %
-------- -------- -------- --------
Human Health ................... $127,819 50.4% $122,196 47.6%
Biosciences .................... 54,890 21.6 49,627 19.4
Animal Health/Agriculture ...... 28,649 11.3 27,307 10.6
Specialty and Fine Chemicals ... 42,388 16.7 57,328 22.4
-------- -------- -------- --------
Total gross sales ........ $253,746 100.0% $256,458 100.0%
======== ======== ======== ========
The following table shows the sales and gross profit of the Company's four
product segments for the six months 2001 and 2000.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2001
Human Health ........................... $127,819 $ 53,048 41.5%
Biosciences ............................ 54,890 29,128 53.1
Animal Health/Agriculture .............. 28,649 6,059 21.1
Specialty and Fine Chemicals............ 42,388 9,800 23.1
-------- -------- --------
Total ............................ $253,746 $ 98,035 38.6%
======== ======== ========
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
2000
Human Health ........................... $122,196 $ 49,589 40.6%
Biosciences ............................ 49,627 27,181 54.8
Animal Health/Agriculture .............. 27,307 4,612 16.9
Specialty and Fine Chemicals ........... 57,328 13,513 23.6
-------- -------- --------
Total ............................ $256,458 $ 94,895 37.0%
======== ======== ========
Gross sales in the first half 2001 decreased 1.1% to $253,746 from $256,458 in
the first half 2000. Sales in the Human Health, Biosciences, and
Animal/Health/Agriculture segments increased compared to the first half 2000,
but were more than offset by the decrease in the Specialty and Fine Chemicals
Segment.
The effect of foreign currency exchange rates on gross sales for the first six
months resulted in a negative impact on sales of $5,404 or 2.1% compared to the
corresponding period in 2000. Gross sales for 2001 would have been $259,150
using 2000 exchange rates compared to 2000 sales of $256,458.
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18
RESULTS OF OPERATIONS (CONTINUED)
The Human Health Segment gross sales of $127,819 were $5,623 (4.6%) above the
first half of 2000 due primarily to higher sales of generics used in
cardiovascular and central nervous system preparations, new products, and sales
generated by the acquisition of Conti in Belgium in March 2000 and the Arizona
Chemical product line in August 2000. Sales growth in Human Health would have
been 7.7% without the impact of the decline in European currencies. These
increases were partially offset by reduced sales of a gastro-intestinal product
and a cough suppressant ingredient due to competitive issues in the marketplace,
as well as the impact of a one-time campaign in 2000 of a cardiovascular
supplement.
The Biosciences Segment gross sales of $54,890 were $5,263 (10.6%) above the
first half of 2000 primarily due to increased shipments of cell culture and
endotoxin detection products due to increased marketing and sales efforts, as
well as timing of shipments and the impact of the June 2001 acquisition of Bio
Science Contract Production Corp. Sales growth in this segment would have been
12% without the decline in European currencies.
The Animal Health/Agriculture Segment gross sales of $28,649 were $1,342 (4.9%)
above the first half of 2000. This increase was mainly due to higher sales of
agricultural intermediates; primarily 2-Cyanopyridine and pyridine derivatives
due to timing of orders and campaigns. These increases were partially offset by
lower feed additive sales, principally reflecting decreased sales of
3-Cyanopyridine and Niacinamide due to the previously announced reactor damage
at one of the Company's chemical plants.
The Specialty and Fine Chemicals Segment gross sales of $42,388 were $14,940
(26.1%) below the first half of 2000 due to lower sales in telecommunications,
coatings and performance enhancing products. Certain reductions in the
performance enhancing products were due to initiatives to reduce sales of lower
margin products, and weak photographic demand. Reduced sales in
telecommunications and coating products have been influenced by a general
economic slowdown in those industries.
Export sales from U.S. businesses of $24,104 in the first half of 2001 compared
to $27,227 in 2000. International sales from our European operations totaled
$123,916 for the first six months of 2001 compared to $122,055 in 2000.
Total gross profit of $98,035 was $3,140 above 2000 due to the improved gross
margin on the Human Health and Animal Health/Agriculture Segments sales. The
gross margin for the first half of 2001 was 38.6% versus 37.0% in 2000. The
higher gross margin % was driven by favorable product mix in Human Health and
improvement in Animal Health/Agriculture despite significant raw material and
energy cost increases. This segment included the benefit from insurance
recoveries of expenses incurred in 2000 as a result of a damaged plant reactor
which is in the process of being replaced.
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19
RESULTS OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses as a percentage of gross sales was
17.4% in the first half of 2001, above the 16.3% level in 2000. Costs increased
primarily due to higher sales and marketing efforts in Biosciences and increased
amortization expenses associated with the June 2001 acquisition of Bio Science
Corp. and the August 2000 acquisition of the Arizona product lines.
Research and development expenses of $9,317 were 3.7% of gross sales in the
first half of 2001, and represented a 28.8% increase from 2000 spending of
$7,235. This increase is related to increased efforts in the Bioscience segment
and expansion of the Company's Technical Centre of Excellence.
The operating profit in the first half of 2001 was $44,666, down 2.5% compared
to 2000. This decrease is due primarily to lower sales in the Specialty and Fine
Chemicals Segment and increased amortization expense partly offset by the
increased sales in the Human Health, Biosciences and Animal Health/Agriculture
Segments, as well as higher gross margin % in the Human Health and Animal
Health/Agriculture Segments.
Net interest expense of $4,285 in the first half of 2001 reflected a decrease of
$1,737 from 2000 as a result of lower average debt levels and a decline in
interest rates. The average interest was 5.7% in the first half of 2001 versus
6.7% in 2000. The provision for income taxes for the first half of 2001 resulted
in an effective rate of 28% as compared with 33.5% in the first half of 2000
reflecting the impact of favorable tax audits, R&D tax credit programs and a
favorable geographic mix of income.
The Company's net income for the first half of 2001 increased 10.3% to $29,246
compared with a net income of $26,518 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, the Company generated cash flows from
operations totaling $11,994, a decrease of $35,207 over the same period a year
ago. This decrease in cash flows is due primarily to higher levels of inventory,
prepaid expenses and other current assets as well as a decrease in accounts
payable and accrued expenses partially offset by increased earnings.
Capital expenditures were $15,293 in the six months of 2001 as compared to
$20,254 in the six months of 2000. Part of the funds was used for plant upgrades
and a system implementation at the BioWhittaker facility in Maryland.
In June 2001, Cambrex acquired BioScience Contact Production Corp., a
biopharmaceutical manufacturing business in Baltimore, Maryland, for
approximately $120 million in cash. This transaction was funded by an existing
line of credit facility.
18
20
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the first six months of 2000, the Company paid cash dividends of $0.06
per share.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. Investors should be aware of
factors that could cause Cambrex actual results to vary materially from those
projected in the forward-looking statements. These factors include, but are not
limited to, global economic trends; competitive pricing or product development
activities; markets, alliances, and geographic expansions developing differently
than anticipated; government legislation and/or regulation (particularly on
environmental issues); and technology, manufacturing and legal issues.
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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, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) There are no exhibits filed as part of this report.
b) Reports on Form 8-K
The registrant filed a report on Form 8-K, dated June 18, 2001,
regarding the acquisition of the Bio Science Production
Corporation.
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22
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/ Salvatore J. Guccione
-----------------------------------------------
Salvatore J. Guccione
Sr. Vice President and Chief Financial Officer
(On behalf of the Registrant and
as the Registrant's Principal
Financial Officer)
Date: August 10, 2001
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