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, 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 October 31, 2001, there were 25,756,686 shares outstanding of the
registrant's Common Stock, $.10 par value.
CAMBREX CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended September 30, 2001
Table of Contents
Page No.
--------
Part I Financial information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
September 30, 2001 and December 31, 2000 2
Condensed consolidated income statements
for the three months and nine months ended
September 30, 2001 and 2000 3
Condensed consolidated statements of cash flows
for the nine months ended September 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
Part 1 - FINANCIAL INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands except share data)
September 30, December 31,
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 31,577 $ 21,721
Trade receivables, net ............................ 71,455 76,394
Inventories, net .................................. 121,000 107,616
Deferred tax assets ............................... 14,743 14,743
Prepaid expenses and other current assets ......... 18,448 12,380
--------- ---------
Total current assets .......................... 257,223 232,854
Property, plant and equipment, net .................... 296,827 287,338
Intangible assets, net ................................ 258,449 149,199
Other assets .......................................... 14,423 11,709
--------- ---------
Total assets .................................. $ 826,922 $ 681,100
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .......... $ 71,690 $ 78,198
Income taxes payable .............................. 4,766 9,224
Short-term debt and current portion of
Long-term debt ................................ 4,107 1,484
--------- ---------
Total current liabilities ............................. 80,563 88,906
Long-term debt ........................................ 298,298 168,591
Deferred tax liabilities .............................. 61,531 61,531
Other noncurrent liabilities .......................... 23,298 24,451
--------- ---------
Total liabilities ............................. 463,690 343,479
--------- ---------
Stockholders' equity:
Common stock, $.10 par value; issued 27,991,825 and
27,433,170 shares at respective dates ......... 2,822 2,769
Additional paid-in capital ........................ 192,469 181,698
Retained earnings ................................. 249,313 214,269
Treasury stock, at cost 2,235,139 and 2,193,945
shares at respective dates ..................... (14,542) (13,010)
Accumulated other comprehensive loss .............. (66,830) (48,105)
--------- ---------
Total stockholders' equity .................... 363,232 337,621
--------- ---------
Total liabilities and stockholders' equity .... $ 826,922 $ 681,100
========= =========
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,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Gross sales ........................... $ 117,588 $ 115,742 $ 371,334 $ 372,200
Commissions & allowances........... 1,148 1,023 3,302 3,484
--------- --------- --------- ---------
Net sales ............................. 116,440 114,719 368,032 368,716
Other revenues .................... 1,075 1,243 2,798 3,597
--------- --------- --------- ---------
NET REVENUES .......................... 117,515 115,962 370,830 372,313
Cost of goods sold .................... 76,806 74,594 232,086 236,050
--------- --------- --------- ---------
GROSS PROFIT .......................... 40,709 41,368 138,744 136,263
Operating expenses:
Selling, general and administrative 21,232 18,801 65,214 60,652
Research and development .......... 5,170 3,405 14,557 10,641
--------- --------- --------- ---------
Total operating expenses ........ 26,402 22,206 79,771 71,293
OPERATING PROFIT ...................... 14,307 19,162 58,973 64,970
Other (income) expenses:
Interest expense, net ............. 3,420 3,229 7,705 9,251
Other (income)/expense, net ....... (76) (55) (315) (145)
--------- --------- --------- ---------
Income before income taxes ............ 10,963 15,988 51,583 55,864
Provision for income taxes ........ 2,862 4,737 14,236 18,095
--------- --------- --------- ---------
NET INCOME ............................ $ 8,101 $ 11,251 $ 37,347 $ 37,769
========= ========= ========= =========
Weighted average shares outstanding:
Basic ............................. 25,754 25,082 25,608 24,891
Effect of dilutive stock options .. 859 1,134 1,007 1,128
--------- --------- --------- ---------
Diluted ........................... 26,613 26,216 26,615 26,019
Earnings per share of common stock and
common stock equivalents:
Basic ............................. $ 0.31 $ 0.45 $ 1.46 $ 1.52
========= ========= ========= =========
Diluted ........................... $ 0.30 $ 0.43 $ 1.40 $ 1.45
========= ========= ========= =========
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
---------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net income ............................................ $ 37,347 $ 37,769
Depreciation and amortization ......................... 36,605 35,715
Deferred income tax provision ......................... -- 232
Changes in assets and liabilities (net of assets and
liabilities acquired):
Receivables, net .................................. 4,034 953
Inventories ....................................... (15,031) (9,104)
Prepaid expenses and other current assets ........ (5,566) (2,320)
Accounts payable and accrued liabilities ......... (12,004) 8,130
Income taxes payable ............................. (2,269) 7,658
Other noncurrent assets and liabilities .......... (9,564) 657
--------- ---------
Net cash provided by operating activities ......... 33,552 79,690
--------- ---------
Cash flows from investing activities:
Capital expenditures .................................. (29,238) (31,836)
Acquisition of businesses (net of cash acquired) ...... (120,392) (8,303)
Other investing activities ............................ (185) --
--------- ---------
Net cash used in investing activities ............. (149,815) (40,139)
--------- ---------
Cash flows from financing activities:
Dividends ............................................. (2,303) (2,235)
Net increase (decrease) in short-term debt ............ 2,638 (3,906)
Long-term debt activity (including current portion):
Borrowings ........................................ 258,743 37,801
Repayments ........................................ (141,286) (39,126)
Proceeds from the issuance of common stock ............ 10,824 7,931
Purchase of treasury stock ............................ (1,532) (788)
--------- ---------
Net cash provided by (used) in financing activities 127,084 (323)
--------- ---------
Effect of exchange rate changes on cash ................... (965) (13,552)
--------- ---------
Net increase in cash and cash equivalents ................. 9,856 25,676
Cash and cash equivalents at beginning of period .......... 21,721 39,796
--------- ---------
Cash and cash equivalents at end of period ................ $ 31,577 $ 65,472
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(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, 2000.
The results of operations for the nine months ended September 30, 2001
are not necessarily indicative of the results to be expected for the full year.
(2) INVENTORIES
Inventories at September 30, 2001 and December 31, 2000 consist of the
following:
September 30, December 31,
2001 2000
-------- --------
Finished goods ...... $ 53,310 $ 44,437
Work in process ..... 33,922 33,601
Raw materials ....... 30,215 25,156
Fuel oil and supplies 3,553 4,422
-------- --------
Total ........... $121,000 $107,616
======== ========
(3) ACQUISITIONS
On June 1, 2001, Cambrex Corporation completed its acquisition of the Bio
Science Contract Production Corporation biopharmaceutical manufacturing business
in Baltimore, Maryland. The business involves the cGMP manufacture of purified
bulk biologics and pharmaceutical ingredients. 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
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACQUISITIONS (CONTINUED)
On October 30, 2001, Cambrex Corporation announced the acquisition of
Marathon Biopharmaceuticals, located in Hopkinton, Massachusetts, for
approximately $26 million in cash through a share purchase of CoPharma Inc.
Marathon is a full-service cGMP manufacturer of biopharmaceutical ingredients
and purified bulk biologics for pre-clinical evaluation, clinical trials and
commercial scale quantities.
As indicated above, in June 2001, Cambrex completed the acquisition of
Bio Science Contract Production Corporation. Marathon strengthens Cambrex's
existing capabilities for producing pre-clinical, clinical and commercial
quantities of bulk biologics.
(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 September 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 September 30, 2001, was $2,321. This amount will be
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
reclassified into earnings as the underlying forecasted transactions occur. All
transition amounts and the balance of net unrealized losses included in
comprehensive income at September 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 nine months ended September 30,
2001 was $841 and $3,134, respectively. The net loss on interest rate swap
contracts recognized in interest expense was $435 and $588 for the three and
nine months ended September 30, 2001, respectively.
(5) COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30,
2001 was $12,075 and $18,621, respectively. The amounts for the same period in
2000 were ($257) and $18,587, respectively. The increase in the three month
period ended September 30, 2001 was due primarily to favorable foreign currency
translation impacts in 2001 versus 2000, partly offset by lower net income.
(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 throughout
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 are in the process of being reviewed by the insurance
company. The Company currently estimates that the total amount of the claim will
be approximately $11.0 million. All costs incurred to date have been expensed as
incurred, unless capital in nature. 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,
subject to deductible levels.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In July, 2001 the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No.'s 141 "Business Combinations" (SFAS 141)
and 142 "Goodwill and Other Intangible Assets" (SFAS 142).
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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, as well as 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 remaining useful lives. SFAS 142 will be
effective on January 1, 2002; however, goodwill and intangibles acquired after
June 30, 2001 will be subject immediately to the provisions of this Statement.
The impact of this statement will not have a material impact on 2001 results.
The Company is currently evaluating the impact that adoption will have on its
2002 annual results.
In August, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 primarily
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. SFAS will be effective on January 1, 2002. The Company is
currently evaluating the impact that adoption will have on its results.
(8) LONG-TERM DEBT
Long-term debt at September 30, 2001 and December 31, 2000 consists of
the following:
September 30, December 31,
2001 2000
-------- --------
Bank credit facilities $283,500 $164,500
Other ................ 15,085 4,528
-------- --------
Subtotal ......... 298,585 169,028
Less: current portion 287 437
-------- --------
Total ............ $298,298 $168,591
======== ========
The Company met all the bank covenants for the first nine months of 2001.
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SEGMENT INFORMATION
Following is a summary of business segment information for the following
dates:
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Gross Sales:
-----------
Human Health ................ $ 57,071 $ 55,257 $ 184,890 $ 177,453
Biosciences ................. 31,699 23,679 86,589 73,306
Animal Health/Agriculture ... 10,689 10,775 39,338 38,082
Specialty and Fine Chemicals 18,129 26,031 60,517 83,359
--------- --------- --------- ---------
$ 117,588 $ 115,742 $ 371,334 $ 372,200
========= ========= ========= =========
Gross Profit:
------------
Human Health ................ $ 21,228 $ 22,064 $ 74,276 $ 71,653
Bioscienses ................. 16,146 11,727 45,274 38,908
Animal Health/Agriculture ... (81) 2,054 5,978 6,666
Specialty and Fine Chemicals 3,416 5,523 13,216 19,036
--------- --------- --------- ---------
$ 40,709 $ 41,368 $ 138,744 $ 136,263
========= ========= ========= =========
Net Income*
----------
Biosciences ................. $ 1,280 $ 741 $ 4,368 $ 4,060
Human Health, Animal Health/
Agriculture & Specialty and
FineChemicals ............. 6,821 10,510 32,979 33,709
--------- --------- --------- ---------
$ 8,101 $ 11,251 $ 37,347 $ 37,769
========= ========= ========= =========
* 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.
Capital Spending:
----------------
Biosciences ................. $ 1,676 $ 484 $ 3,312 $ 3,099
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............ 12,269 11,098 25,926 28,737
------- ------- ------- -------
$13,945 $11,582 $29,238 $31,836
======= ======= ======= =======
Depreciation:
------------
Biosciences ................. $ 1,240 $ 784 $ 3,218 $ 2,736
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............ 7,678 8,972 23,512 25,540
------- ------- ------- -------
$ 8,918 $ 9,756 $26,730 $28,276
======= ======= ======= =======
Amortization:
------------
Biosciences ................. $ 2,979 $ 1,430 $ 6,549 $ 4,338
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............ 1,124 807 3,326 3,101
------- ------- ------- -------
$ 4,103 $ 2,237 $ 9,875 $ 7,439
======= ======= ======= =======
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SEGMENT INFORMATION (CONTINUED)
September 30, December 31,
2001 2000
-------- --------
Total Assets
------------
Biosciences ................. $327,095 $190,770
Human Health, Animal Health/
Agriculture & Specialty and
Fine Chemicals ............ 499,827 490,330
-------- --------
$826,922 $681,100
======== ========
(10) CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities.
Environmental
In connection with laws and regulations pertaining to the protection of
the environment, the Company is 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 September 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
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONTINGENCIES (CONTINUED)
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 Court for the
District of Columbia on behalf of those states and persons in those states who
were purchasers of the generic pharmaceuticals.
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. 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 and Profarmaco have also been named in purported class action
complaints brought by private plaintiffs in various state courts on behalf of
purchasers of lorazepam and clorazepate in generic form, making allegations
essentially similar to those raised in the FTC's complaint and seeking various
forms of relief including treble damages.
The Company 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.
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.
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CONTINGENCIES (CONTINUED)
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.
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 September 30, 2001 was
$5,301 and $752, 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 or
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
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 2001 VERSUS THIRD QUARTER 2000
Earnings for the third quarter of 2001 were below the same period a year ago
reflecting reduced volumes and product mix in non-core and older product lines
coupled with increased marketing, research and amortization expenses,
particularly in the biosciences segment. In addition, the provision for income
taxes was lower than last year due to lower pre-tax income and a favorable
effective rate.
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 September 30, 2001 and 2000.
Quarter Ended September 30,
-----------------------------------------------------
2001 2000
----------------------- -----------------------
$ % $ %
-------- ------- -------- -------
Human Health ............... $ 57,071 48.5% $ 55,257 47.7%
Biosciences ................ 31,699 27.0 23,679 20.5
Animal Health/Agriculture .. 10,689 9.1 10,775 9.3
Specialty and Fine Chemicals 18,129 15.4 26,031 22.5
-------- ------- -------- -------
Total gross sales .... $117,588 100.0% $115,742 100.0%
======== ======= ======== =======
The following table shows the gross sales and profit of the Company's four
product segments for the third quarter 2001 and 2000.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- ----
2001
Human Health ............... $ 57,071 $ 21,228 37.2%
Biosciences ................ 31,699 16,146 50.9
Animal Health/Agriculture .. 10,689 (81) (.8)
Specialty and Fine Chemicals 18,129 3,416 18.8
-------- -------- ----
Total ................ $117,588 $ 40,709 34.6%
======== ======== ====
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- ----
2000
Human Health ............... $ 55,257 $ 22,064 39.9%
Biosciences ................ 23,679 11,727 49.5
Animal Health/Agriculture .. 10,775 2,054 19.1
Specialty and Fine Chemicals 26,031 5,523 21.2
-------- -------- ----
Total ................ $115,742 $ 41,368 35.7%
======== ======== ====
13
RESULTS OF OPERATIONS (CONTINUED)
Gross sales in the third quarter 2001 increased 1.6% to $117,588 from $115,742
in the third quarter 2000. Sales increases in the Human Health and Biosciences
segments were partially offset by decreases in the Specialty and Fine Chemicals
and Animal Health/Agricultural segments.
The effect of foreign currency exchange rates on gross sales for the third
quarter resulted in a negative impact on sales of $1,197, or 1.0%, compared to
the corresponding period in 2000. Gross sales for 2001 would have been $118,785
using 2000 exchange rates compared to 2000 sales of $115,742.
The Human Health Segment gross sales of $57,071 were $1,814 (3.3%) above the
third quarter 2000. Gross sales were above the prior year primarily reflecting
higher sales of generic actives due to higher worldwide demand and timing of
shipments, a new advanced intermediate used in a Phase III antiviral product and
continued growth in sales of an intermediate used in a product to treat
end-stage kidney disease. These increases were partly offset by lower sales of
older gastrointestinal and cardiovascular products due to competitive pricing
pressures. The cardiovascular product sales loss is offset by lower
manufacturing costs reflecting a change in chemical processing. The sales in
this segment were reduced by 1.6% due to the impact of European currencies
versus the U.S. dollar.
The Bioscience Segment gross sales of $31,699 were $8,020 (33.9%) above the
third quarter 2000 due primarily to the acquisition of Bio Science Contract
Production Corp. in June 2001. In addition, the Company saw increased cell
culture and endotoxin detection product sales, partially offset by the events of
the September 11th terrorist attacks.
The Animal Health/Agriculture Segment gross sales of $10,689 in the third
quarter 2001 were essentially flat compared to third quarter 2000. Animal
Health/Agriculture business sales were essentially flat as higher shipments of
Niacinamide feed grade and 2-Cyanopyridine were offset by lower agricultural
intermediate sales of pyridine. The increase in Niacinamide and 2-Cyanopyridine
sales were due to increased demand, as well as timing of annual production
campaigns. The lower Pyridine shipments to the agricultural market were due
primarily to timing of shipments.
The Specialty Business Segment gross sales of $18,129 decreased $7,902 (30.4%)
below the third quarter 2000 reflecting reduced sales of encapsulants used in
the telecommunications industry, coating additives (primarily castor oil based)
and performance enhancing products. The reduced coatings and telecommunications
product sales have been influenced by a general economic slowdown in those
industries. Certain performance enhancing product sales reductions were due to
weak photographic demand, a customer decision to move more production of a
polycarbonate additive in-house, lower demand and timing of shipments in
European markets.
14
RESULTS OF OPERATIONS (CONTINUED)
Export sales from U.S. businesses of $11,300 in the third quarter 2001 increased
from $11,211 in the third quarter 2000. International sales from our European
operations totaled $53,689 for the third quarter of 2001 as compared with
$53,449 in 2000.
Gross profit in the third quarter of 2001 was $40.7 million, or 34.6% of sales,
compared to $41.4 million, or 35.7% of sales, in the third quarter 2000. With
respect to the Human Health segment, gross margin was 37.2% in the third quarter
versus 39.9% last year reflecting unfavorable product mix and overhead
absorption in certain plants. The Biosciences segment gross margin of 50.9% was
above prior year of 49.5% primarily due to improved sales mix. Specialty and
Fine Chemicals gross margin declined compared to last year, due primarily to
reduced volume. Lower production levels, unfavorable sales mix, increased raw
material and energy costs significantly impacted Animal Health/Agriculture
segment gross margin.
Selling, general and administrative expenses as a percentage of gross sales were
18.1% in the third quarter 2001, up from 16.2% in the third quarter 2000. The
third quarter 2001 included the added administration costs of Bio Science
Contract Production Corporation acquired in June 2001. The third quarter 2001
also had increased marketing and sales spending in the Biosciences and Human
Health segments to promote new product growth and higher amortization expense
due to the June 2001 Bio Science and August 2000 Arizona Chemicals product line
acquisitions.
Research and development expenses of $5,170 were 4.4% of gross sales in the
third quarter 2001, and represented a 51.8% 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 Cambrex Center of Technical Excellence.
The operating profit in the third quarter 2001 was $14,307, compared to $19,162
in 2000 due primarily to weakness in the gross margins in the non-life science
businesses and higher SG&A and amortization expense due to acquisitions.
Net interest expense of $3,420 in the third quarter 2001 increased $191 from
2000 reflecting lower interest rates offset by a higher average debt balance.
The average interest rate was 5.02% in the third quarter 2001 versus 7.0% in
2000.
The provision for income taxes for the third quarter 2001 resulted in an
effective rate of 26.1% as compared with 29.6% in the third quarter 2000. The
decrease is due to the impact of favorable audits, R&D tax credit programs and a
favorable geographic mix of income.
The Company's net income for the third quarter 2001 decreased to $8,101 compared
with a net income of $11,251 in the third quarter 2000.
15
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF FIRST NINE MONTHS OF 2001 VERSUS NINE MONTHS OF 2000
Earnings in the first nine months of 2001 were approximately even with the
comparable 2000 period reflecting higher sales in the Human Health and
Biosciences segments, which yield higher gross margins than the non-life science
businesses, offset by increased SG&A costs and research and development
spending.
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
nine months 2001 and 2000.
Nine Months Ended September 30
---------------------------------------------------
2001 2000
--------------------- ---------------------
$ % $ %
-------- ----- -------- -----
Human Health ............... $184,890 49.8% $177,453 47.7%
Biosciences ................ 86,589 23.3 73,306 19.7
Animal Health/Agriculture .. 39,338 10.6 38,082 10.2
Specialty and Fine Chemicals 60,517 16.3 83,359 22.4
-------- ----- -------- -----
Total gross sales .... $371,334 100.0% $372,200 100.0%
======== ===== ======== =====
The following table shows the gross sales and profit of the Company's four
product segments for the nine months 2001 and 2000.
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- ----
2001
Human Health......................................... $184,890 $ 74,276 40.2%
Biosciences.......................................... 86,589 45,274 52.3
Animal Health/Agriculture............................ 39,338 5,978 15.2
Specialty and Fine Chemicals......................... 60,517 13,216 21.8
-------- -------- ----
Total.......................................... $371,334 $138,744 37.4%
======== ======== ====
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- ----
2000
Human Health......................................... $177,453 $ 71,653 40.4%
Biosciences.......................................... 73,306 38,908 53.1
Animal Health/Agriculture............................ 38,082 6,666 17.5
Specialty and Fine Chemicals......................... 83,359 19,036 22.8
-------- -------- ----
Total.......................................... $372,200 $136,263 36.6%
======== ======== ====
16
RESULTS OF OPERATIONS (CONTINUED)
Gross sales in the first nine months 2001 were $371,334 compared to $372,200 in
the first nine months 2000. Higher sales in the Human Health, Biosciences and
Animal Health/Agriculture segments were offset by the decrease in the Specialty
and Fine Chemicals segment.
The effect of foreign currency exchange rates on gross sales for the first nine
months resulted in a negative impact on sales of $7,007 or 1.9% compared to the
corresponding period in 2000. Gross sales for 2001 would have been $378,341
using 2000 exchange rates compared to 2000 sales of $372,200.
The Human Health Segment gross sales of $184,890 were $7,437 (4.2%) above the
first nine months 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 7.0% without the impact of the decline in European currencies. These
increases were partially offset by reduced sales of a gastro-intestinal product
due to customer bringing manufacturing in-house and a cardiovascular product due
to a price decrease. This impact of this price decrease is offset by lower
manufacturing cost, reflecting a change in chemical processing.
The BioScience Segment gross sales of $86,589 were $13,283 (18.1%) above the
first nine months 2000 primarily due to the acquisition of Bio Science Contract
Production Corp. in June, 2001, as well as increased shipments of media and
serum products, including liquid media flex pack and powder formulations, and
LAL products due to increased marketing and production efforts.
The Animal Health/Agriculture Segment gross sales of $39,338 were $1,256 (3.3%)
above the first nine months 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 chemicals plants.
The Specialty and Fine Chemicals Segment gross sales of $60,517 were $22,842
(27.4%) below the first nine months 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. In addition, lower sales of a
polycarbonate additive were due to a customer decision to move production
in-house.
Export sales from U.S. businesses of $35,404 in the first nine months of 2001
compared to $38,438 in 2000. International sales from our European operations
totaled $177,625 for the first nine months of 2001 compared to $175,504 in 2000.
17
RESULTS OF OPERATIONS (CONTINUED)
Total gross profit of $138,744 was $2,481 above 2000 due to higher sales volume
primarily in the Human Health and Bioscience segments partly offset by lower
sales volume in the Specialty and Fine Chemicals segment. The gross margin for
the first nine months of 2001 was 37.4% versus 36.6% in 2000.
Selling, general and administrative expenses as a percentage of gross sales were
17.6% in the first nine months of 2001, versus 16.3% for 2000. Administration
costs increased due primarily to the acquisition of Bio Science Contract
Production Corporation in June 2001. In addition, amortization expenses were
higher due to the June 2001 Bio Science Contract Production Corporation and
August 2000 Arizona product line acquisitions.
Research and development expenses of $14,557 were 3.9% of gross sales in 2001
compared to $10,641 or 2.9% of gross sales in the first nine months of 2000.
This increase is related to increased efforts in the BioScience segment and
expansions of the Company's Technical Center of Excellence.
The operating profit in the first nine months of 2001 was $58,973 compared to
$64,970 in 2000.
Net interest expense of $7,705 in the first nine months of 2001 decreased $1,546
from 2000 reflecting a lower average debt balance and lower interest rates. The
average interest rate was 5.54% in the first nine months of 2001 versus 6.8% in
2000. The provision for income taxes for the first nine months of 2001 resulted
in an effective rate of 27.6% compared to 32.4% last year 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 nine months of 2001 was $37,347 compared
to $37,769 in 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, the Company generated cash
flows from operations totaling $33,552 a decrease of $46,138 versus the same
period a year ago. This decrease in cash flows is due primarily to higher
inventory levels and a decrease in accounts payable, accrued liabilities and
income taxes payable.
Capital expenditures were $29,238 in the nine months of 2001 as compared to
$31,836 in 2000. Part of the funds were used for plant upgrades at Nordic AB, a
water treatment upgrade at Profarmaco and system implementation at the
BioWhittaker facility in Maryland.
In June 2001, Cambrex acquired Bio Science Contract Production Corporation, 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
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the first nine months of 2001, 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.
COST SAVINGS PROGRAM
Management is in the process of developing a cost savings program and is
reviewing operations across all business lines. The program will primarily
consist of rationalization of certain products and product lines, disposal of
associated equipment and headcount reductions. The Company expects the plan to
be committed to and all communications made by the end of the fourth quarter of
this year. The cost of this program and associated future savings estimates are
currently under review.
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.
19
PART II - OTHER INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITIES HOLDERS.
Refer to Form 10-Q for the quarterly period ended March 31, 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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAMBREX CORPORATION
By /s/ 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: November 14, 2001
21