<PAGE> 1
CONFORMED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission file number 1-10638
CAMBREX CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-2476135
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073
--------------------------------------------------------
(Address of principal executive offices)
(201) 804-3000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of May 1, 1999, there were 24,555,310 shares outstanding of the
registrant's Common Stock, $.10 par value.
<PAGE> 2
CAMBREX CORPORATION AND SUBSIDIARIES
FORM 10-Q
For The Quarter Ended March 31, 1999
Table of Contents
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets as of
March 31, 1999 and December 31, 1998 2
Condensed consolidated income statements
for the three months ended March 31, 1999 and 1998 3
Condensed consolidated statements of comprehensive
income for the three months ended March 31, 1999 and 1998 4
Condensed consolidated statements of cash flows
for the three months ended March 31, 1999 and 1998 5
Notes to condensed consolidated financial statements 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 17
Part II Other Information
Item 4. Matters Submitted to a Vote of Securities Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit 27 - Financial Data Schedule 20
<PAGE> 3
Part 1 - FINANCIAL INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 19,452 $ 48,527
Trade receivables, less allowances of $1,055 and $1,550 69,781 56,964
Other receivables ..................................... 7,934 7,689
Inventories, net ...................................... 102,923 100,245
Deferred tax assets ................................... 11,759 11,759
Prepaid expenses and other current assets ............. 7,677 6,342
--------- ---------
Total current assets ................................ 219,526 231,526
Property, plant and equipment, net ....................... 274,524 255,016
Intangible assets, net ................................... 134,061 126,995
Other assets ............................................. 3,518 3,517
--------- ---------
Total assets ........................................ $ 631,629 $ 617,054
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .............. $ 70,271 $ 63,467
Income taxes payable .................................. 7,463 8,733
Short-term debt ....................................... 3,356 2,451
Current portion of long-term debt ..................... 563 578
--------- ---------
Total current liabilities ........................... 81,653 75,229
Long-term debt ........................................... 195,844 191,372
Deferred tax liabilities ................................. 54,817 52,183
Other noncurrent liabilities ............................. 21,451 21,010
--------- ---------
Total liabilities ................................... 353,765 339,794
--------- ---------
Stockholders' equity:
Common stock, $.10 par value; issued 26,642,579 and
26,573,324 shares at respective dates ............. 2,661 2,655
Additional paid-in capital ............................ 163,941 163,525
Retained earnings ..................................... 141,916 132,471
Treasury stock, at cost; 2,099,239 and 2,081,099
shares at respective dates ......................... (10,232) (9,841)
Accumulated other comprehensive income/(loss) ......... (20,422) (11,550)
--------- ---------
Total stockholders' equity .......................... 277,864 277,260
--------- ---------
Total liabilities and stockholders' equity .......... $ 631,629 $ 617,054
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
CAMBREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Income Statements
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Gross sales ................................... $ 117,519 $ 113,770
Commissions & freight ..................... 1,323 1,585
Sales, returns and allowances .............. (106) 154
--------- ---------
Net sales ..................................... 116,302 112,031
Other revenues ............................. 1,097 1,571
--------- ---------
Net revenues .................................. 117,399 113,602
Cost of goods sold ............................ 76,896 74,652
--------- ---------
Gross profit .................................. 40,503 38,950
Operating expenses:
Selling, general and administrative
expenses ................................. 19,480 18,221
Research and development ................... 3,609 3,313
--------- ---------
Total operating expenses ................. 23,089 21,534
Operating profit .............................. 17,414 17,416
Other (income) expenses:
Interest expense, net ...................... 2,177 2,955
Other (income)/expense, net ................ 43 175
--------- ---------
Income before income taxes .................... 15,194 14,286
Provision for income taxes ................. 5,014 5,143
--------- ---------
Net income .................................... $ 10,180 $ 9,143
========= =========
Weighted average shares outstanding:
Basic ...................................... 24,533 23,910
Effect of dilutive stock options ........... 851 1,142
--------- ---------
Diluted .................................... 25,384 25,052
Earnings per share of common stock and
common stock equivalents:
Basic ...................................... $ 0.41 $ 0.38
========= =========
Diluted .................................... $ 0.40 $ 0.36
========= =========
Cash dividends paid per share ................. $ 0.03 $ 0.025
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
CAMBREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net income ....................................... $ 10,180 $ 9,143
Other comprehensive income/(loss):
Foreign currency translation adjustments* .... (8,872) (1,381)
-------- --------
Comprehensive income/(loss) ...................... $ 1,308 $ 7,762
======== ========
</TABLE>
- ---------
* The Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
CAMBREX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 10,180 $ 9,143
Depreciation and amortization ........................ 10,324 10,264
Deferred income tax provision ........................ 944 403
Changes in assets and liabilities (net of assets and
liabilities acquired):
Receivables, net ................................... (9,599) (10,002)
Inventories ........................................ 1,988 (4,392)
Prepaid expenses and other current assets ....... (1,260) (747)
Accounts payable and accrued liabilities ........ 9,413 (221)
Income taxes payable ............................ (462) 4,825
Other noncurrent assets and liabilities ......... (529) 3,869
-------- --------
Net cash provided by operating activities .......... 20,999 13,142
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (6,230) (6,632)
Acquisition of businesses (net of cash acquired) ..... (37,336) (11,328)
Other investing activities ........................... (745) (270)
-------- --------
Net cash used in investing activities .............. (44,311) (18,230)
-------- --------
Cash flows from financing activities:
Dividends ............................................ (735) (596)
Net increase (decrease) in short-term debt ........... 1,145 (1,059)
Long-term debt activity (including current portion):
Borrowings ......................................... 5,500 20,700
Repayments ......................................... (6,401) (7,137)
Proceeds from the issuance of common stock ........... 476 1,797
(Purchase of) Proceeds from the sale of treasury stock (446) 284
-------- --------
Net cash (used in) provided by financing
activities............................... (461) 13,989
--------- --------
Effect of exchange rate changes on cash ................. (5,302) (1,854)
-------- --------
Net increase in cash and cash equivalents ............... (29,075) 7,047
Cash and cash equivalents at beginning of period ........ 48,527 21,469
-------- --------
Cash and cash equivalents at end of period .............. $ 19,452 $ 28,516
======== ========
Supplemental disclosure:
Interest paid (net of capitalized interest) .......... $ 2,135 $ 3,885
Income taxes paid .................................... $ 3,879 $ 293
Depreciation expense ................................. $ 8,184 $ 7,550
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 7
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(in thousands, except per share amounts)
(1) Basis of Presentation
Unless otherwise indicated by the context, "Cambrex" or the "Company"
means Cambrex Corporation and subsidiaries.
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared from the records of the Company. In the opinion of
management, the financial statements include all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of financial
position and results of operations in conformity with generally accepted
accounting principles. These interim financial statements should be read in
conjunction with the financial statements for the year ended December 31, 1998.
All diluted earnings per share are computed on the basis of the weighted
average shares of common stock outstanding plus common equivalent shares arising
from the effect of dilutive stock options, using the treasury stock method.
The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the full year.
(2) Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventories at March 31, 1999 and December 31, 1998
consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Finished goods ................... $ 51,624 $ 54,264
Work in process .................. 25,307 20,177
Raw materials .................... 20,780 20,105
Fuel oil and supplies ............ 5,212 5,699
-------- --------
Total ....................... $102,923 $100,245
======== ========
</TABLE>
(3) Mergers and Acquisitions
On March 12, 1999, Cambrex announced the purchase of the Irotec
Laboratories Ltd. ("Irotec"), a supplier of active pharmaceutical ingredients
(APIs) located in Cork, Ireland. Cambrex paid approximately $35 million for the
business, net of cash acquired, which was financed through the Company's cash
reserves. The acquisition has been accounted for under the purchase method and
as such, the purchase price has been allocated to the fair value of assets
acquired and liabilities assumed.
6
<PAGE> 8
Notes to Condensed Consolidated Financial Statements (continued)
(3) Mergers and Acquisitions (continued)
On January 4, 1999, the Company acquired Poietic Technologies, Inc.
("Poietics"), the leading supplier of normal human cells of hematopoietic
origin. The Company paid $2.5 million cash and will pay future consideration
based on the performance of the business.
For the first quarter of 1999, the above acquisitions increased gross
sales by $1,066, operating profit by $46, and had no impact on earnings per
share.
(4) Commitments
On March 19, 1999, Cambrex announced that it had entered into a put option
and call option pertaining to the stock of Conti BPC NV ("Conti"), a
manufacturer and supplier of pharmaceutical intermediates and active
pharmaceutical ingredients located in Landen, Belgium. Cambrex granted a put
option for the stock of Conti that may be exercised from March 1, 2001 to March
1, 2002 to the seller. Simultaneously, Cambrex was granted a call option with
terms similar to the put option by the seller. The price associated to the put
and call options is approximately $7.5 million, subject to future working
capital adjustments.
(5) Income Taxes
The provision for income taxes of March 31, 1999 resulted in an effective
rate of 33% versus 36% at March 31, 1998. The decrease is mainly due to the
effect of the Italian Substitute Tax Benefit, which was recorded in the second
quarter of 1998 and will favorably impact the tax rate in 1999. This election
allows previously non-deductible goodwill of Cambrex's Italian subsidiary,
Profarmaco, S.r.l., to be deducted and will result in a total future tax benefit
in the years 1999 to 2004 of approximately $8,000.
(6) Long-term Debt
Long-term debt at March 31, 1999 and December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Bank credit facilities ........... $189,100 $190,000
Capital lease .................... 47 49
Notes payable .................... 7,260 1,901
-------- --------
Subtotal ................. 196,407 191,950
Less: current portion ........... 563 578
-------- --------
Total ....................... $195,844 $191,372
======== ========
</TABLE>
The Company met all the bank covenants for the first three months of 1999.
7
<PAGE> 9
Notes to Condensed Consolidated Financial Statements (continued)
(7) Segment Information
Following is a summary of business segment information for the following
dates:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Gross Sales:
Human Health ............................. $ 55,645 $ 50,212
Biotechnology ............................ 17,619 15,536
Animal Health/Agriculture ................ 15,856 16,283
Specialty Business ....................... 28,399 31,739
-------- --------
$117,519 $113,770
======== ========
Gross Profit:
Human Health ............................. $ 21,570 $ 20,471
Biotechnology ............................ 9,075 8,340
Animal Health/Agriculture ................ 2,890 3,861
Specialty Business ....................... 6,968 6,278
-------- --------
$ 40,503 $ 38,950
======== ========
Net Income:
Biotechnology ............................ $ 470 $ 834
Human Health, Animal Health/Agriculture &
Specialty Business .................... 9,710 8,309
-------- --------
$ 10,180 $ 9,143
======== ========
Capital Spending:
Biotechnology ............................ $ 484 $ 411
Human Health, Animal Health/Agriculture &
Specialty Business .................... 5,746 6,221
-------- --------
$ 6,230 $ 6,632
======== ========
Depreciation:
Biotechnology ............................ $ 593 $ 421
Human Health, Animal Health/Agriculture &
Specialty Business .................... 7,591 7,129
-------- --------
$ 8,184 $ 7,550
======== ========
Amortization:
Biotechnology ............................ $ 1,137 $ 1,122
Human Health, Animal Health/Agriculture &
Specialty Business .................... 1,003 1,592
-------- --------
$ 2,140 $ 2,714
======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Identifiable Assets:
Biotechnology ............................ $ 27,689 $ 27,799
Human Health, Animal Health/Agriculture &
Specialty Business .................... 239,651 227,217
-------- --------
$267,340 $255,016
======== ========
</TABLE>
8
<PAGE> 10
Notes to Condensed Consolidated Financial Statements (continued)
(8) Contingencies
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities.
Environmental
In connection with laws and regulations pertaining to the protection of
the environment, the Company is a party to several environmental remediation
investigations and cleanups and, along with other companies, has been named a
"potentially responsible party" for certain waste disposal sites (Superfund
sites). Each of these matters is subject to various uncertainties, and it is
possible that some of these matters will be decided unfavorably against the
Company. The Company had accruals, included in current accrued liabilities and
other noncurrent liabilities, of $4,800 at March 31, 1999 and December 31, 1998
for costs associated with the study and remediation of Superfund sites and the
Company's current and former operating sites for matters that are probable and
reasonably estimable. After reviewing information currently available,
management believes any amounts paid in excess of the accrued liabilities will
not have a material effect on its financial position or results of operations.
However, these matters, if resolved in a manner different from the estimates,
could have a material adverse effect on financial condition, operating results
and cash flows when resolved in a future reporting period.
Litigation
The Company and its subsidiary Profarmaco S.r.l. ("Profarmaco") were named
as defendants in a proceeding instituted by the Federal Trade Commission ("FTC")
on December 21, 1998, in the United States District Court for the District of
Columbia. The complaint alleges that exclusive license agreements which
Profarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering the
drug master files for (and, therefore, the right to buy and use) two active
pharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of an
effort on Mylan's part to restrict competition in the supply of lorazepam and
clorazepate and to increase the price charged for these products when Mylan sold
them as generic pharmaceuticals. The complaint further alleges that these
agreements violate the Federal Trade Commission Act, and that Mylan, Cambrex,
Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor in
the United States, engaged in an unlawful restraint of trade and conspired to
monopolize and attempted to monopolize the markets for the generic
pharmaceuticals incorporating the APIs. The FTC seeks a permanent injunction and
other relief, including disgorgement of the profits generated through the
licensing arrangements, which the FTC alleges to be in excess of $120,000 for
all defendants. In accordance with the license agreement, the Company received
royalties of approximately $19,300 for the year ended December 31, 1998. The
first quarter 1998 included $1,000 in royalty income from Mylan. The royalty
arrangements under the agreement have concluded, however, the Company sold these
products on a non-exclusive basis in the first quarter 1999.
9
<PAGE> 11
Notes to Condensed Consolidated Financial Statements (continued)
(8) Contingencies (continued)
A lawsuit making similar allegations against the Company and Profarmaco,
and seeking injunctive relief and treble damages, has been filed by the
Attorneys General of 31 states and the District of Columbia in the United States
District Court for the District of Columbia on behalf of those states and
persons in those states who were purchasers of the generic pharmaceuticals. The
Company and Profarmaco have also been named in purported class action complaints
brought by private plaintiffs in various state courts on behalf of purchasers of
lorazepam and clorazepate in generic form, making allegations essentially
similar to those raised in the FTC's complaint and seeking various forms of
relief including treble damages.
The Company believes that its licensing arrangements with Mylan are in
accordance with regulatory requirements and will vigorously defend the FTC's
actions and various other lawsuits and class actions. However, the Company and
Mylan have terminated the exclusive licenses to the drug master files. The
future royalty arrangements under the agreements have concluded as of December
31, 1998. In entering these licensing arrangements, the Company elected not to
raise the price of its products and had no control or influence over the pricing
of the final generic product forms by Mylan.
On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and
seller of niacinamide (Vitamin B3), received a Federal Grand Jury subpoena for
the production of documents relating to the pricing and possible customer
allocation with regard to that product. The Company understands that the
subpoena was issued as part of the Federal Government's ongoing antitrust
investigation into various business practices in the vitamin industry generally.
The Company and Nepera have been cooperating fully with the government's
investigation.
While it is not possible to predict with certainty the outcome of the FTC
action and various other lawsuits and class actions, it is the opinion of
management that the ultimate resolution of these proceedings should not have a
material adverse affect on the Company's results of operations, cash flows and
financial position. These matters, if resolved in a unfavorable manner, could
have a material affect on the operating results of cash flows when resolved in a
future reporting period.
10
<PAGE> 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 First Quarter 1999 versus First Quarter 1998
The results for the first quarter of 1999 were above the same period a year ago
due to increased sales in the Biotechnology and Human Health Segments, improved
gross profit, lower interest costs and a reduced tax rate. The effective tax
rate for the quarter ended March 1999 was 33%, versus 36% in the first quarter
1998. The increases in selling, general and administrative expense were in sales
and marketing costs for the Biotechnology Segment in Europe and the U.S. The
increased research and development occurred in the Biotechnology and Human
Health Segments.
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 March 31, 1999 and 1998.
<TABLE>
<CAPTION>
First Quarter Ended March 31,
-----------------------------------------
1999 1998
------------------ ------------------
$ % $ %
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Human Health........................ $ 55,645 47.3% $ 50,212 44.1%
Biotechnology....................... 17,619 15.0 $ 15,536 13.7
Animal Health/Agriculture........... 15,856 13.5 16,283 14.3
Specialty Business.................. $ 28,399 24.2 $ 31,739 27.9
--------- ------ --------- ------
Total gross sales ............ $117,519 100.0% $113,770 100.0%
======== ====== ======== ======
Total net revenues............ $117,399 $113,602
======== ========
Total gross profit............ $ 40,503 $ 38,950
======== ========
</TABLE>
The following table shows the gross sales and gross profit of the Company's four
product segments and gross profit as a percentage of each product segment for
the first quarter 1999 and 1998.
<TABLE>
<CAPTION>
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
<S> <C> <C> <C>
1999
Human Health ...................... $ 55,645 $ 21,570 38.8%
Biotechnology ..................... 17,619 9,075 51.5
Animal Health/Agriculture ......... 15,856 2,890 18.2
Specialty Business ................ 28,399 6,968 24.5
-------- -------- ----
Total ....................... $117,519 $ 40,503 34.5%
======== ======== ====
</TABLE>
11
<PAGE> 13
Results of Operations (continued)
<TABLE>
<CAPTION>
Gross Gross Gross
Sales Profit $ Profit %
-------- -------- --------
<S> <C> <C> <C>
1998
Human Health........................ $ 50,212 $ 20,471 40.8%
Biotechnology....................... 15,536 8,340 53.7
Animal Health/Agriculture........... 16,283 3,861 23.7
Specialty Business.................. 31,739 6,278 19.8
-------- -------- ----
Total......................... $113,770 $ 38,950 34.2%
======== ======== ====
</TABLE>
Gross sales in the first quarter 1999 increased 3.3% to $117,519 from $113,770
in the first quarter 1998. The Human Health and Biotechnology product segments
increased compared to the first quarter 1998 and more than offset decreases in
the Animal Health/Agriculture products and Specialty Business.
The foreign currency translation adjustments decreased by $8,872 to a negative
$18,391. This decrease is attributable primarily to significant exchange rate
fluctuations in the Italian lira against the U.S. dollar in the first quarter
1999. The exchange rate declined from 1648.94 lira to the dollar at December 31,
1998 to 1793.51 lira to the dollar at March 31, 1999, a decline of 8%. There
were also fluctuations in the Italian lira between average rates and month end
rates in the first quarter 1999 which had an effect on the foreign currency
translation adjustment.
The Human Health Segment gross sales of $55,645 were $5,433 (11%) above the
first quarter 1998. Gross sales were above the prior year due to strong demand
for our gastro-intestinal products used for treating ulcerative colitis and
increased shipments of active ingredients used in central nervous system drugs,
as well as to increased shipments from our chiral intermediates business (now
Chiragene). Partially offsetting these increases was the absence of shipments of
an advanced intermediate used in the production of a protease inhibitor for the
treatment of AIDS due to a buildup of inventory by the customer.
The BioTechnology Segment gross sales of $17,619 were $2,083 (13%) above the
first quarter 1998. This increase was primarily due to the additional sales of
endotoxin detection and cells culture products generated by our European
subsidiary acquired in May 1998.
The Animal Health/Agriculture Segment gross sales of $15,856 in the first
quarter 1999 were $427 (3%) below the first quarter 1998. The first quarter
experienced a decrease in sales of Vitamin B3 products, used to enhance growth
rate and weight in farm animals, due to price decreases and a product not being
available for shipment due to scheduling. Agricultural Intermediate sales used
for crop protection were up due to new applications by a customer. Animal Health
product sales were down due to slower exports made by a major customer caused by
the economic slowdown in Pacific Rim countries.
The Specialty Business Segment gross sales of $28,399 decreased $3,340 (11%)
below the first quarter 1998 reflecting lower sales of THPE, a specialty polymer
used as a cross-linking agent to improve the performance of polycarbonate
resins, reduced specialty additives sales to Pacific Rim countries, reduced
pigment shipments in Europe, and reduced demand in the Far East for a monomer
used in high performance plastics.
12
<PAGE> 14
Results of Operations (continued)
Export sales from U.S. businesses of $17,349 in the first quarter 1999 increased
17% from the first quarter 1998. International sales from our European
operations totaled $48,936 for the first quarter of 1999 as compared with
$43,405 in 1998, an increase of 13%.
The gross profit in the first quarter 1999 was $40,503 compared to $38,950 in
1998. The increase was due to the higher sales in Human Health and Biotechnology
and improved Specialty Business gross margin percent. The gross margin was 34.5%
versus 34.2% in the first quarter 1998. The gross margin percent for the Human
Health Segment was impacted by no shipments of an advanced intermediate for an
AIDS drug, sales of which exceeded $3,000 in the first quarter 1998. The Animal
Health/Agriculture Segment gross margin was negatively affected by pricing
decreases in crop protection products compared to the first quarter 1998. The
Specialty Business gross margin improved due to improved plant efficiencies and
the general mix of sales.
The first quarter 1998 included $1,000 in royalty income from Mylan Laboratories
for the use of intellectual property related to three pharmaceutical
ingredients. The royalty arrangements under the agreements have concluded. The
Company sold these products on a non-exclusive basis in first quarter 1999.
Selling, general and administrative expenses as a percentage of gross sales was
16.5% in the first quarter 1999, up from 16.0% in the first quarter 1998. The
increase is mainly due to the higher sales and marketing expense resulting from
building the Biotechnology and Human Health Segment business, and the additional
selling expense associated with the European Biotechnology acquisition completed
in the second quarter 1998.
Research and development expenses of $3,609 were 3.1% of gross sales in the
first quarter 1999, and represented a 9% increase from 1998. This increase was
due to the acquisition of Poietics in the Biotechnology segment and higher
spending by our European facilities.
The operating profit in the first quarter 1999 was $17,414, which was equal to
1998, with a higher gross profit being offset by the increased sales and
marketing expenses.
Net interest expense of $2,177 in the first quarter 1999 reflected a decrease of
$778 from 1998. The decrease was due to a reduced outstanding loan balance. The
average interest rate was 6.0% in the first quarter 1999 versus versus 6.4% in
1998.
13
<PAGE> 15
Results of Operations (continued)
Other expense of $43 for the first quarter 1999 compares to $175 for 1998.
The provision for income taxes for the first quarter 1999 resulted in an
effective rate of 33% versus 36% in 1998. The decrease was mainly due to the
effect of the Italian Substitute Tax Benefit, which was recorded in the second
quarter 1998 and will favorably impact the tax rate in 1999.
The Company's net income for the first quarter 1999 increased 11.3% to $10,180
compared with a net income of $9,143 in the first quarter 1998.
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company generated cash flows
from operations totaling $20,999, an increase of $7,857 over the same period a
year ago. This increase in cash flows is due primarily to increased revenues, as
well as increased current liabilities and reduced inventories. The decrease in
the cash balance for the three months 1999 was $29,075, primarily due to the
acquisition of Irotec for $34,836, net of cash acquired.
Capital expenditures were $6,230 in the first three months of 1999 as compared
to $6,632 in the first three months of 1998. Funds were used for new production
capabilities in Bayonne, NJ, and the start of construction of a new Niacinimide
(Vitamin B3) plant which is expected to lower operating/production costs.
During the first three months of 1999, the Company paid cash dividends of $0.03
per share.
The Company's primary market risk relates to exposure to foreign currency
exchange rate fluctuations on transactions entered into by our international
operations which are primarily denominated in the U.S. dollar, Swedish krona and
Italian lira. The Company currently uses foreign currency forward exchange
contracts to mitigate the effect of short-term foreign exchange rate movements
on the Company's operating results. The net notional amount of these contracts
is $28,318 which the Company estimates to be approximately 63% of the foreign
currency exposure during the period covered resulting in a deferred currency
loss of $734 at March 31, 1999.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
14
<PAGE> 16
Year 2000 Update
The ability of computers, software or any equipment utilizing micro-processors
to properly recognize and process data information at the turn of the century is
commonly referred to as a Year 2000 ("Y2K") compliance issue. To minimize the
risk of unplanned interruptions, the Company is using a multi-step approach in
conducting its year 2000 project. These steps are as follows:
Hardware/Software Inventory and Assessment: Documenting the hardware and
software used by Cambrex and assigning a impact level to the business, if
the item fails due to Y2K related problems.
Hardware/Software Verification and Validation: Documenting the Compliance
status of hardware and software used by Cambrex and performing test to
validate compliance for critical systems.
Supplier/Customer Verification: Surveying suppliers and customers on their
Y2K compliance readiness and assessing their responses and taking
corrective action.
Implementation and Testing: Remediation of systems found not to be Y2K
compliant. Most Cambrex systems are purchased third party packages and
therefore are typically upgraded, replaced or retired.
Contingency Plans: Development of plans to perform alternate activities or
steps for critical systems or for systems that will not be Y2K compliant
by January 1, 2000.
An estimate of completion for these steps is as follows:
<TABLE>
<CAPTION>
% Completion
---------------------------------
Actual Plan
-------- -----------------------
3/99 6/99 9/99 12/99
---------------------------------
<S> <C> <C> <C> <C>
Hardware/Software Inventory and
Assessment .................... 90% 100% 100% 100%
Hardware/Software Verification and
Validation .................... 70% 100% 100% 100%
Supplier/Customer Verification ... 70% 90% 100% 100%
Implementation and Testing ....... 50% 80% 90% 100%
Contingency Plans ................ 10% 40% 90% 100%
</TABLE>
The Company approaches its Y2K compliance issue by categorizing its dependencies
into two sections: Internal systems (Information Technology ("IT") systems and
Non-IT systems), and External systems of suppliers and customers. Generally,
internal systems identified as non-Y2K compliant will be replaced or modified
(reprogrammed, upgraded, etc.). Many of the internal non-compliant systems were
targeted for replacement for reasons other than Y2K issues as the benefits of
newer technology had already created an economic business case for action.
Replacement solution costs will be capitalized as permitted by applicable
accounting standards whereas the cost of modification solutions will generally
be expensed as repairs. External systems will be monitored with the cooperation
of our suppliers and customers.
15
<PAGE> 17
Year 2000 Update (continued)
Internal Systems
a) IT systems - These systems include internal applications software such as
finance, manufacturing (purchasing, product costing, production reporting,
maintenance, and planning and scheduling) and logistics (distribution planning
and customer order entry). All internal IT systems have been inventoried and
assessed and remediated where necessary for Y2K compliance and are now being
tested. The Company anticipates its internal IT will be Y2K compliant by the end
of 1999.
b) Non-IT systems - These systems are used for process monitoring and control,
laboratory measurement and analysis, waste treatment control, and in other plant
operations. These systems include embedded chip technology such as programmable
logic controllers and related hardware/software; and personal computers and
related software. All internal non-IT systems have been inventoried and assessed
for Y2K compliance and those which require modification are being remediated.
This remediation, or where necessary replacement, will be completed by mid-1999.
Testing will be completed on all systems by the end of the third quarter 1999.
External systems
External systems include systems of customers and suppliers. The Company is in
the process of understanding the extent to which it is vulnerable to the Y2K
issues of its customers and suppliers. The Company has identified and contacted
third parties whose systems would have a significant negative impact on
operations if not Y2K compliant, and is in the process of assessing the systems
of these third parties. The Company expects to complete its assessment and to
have developed requisite action plans with respect to these findings by
mid-1999.
The Company will also develop contingency plans during the third and fourth
quarters of 1999 for all critical systems and key suppliers in the event an
internal or external system that is believed to be compliant fails.
The dates on which the Company plans to complete any necessary Y2K modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. The Company
believes its most reasonably likely worst case scenario in the event of the
failure to correct a material Y2K compliance problem, internal or external,
could result in an interruption in, or a failure of, certain normal business
activities or operations. While management is not aware of such problems, such
failures, if they occur, could have a material adverse impact on the operations
of the Company. The Company believes that with the implementation of new
business systems and completion of the Y2K project as scheduled, the possibility
of significant interruptions of normal operations will be reduced.
16
<PAGE> 18
Year 2000 Update (continued)
The estimated total cost of implementing Y2K solutions is approximately $8,500.
The total amount expended through December 1997 was $6,000 with an additional
spending of approximately $1,900 occurring in 1998. With regard to the $7,900
expended through 1998, approximately $700 has been expensed and $7,200 has been
expensed and capitalized in accordance with applicable accounting standards. The
Company has spent approximately $100 in the first quarter 1999 and expects to
spend an additional $500 by year end.
Forward-Looking Statements
This document contains forward-looking statements. Investors should be aware of
factors that could cause Cambrex actual results to vary materially from those
projected in the forward-looking statements. These factors include, but are not
limited to, global economic trends; competitive pricing or product development
activities; markets, alliances, and geographic expansions developing differently
than anticipated; government legislation and/or regulation (particularly on
environmental issues); and technology, manufacturing and legal issues; and the
factors disclosed in the Year 2000 Update.
17
<PAGE> 19
PART II - OTHER INFORMATION
CAMBREX CORPORATION AND SUBSIDIARIES
Item 4. Matters Submitted to a Vote of Securities Holders.
1. At the annual meeting of stockholders held on April 22, 1999,
William B. Korb, James A. Mack, John R. Miller, and Dean P. Phypers
were elected to hold office as directors in Class III of the Company
until the 2000 annual meeting of stockholders.
2. In addition, the stockholders voted for the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants
for 1999. Of the 22,454,531 shares represented at the meeting,
22,425,967 votes were cast in favor the appointment of
PricewaterhouseCoopers LLP as auditors, 22,117 were cast against and
6,447 abstained.
Item 6. Exhibits and Reports on Form 8-K
a) The exhibits filed as part of this report are listed below.
Exhibit No. Description
----------- -----------
27 Financial Data Schedule.
b) Reports on Form 8-K
The registrant filed no reports on Form 8-K during the first quarter
of the year ended March 31, 1999.
18
<PAGE> 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/Douglas MacMillan
---------------------------------
Douglas MacMillan
Vice President
(On behalf of the Registrant and
as the Registrant's Principal
Financial Officer)
Date: May 13, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,433
<SECURITIES> 0
<RECEIVABLES> 70,836
<ALLOWANCES> 1,055
<INVENTORY> 102,923
<CURRENT-ASSETS> 219,526
<PP&E> 443,281
<DEPRECIATION> 168,757
<TOTAL-ASSETS> 631,629
<CURRENT-LIABILITIES> 81,653
<BONDS> 195,844
2,661
0
<COMMON> 0
<OTHER-SE> 275,203
<TOTAL-LIABILITY-AND-EQUITY> 631,629
<SALES> 116,302
<TOTAL-REVENUES> 117,399
<CGS> 76,896
<TOTAL-COSTS> 23,089
<OTHER-EXPENSES> 43
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,177
<INCOME-PRETAX> 15,194
<INCOME-TAX> 5,014
<INCOME-CONTINUING> 10,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,180
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.40
</TABLE>
