The following consolidated financial statements and selected quarterly financial data of the Company are filed under this item:
The financial statement schedules are filed pursuant to Item 15 of this report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Cambrex Corporation and subsidiaries (the “Company” or “Cambrex”) primarily provides products and services worldwide to pharmaceutical companies and generic drug companies. The Company is dedicated to accelerating its customers’ drug discovery, development and manufacturing processes for human therapeutics. The Company’s products consist of active pharmaceutical ingredients (“APIs”) and finished dosage form (“FDF”) produced under Food and Drug Administration current Good Manufacturing Practices for use in the innovator and generic pharmaceuticals markets.
On September 12, 2018, the Company acquired Halo Pharma (“Halo”). The results of Halo have been included in the consolidated results since the acquisition date. As a result of the acquisition of Halo, the Company reports its results in two segments, APIs and FDF. See Note 5 for additional information on the Halo acquisition.
(
2
)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All other significant intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
Temporary cash investments with an original maturity of less than three months are considered cash equivalents. The carrying amounts approximate fair value.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts relating to estimated losses resulting from customers being unable to make required payments. Allowances for doubtful accounts are based on historical experience and known factors regarding specific customers and the industries in which those customers operate. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make payments, additional allowances would be required.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. In the normal course of business, the Company maintains cash balances with European Union banks up to the equivalent of $20,000 and slightly larger balances in U.S. banks. The Company routinely monitors the risks associated with these institutions and diversifies its exposure by maintaining balances with multiple financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large number of customers and their dispersion throughout the world. At December 31, 2018 and 2017, the Company had receivables with one customer totaling nearly 23% and 12%, respectively, of overall accounts receivables. The Company does not consider this customer to pose any significant credit risk.
Derivative Instruments
Derivative financial instruments are periodically used by the Company primarily to mitigate a variety of working capital, investment and borrowing risks. The Company primarily uses foreign currency forward contracts to minimize foreign currency exchange rate risk associated with foreign currency transactions. Changes in the fair value on these forward contracts are recognized in earnings.
None of the foreign currency forward contracts entered into during 2018 and 2017 were designated for hedge accounting treatment.
46
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Inventories
Inventories are stated at the lower of cost, determined on a first‑in, first‑out basis and net realizable value. The determination of net realizable value involves an assessment of numerous factors, including estimated selling prices. Reserves are recorded to reduce the carrying value for inventory determined to be damaged, obsolete or otherwise unsaleable.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Plant and equipment are depreciated on a straight‑line basis over the estimated useful lives for each applicable asset group as follows:
Buildings and improvements
|
|
20 to 30 years, or term of lease if applicable
|
Machinery and equipment
|
|
7 to 15 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Computer hardware and software
|
|
3 to 7 years
|
Expenditures for additions, major renewals or betterments are capitalized and expenditures for maintenance and repairs are charged to income as incurred.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in cost of goods sold or operating expenses. Interest is capitalized in connection with the construction and acquisition of assets that are capitalized over longer periods of time for larger amounts. The capitalized interest is recorded as part of the cost of the asset to which it relates and is amortized over the asset’s estimated useful life. Total interest capitalized in connection with ongoing construction activities was $125 in 2018, immaterial in 2017, and $575 in 2016.
Impairment of Goodwill
The Company reviews the carrying value of goodwill to determine whether impairment may exist on an annual basis or whenever it has reason to believe goodwill may not be recoverable. The annual impairment test of goodwill is performed during the fourth quarter of each fiscal year. For the years ended December 31, 2018 and 2017, the Company did not have an impairment.
The Company first performs a qualitative assessment to test goodwill for impairment. If, after performing the qualitative assessment, the Company concludes that it is more likely than not that the fair value of the reporting units is less than its carrying value, the two-step process would be utilized. The first step of the goodwill impairment test is to identify potential impairment by comparing the fair value of each reporting unit, determined using various valuation techniques, with the primary technique being a discounted cash flow analysis, to its carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized.
Based upon the Company’s most recent analysis, the fair value of most of the reporting units substantially exceeded their carrying values. Due to the recent acquisitions of Cambrex High Point, Inc. and Halo Pharma, the percentage by which their fair value exceed its carrying value is significantly less than that of the Company’s other reporting units.
47
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Impairment of Long-Lived Assets
The Company assesses the impairment of its long-lived assets, including amortizable intangible assets, and property, plant and equipment, whenever economic events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Long lived assets are considered to be impaired when the sum of the undiscounted expected future operating cash flows is less than the carrying amounts of the related assets. If impaired, the assets are written down to fair market value.
Revenue Recognition
2018 results are accounted for under the following new policy:
The Company adopted ASC 606 Revenue from Contracts with Customers on January 1, 2018 using the modified retrospective method. As a result, the Company has changed its accounting policy for revenue recognition as detailed below. The cumulative effect of initially applying the new revenue standard was recorded as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under accounting standard ASC 605 which was in effect for those periods.
Revenue is recognized when control over a product or service is transferred to a customer. Revenue is measured as the amount of consideration expected in exchange for transferring goods or providing services.
Sales terms to certain customers include rebates if certain conditions are met. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates and returns at the time of sale based on the terms of agreements with customers and historical experience and estimated orders. The Company recognizes revenue net of these estimated costs which are classified as allowances and rebates.
Shipping and handling costs are treated as fulfillment costs and estimates for the portion of revenue recognized on performance obligations recognized over time are accrued.
For variable consideration arrangements where the transaction price fluctuates based on quantity, the most likely estimated quantity is assumed using forecasts provided by the customer.
Single-use products
In most single-use product sales, a quantity is ordered and manufactured according to the customer’s specifications and typically only one performance obligation is included. The Company also manufactures early phase product that can be included in a contract with services. These services are distinct and separated from the product performance obligations and are shown as a service revenue stream. The products are manufactured exclusively for a specific customer and have no alternative use. Generally, under these customer agreements, the Company is entitled to consideration for progress to date that includes an element of profit margin. To the extent an agreement does not include an element of profit margin for progress to date, it is recognized at a point in time. Revenues that are recognized over time utilize a measure of progress toward satisfaction of the performance obligations. The Company measures progress using an input method which compares the cost of cumulative work in process to date to the most current estimates for the entire performance obligation. The raw materials are excluded from this measurement due to the high value and inclusion in the early stages of the project that would otherwise overstate progress to date.
Multi-use products
The Company’s multi-use product sales can be sold to multiple customers and have an alternative use. Both the transaction sales price and shipping terms are agreed upon in the contract. For these products, all revenue is recognized at a point in time, generally when title to products and risk of loss is transferred to the customers based upon shipping terms. These arrangements typically include only one performance obligation.
48
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Service revenue
The service revenue stream represents services provided to a customer to assist with early stages of the regulatory approval process. The customer owns the drug details and process. The Company works with its customers to develop, validate and document the production process in order to comply with the regulatory approval process. These custom development projects could have one or more performance obligations with no alternative use. The contracts are structured to ensure the Company is paid for in-process work, including a profit margin. Revenues related to this stream are recognized over time by allocating to each performance obligation the best estimate of the standalone selling price of each service. Standalone selling prices are generally based on the prices charged to customers or based on an expected cost-plus margin. The Company measures progress using an input method which compares the cost of cumulative work in process to date to the most current estimates for the entire performance obligation.
Contract balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer advances and deferred revenue). For each reporting period presented, the Company reports contract balances in a net contract asset or liability position on a contract-by-contract basis. Contract assets are recorded when the right to consideration is conditioned on something other than the passage of time. When an entity’s right to consideration is unconditional, the receivable is recorded within Trade Receivables on the balance sheet. Contract liabilities represent advance payments from customers, and deferred revenue. Contract assets will convert to trade receivables or cash and current contract liabilities will convert into revenue within a one-year period.
Payment terms can vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, payment prior to satisfaction of a performance obligation can be required, and results in recording a contract liability.
All prior periods presented are accounted for under the following policy:
Revenues are generally recognized when title to products and risk of loss are transferred to customers. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations.
Amounts billed in advance are recorded as contract liabilities on the balance sheet. Since payments received are sometimes non-refundable, the termination of a contract by a customer prior to its completion could result in an immediate recognition of deferred revenue relating to payments already received but not previously recognized as revenue.
Sales terms to certain customers include rebates if certain conditions are met. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates and returns at the time of sale based on the terms of agreements with customers and historical experience and estimated orders. The Company recognizes revenue net of these estimated costs which are classified as allowances and rebates.
The Company bills a portion of freight cost incurred on shipments to customers. Amounts billed to customers are recorded within net revenues. Freight costs are reflected in cost of goods sold.
Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S. income tax return. Foreign subsidiaries are consolidated for financial reporting but are not eligible to be included in the consolidated U.S. income tax return. However, in periods prior to the enactment of TCJA, the earnings of foreign subsidiaries were generally taxed by the U.S. when repatriated and such U.S. tax may have been reduced or eliminated by federal foreign tax credits based on the foreign income and withholding taxes paid or accrued by the foreign subsidiaries. Due in part to a continuing
49
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
desire to limit credit and currency exposure for cash held in foreign currencies or in non-U.S. banks, the Company previously determined that it was likely that a portion of the undistributed earnings of its foreign subsidiaries wou
ld be repatriated to the U.S. in the future. Under TCJA’s transition to a modified territorial tax system whereby future repatriations of foreign earnings will generally be exempt from U.S. tax, it is likely that the Company will continue to repatriate ce
rtain foreign earnings in the future. Therefore, the Company will continue to monitor available evidence and its plans for foreign earnings and expects to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes th
at would be due upon repatriation of amounts not considered
permanently reinvested.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of inventory, accounts receivable, asset impairments, stock based compensation and deferred tax assets. Actual results could differ from those estimates.
Environmental Costs
The Company is subject to extensive and changing federal, state, local and foreign environmental laws and regulations, and has made provisions for the estimated financial impact of environmental activities. The Company’s policy is to accrue environmental related costs of a non-capital nature, including estimated litigation costs, when those costs are believed to be probable and can be reasonably estimated. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, advancements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Such accruals are adjusted as further information develops or circumstances change. For certain matters, the Company expects to share costs with other parties. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed certain.
Foreign Currency
The functional currency of the Company's foreign subsidiaries is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts and cash flows using average rates of exchange prevailing during the year. Adjustments resulting from the translation of foreign currency financial statements are accumulated in stockholders' equity until the entity is sold or substantially liquidated. Gains or losses relating to transactions of a long-term investment nature are also accumulated in stockholders' equity. Gains or losses resulting from third-party foreign currency transactions are included as a component of other revenues, net in the consolidated income statement. Foreign currency net gains/(losses) were $908, ($550) and $306, in 2018, 2017 and 2016, respectively.
Earnings per Common Share
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, equity-settled performance shares and restricted stock units, using the treasury stock method.
For the years ended December 31, 2018, 2017 and 2016, shares of 537,163, 521,096 and 558,499, respectively, were not included in the calculation of diluted shares outstanding because the effect would be anti-dilutive.
50
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Comprehensive
Income
Included within accumulated other comprehensive income (“AOCI”) for the Company are foreign currency translation adjustments and changes in the pensions, net of tax. Total comprehensive income/loss for the years ended December 31, 2018 and 2017 are included in the Statements of Comprehensive Income.
Reclassification
Certain reclassifications have been made to prior year amounts to conform with current year presentation and recent accounting pronouncements.
(
3)
|
Impact of Recently Issued Accounting Pronouncements
|
The following accounting pronouncements became effective for the Company January 1, 2018:
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09. On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts not completed as of January 1, 2018 using the modified retrospective method. The new revenue standard introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The cumulative effect of initially applying the new revenue standard was $16,219 and has been recorded as an adjustment to increase the opening balance of retained earnings. The cumulative effect adjustment relates primarily to the recognition of revenue and costs for contracts that transfer promised goods or services over time. Gross sales, cost of goods sold, and tax expense of $51,896, $31,347, and $4,330 respectively, were recorded as part of the cumulative effect adjustment. The comparative information has not been restated and is reported in accordance with accounting standard ASC 605, which was in effect for those periods.
The adoption of the new revenue standard impacted the consolidated financial statements as follows:
Income Statement
|
|
For the Twelve Months
Ended December 31, 2018
|
|
|
|
As
Reported
|
|
|
Effect of
Change
|
|
|
Amount
Without
Adoption of
ASC 606
|
|
Gross sales
|
|
$
|
514,997
|
|
|
$
|
(19,781
|
)
|
|
$
|
534,778
|
|
Net revenue
|
|
|
532,093
|
|
|
|
(19,781
|
)
|
|
|
551,874
|
|
Cost of goods sold
|
|
|
335,405
|
|
|
|
(5,753
|
)
|
|
|
341,158
|
|
Gross profit
|
|
|
196,688
|
|
|
|
(14,028
|
)
|
|
|
210,716
|
|
Operating profit
|
|
|
101,496
|
|
|
|
(14,028
|
)
|
|
|
115,524
|
|
Provision for income taxes
|
|
|
16,596
|
|
|
|
(2,928
|
)
|
|
|
19,524
|
|
Income from continuing operations
|
|
|
93,209
|
|
|
|
(11,100
|
)
|
|
|
104,309
|
|
Net income
|
|
|
92,418
|
|
|
|
(11,100
|
)
|
|
|
103,518
|
|
Diluted earnings per share from continuing
operations
|
|
|
2.77
|
|
|
|
(0.33
|
)
|
|
|
3.10
|
|
51
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Balance Sheet
|
|
December 31, 2018
|
|
|
|
As
Reported
|
|
|
Effect of
Change
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
33,490
|
|
|
$
|
33,490
|
|
|
$
|
-
|
|
Inventory
|
|
|
111,062
|
|
|
|
(27,733
|
)
|
|
|
138,795
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes payable
|
|
|
1,651
|
|
|
|
1,402
|
|
|
|
249
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
538,463
|
|
|
|
5,119
|
|
|
|
533,344
|
|
Presentation of Net Periodic Benefit Cost Related to Defined Benefit Plans
In March 2017, the FASB issued ASU 2017-07 which amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined pension and other postretirement plans. The ASU requires entities to disaggregate the service-cost component from the other components of net benefit cost and present it with other compensation costs for related employees in the income statement and present the other components elsewhere in the income statement and outside of income from operations if such subtotal is presented. This standard became effective for the Company on January 1, 2018. For the year ended December 31, 2018, the Company recorded $813 to “Other expenses, net” which formerly would have been recorded as “Selling, general and administrative expenses” or “Cost of goods sold.” To conform to the current year presentation, for the years ended December 31, 2017 and 2016, the Company reclassified $1,484 and $1,540, respectively, from “Selling, general and administrative expenses” and $216 and $163, respectively, from “Cost of goods sold” to “Other expenses, net.”
Scope of Modification Accounting, Stock Based Compensation
In May 2017, the FASB issued ASU 2017-09 which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The update became effective on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
Business Combinations – Clarifying the Definition of a Business
In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. The amendment became effective on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
52
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU 2016-15 which provides guidance on the presentation and classification in the statement of cash flows for specific cash receipt and payment transactions, including debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, and distributions received from equity method investees. The standard became effective on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
Statement of Cash Flows – Restricted Cash
In November 2016, the FASB issued ASU 2016-18 which clarifies the presentation requirements of restricted cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. The update became effective on January 1, 2018 and did not have a material impact on the Company’s consolidated financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU amends guidance on the classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The ASU requires equity securities to be measured at fair value with changes in fair value recognized through net earnings and amends certain disclosure requirements associated with the fair value of financial instruments. In the period of adoption, the Company is required to reclassify the unrealized gains/losses on equity securities within accumulated other comprehensive income/(loss) to retained earnings. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), which clarified certain aspects of the previously issued ASU. The ASU was adopted by the Company on January 1, 2018 and did not have a material effect on the Company’s consolidated financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02 to address the tax effects of TCJA on amounts that were initially recognized directly in AOCI. ASU 2018-02 allows an entity to elect a one-time reclassification from AOCI to retained earnings of stranded tax effects due to the enactment of TCJA, equal to the difference between the amount initially charged or credited directly to AOCI at the previously enacted U.S. federal corporate income tax rate and the amount that would have been charged or credited directly to AOCI by using the newly enacted tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has evaluated the provisions of ASU 2018-02 and has decided not to elect the reclassification from AOCI to retained earnings addressed in the ASU.
53
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Effects of the Tax Cuts and Jobs Act
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”) which allowed SEC registrants to record provisional amounts for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of TCJA. The Company recognized the estimated income tax effects of TCJA in its 2017 Consolidated Financial Statements in accordance with SAB No. 118. The Company’s accounting for the TCJA one-time toll charge on previously undistributed accumulated foreign earnings has been completed, resulting in a $2,105 measurement period tax benefit and corresponding reduction in taxes payable.
The following recently issued accounting pronouncements will become effective for the Company in future periods:
Improvements to Nonemployee Share-Based Payment Accounting
In June 2018, the FASB issued ASU 2018-07 which aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. This new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the new guidance and does not expect it to have a material impact on its consolidated financial statements.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13 which modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14 which adds, modifies and removes certain disclosure requirements to improve the effectiveness of disclosures for defined benefit plans. The new standard is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued ASU 2018-15 which states entities should apply the guidance in ASC 350-40 when capitalizing implementation costs related to a hosting arrangement that is a service contract. The capitalized implementation costs should be classified as prepaid expenses and then expensed over the hosting arrangement’s term, with the expense recorded on the same line of the income statement as the service contract. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02 which requires lessees to recognize right of use assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The result of adoption will be an increase to assets and liabilities by the same amount for the identified operating leases. Several
54
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
updates have been issued in 2018 that provide clarification on a number of specific issues and reporting requirements. The Company is
substantially complete
with the evaluation of the new guidance
and
all leases that existed at December 31, 2018 and expects
the adjustment will not be material to the Company.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04 which simplifies the goodwill impairment test by eliminating Step 2 in the determination on whether goodwill should be considered impaired. Instead, an impairment charge should equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued ASU 2017-12 which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The standard also makes certain targeted improvements to simplify the application of the hedge accounting guidance. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
In accordance with ASC 606, the Company disaggregates its revenue from customers with contracts by revenue streams. The Company’s revenue streams are presented in the following table:
|
|
2018
|
|
Single-use products
|
|
$
|
255,599
|
|
Multi-use products
|
|
|
228,336
|
|
Service revenue
|
|
|
31,062
|
|
Total gross sales
|
|
$
|
514,997
|
|
Revenue is recognized when control over a product or service is transferred to a customer. Revenue is measured as the amount of consideration expected in exchange for transferring goods or providing services.
Sales terms to certain customers include rebates if certain conditions are met. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates and returns at the time of sale based on the terms of agreements with customers and historical experience and estimated orders. The Company recognizes revenue net of these estimated costs which are classified as allowances and rebates.
The Company does not have any unsatisfied performance obligations for contracts greater than one year. The costs incurred to obtain or fulfill a contract are not material.
For variable consideration arrangements where the transaction price fluctuates based on quantity, the most likely estimated quantity is assumed using forecasts provided by the customer.
Single-use products
In most single-use product sales, a quantity is ordered and manufactured according to the customer’s specifications and typically only one performance obligation is included. The Company also manufactures early phase product that can be included in a contract with services. These services are distinct and separated from the product performance obligations and are shown as a service revenue stream. The products are manufactured exclusively for
55
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
a specific customer and have no alternative use. Generally, un
der these customer agreements, the Company is entitled to consideration for progress to date that includes an element of profit margin. To the extent an agreement does not include an element of profit margin for progress to date, it is recognized at a poin
t in time. Revenues that are recognized over time utilize a measure of progress toward satisfaction of the performance obligations. The Company measures progress using an input method which compares the cost of cumulative work in process to date to the mo
st current estimates for the entire performance obligation. The raw materials are excluded from this measurement due to the high value and inclusion in the early stages of the project that would otherwise overstate progress to date.
Multi-use products
The Company’s multi-use product sales can be sold to multiple customers and have an alternative use. Both the transaction sales price and shipping terms are agreed upon in the contract. For these products, all revenue is recognized at a point in time, generally when title to products and risk of loss is transferred to the customers based upon shipping terms. These arrangements typically include only one performance obligation.
Service revenue
The service revenue stream represents services provided to a customer to assist with early stages of the regulatory approval process. The customer owns the drug details and process. The Company works with its customers to develop, validate and document the production process in order to comply with the regulatory approval process. These custom development projects could have one or more performance obligations with no alternative use. The contracts are structured to ensure the Company is paid for in-process work, including a profit margin. Revenues related to this stream are recognized over time by allocating to each performance obligation the best estimate of the standalone selling price of each service. Standalone selling prices are generally based on the prices charged to customers or based on an expected cost-plus margin. The Company measures progress using an input method which compares the cost of cumulative work in process to date to the most current estimates for the entire performance obligation.
Contract balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer advances and deferred revenue). For each reporting period presented, the Company reports contract balances in a net contract asset or liability position on a contract-by-contract basis. Contract assets are recorded when the right to consideration is conditioned on something other than the passage of time. When an entity’s right to consideration is unconditional, the receivable is recorded within Trade Receivables on the balance sheet. Contract liabilities represent advance payments from customers, and deferred revenue. Contract assets will convert to trade receivables or cash and current contract liabilities will convert into revenue within a one-year period.
Payment terms can vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, payment prior to satisfaction of a performance obligation can be required, and results in recording a contract liability.
56
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The following table details the significant changes in contract assets during the
year
ended December 31, 2018:
|
|
Contract
Assets
|
|
Balance as of January 1, 2018
|
|
$
|
51,896
|
|
Contracts assets acquired
|
|
|
3,749
|
|
Revenue recognized from performance obligations satisfied
|
|
|
241,373
|
|
Transferred to trade receivables
|
|
|
(262,303
|
)
|
Currency impact
|
|
|
(1,225
|
)
|
Balance as of December 31, 2018
|
|
$
|
33,490
|
|
The Company recognized in revenue $1,709 during the year ended December 31, 2018 for which the contract liability was recorded in a prior period.
On September 12, 2018, the Company completed the acquisition of 100% of Halo Pharma (“Halo”), a finished dosage form Contract Development and Manufacturing Organization. The deal was structured as a stock purchase for consideration of approximately $425,000. The Company utilized cash on hand and borrowings under the credit facility to pay the purchase price. Cambrex acquired two GMP compliant facilities, one in Whippany, NJ, and the other in Mirabel, Quebec, Canada.
These newly acquired facilities provide formulation development and clinical and commercial manufacturing services, specializing in oral solids, liquids, creams, sterile and non-sterile ointments. The facilities core competencies include developing and manufacturing highly complex and difficult to produce formulations, products for pediatric indications and controlled substances.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. Cambrex obtained third-party valuations of certain tangible and intangible assets resulting in the balances shown below. Goodwill and deferred income taxes are subject to change as the Company is waiting for the completion of certain pre-acquisition tax returns, therefore these balances are provisional.
|
|
September 12,
2018
|
|
Cash
|
|
$
|
2,792
|
|
Account receivable and Contract assets
|
|
|
14,045
|
|
Inventory
|
|
|
8,264
|
|
Other current assets
|
|
|
896
|
|
Property, plant and equipment
|
|
|
78,489
|
|
Goodwill
|
|
|
219,294
|
|
Intangible assets (Customer relationships)
|
|
|
180,000
|
|
Total assets acquired
|
|
|
503,780
|
|
Current liabilities
|
|
|
15,407
|
|
Noncurrent liabilities
|
|
|
60,984
|
|
Total liabilities assumed
|
|
$
|
76,391
|
|
The consolidated income statement from the acquisition date to the period ending December 31, 2018 includes net revenue of $28,600 and operating loss of $605.
Operating loss includes integration costs of $571 and a one-time charge for severance of $900. Results on an ASC 605 basis were not materially different than the reported results under ASC 606.
57
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Transaction costs have been recorded as “Acquisition and integration expenses” on the Company’s income statement and totaled $6,419 for the year ended December 31, 2018. Other acquisition an
d integration related expenses of $4,720 for the year ended December 31, 2018 have also been recorded to “Acquisition and integration expenses” on the Company’s income statement.
The following table represents unaudited pro forma revenue and earnings as if Halo had been included in the consolidated results of the Company for the entire years ending December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
Net revenue
|
|
$
|
599,041
|
|
|
$
|
630,184
|
|
Income from continuing operations
|
|
|
86,217
|
|
|
|
96,479
|
|
These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Halo to reflect the accumulated depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on January 1, 2017, together with the consequential tax effects.
In October 2016, Cambrex purchased 100% of PharmaCore, Inc. a privately-held company located in High Point, NC for $24,275, net of cash. The transaction was structured as a stock purchase. PharmaCore, which has been renamed Cambrex High Point, Inc. (“CHP”), specializes in developing, manufacturing and scaling up small molecule APIs for projects in early clinical phases. With the acquisition of CHP, Cambrex enhances its capabilities and expertise to efficiently develop early clinical phase products and new technologies, and increases the number of potential late stage and commercial products that could be manufactured at Cambrex’s larger manufacturing sites.
The allocation of the purchase price of the acquired assets and liabilities was performed on the basis of their respective fair values. The Company utilized a third party to assist in establishing the fair values of the assets acquired and liabilities assumed. This process resulted in goodwill of $9,046, fixed assets of $8,422 and identifiable intangible assets of $6,900 as well as smaller adjustments to certain working capital accounts. The Company also recorded deferred tax assets primarily related to NOLs for approximately $4,000 and deferred tax liabilities for approximately $4,400.
All acquisition costs have been expensed and totaled approximately $640 as well as approximately $200 of severance cost, all of which has been recorded to “Acquisition and integration expenses” on the Company’s 2016 income statement. For the year ended December 31, 2016, the Company recorded gross sales of $4,648 and after purchase price adjustments and severance, operating profit was not material. Proforma disclosures have not been provided due to the immateriality of this acquisition.
Inventories are stated at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis.
Net inventories consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
30,904
|
|
|
$
|
41,521
|
|
Work in process
|
|
|
27,513
|
|
|
|
47,386
|
|
Raw materials
|
|
|
44,705
|
|
|
|
42,491
|
|
Supplies
|
|
|
7,940
|
|
|
|
7,144
|
|
Total
|
|
$
|
111,062
|
|
|
$
|
138,542
|
|
58
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The
components of inventory stated above are net of reserves of $
1
4,231
and $
14,052
as of December 31, 201
8
and 201
7
, respectively.
(
7
)
|
Property, Plant and Equipment
|
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
18,790
|
|
|
$
|
6,911
|
|
Buildings and improvements
|
|
|
177,568
|
|
|
|
129,065
|
|
Machinery and equipment
|
|
|
489,980
|
|
|
|
451,882
|
|
Furniture and fixtures
|
|
|
3,094
|
|
|
|
2,850
|
|
Construction in progress
|
|
|
50,211
|
|
|
|
34,400
|
|
Total
|
|
|
739,643
|
|
|
|
625,108
|
|
Accumulated depreciation
|
|
|
(379,115
|
)
|
|
|
(370,809
|
)
|
Net
|
|
$
|
360,528
|
|
|
$
|
254,299
|
|
Depreciation expense was $32,195, $29,970 and $23,654 for the years ended December 31, 2018, 2017 and 2016, respectively. Total capital expenditures in 2018 and 2017 were $70,547 and $53,900, respectively.
(
8
)
|
Goodwill and Intangible Assets
|
The changes in the carrying amount of goodwill for the year ended December 31, 2018 are as follows:
Balance as of December 31, 2017
|
|
$
|
43,626
|
|
Acquisition of business (see Note 5)
|
|
|
219,294
|
|
Translation effect
|
|
|
(1,825
|
)
|
Balance as of December 31, 2018
|
|
$
|
261,095
|
|
As of December 31, 2018, goodwill of $218,705 relates to the FDF segment. The remaining goodwill relates to the API segment.
Acquired intangible assets, which are amortized, consist of the following:
|
|
|
|
As of December 31, 2018
|
|
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Internal-use software
|
|
3 - 7 years
|
|
$
|
7,026
|
|
|
$
|
(2,912
|
)
|
|
$
|
4,114
|
|
Technology-based intangibles
|
|
20 years
|
|
|
3,481
|
|
|
|
(1,523
|
)
|
|
|
1,958
|
|
Customer-related intangibles
|
|
10 - 15 years
|
|
|
186,698
|
|
|
|
(5,565
|
)
|
|
|
181,133
|
|
|
|
|
|
$
|
197,205
|
|
|
$
|
(10,000
|
)
|
|
$
|
187,205
|
|
59
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
|
|
|
|
As of December 31, 2017
|
|
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Internal-use software
|
|
3 - 7 years
|
|
$
|
7,074
|
|
|
$
|
(1,810
|
)
|
|
$
|
5,264
|
|
Technology-based intangibles
|
|
20 years
|
|
|
3,646
|
|
|
|
(1,413
|
)
|
|
|
2,233
|
|
Customer-related intangibles
|
|
10 - 15 years
|
|
|
7,608
|
|
|
|
(1,237
|
)
|
|
|
6,371
|
|
|
|
|
|
$
|
18,328
|
|
|
$
|
(4,460
|
)
|
|
$
|
13,868
|
|
The change in the gross carrying amount in 2018 is mainly due to the recognition of customer-related intangibles of $180,000 from the acquisition of Halo Pharma in September 2018 and the impact of foreign currency translation. The change in the gross carrying amount in 2017 is mainly due to foreign currency translation and additions.
Beginning in 2014, the Company began implementing a new ERP system, as such, $630 was capitalized and classified as internal-use software during the year ended December 31, 2017.
Amortization expense amounted to $5,662, $1,878 and $1,011 for the years ended December 31, 2018, 2017 and 2016, respectively.
Amortization expense related to current intangible assets is expected to be approximately $13,990 for 2019, $13,973 for 2020, $13,967 for 2021, $13,549 for 2022, and $12,963 for 2023.
(
9
)
|
Restructuring Charges
|
For the year ended December 31, 2016, the Company recorded $1,158 as “Restructuring expenses” on the Company’s consolidated income statement related to the write down of Zenara to reflect the estimated selling price of the business. Zenara was effectively sold on January 30, 2017 and the Company no longer includes Zenara in its reported results.
(
10
)
|
Accrued Expenses and Other Current Liabilities
|
The components of accrued expenses and other current liabilities are as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Salaries and employee benefits payable
|
|
$
|
29,632
|
|
|
$
|
27,451
|
|
Other
|
|
|
14,404
|
|
|
|
15,323
|
|
Total
|
|
$
|
44,036
|
|
|
$
|
42,774
|
|
Income before income taxes consists of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Domestic
|
|
$
|
66,495
|
|
|
$
|
117,273
|
|
|
$
|
91,597
|
|
International
|
|
|
43,310
|
|
|
|
24,552
|
|
|
|
35,942
|
|
Total
|
|
$
|
109,805
|
|
|
$
|
141,825
|
|
|
$
|
127,539
|
|
60
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The provision for income taxes consist of the following provisions/(benefits):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,486
|
|
|
$
|
25,201
|
|
|
$
|
21,167
|
|
State
|
|
|
(80
|
)
|
|
|
-
|
|
|
|
-
|
|
International
|
|
|
8,247
|
|
|
|
5,674
|
|
|
|
10,491
|
|
Total current
|
|
|
18,653
|
|
|
|
30,875
|
|
|
|
31,658
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,420
|
)
|
|
$
|
7,615
|
|
|
$
|
8,350
|
|
State
|
|
|
(656
|
)
|
|
|
-
|
|
|
|
-
|
|
International
|
|
|
19
|
|
|
|
(429
|
)
|
|
|
206
|
|
Total deferred
|
|
|
(2,057
|
)
|
|
|
7,186
|
|
|
|
8,556
|
|
Total income tax expense
|
|
$
|
16,596
|
|
|
$
|
38,061
|
|
|
$
|
40,214
|
|
The provision for income taxes differs from the statutory federal income tax rate of 21% for 2018, and 35% for 2017 and 2016, as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Income tax provision at U.S federal statutory rate
|
|
$
|
23,059
|
|
|
$
|
49,639
|
|
|
$
|
44,638
|
|
State and local taxes, net of federal income tax benefit
|
|
|
(2,539
|
)
|
|
|
(207
|
)
|
|
|
(2,310
|
)
|
Effect of foreign income taxed at rates other than the U.S. federal statutory rate
|
|
|
44
|
|
|
|
(1,989
|
)
|
|
|
(1,154
|
)
|
Tax credits
|
|
|
(280
|
)
|
|
|
(100
|
)
|
|
|
(200
|
)
|
Net change in valuation allowance
|
|
|
476
|
|
|
|
(315
|
)
|
|
|
1,673
|
|
Domestic production deduction
|
|
|
-
|
|
|
|
(3,347
|
)
|
|
|
(2,327
|
)
|
Share-based payment compensation
|
|
|
(3,722
|
)
|
|
|
(5,236
|
)
|
|
|
-
|
|
Tax reform and changes in tax laws
|
|
|
(1,939
|
)
|
|
|
117
|
|
|
|
-
|
|
Permanent items and other
|
|
|
1,497
|
|
|
|
(501
|
)
|
|
|
(106
|
)
|
Total
|
|
$
|
16,596
|
|
|
$
|
38,061
|
|
|
$
|
40,214
|
|
The domestic production deduction was repealed by TCJA. Share-based payment compensation represents the impact of applying ASU 2016-09, which requires recognition immediately in the tax provision of certain effects of share-based payments that were possibly deferred under the previous guidance. Tax reform and changes in tax laws represents the impact of TCJA, New Jersey tax reform enacted in 2018, and other enacted tax rate changes.
The Company’s accounting for TCJA’s one-time toll charge on previously undistributed accumulated foreign earnings was completed in the third quarter of 2018, resulting in a $2,105 measurement period tax benefit and corresponding reduction in taxes payable. The Company has determined that it will elect an accounting policy to treat tax on global low-taxed income (“GILTI”) inclusions under TCJA as a period cost when incurred.
61
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The components of deferred tax assets and liabilities as of December 31, 201
8
and 201
7
relate to temporary differences and carryforwards as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
2,082
|
|
|
$
|
1,522
|
|
Environmental
|
|
|
3,656
|
|
|
|
3,635
|
|
Net operating loss carryforwards
|
|
|
12,347
|
|
|
|
11,447
|
|
Employee benefits
|
|
|
9,512
|
|
|
|
11,245
|
|
Property, plant and equipment
|
|
|
11,581
|
|
|
|
5,007
|
|
Other
|
|
|
4,332
|
|
|
|
3,712
|
|
Total gross deferred tax assets
|
|
|
43,510
|
|
|
|
36,568
|
|
Valuation allowance
|
|
|
(12,263
|
)
|
|
|
(11,824
|
)
|
Total deferred tax assets
|
|
$
|
31,247
|
|
|
$
|
24,744
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(69,337
|
)
|
|
|
(15,275
|
)
|
Intangibles and other
|
|
|
(14,536
|
)
|
|
|
(8,537
|
)
|
Foreign tax allocation reserve
|
|
|
(2,527
|
)
|
|
|
(2,710
|
)
|
Other
|
|
|
(714
|
)
|
|
|
(2,830
|
)
|
Total deferred tax liabilities
|
|
$
|
(87,114
|
)
|
|
$
|
(29,352
|
)
|
Net deferred tax liability
|
|
$
|
(55,867
|
)
|
|
$
|
(4,608
|
)
|
Classified as follows in the consolidated balance
sheet:
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset
|
|
|
1,409
|
|
|
|
3,198
|
|
Non-current deferred tax liability
|
|
|
(57,276
|
)
|
|
|
(7,806
|
)
|
Total
|
|
$
|
(55,867
|
)
|
|
$
|
(4,608
|
)
|
The Company expects to maintain a domestic valuation allowance against state NOLs and state credits tax due to restrictive rules regarding realization and recent history of state losses. The Company expects to maintain a valuation allowance against certain foreign deferred tax assets, primarily NOL carryforwards, until such time as the Company attains an appropriate level of future profitability in the appropriate jurisdictions and is able to conclude that it is more likely than not that its foreign deferred tax assets are realizable.
In July 2018, New Jersey enacted comprehensive corporate income tax reform legislation which included, among other items, the imposition of a multi-year temporary surtax, mandatory combined reporting starting in 2019, revised NOL and dividend exclusion rules, and decoupling from certain federal tax reform provisions. In October 2018 New Jersey enacted additional tax legislation that included significant technical corrections and clarifications to the July law as well as other substantive changes to the State’s corporate tax regime, and in December 2018 and January 2019 New Jersey issued technical guidance on combined reporting and New Jersey’s treatment of certain TCJA items such as GILTI income and related GILTI and foreign-derived income (“FDII”) special tax deductions, as well as the sourcing of GILTI and FDII, which were considerably different than the July 2018 tax reform law.
In the third quarter of 2018, under New Jersey’s July 2018 tax reform law as enacted, the Company recorded a discrete benefit of $11,437 to release valuation allowance against New Jersey NOLs and state net deferred tax assets against which the Company had previously maintained a full valuation allowance. The determination to release the valuation allowance was based on the impact and sourcing in future combined reporting of GILTI income without the related GILTI and FDII special deductions, which would have allowed the Company to use the entire New Jersey NOL before expiration.
62
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The Company considers both positive and negative evidence related to the likelihood of realization of deferred tax asset
s. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, the Company records a valuation allowance against all or a portion of the deferred tax assets to adjust the balance to the amount con
sidered more likely than not to be realized. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified.
This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the nature, frequency, and severity of current and cumulative financial reporting losses, sources of future taxable income, future reversals of existing taxable temporary differences, and prudent and feasible tax planning strategies, weighted by objectivity.
In the fourth quarter of 2018, the enactment of New Jersey’s October 2018 tax reform law and related guidance, which allows GILTI and FDII special tax deductions, and notably provides a separate apportionment methodology for sourcing net GILTI income to New Jersey, will result in no New Jersey tax of the Company’s net GILTI income and no utilization of the Company’s New Jersey NOLs for which the valuation allowance was released in the third quarter of 2018. Therefore, in the fourth quarter of 2018, the Company recorded a full valuation allowance against the New Jersey NOLs.
The domestic valuation allowance for the years ended December 31, 2018, 2017 and 2016 increased $722, $264 and $2,294, respectively. The 2018, 2017 and 2016 increases in the domestic valuation allowance are due to domestic state items.
The foreign valuation allowance for the years ended December 31, 2018, 2017 and 2016 decreased $283, increased $101, and decreased $698, respectively. The 2018 decrease in the foreign valuation allowance was allocated as follows: the valuation allowance decreased $246 for foreign income and decreased $37 for currency translation adjustments included in other comprehensive income (“OCI”). The 2017 increase in the foreign valuation allowance was allocated as follows: the valuation allowance increased $51 for foreign losses and increased $50 for currency translation adjustments included in OCI. The 2016 decrease in the foreign valuation allowance was allocated as follows: the valuation allowance decreased $621 for foreign income and decreased $77 for currency translation adjustments included in OCI.
63
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Under the tax laws of the various jurisdictions in which the Company operates, NOLs may be carried forward or back, subject to statutory limitations, to reduce taxable income in future or prior years. Domestic federal
and state
NOLs acquired in t
he
CHP
stock acquisition are $
5,266
and $
8,576
, respectively, and will expire in 2023
through 203
6
. The
federal
NOLs can be utilized against U.S. consolidated taxable income, subject to annual limitations
.
A full valuation allowance has been recorded aga
inst domestic state NOL
s totaling approximately $1
2
9,198
as of December 31, 201
8
which will expire in 2029 through 203
8
. A full valuation allowance has been recorded against foreign NOLs totaling approximately $
1,
588
which in most foreign jurisdictions wi
ll carry forward indefinitely
.
Due in part to a continuing desire to limit credit and currency exposure for cash held in foreign currencies or in non-U.S. banks, the Company previously determined that it was likely that a portion of the undistributed earnings of its foreign subsidiaries would be repatriated to the U.S. in the future. Under TCJA’s transition to a modified territorial tax system whereby future repatriations of foreign earnings will generally be exempt from U.S. tax, it is likely that the Company will continue to repatriate certain foreign earnings in the future. Therefore, the Company will continue to monitor available evidence and its plans for foreign earnings and expects to continue to provide any applicable deferred taxes based on the tax liability or withholding taxes that would be due upon repatriation of amounts not considered permanently reinvested.
The following table summarizes the activity related to the Company’s unrecognized tax benefits as of December 31, 2018, 2017 and 2016:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at January 1
|
|
$
|
1,654
|
|
|
$
|
1,778
|
|
|
$
|
1,492
|
|
Gross increases related to current period tax positions
|
|
|
210
|
|
|
|
215
|
|
|
|
687
|
|
Gross increases related to prior period tax positions
|
|
|
416
|
|
|
|
-
|
|
|
|
-
|
|
Gross decreases related to prior period tax positions
|
|
|
(37
|
)
|
|
|
(52
|
)
|
|
|
(84
|
)
|
Expirations of statute of limitations for the assessment of taxes
|
|
|
(233
|
)
|
|
|
(353
|
)
|
|
|
(257
|
)
|
Settlements
|
|
|
-
|
|
|
|
(134
|
)
|
|
|
-
|
|
Foreign currency translation
|
|
|
(67
|
)
|
|
|
200
|
|
|
|
(60
|
)
|
Balance at December 31
|
|
$
|
1,943
|
|
|
$
|
1,654
|
|
|
$
|
1,778
|
|
Of the total balance of unrecognized tax
benefits
at December 31, 2018, $1,943, if recognized, would affect the effective tax rate.
Gross interest and penalties at December 31, 2018, 2017, and 2016, of $455, $412, and $455, respectively, related to the above unrecognized tax benefits are not reflected in the table above. In 2018, 2017, and 2016, the Company accrued $99, $153, and $63, respectively, of interest and penalties in the income statement. Consistent with prior periods, the Company recognizes interest and penalties within its income tax provision.
Tax years 2012 and forward in the U.S. are open to examination by the IRS. The Company is also subject to examinations in its material non-U.S. jurisdictions for 2012 and later years.
The Company is also regularly subject to audits in various states for various years.
P
revious state audits have resulted in immaterial adjustments. In the majority of states where the Company files, the Company is subject to examination for tax years 2013 and forward.
64
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
In 2018
a state tax authority
commenced an examination of the Company’s tax returns for 2014 a
nd forward. The tax authority
challenged the Company’s sourcing of income to the state, and accordingly the Company has recorded
an increase to tax expense of $
447
. The Company is proceeding towards settlement discussions
.
In May 2016, the Company entered into a $500,000 five-year Syndicated Senior Revolving Credit Facility (“Credit Facility”) which expires in May 2021. The Company pays interest on this Credit Facility at LIBOR plus 1.25% - 2.00% based upon certain financial measurements. The Credit Facility also includes financial covenants regarding interest coverage and leverage ratios. As of December 31, 2018, there was $300,000 outstanding on the Credit Facility. As of December 31, 2017, the facility was undrawn. The 2018 weighted average interest rate for long-term bank debt was 3.8%.
On January 2, 2019, the Company amended and restated its Credit Facility. Please see Note 23 for further details.
(1
3
)
|
Derivatives and Hedging Activities
|
The Company operates internationally and is exposed to fluctuations in foreign exchange rates and interest rates in the normal course of business. The Company, from time to time, uses derivatives to reduce exposure to market risks resulting from fluctuations in interest rates and foreign exchange rates.
All financial instruments involve market and credit risks. The Company is exposed to credit losses in the event of non-performance by the counterparties to the contracts. While there can be no assurance, the Company does not anticipate non-performance by these counterparties.
Foreign Currency Forward Contracts
The Company periodically enters into foreign currency forward contracts to protect against currency fluctuations of forecasted cash flows and existing balance sheet exposures at its foreign operations, as deemed appropriate. The Company may or may not elect to designate certain forward contracts for hedge accounting treatment.
For derivatives that are not designated for hedge accounting treatment, changes in the fair value are immediately recognized in earnings. This treatment has the potential to increase volatility of the Company’s earnings.
None of the foreign currency forward contracts entered into during 2018 or 2017 were designated for hedge accounting treatment. The notional amounts of the Company’s outstanding foreign exchange forward contracts were $35,734, $32,781 and $20,896 at December 31, 2018, 2017, and 2016, respectively. The Company does not hold or purchase any foreign currency forward contracts for trading or speculative purposes and no contractual term is greater than twelve months.
The fair value of the Company’s foreign exchange forward contracts outstanding was a loss of $430 and a gain of $83 at December 31, 2018 and 2017, respectively. Losses are reflected under the caption “Accrued expenses and other current liabilities” and a gain is reflected under the caption “Prepaid expenses and other current assets” on the Company’s balance sheet and “Other revenues, net” on the Company’s income statement.
65
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(1
4
)
|
Fair Value Measurements
|
U.S. GAAP establishes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value, measured on a recurring basis, as of December 31, 2018 and 2017.
Fair Value - Level 2
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Foreign currency forwards, (liabilities)/assets
|
|
$
|
(430
|
)
|
|
$
|
83
|
|
Investment in equity securities
|
|
|
13,048
|
|
|
|
-
|
|
Total
|
|
$
|
12,618
|
|
|
$
|
83
|
|
The Company’s foreign currency forward contracts are measured at fair value using observable market inputs such as forward rates, the Company’s credit risk and its counterparties’ credit risks. Based on the Company’s continued ability to enter into forward contracts, the Company considers the markets for its fair value instruments to be active.
Based on these inputs, the Company’s foreign currency forward contracts are classified within Level 2 of the valuation hierarchy.
The Company’s financial instruments also include cash and cash equivalents, accounts receivables and accounts payables. The carrying amount of these instruments approximates fair value because of their short-term nature.
During 2018, the Company acquired a 19.9% equity investment in a European company (“Investee”). The Investee completed an initial public offering on a foreign exchange late in the second quarter, which reduced the Company’s ownership share to 16.3%. The Company’s investment is subject to a prohibition on selling the shares for one year following the acquisition. The Company has one seat on the Board of Directors of the Investee and concluded it is able to exercise significant influence and that equity accounting would be appropriate. In accordance with ASC 825, the Company has elected to record this investment at fair value. The Company selected an appropriate valuation methodology to compute a discount for the lack of marketability to be applied to the closing market price of the shares as of December 31, 2018. The fair value of the Company’s shares increased to $13,048 during the year ended December 31, 2018 resulting in an unrealized gain that was recorded as “Unrealized gain on investment in equity securities” on the income statement and “Prepaid expenses and other current assets” on the balance sheet. Since the shares owned by the Company are substantially in excess of the daily trade volumes of the stock, it could be difficult to sell the shares in a timely manner when the restrictions lapse and it is possible the ultimate value to be realized by the Company could be significantly less upon a sale of the securities.
Refer to Note 13 to the Company’s consolidated financial statements for further disclosures on the Company’s financial instruments.
66
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
(1
5
)
|
Stockholders' Equity
|
The Company has two classes of common shares, Common Stock and Nonvoting Common Stock. Authorized shares of Common Stock were 100,000,000 at December 31, 2018 and 2017. Authorized shares of Nonvoting Common Stock were 730,746 at December 31, 2018 and 2017. Nonvoting Common Stock with a par value of $0.10 has equal rights with Common Stock, with the exception of voting power. Nonvoting Common Stock is convertible, share for share, into Common Stock, subject to any legal requirements applicable to holders restricting the extent to which they may own voting stock. As of December 31, 2018 and 2017, no shares of Nonvoting Common Stock were outstanding. The Company has authorized 5,000,000 shares of Series Preferred Stock, par value $0.10, issuable in series and with rights, powers and preferences as may be fixed by the Board of Directors. At December 31, 2018 and 2017, there was no preferred stock outstanding.
The Company held treasury shares of 1,264,109 and 1,424,153 at December 31, 2018 and 2017, respectively, which are primarily used for issuance to employee compensation plans.
At December 31, 2018, there were 662,671 authorized shares of Common Stock reserved for issuance through equity compensation plans.
(1
6
)
|
Accumulated Other Comprehensive Loss
|
The following tables provide the changes in AOCI by component, net of tax, for the years ended December 31, 2018 and 2017:
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of December 31, 2017
|
|
$
|
(12,040
|
)
|
|
$
|
(30,188
|
)
|
|
$
|
(42,228
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(15,696
|
)
|
|
|
(3,155
|
)
|
|
|
(18,851
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
942
|
|
|
|
942
|
|
Net current-period other comprehensive loss
|
|
|
(15,696
|
)
|
|
|
(2,213
|
)
|
|
|
(17,909
|
)
|
Balance as of December 31, 2018
|
|
$
|
(27,736
|
)
|
|
$
|
(32,401
|
)
|
|
$
|
(60,137
|
)
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
(34,290
|
)
|
|
$
|
(31,230
|
)
|
|
$
|
(65,520
|
)
|
Other comprehensive income before reclassifications
|
|
|
22,250
|
|
|
|
121
|
|
|
|
22,371
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
921
|
|
|
|
921
|
|
Net current-period other comprehensive income
|
|
|
22,250
|
|
|
|
1,042
|
|
|
|
23,292
|
|
Balance as of December 31, 2017
|
|
$
|
(12,040
|
)
|
|
$
|
(30,188
|
)
|
|
$
|
(42,228
|
)
|
67
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The following table
s
provide the reclassifications out of AOCI by component for the
year
s
ended
December
3
1
, 201
8
and 201
7
:
Details about AOCI Components
|
|
Amount
Reclassified
from AOCI for
the year ended
December 31,
2018
|
|
|
Amount
Reclassified
from AOCI for
the year ended
December 31,
2017
|
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
Actuarial losses
|
|
$
|
(1,224
|
)
|
|
$
|
(1,400
|
)
|
Prior service costs
|
|
|
5
|
|
|
|
(52
|
)
|
Total before tax
|
|
|
(1,219
|
)
|
|
|
(1,452
|
)
|
Tax benefit
|
|
|
277
|
|
|
|
531
|
|
Total reclassification for the period, net of tax
|
|
$
|
(942
|
)
|
|
$
|
(921
|
)
|
The Company recognizes all components of net periodic benefit cost except service costs in “Other expenses, net” in its income statement. Service costs are recognized in “Selling, general and administrative expenses” and “Cost of goods sold” in its income statement depending on the functional area of the underlying employees included in the plan.
(
1
7
)
|
Stock Based Compensation
|
The Company recognizes compensation cost for stock options awarded to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value per share for the stock options granted to employees for the years ended December 31, 2018, 2017 and 2016 were $21.00, $17.71, and $15.17, respectively.
The following assumptions were used in determining the fair value of stock options for grants issued in 2018, 2017 and 2016:
|
|
2018
|
|
2017
|
|
2016
|
Expected volatility
|
|
40.29% - 41.43%
|
|
37.73% - 45.91%
|
|
42.09% - 46.49%
|
Expected term
|
|
4.60 - 6.80 years
|
|
0.97 - 6.80 years
|
|
0.99 - 6.80 years
|
Risk-free interest rate
|
|
2.82% - 2.95%
|
|
1.06% - 2.22%
|
|
0.54% - 1.63%
|
The Company does not have any publicly traded stock options; therefore, expected volatilities are based on historical volatility of the Company’s stock. The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bond whose maturity period approximates the option’s expected term. The expected life assumption represents the weighted-average period of time that newly granted stock-based awards are expected to remain outstanding. The expected life is estimated by analyzing three components of historical grants with the same vesting schedules: (i) observed post-vesting forfeiture, (ii) observed exercise behavior, and (iii) expected exercise behavior. The expected time to early exercise is calculated by assuming that the options outstanding as of the valuation date will be exercised at the midpoint between the final vest date and the expiration date. If a grant is already fully vested, it is assumed the outstanding options exercise at the midpoint between the valuation date and the expiration date. The three components are then option-weighted to estimate expected life. The Company stratifies its employees as Board of Directors, Named Executives and all other employees, each group with its own exercise behavior and thus, expected life.
68
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
For 20
1
8
, 20
1
7
, and 201
6
, the Company recorded
$
4,288
,
$4,368
and
$
3,816
, respectively, in selling, general and administrative expenses for stock options. As of December 31, 20
1
8
, the total compensation cost related to unvested stock option
awards granted to employees but not yet recognized was $
9,871
. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of
2.7
years.
The following table is a summary of the Company’s stock option activity issued to employees and related information:
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Exercise
Price
|
|
|
Options
Exercisable
|
|
Outstanding at December 31, 2017
|
|
|
1,484,914
|
|
|
$
|
32.53
|
|
|
|
727,645
|
|
Granted
|
|
|
231,455
|
|
|
|
53.61
|
|
|
|
|
|
Exercised
|
|
|
(599,149
|
)
|
|
|
23.43
|
|
|
|
|
|
Forfeited or expired
|
|
|
(65,597
|
)
|
|
|
47.55
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,051,623
|
|
|
|
41.41
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
450,110
|
|
|
$
|
34.40
|
|
|
|
|
|
The aggregate intrinsic value for all stock options exercised for the years ended December 31, 2018, 2017 and 2016 was $19,976, $13,775 and $14,832, respectively. The aggregate intrinsic values for all stock options outstanding and exercisable as of December 31, 2018 were $3,314 and $3,211, respectively.
A summary of the Company’s nonvested stock options, restricted stock and performance shares activity is presented below:
|
|
Nonvested
|
|
|
|
Stock Options
|
|
|
Restricted Stock
|
|
|
Performance Shares
|
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Nonvested at December 31, 2017
|
|
|
757,269
|
|
|
$
|
15.20
|
|
|
265
|
|
|
$
|
44.23
|
|
|
|
276,250
|
|
|
$
|
42.08
|
|
Granted
|
|
|
231,455
|
|
|
|
21.00
|
|
|
|
9,779
|
|
|
|
53.70
|
|
|
|
71,750
|
|
|
|
50.49
|
|
Vested during period
|
|
|
(321,614
|
)
|
|
|
13.84
|
|
|
|
(10,044
|
)
|
|
|
53.45
|
|
|
|
(46,000
|
)
|
|
|
41.36
|
|
Forfeited
|
|
|
(65,597
|
)
|
|
|
18.22
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(150,000
|
)
|
|
|
41.73
|
|
Nonvested at December 31, 2018
|
|
|
601,513
|
|
|
$
|
17.83
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
152,000
|
|
|
$
|
46.61
|
|
Members of the Cambrex Board of Directors currently participate in an incentive plan which rewards service with restricted stock units. Awards are made annually and vest over six months. On the six month anniversary of the grant, restrictions on sale or transfer are removed and shares are issued to the Directors. These awards are classified as equity awards.
For 2018, 2017 and 2016, the Company recorded $533, $571 and $489, respectively, in selling, general and administrative expenses for restricted stock units. As of December 31, 2018, there was no compensation cost related to unvested restricted stock not yet recognized.
69
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The Company granted equity-settled performance shares (“PSs”) to certain executives. PS awards provide the recipient the right to receive a certain number of shares of the Company’s common stock in the future,
which depends on the Company’s level of achievement of
net
revenue and EBITDA growth as compared to the
net
revenue and EBITDA growth of the members of a specified peer group of companies over a three year period. The peer group consists of publicly-trad
ed life sciences companies competing in the same industry as the Company. For 201
8
, 201
7
and 201
6
, the Company recorded
a benefit of
$
727
,
expense of
$3,975
and
expense of
$3,461
, respectively, in selling, general and administrative expense
s
related to these PS awards.
As of December 31, 201
8
, total compensation cost related to unvested performance shares not yet recognized was $
4,322
. The cost will be amortized on a straight-line basis over the remaining weighted-ave
rage vesting period of
1.
7
years
.
Domestic Pension Plan
The Company maintains a defined benefit pension plan (“Domestic Pension Plan”) for certain salaried and certain hourly employees. It is the Company’s policy to contribute to the domestic pension plan to ensure adequate funds are available in the plan to make benefit payments to plan participants and beneficiaries when required. The Company also had a Supplemental Executive Retirement Plan (“SERP”) for key executives. This plan was non-qualified and unfunded. Benefits accruing under both plans were frozen in 2007. In July 2008, the Board of Directors of the Company amended the SERP to allow for lump sum payments effective January 1, 2009. The lump sum value as of January 1, 2009 was paid in 10 equal actuarial equivalent installments through 2018.
International Pension Plans
A foreign subsidiary of the Company maintains a pension plan (“International Pension Plan”) for its employees that conforms to the common practice in that country. Based on local laws and customs, this plan is unfunded.
The benefit obligations as of December 31, 2018 and 2017 are as follows:
|
|
Pension Plans
|
|
|
|
Domestic
|
|
|
SERP
|
|
|
International
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
59,186
|
|
|
$
|
57,718
|
|
|
$
|
609
|
|
|
$
|
1,209
|
|
|
$
|
29,423
|
|
|
$
|
25,002
|
|
Service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,009
|
|
|
|
941
|
|
Interest cost
|
|
|
2,043
|
|
|
|
2,214
|
|
|
|
-
|
|
|
|
9
|
|
|
|
720
|
|
|
|
732
|
|
Actuarial (gain)/loss
|
|
|
(4,218
|
)
|
|
|
2,676
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,295
|
|
|
|
798
|
|
Benefits paid
|
|
|
(3,590
|
)
|
|
|
(3,422
|
)
|
|
|
(609
|
)
|
|
|
(609
|
)
|
|
|
(730
|
)
|
|
|
(725
|
)
|
Currency translation effect
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,551
|
)
|
|
|
2,675
|
|
Benefit obligation, end of year
|
|
$
|
53,421
|
|
|
$
|
59,186
|
|
|
$
|
-
|
|
|
$
|
609
|
|
|
$
|
30,166
|
|
|
$
|
29,423
|
|
The plan assets and funded status of the Domestic Pension Plan as of December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of period
|
|
$
|
46,650
|
|
|
$
|
39,524
|
|
Actual return on plan assets
|
|
|
(2,879
|
)
|
|
|
6,663
|
|
Contributions
|
|
|
360
|
|
|
|
3,885
|
|
Benefits paid
|
|
|
(3,590
|
)
|
|
|
(3,422
|
)
|
Fair value of plan assets, end of period
|
|
$
|
40,541
|
|
|
$
|
46,650
|
|
Unfunded status
|
|
|
(12,880
|
)
|
|
|
(12,536
|
)
|
Accrued benefit cost, end of period
|
|
$
|
(12,880
|
)
|
|
$
|
(12,536
|
)
|
70
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The unfunded status of the International Pension
Plan was $30,166 and $29,423 as of December 31, 2018 and 2017, respectively.
As of
December
31, 2018 and 2017, AOCI consists of the following:
|
|
Pension Plans
|
|
|
|
Domestic
|
|
|
SERP
|
|
|
International
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Actuarial loss
|
|
$
|
22,068
|
|
|
$
|
20,956
|
|
|
$
|
-
|
|
|
$
|
121
|
|
|
$
|
12,013
|
|
|
$
|
10,183
|
|
Prior service cost/(benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
(1
|
)
|
Total
|
|
$
|
22,068
|
|
|
$
|
20,956
|
|
|
$
|
-
|
|
|
$
|
121
|
|
|
$
|
12,017
|
|
|
$
|
10,182
|
|
The Company recognizes all components of net periodic benefit cost except services costs in “Other expenses, net” in its income statement. Services costs are recognized in “Selling, general and administrative expenses” and “Cost of goods sold” in its income statement depending on the functional area of the underlying employees included in the plan. As a result of the adoption of ASU 2017-07, the Company recorded $813 for the year ended December 31, 2018 to “Other expenses, net” which formerly would have been recorded as “Selling, general and administrative expenses” or “Cost of goods sold.” To conform to the current year presentation, for the years ended December 31, 2017 and 2016, the Company reclassified $1,484 and $1,540, respectively, from “Selling, general and administrative expenses” and $216 and $163, respectively, from “Cost of goods sold” to “Other expenses, net.”
The components of net periodic benefit cost are as follows:
|
|
Pension Plans
|
|
|
|
Domestic
|
|
|
SERP
|
|
|
International
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Components of net
periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,009
|
|
|
$
|
941
|
|
|
$
|
742
|
|
Interest cost
|
|
|
2,043
|
|
|
|
2,214
|
|
|
|
2,390
|
|
|
|
-
|
|
|
|
9
|
|
|
|
18
|
|
|
|
720
|
|
|
|
732
|
|
|
|
740
|
|
Expected return on plan
assets
|
|
|
(3,169
|
)
|
|
|
(2,707
|
)
|
|
|
(2,649
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of prior
service cost/(benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57
|
|
|
|
57
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Recognized actuarial
loss
|
|
|
719
|
|
|
|
798
|
|
|
|
776
|
|
|
|
121
|
|
|
|
241
|
|
|
|
182
|
|
|
|
384
|
|
|
|
361
|
|
|
|
194
|
|
Net periodic benefit
cost
|
|
$
|
(407
|
)
|
|
$
|
305
|
|
|
$
|
517
|
|
|
$
|
121
|
|
|
$
|
307
|
|
|
$
|
257
|
|
|
$
|
2,108
|
|
|
$
|
2,029
|
|
|
$
|
1,671
|
|
The estimated amounts that will be amortized from AOCI into net periodic benefit cost in 2019 are as follows:
|
|
Pension Plans
|
|
|
|
Domestic
|
|
|
International
|
|
Actuarial loss
|
|
$
|
829
|
|
|
$
|
476
|
|
Total
|
|
$
|
829
|
|
|
$
|
476
|
|
71
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Major assumptions
used
in determining the benefit obligations are presented in the following table:
|
|
2018
|
|
|
2017
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
Domestic Pension Plan
|
|
|
4.20
|
%
|
|
|
3.55
|
%
|
International Pension Plan
|
|
|
2.30
|
%
|
|
|
2.65
|
%
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
International Pension Plan
|
|
|
2.75
|
%
|
|
|
2.70
|
%
|
Major assumptions used in determining the net benefit cost are presented in the following table:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Discount rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Pension Plan
|
|
|
3.55
|
%
|
|
|
3.95
|
%
|
|
|
4.20
|
%
|
SERP
|
|
|
-
|
|
|
|
1.55
|
%
|
|
|
1.55
|
%
|
International Pension Plan
|
|
|
2.65
|
%
|
|
|
2.80
|
%
|
|
|
3.35
|
%
|
Expected return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Pension Plan
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
|
|
7.00
|
%
|
Rate of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
|
|
International Pension Plan
|
|
|
2.70
|
%
|
|
|
2.65
|
%
|
|
|
2.55
|
%
|
In making its assumption for the long-term rate of return on plan assets, the Company has utilized historical rates earned on securities allocated consistently with its investments. The discount rate was selected by projecting cash flows associated with plan obligations, which were matched to a yield curve of high quality corporate bonds. The Company then selected the single rate that produced the same present value as if each cash flow were discounted by the corresponding spot rate on the yield curve.
The aggregate Accumulated Benefit Obligation (“ABO”) of $53,421 exceeds plan assets by $12,880 as of December 31, 2018 for the Domestic Pension Plan. The aggregate ABO is $28,982 for the International Pension Plan as of December 31, 2018. The International Pension Plan is unfunded.
The Company expects to contribute approximately $255 in cash to the Domestic Pension Plan in 2019. The Company does not expect to contribute cash to its International Pension Plan in 2019.
The following benefit
payments
are expected to be paid out of the plans:
|
|
Pension Plans
|
|
|
|
Domestic
|
|
|
International
|
|
2019
|
|
$
|
3,375
|
|
|
$
|
827
|
|
2020
|
|
$
|
3,449
|
|
|
$
|
853
|
|
2021
|
|
$
|
3,498
|
|
|
$
|
840
|
|
2022
|
|
$
|
3,533
|
|
|
$
|
930
|
|
2023
|
|
$
|
3,516
|
|
|
$
|
977
|
|
2024-2028
|
|
$
|
17,267
|
|
|
$
|
4,962
|
|
72
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The investment objective for
the
Domestic Pension Plan’s
assets is to achieve long-term growth with exposure to risk at an appropriate level.
The Company invests in
a diversified asset mix consisting of equities (domestic and international) and taxable fixed income securities.
Assets are
m
anaged
to obtain the highest total rate of return in keeping with a moderate level of risk.
The target allocations for plan asse
ts are
30
%
- 80%
equity securities
,
2
5
%
- 45%
U.S. fixed income
and
5
%
- 15
%
all other investments
.
Equity securities
primarily include investments in large
cap and small-cap companies, U.S. fixed income securities including high quality corporate bonds, and U.S. government securities.
The fair values of the Company’s pension plan assets by asset category are as follows:
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2018 using:
|
|
Asset Category
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
$
|
16,087
|
|
|
$
|
-
|
|
|
$
|
16,087
|
|
|
$
|
-
|
|
International companies
|
|
|
8,873
|
|
|
|
-
|
|
|
|
8,873
|
|
|
|
-
|
|
U.S. fixed income
|
|
|
13,673
|
|
|
|
-
|
|
|
|
11,437
|
|
|
|
2,236
|
|
Commodities
|
|
|
1,908
|
|
|
|
-
|
|
|
|
1,908
|
|
|
|
-
|
|
|
|
$
|
40,541
|
|
|
$
|
-
|
|
|
$
|
38,305
|
|
|
$
|
2,236
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2017 using:
|
|
Asset Category
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. companies
|
|
$
|
18,581
|
|
|
$
|
-
|
|
|
$
|
18,581
|
|
|
$
|
-
|
|
International companies
|
|
|
10,280
|
|
|
|
-
|
|
|
|
10,280
|
|
|
|
-
|
|
U.S. fixed income
|
|
|
15,543
|
|
|
|
-
|
|
|
|
13,329
|
|
|
|
2,214
|
|
Commodities
|
|
|
2,246
|
|
|
|
-
|
|
|
|
2,246
|
|
|
|
-
|
|
|
|
$
|
46,650
|
|
|
$
|
-
|
|
|
$
|
44,436
|
|
|
$
|
2,214
|
|
The following table sets forth a summary of the changes in the fair value of the Domestic Plan’s Level 3 assets, which are annuity contracts with an insurance company, for the year ended December 31, 2018:
|
|
Group
Annuity
Contract
|
|
Balance at December 31, 2017
|
|
$
|
2,214
|
|
Net investment gain
|
|
|
22
|
|
Balance at December 31, 2018
|
|
$
|
2,236
|
|
Savings Plan
Cambrex makes available to all domestic employees a savings plan. Employee contributions are matched in part by Cambrex. The cost of this plan amounted to $1,745, $1,491 and $1,294 in 2018, 2017 and 2016, respectively.
(1
9
)
|
Segment Information
|
Cambrex is a life sciences company that provides products and services that accelerate and improve the development and commercialization of new and generic therapeutics. The Company primarily supplies its products and services worldwide to innovator and generic pharmaceutical companies.
73
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Including the Company’s acquisition of Halo Pharma on September 12, 2018,
which represents the Finished Dosage Form (“FDF”) segment,
Cambrex has six manufacturing facilities.
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the chief operating decision maker (the Company’s Chief Executive Officer) in making decisions on how to allocate resources and assess performance. To be in alignment with the financial information received by the Chief Executive Officer and how the business is managed, the Company’s five operating segments were aggregated to form two reportable segments,
A
ctive Pharmaceutical Ingredients (“APIs”)
and FDF.
All purchase accounting adjustments are recorded by the reporting segment.
API’s:
The Company’s API segment is comprised of the custom development and manufacture of pharmaceutical ingredients derived from organic chemistry. APIs are used in the production of prescription and over-the-counter drug products.
FDF:
The Company’s FDF segment consists of contract development and commercial manufacturing of finished dosage form products including oral solids, liquids and creams, and sterile and non-sterile ointments.
The Company’s Corporate headquarters provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, legal, compliance, human resources, information technology and finance departments. The Company allocates certain corporate expenses to each of its segments. Depreciation and amortization on certain assets are not allocated to the Company’s reportable segments.
The Company evaluates the performance of its segments based on segment operating profit. Transactions between reportable segments are not material. The Company does not allocate interest expense or income taxes to the operating segments. Discontinued operations are not recorded by the reportable segments. The Company accounts for total assets on a consolidated basis and does not allocate or disclose it for each reportable segment. The chief operating decision maker does not review segment’s assets.
The following table summarizes the Company’s financial information by reportable segment:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Gross sales by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
APIs
|
|
$
|
489,132
|
|
|
$
|
525,936
|
|
|
$
|
491,538
|
|
FDF
|
|
|
25,865
|
|
|
-
|
|
|
-
|
|
Total reported gross sales
|
|
|
514,997
|
|
|
|
525,936
|
|
|
|
491,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
APIs
|
|
|
130,721
|
|
|
|
168,330
|
|
|
|
148,073
|
|
FDF
|
|
|
(605
|
)
|
|
-
|
|
|
-
|
|
Total segment operating profit
|
|
|
130,116
|
|
|
|
168,330
|
|
|
|
148,073
|
|
Corporate operating loss
|
|
|
(28,620
|
)
|
|
|
(23,912
|
)
|
|
|
(18,017
|
)
|
Total reported operating profit
|
|
$
|
101,496
|
|
|
$
|
144,418
|
|
|
$
|
130,056
|
|
74
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The following summarized data represents the gross sales and long lived assets for the Company’s domestic and foreign entities for 20
1
8
, 20
1
7
and 20
1
6
:
|
|
Domestic
|
|
|
Foreign
|
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
275,369
|
|
|
$
|
239,628
|
|
|
$
|
514,997
|
|
Long-lived assets
|
|
|
568,801
|
|
|
|
240,027
|
|
|
|
808,828
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
312,895
|
|
|
$
|
213,041
|
|
|
$
|
525,936
|
|
Long-lived assets
|
|
|
143,540
|
|
|
|
168,253
|
|
|
|
311,793
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
270,773
|
|
|
$
|
220,765
|
|
|
$
|
491,538
|
|
Long-lived assets
|
|
|
136,692
|
|
|
|
135,523
|
|
|
|
272,215
|
|
Export sales, included in domestic gross sales, in 2018, 2017 and 2016 amounted to $138,613, $195,193 and $182,215, respectively.
The following table reflects gross sales by geographic area:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Europe
|
|
$
|
301,970
|
|
|
$
|
327,309
|
|
|
$
|
321,525
|
|
North America
|
|
|
183,022
|
|
|
|
170,490
|
|
|
|
138,328
|
|
Asia
|
|
|
17,101
|
|
|
|
17,625
|
|
|
|
17,996
|
|
Other
|
|
|
12,904
|
|
|
|
10,512
|
|
|
|
13,689
|
|
Total
|
|
$
|
514,997
|
|
|
$
|
525,936
|
|
|
$
|
491,538
|
|
One customer from both the API and FDF segment, accounted for 24.8%, 35.1% and 36.9% of 2018, 2017 and 2016 consolidated gross sales, respectively. Substantially all of the sales to this customer are within the API segment.
The Company has operating leases expiring on various dates through the year 2029. The leases are primarily for the rental of office space. At December 31, 2018, future minimum commitments under non-cancelable operating lease arrangements were as follows:
Year ended December 31:
|
|
|
|
|
2019
|
|
$
|
1,004
|
|
2020
|
|
|
1,204
|
|
2021
|
|
|
1,126
|
|
2022
|
|
|
974
|
|
2023
|
|
|
937
|
|
2024 and thereafter
|
|
|
3,220
|
|
Total commitments
|
|
$
|
8,465
|
|
Total operating lease expense was $1,835, $2,334 and $2,044 for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company is party to several unconditional purchase obligations resulting from contracts that contain legally binding provisions with respect to quantities, pricing and timing of purchases. The Company’s purchase obligations
75
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
include
s
commitments to pur
chase
utilities
. At December 31, 201
8
, future commitments under th
ese obligations were
as follows:
Year ended December 31:
|
|
|
|
|
2019
|
|
$
|
8,777
|
|
2020
|
|
|
256
|
|
2021
|
|
|
27
|
|
2022
|
|
|
7
|
|
2023
|
|
|
-
|
|
Total commitments
|
|
$
|
9,067
|
|
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company continually assesses known facts and circumstances as they pertain to applicable legal and environmental matters and evaluates the need for reserves and disclosures as deemed necessary based on these facts and circumstances. These matters, either individually or in the aggregate, could result in actual costs that are significantly higher than the Company’s current assessment and could have a material adverse effect on the Company's operating results and cash flows in future reporting periods. Based upon past experience, the Company believes that payments significantly in excess of current reserves, if required, would be made over an extended number of years.
Environmental
In connection with laws and regulations pertaining to the protection of the environment, the Company and its subsidiaries are a party to several environmental proceedings and remediation activities and along with other companies, have been named a potentially responsible party (“PRP”) for certain waste disposal sites ("Superfund sites"). All of the liabilities currently recorded on the Company’s balance sheet for environmental proceedings are associated with discontinued operations. The Company had insurance policies in place at certain of the discontinued operations for certain years that the Company believes should cover some portion of the recorded liabilities or potential future liabilities and the Company expects the net cash impact related to the contingencies described below to be reduced by the applicable income tax rate.
It is the Company’s policy to record appropriate liabilities for environmental matters where remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are based on the Company’s estimate of the undiscounted future costs required to complete the remedial work. Each of these matters is subject to various uncertainties, and it is possible that some of these matters will be decided against the Company. The resolution of such matters often spans several years and frequently involves regulatory oversight or adjudication. Additionally, many remediation requirements are fluid and are likely to be affected by future technological, site and regulatory developments. It is not possible at this time for the Company to determine fully the effect of all asserted and unasserted claims on its consolidated financial condition, results of operations or liquidity; however, to the extent possible, where asserted and unasserted claims can be estimated and where such claims are considered probable, the Company would record a liability. Consequently, the ultimate liability with respect to such matters, as well as the timing of cash disbursements, is uncertain.
76
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
In matters w
here the Company is able to reasonably estimate the probable and estimable costs associated with environmental proceedings, the Company accrues for the estimated costs associated with the study and remediation of applicable sites. At December 31, 2018, the
se reserves were $
17,411
, of which $
16,599
is included in “Other non-current liabilities” on the Company’s balance sheet. At December 31, 2017, the reserves were $17,511, of which $16,976 is included in “Other non-current liabilities” on the Company’s bala
nce sheet. The increase in the reserves includes adjustments to reserves of $
1,055
, partially offset by payments of $
1,155
. The reserves are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information b
ecomes available. Given the uncertainties regarding the outcome of investigative and study activities, the status of laws, regulations, enforcement, policies, the impact of other PRPs, technology and information related to individual sites, the Company do
es not believe it is possible to currently develop an estimate of the range of reasonably possible environmental loss in excess of its reserves.
Bayonne
As a result of the sale of a Bayonne, New Jersey facility, the Company became obligated to investigate site conditions and conduct required remediation under the New Jersey Industrial Site Recovery Act. The Company is completing an investigation and sampling plan at the property pursuant to the New Jersey Department of Environmental Protection’s (“NJDEP”) private oversight program. The results will be used to develop a proposed remedial action work plan for the site. Among other things, the remedial plan is anticipated to set forth further details of the proposed cleanup, including the removal and/or encapsulation of certain impacted soils and implementation of engineering controls and deed restrictions. As of December 31, 2018, the Company’s reserve was $608.
Clifton and Carlstadt
The Company has implemented a sampling and pilot program in Clifton and Carlstadt, New Jersey pursuant to the NJDEP private oversight program. The results of the sampling and pilot program to date have been used to develop an estimate of the Company's future liability for remediation costs, and the Company continues to move forward with the projects at each site in accordance with the established schedules and work plans. As of December 31, 2018, the Company’s reserve was $1,827.
Berry’s Creek
The Company received a notice from the United States Environmental Protection Agency (“USEPA”) that two subsidiaries of the Company are considered PRPs at the Berry’s Creek Study Area in New Jersey. These subsidiaries are among many other PRPs that were listed in the notice. Pursuant to the notice, the PRPs have been asked to perform a remedial investigation (“RI”) and feasibility study (“FS”) of the Berry’s Creek site. The Company has joined the group of PRPs and entered into an Administrative Settlement Agreement (“Agreement”) and Order on Consent with the USEPA agreeing to jointly conduct or fund an appropriate remedial investigation and feasibility study of the Berry’s Creek site with the other PRPs in the Agreement. The PRPs have engaged consultants to perform the work specified in the Agreement and develop a method to allocate related costs among the PRPs.
In June 2016, the PRPs received a request from USEPA to amend the RI/FS Work Plan to accommodate a phased, iterative approach to the Berry’s Creek remediation. USEPA requested an initial Phase I remedy that focuses on a portion of the site, namely, sediments in Upper and Middle Berry’s Creek and the marsh in Upper Peach Island Creek. Any subsequent remedial action will occur after the implementation and performance monitoring of this Phase I remedy and the extent of future action is expected to be at least partially determined by the outcome of this initial phase. In April 2017, USEPA approved the requested addendum to the RI/FS Work Plan, which included the description of the phased and adaptive management approach to the Berry’s Creek remedy.
77
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
In September 2018, USEPA issued its Record of Decision (“ROD”) for an interim remedy at Berry’s Creek. The interim remedy calls for, among other things, dredging and capping of contaminated sediments. The next step in the process is to d
esign the remedy (“Remedial Design”). USEPA issued a letter to the Berry’s Creek PRP Group in September 2018 that provided notice of potential liability and a request that the PRP Group agree to perform the Remedial Design. USEPA provided a draft settlem
ent agreement and statement of work to implement the Remedial Design. As a member of the Berry’s Creek PRP Group, the Company will participate in the PRP Group’s
engagement with
USEPA
on Remedial Design
, and is coordinating with PRP Group members and PRP
Group
common counsel accordingly
.
The estimated costs for the interim remedy may be further developed and the Company’s accrual may change based upon revisions to cost estimates. As of December 31, 2018, the Company’s reserve was $9,647. At this time it is not known when the costs for the complete remediation plan will be estimable, and as such, no accrual beyond the interim remedy has been recorded. The Company’s share has been preliminarily estimated by the PRP group at 2.4%. While the Company will defend its position that its share should be reduced from the current level, its share could be increased or decreased depending on the outcome of the final allocation process that will take place in future periods.
While any resolution of this matter is not expected to materially impact the Company’s operations or financial position, it could be material to the financial statements in the period recorded.
In July 2014, the Company received a notice from the U.S. Department of the Interior, U.S. Fish & Wildlife Service, regarding the Company’s potential liability for natural resource damages at the Berry’s Creek site and inviting the Company to participate in a cooperative assessment of natural resource damages. Most members of the Berry’s Creek PRP group received such notice letters, and the PRP Group coordinated a joint response, which was to decline participation in a cooperative assessment at this time, given existing investigation work at the site. The cost of any future assessment and the ultimate scope of natural resource damage liability are not yet known.
Maybrook Site
A subsidiary of Cambrex is named a PRP of a site in Hamptonburgh, New York by the USEPA in connection with the discharge, under appropriate permits, of wastewater at that site prior to Cambrex's acquisition in 1986. The PRPs implemented soil remediation which was completed in 2012 pending approval by the USEPA. The PRPs will continue implementing the ground water remediation at the site. USEPA completed its 5-year review report in August 2018, and USEPA’s review of the site remedy is on-going. It is unclear if such review, together with an agreed proposed modification to the USEPA Consent Decree, will result in any additional site work. In November 2018, under a statewide initiative, the New York State Department of Environmental Conservation (“NYSDEC”) requested that the PRPs perform additional sampling for certain “emerging contaminants.” NYSDEC approved the PRPs work plan in December 2018, and the sampling is anticipated to be performed during the first quarter of 2019. As of December 31, 2018, the Company’s reserve was $329, to cover long-term ground water monitoring and related costs.
Harriman Site
Subsidiaries of Cambrex and Pfizer are named as responsible parties for the Company’s former Harriman, New York production facility by the New York State Department of Environmental Conservation (“NYSDEC”). A final Record of Decision (“ROD”) describing the Harriman site remediation responsibilities for Pfizer and the Company was issued in 1997 (the “1997 ROD”) and incorporated into a federal court Consent Decree in 1998 (the “Consent Decree”). In December 2013, the Company, Pfizer and the NYSDEC entered into a federal court stipulation, which the court subsequently endorsed as a court order, resolving certain disputes with the NYSDEC about the scope of the obligations under the Consent Decree and the 1997 ROD, and requiring the Company and Pfizer to carry out an environmental investigation and study of certain areas of the Harriman Site.
78
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Site clean-up work under the 1997 ROD, the Consent Decree and the 2013 stipulation is ongoing and is being jointly performed by Pfizer and the Company, with NYSDEC oversight. Since 2014, Pfizer and the Com
pany have performed supplemental remedial investigation measures requested by the NYSDEC, and the findings have been submitted to NYSDEC in various reports, including a study evaluating the feasibility of certain remedial alternatives in August 2016. By l
etter dated January 5, 2017, NYSDEC disapproved such feasibility study report and requested certain revisions to the report. The Company and Pfizer engaged in further discussions with NYSDEC and have agreed to submit a revised version of the August 2016 f
easibility study to address certain of NYSDEC’s requests. In September 2017, the NYSDEC requested that Pfizer, the Company and the current owner of the Harriman Site, ELT Harriman LLC (“ELT”), conduct an investigation of additional constituents not addres
sed under the 1997 ROD based on the detection of those constituents at the Harriman Site and other properties in the area. The parties have requested more information from the State of New York to evaluate the request, while also responding to NYSDEC that
no further investigation was warranted.
As it is too soon to determine whether the NYSDEC’s requests or the reports and remedial plans, when finalized, will result in any significant changes to the Company’s responsibilities, no change to the reserve has been made. ELT is conducting other investigation and remediation activities under a separate NYSDEC directive.
No final remedy for the site has been determined, which will follow further discussions with the NYSDEC. The Company estimates the range for its share of the liability at the site to be between $2,000 and $7,000. As of December 31, 2018, the Company’s reserve was $3,365. At this time, the Company is unable to provide an estimate of the ultimate investigative and remedial costs to the Company for any final remedy selected by the NYSDEC.
The Company intends to enforce all of its contractual rights to recover costs and for indemnification under a 2007 settlement agreement, and has filed such claims in an arbitration proceeding against ELT and the immediately preceding owner, Vertellus Specialties Holdings (“Vertellus”). ELT has filed counterclaims, and has threatened to file additional counterclaims, for contractual indemnification and for breach of the settlement agreement against the Company. Currently, the arbitration proceeding is stayed indefinitely. In May 2016, some but not all of the Vertellus entities who are parties to the Company’s 2007 settlement agreement filed for restructuring under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company has filed several claims as creditors in the bankruptcy proceeding and will continue to monitor the bankruptcy proceeding.
Scientific Chemical Processing (“SCP”) Superfund Site
A subsidiary of Cambrex was named a PRP of the SCP Superfund site, located in Carlstadt, New Jersey, along with approximately 130 other PRPs. The site is a former waste processing facility that accepted various waste for recovery and disposal including processing wastewater from this subsidiary. The PRPs are in the process of implementing a final remedy at the site. The SCP Superfund site has also been identified as a PRP in the Berry’s Creek Superfund site (see previous discussion). While the Company continues to dispute the methodology used by the PRP group to arrive at its interim allocation for cash contributions, the Company has paid the funding requests. A final allocation of SCP Site costs (excluding Berry’s Creek costs) is expected to be finalized in 2019. As of December 31, 2018, the Company’s reserve was $732, of which approximately $468 is expected to be covered by insurance.
Newark Bay Complex
The USEPA and a private party group are evaluating remediation plans for the Passaic River, Newark Bay, Hackensack River, Arthur Kill, Kill Van Kull and adjacent waters (the “Newark Bay Complex”). Although the Company is not involved in the USEPA action, it continues to monitor developments related to the site due to its past involvement in a previously settled state action relating to the Newark Bay Complex. The USEPA has finalized its decision on a cleanup plan for 8.3 miles of the lower Passaic River, and has estimated the cost of this plan at $1.38 billion. Due to the uncertainty of the future scope and timing of any possible claims against the Company, no liability has been recorded.
79
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The Company is involved in other related and unrelated environmental matters where the range of liability is not reasonably estimable at this time and it is not fo
reseeable when information will become available to provide a basis for adjusting or recording a reserve, should a reserve ultimately be required.
Other
The Company has commitments incident to the ordinary course of business including corporate guarantees of certain subsidiary obligations to the Company’s lenders related to financial assurance obligations under certain environmental laws for remediation; closure and third party liability requirements of certain of its subsidiaries and a former operating location; contract provisions for indemnification protecting its customers and suppliers against third party liability for the manufacture and sale of Company products that fail to meet product warranties and contract provisions for indemnification protecting licensees against intellectual property infringement related to licensed Company technology or processes.
Additionally, as permitted under Delaware law, the Company indemnifies its officers, directors and employees for certain events or occurrences while the officer, director or employee is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer's, director's or employee’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that covers a portion of any potential exposure. The Company currently believes the estimated fair value of its indemnification agreements is not material based on currently available information, and as such, the Company had no liabilities recorded for these agreements as of December 31, 2018.
The Company's subsidiaries are party to a number of other proceedings that are not considered material at this time.
(2
2
)
|
Discontinued Operations
|
For all periods presented, financial results for discontinued operations relate to environmental investigation and remediation expenses for divested sites. The following table is a reconciliation of the pre-tax loss from discontinued operations to the net loss from discontinued operations, as presented on the income statement:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Pre-tax loss from discontinued operations
|
|
$
|
(971
|
)
|
|
$
|
(2,020
|
)
|
|
$
|
(8,777
|
)
|
Income tax benefit
|
|
|
180
|
|
|
|
706
|
|
|
|
3,130
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(791
|
)
|
|
$
|
(1,314
|
)
|
|
$
|
(5,647
|
)
|
As of December 31, 2018 and 2017, liabilities recorded on the Company’s balance sheet related to discontinued operations were $17,411 and $17,511, respectively. At this time, we cannot reasonably estimate the period of time during which the involvement is expected to continue. Net cash used in discontinued operations was $916, $1,440 and $516 for 2018, 2017, and 2016, respectively. Refer to Note 21 to the Company’s consolidated financial statements for further disclosures on the Company’s environmental contingencies.
(23)
Subsequent Event
On January 2, 2019, the Company completed the acquisition of 100% of Avista Pharma Solutions, a contract development, manufacturing, and testing organization with sites located in Durham, NC, Longmont, CO, Agawam, MA and Edinburgh, Scotland, UK. The purchase price of approximately $252,000 was funded with a combination of cash on hand and borrowings under a new senior secured credit facility, following a refinancing completed on the same day. The amended and restated Credit Facility is a $800,000 five-year Syndicated Senior Credit Facility expiring January 2, 2024, comprising of a $600,000 Revolving Credit Facility and $200,000 Term Loan A. The Company pays interest on the New Credit Facility at LIBOR plus 1.25% - 2.00% based upon certain financial measurements. The New Credit Facility also includes financial covenants regarding interest coverage and leverage ratios.
80
CAMBREX CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL
AND SUPPLEMENTARY DATA - UNAUDITED
(in thousands, except per share data)
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
139,130
|
|
|
$
|
147,214
|
|
|
$
|
104,231
|
|
|
$
|
124,422
|
|
Net revenues
|
|
|
141,097
|
|
|
|
152,046
|
|
|
|
104,618
|
|
|
|
134,332
|
|
Gross profit
|
|
|
50,855
|
|
|
|
64,792
|
|
|
|
32,725
|
|
|
|
48,316
|
|
Income from continuing operations (1)
|
|
|
24,249
|
|
|
|
40,852
|
|
|
|
26,815
|
|
|
|
1,293
|
|
Loss from discontinued operations (3)
|
|
|
(191
|
)
|
|
|
(433
|
)
|
|
|
(86
|
)
|
|
|
(81
|
)
|
Net income
|
|
|
24,058
|
|
|
|
40,419
|
|
|
|
26,729
|
|
|
|
1,212
|
|
Earnings per share of common stock: (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.74
|
|
|
|
1.23
|
|
|
|
0.80
|
|
|
|
0.04
|
|
Diluted
|
|
|
0.72
|
|
|
|
1.21
|
|
|
|
0.79
|
|
|
|
0.04
|
|
Average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,894
|
|
|
|
33,085
|
|
|
|
33,406
|
|
|
|
33,577
|
|
Diluted
|
|
|
33,621
|
|
|
|
33,642
|
|
|
|
33,892
|
|
|
|
33,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
|
2nd
Quarter
|
|
|
3rd
Quarter
|
|
|
4th
Quarter
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
103,711
|
|
|
$
|
134,487
|
|
|
$
|
112,233
|
|
|
$
|
175,505
|
|
Net revenues
|
|
|
105,006
|
|
|
|
134,554
|
|
|
|
112,619
|
|
|
|
182,277
|
|
Gross profit
|
|
|
46,875
|
|
|
|
57,559
|
|
|
|
46,943
|
|
|
|
78,926
|
|
Income from continuing operations (2)
|
|
|
21,115
|
|
|
|
25,124
|
|
|
|
17,276
|
|
|
|
40,249
|
|
(Loss)/income from discontinued operations (3)
|
|
|
(1,250
|
)
|
|
|
(94
|
)
|
|
|
20
|
|
|
|
10
|
|
Net income
|
|
|
19,865
|
|
|
|
25,030
|
|
|
|
17,296
|
|
|
|
40,259
|
|
Earnings per share of common stock: (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.61
|
|
|
0.77
|
|
|
0.53
|
|
|
1.23
|
|
Diluted
|
|
0.60
|
|
|
0.75
|
|
|
0.52
|
|
|
1.20
|
|
Average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
32,454
|
|
|
32,629
|
|
|
32,749
|
|
|
32,810
|
|
Diluted
|
|
|
33,365
|
|
|
|
33,469
|
|
|
|
33,512
|
|
|
|
33,532
|
|
(1)
|
Income from continuing operations includes a benefit of approximately $11,400 in the third quarter of 2018 for the release of valuation allowance against state NOLs. A similar amount was recorded as an expense in the fourth quarter of 2018 as a valuation allowance against state NOLs for a change in enacted tax laws. The Company adopted ASC 606 – Revenue from Contracts with Customers on January 1, 2018 using the modified retrospective method which does not require comparative periods, reported under ASC 605, to be restated.
|
(2)
|
Income from continuing operations includes expense of $117 in the fourth quarter of 2017 as a result of the change in enacted tax rates in the U.S. and the toll tax.
|
(3)
|
Discontinued operations include charges and reimbursements for environmental remediation related to sites of divested businesses.
|
(4)
|
Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period. As such, the sum of the quarters may not necessarily equal the earnings per share amount for the year.
|
81