Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
(1)
|
Basis of Presentation
|
Unless otherwise indicated by the context, "Cambrex" or the "Company" means Cambrex Corporation and subsidiaries.
On September 12, 2018 the Company acquired Halo Pharma (“Halo”) and on January 2, 2019 the Company acquired Avista Pharma Solutions (“Avista”). The results of Halo and Avista have been included in the consolidated results since their respective acquisition dates. Due to the acquisitions and to be consistent with how the business is managed, the Company now reports its results in three segments, Drug Substance (“DS”), Drug Product (“DP”) and Early Stage Development and Testing (“ESDT”). See Note 4 for additional information on the acquisitions and Note 15 for additional segment information.
The accompanying unaudited consolidated financial statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments, which are of a normal and recurring nature, except as otherwise described herein, and are necessary for a fair statement of financial position and results of operations in conformity with U.S. generally accepted accounting principles (“GAAP”). These interim financial statements should be read in conjunction with the financial statements for the year ended December 31, 2018.
The results of operations of any interim period are not necessarily indicative of the results expected for the full year.
For all periods presented, financial results for discontinued operations relate to environmental investigation and remediation at sites of divested businesses.
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
(2)
|
Impact of Recently Issued Accounting Pronouncements
|
The following accounting pronouncements became effective for the Company January 1, 2019:
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. Several updates were issued in 2018 and 2019 that provide clarification on a number of specific issues and reporting requirements. This standard became effective for the Company on January 1, 2019. As a result of adopting this update, right of use assets of $37,903 and operating lease liabilities of a similar amount were recorded on the balance sheet for identified operating leases. See Note 11.
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. The update became effective on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.
9
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 update became effective on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.
The following recently issued accounting pronouncements will become effective for the Company in future periods:
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.
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 of 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.
10
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses.
The Company disaggregates its revenue from customers with contracts by revenue streams. The Company’s revenue streams are presented in the following table:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Single-use products
|
|
$
|
82,823
|
|
|
$
|
76,399
|
|
|
$
|
145,088
|
|
|
$
|
149,177
|
|
Multi-use products
|
|
|
62,450
|
|
|
|
66,594
|
|
|
|
124,430
|
|
|
|
129,275
|
|
Service revenue
|
|
|
29,923
|
|
|
|
4,221
|
|
|
|
63,898
|
|
|
|
7,892
|
|
Total gross sales
|
|
$
|
175,196
|
|
|
$
|
147,214
|
|
|
$
|
333,416
|
|
|
$
|
286,344
|
|
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.
11
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 did not include an element of profit margin for progress to date, it would be 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 customer 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 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.
12
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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.
The following table details the significant changes in contract assets:
|
|
2019
|
|
|
2018
|
|
Balance as of January 1,
|
|
$
|
33,490
|
|
|
$
|
51,896
|
|
Contract assets acquired
|
|
|
4,243
|
|
|
|
-
|
|
Revenue recognized from performance obligations satisfied
|
|
|
155,225
|
|
|
|
145,820
|
|
Transferred to trade receivables
|
|
|
(95,848
|
)
|
|
|
(89,551
|
)
|
Currency impact
|
|
|
(388
|
)
|
|
|
(1,082
|
)
|
Balance as of June 30,
|
|
$
|
96,722
|
|
|
$
|
107,083
|
|
The Company recognized in revenue $7,197 and $1,114, during the six months ended June 30, 2019 and 2018, respectively, for which the contract liability was recorded in a prior period.
On January 2, 2019, the Company completed the acquisition of 100% of Avista Pharma Solutions (“Avista”), a contract development, manufacturing, and testing organization with sites located in Durham, NC, Longmont, CO, Agawam, MA and Edinburgh, Scotland U.K. The purchase price of $252,000 was funded with a combination of cash on hand and borrowings under the credit facility. See Note 8 for details on the amended and restated credit facility.
Avista offers a broad suite of scientifically differentiated services ranging from early stage API and drug product development and cGMP manufacturing to stand-alone analytical, microbiology testing and solid state sciences.
13
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. Cambrex is in the process of obtaining third-party valuations of certain tangible and intangible assets; therefore the provisional measurements of property, plant and equipment, intangible assets, goodwill and deferred income taxes are subject to change. Additionally, finalization of the working capital adjustment has not been completed.
|
|
January 2, 2019
|
|
Cash
|
|
$
|
4,125
|
|
Trade receivables
|
|
|
6,786
|
|
Contract assets
|
|
|
4,243
|
|
Inventories
|
|
|
21
|
|
Other current assets
|
|
|
1,159
|
|
Property, plant and equipment
|
|
|
34,172
|
|
Right of use assets
|
|
|
31,497
|
|
Goodwill
|
|
|
148,481
|
|
Intangible assets (Customer relationships)
|
|
|
73,000
|
|
Other non-current assets
|
|
|
532
|
|
Total assets acquired
|
|
|
304,016
|
|
Operating lease liabilities, current
|
|
|
2,053
|
|
Other current liabilities
|
|
|
11,422
|
|
Operating lease liabilities, non-current
|
|
|
29,444
|
|
Other non-current liabilities
|
|
|
8,826
|
|
Total liabilities assumed
|
|
$
|
51,745
|
|
Acquisition and integration expenses recorded on the Company’s income statement totaled $562 and $6,618 for the three and six months ended June 30, 2019, respectively. Acquisition and integration expenses were $339 for the three and six months ended June 30, 2018.
The consolidated income statement for the six months ending June 30, 2019 includes revenue from Avista of $35,274, and a net loss of $3,159. These results include integration costs of $1,248, primarily consisting of a one-time charge for severance.
On September 12, 2018, the Company completed the acquisition of 100% of Halo Pharma, a finished dosage form contract development and manufacturing organization.
Inventories are stated at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis.
14
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
Net inventories consist of the following:
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Finished goods
|
|
$
|
41,615
|
|
$
|
30,904
|
|
Work in process
|
|
|
18,473
|
|
|
27,513
|
|
Raw materials
|
|
|
42,060
|
|
|
44,705
|
|
Supplies
|
|
|
7,438
|
|
|
7,940
|
|
Total
|
|
$
|
109,586
|
|
$
|
111,062
|
|
(
6
)
|
Goodwill and Intangible Assets
|
The changes in the carrying amount of goodwill for the six months ended June 30, 2019 are as follows:
Balance as of December 31, 2018
|
|
$
|
261,095
|
|
Acquisition of business (see Note 4)
|
|
|
146,357
|
|
Translation effect
|
|
|
561
|
|
Balance as of June 30, 2019
|
|
$
|
408,013
|
|
As of June 30, 2019, goodwill of $217,301 relates to the DP segment and $157,527 relates to the ESDT segment. The remaining goodwill relates to the DS segment.
Acquired intangible assets, which are amortized, consist of the following:
|
|
|
|
As of June 30, 2019
|
|
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Internal-use software
|
|
3 - 7 years
|
|
$
|
7,985
|
|
|
$
|
(3,487
|
)
|
|
$
|
4,498
|
|
Technology-based intangibles
|
|
20 years
|
|
|
3,460
|
|
|
|
(1,600
|
)
|
|
|
1,860
|
|
Customer-related intangibles
|
|
10 - 15 years
|
|
|
260,776
|
|
|
|
(14,392
|
)
|
|
|
246,384
|
|
|
|
|
|
$
|
272,221
|
|
|
$
|
(19,479
|
)
|
|
$
|
252,742
|
|
|
|
|
|
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
|
|
The change in the gross carrying amount in 2019 is mainly due to the recognition of customer-related intangibles of $73,000 from the acquisition of Avista in January 2019, the impact of foreign currency translation and additions to internal-use software.
15
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
Amortization expense was $4,726 and $9,456 for the three and six months ended June 30, 2019, respectively. Amortization expense for the three and six months ended June 30, 2019 includes $2,994 and $5,990, respectively, related to the acquisition of Halo and $1,216 and $2,433, respectively, related to the acquisition of Avista. Amortization expense was $510 and $1,023 for the three and six months ended June 30, 2018, respectively.
Amortization expense related to intangible assets is expected to be approximately $18,919 for 2019, $18,903 for 2020, $18,897 for 2021, $18,458 for 2022, and $17,844 for 2023.
Income tax expense from continuing operations for the three and six months ended June 30, 2019 was $7,872 and $11,404, respectively, compared to $8,748 and $14,534 for the three and six months ended June 30, 2018, respectively. The effective tax rate for the three and six months ended June 30, 2019 was 33.4% and 30.3%, respectively, compared to 17.6% and 18.3% for the three and six months ended June 30, 2018, respectively. The tax rate for the three and six months ended June 30, 2019 would have been 25.9% and 25.4%, respectively, excluding the impact of certain effects of share-based compensation, amortization of purchased intangibles, acquisition and integration expenses and unrealized loss on investment in equity securities. The increase in the tax rate for 2019 as compared to 2018 is primarily due to state tax reform and the Company’s expanded state presence due to the Halo and Avista acquisitions, and the geographic mix of income.
On January 2, 2019, the Company amended and restated its Credit Facility by entering into an $800,000 five-year Syndicated Senior Credit Facility (“Credit Facility”),
comprising of a $600,000 Revolving Credit Facility and $200,000 Term Loan A
. The Company is required to make minimum quarterly principal payments on the Term Loan A of $2,500 through December 2020, $3,750 through December 2022 and $5,000 through December 2023. The remainder of the principal is due on January 2, 2024. The Company pays interest on the 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. The Company was in compliance with all financial covenants at June 30, 2019 and December 31, 2018. As of June 30, 2019, there was $505,000 outstanding on the Credit Facility, of which $10,000 was recorded as current in the consolidated balance sheet. As of December 31, 2018, there was $300,000 outstanding on the Credit Facility. For the six months ended June 30, 2019, the weighted average interest rate for long-term bank debt was 4.3%.
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.
16
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 the six months ended June 30, 2019 and 2018 were designated for hedge accounting treatment. The notional amounts of the Company’s outstanding foreign exchange forward contracts were $42,079 and $35,734 at June 30, 2019 and December 31, 2018, 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 gain of $259 and a loss of $430 at June 30, 2019 and December 31, 2018, respectively. Losses are reflected under the caption “Accrued expenses and other current liabilities” and gains are 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.
Interest Rate Swap
The Company entered into an interest rate swap in February 2019 to reduce the impact of changes in interest rates on its floating rate debt through February 2023. The swap is a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional debt amount.
The swap contract outstanding at June 30, 2019 has been designated as a cash flow hedge and, accordingly, changes in the fair value of this derivative are not recorded in earnings but are recorded each period in AOCI and reclassified into earnings as interest expense in the same period during which the hedged transaction affects earnings. The ineffective portion of the interest rate swap is recognized in earnings and has been immaterial to the Company's financial results.
As of June 30, 2019, the interest rate swap had a notional value of $200,000, at a fixed rate of 2.54%. The fair value of this swap is based on quoted market prices and was in a loss position of $6,527 at June 30, 2019. The Company did not have an interest rate swap outstanding at December 31, 2018. Losses are reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities.”
At June 30, 2019, the Company’s interest rate swap fixed 39.6% of the variable interest rate debt. Holding all other variables constant, if the LIBOR portion of the weighted average interest rate in the variable debt increased by 100 basis points, the effect on the Company would have been higher interest expense of $1,851 for the six months ended June 30, 2019.
Assuming current market conditions continue, a loss of $1,381 is expected to be reclassed out of AOCI into earnings within the next twelve months.
17
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
(
10
)
|
Fair Value Measurements
|
Accounting standards establish 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:
Fair Value - Level 2
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Interest rate swap, liability
|
|
$
|
(6,527
|
)
|
|
$
|
-
|
|
Foreign currency forwards, assets/(liabilities)
|
|
|
259
|
|
|
|
(430
|
)
|
Investment in equity securities, asset
|
|
|
8,741
|
|
|
|
13,048
|
|
|
|
$
|
2,473
|
|
|
$
|
12,618
|
|
The fair value of the interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rate and the expected cash flows at current market interest rates using observable benchmarks for the LIBOR forward rates at the end of the period. The Company’s credit risk and its counterparty’s credit risk is also evaluated to estimate fair value.
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.
As of the second quarter of 2018, the Company owns a 16.3% equity investment in a European company. The Company has elected to record this investment at fair value. The fair value of the Company’s shares, which are recorded as “Prepaid expenses and other current assets” on the balance sheet decreased to $8,741 during the six months ended June 30, 2019 compared to $13,048 at December 31, 2018. An unrealized loss of $3,235 and $3,804 for the three and six months ended June 30, 2019, respectively, and an unrealized gain of $5,146 for the three and six months ended June 30, 2018, was recorded as “Unrealized loss/(gain) on investment in equity securities” on the income statement. 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 and it is possible the ultimate value to be realized by the Company could be significantly less upon a sale of the securities.
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.
18
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
In February 2016 the FASB issued ASU 2016-02, Leases (“ASC 842”), which requires lessees to recognize right of use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months. Lease obligations are measured at the present value of remaining lease payments and accounted for using the effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.
The Company adopted the new lease standard on January 1, 2019 by applying the new transition alternative. As such, the Company initially applied the new standard to all leases existing at the beginning of the period of adoption. Prior period financial results were not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. The Company has elected the package of practical expedients permitted under the transition guidance within the new standard, that allows the Company (1) to not reassess whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing leases, and (3) to not reassess initial direct costs for any existing leases. The Company has also elected, for its vehicle and equipment leases, the practical expedient that permits the ability to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component.
Further, the Company has made an accounting policy election to keep leases with an initial term of twelve months or less off the balance sheet. This policy applies to all classes of the underlying assets. The Company will recognize those lease payments in the consolidated income statement over the lease term.
The determination of the incremental borrowing rate used to calculate the present value of the ROU assets and lease liabilities depends on whether an interest rate is specified in the lease or not. If the lease specifies a rate, that rate is used when calculating the present value of lease payments. If the rate is not readily determinable, which is generally the case for the Company, the Company’s incremental borrowing rate (“IBR”) as of the date of inception is used (for initial measurement, the IBR was determined as of the adoption date of the standard). The incremental borrowing rate is the estimated rate of interest that Cambrex would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.
The Company’s leases that contain variable payments are not material.
Operating Leases:
The Company has operating leases expiring on various dates through the year 2032 with options to extend beyond this date. The leases are primarily for the rental of manufacturing, office and warehouse space in addition to vehicles, forklifts and equipment. The Company generally enters into operating leases when it doesn’t have the desire to own the asset.
19
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
The Company’s operating leases related to the rental of manufacturing, office and warehouse space often contain one or more options to extend the lease, typically for a period of three to five years each and based on the then prevailing market rental rate. The Company will generally exercise these options to extend the lease for its manufacturing space due to the significant costs to install and remove the manufacturing equipment should the Company decide to vacate the building. As such, the lease terms used in calculating the value of the ROU assets and lease liabilities for these types of leases will include the periods covered under any renewal options.
The Company’s equipment, vehicle and forklift leases may or may not contain an option to extend the lease but as a general rule, the Company doesn’t exercise these options because there are no associated costs to return the equipment and either purchase or lease new equipment. As a result, these extension options aren’t considered in the calculation of ROU assets and lease liabilities. If or when circumstances change and the Company becomes reasonably certain that it is going to exercise the extension option, the ROU asset and lease liability would be remeasured at that time.
For operating leases, expense is recognized evenly over the term of the lease as either cost of goods sold or selling, general and administrative expense, depending on the leased asset, in the Company’s income statement.
As of June 30, 2019, ROU assets related to operating leases were $36,474 and reflected in the Company’s balance sheet under the caption “Right of use assets.” As of June 30, 2019, short-term operating lease liabilities were $2,937 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, current” and long-term operating lease liabilities were $33,840 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, non-current.”
The Company’s largest leases are described below:
The Company leases its manufacturing and office facilities in Longmont, Colorado. This facility is part of the ESDT segment. The lease expires in May 2025 and includes two five year extension options at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,700 per year.
The Company leases its manufacturing and office facilities in Durham, North Carolina and is part of the ESDT segment. The lease expires in March 2023 and includes one five year extension option at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,300 per year.
The Company leases office space in East Rutherford, New Jersey for its corporate headquarters. The lease expires in November 2029. This lease includes one five year extension option at prevailing market rates but at this time, the expiration date is too far in the future to be reasonably certain that the lease will be extended. Rent expense is recognized on a straight-line basis and is approximately $400 per year.
Finance leases:
The Company has finance leases expiring on various dates through the year 2023. The leases are primarily for the rental of manufacturing equipment. These leased assets are amortized on a straight-line basis and recorded as depreciation expense and the financing component is recorded as interest expense in the income statement resulting in higher expense in the earlier part of the lease term.
20
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
For finance
leases, the depreciation expense is recognized evenly over the term of the
lease as cost of goods sold and selling, general and administrative expense in the Company’s income statement. The interest expense component is recognized separately as interest expense in the Company’s income statement.
As of June 30, 2019, ROU assets related to finance leases were $3,471 and reflected in the Company’s balance sheet under the caption “Property, plant and equipment, net.” As of June 30, 2019, short-term finance lease liabilities were $1,118 and reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities” and long-term finance lease liabilities were $1,132 and reflected in the Company’s balance sheet under the caption “Other non-current liabilities.”
The following tables summarize the lease activity for the three and six months ended June 30, 2019:
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
Lease cost:
|
|
|
|
|
|
|
|
Operating lease cost
|
$
|
1,191
|
|
|
$
|
2,377
|
|
Finance lease cost
|
|
|
|
|
|
|
|
Amortization of ROU assets
|
|
72
|
|
|
|
144
|
|
Interest on lease liabilities
|
|
41
|
|
|
|
88
|
|
Short-term lease cost
|
|
349
|
|
|
|
566
|
|
Total lease cost
|
$
|
1,653
|
|
|
$
|
3,175
|
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
(995
|
)
|
|
$
|
(2,062
|
)
|
Operating cash flows from finance leases
|
|
(38
|
)
|
|
|
(51
|
)
|
Financing cash flows from finance leases
|
|
(251
|
)
|
|
|
(527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Supplemental balance sheet information:
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases (yrs)
|
|
|
|
|
|
9.9
|
|
Weighted-average remaining lease term - finance leases (yrs)
|
|
|
|
|
|
2.6
|
|
Weighted-average discount rate - operating leases
|
|
|
|
|
|
4.2
|
%
|
Weighted-average discount rate - finance leases
|
|
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
The following table represents the Company’s undiscounted lease maturities over the next five years and beyond for its operating and finance leases. The undiscounted cash flows disclosed below represent full years for all periods presented.
21
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
Below is a reconciliation of the Company’s undiscounted cash flows to the operating and finance lease liabilities recognized in the consolidated balance sheet.
|
|
Total Undiscounted Cash Flows
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
2019
|
|
$
|
4,746
|
|
|
$
|
1,126
|
|
2020
|
|
|
5,142
|
|
|
|
1,033
|
|
2021
|
|
|
5,068
|
|
|
|
596
|
|
2022
|
|
|
4,972
|
|
|
|
201
|
|
2023
|
|
|
4,977
|
|
|
|
43
|
|
2024+
|
|
|
26,428
|
|
|
|
-
|
|
|
|
|
51,333
|
|
|
|
2,999
|
|
|
|
|
|
|
|
|
|
|
Present values ("PV"):
|
|
|
|
|
|
|
|
|
Lease liabilities, current
|
|
|
2,937
|
|
|
|
1,118
|
|
Lease liabilities, non-current
|
|
|
33,840
|
|
|
|
1,132
|
|
Total PV of lease liabilities
|
|
|
36,777
|
|
|
|
2,250
|
|
Difference between undiscounted cash flows and discounted cash flows
|
|
$
|
14,556
|
|
|
$
|
749
|
|
At December 31, 2018, under ASC 840, the Company had operating leases expiring on various dates through the year 2029. The leases were primarily for the rental of office space. At December 31, 2018, future minimum commitments under non-cancelable operating lease arrangements were as follows:
|
|
Total Undiscounted Cash Flows
|
|
2019
|
|
$
|
1,004
|
|
2020
|
|
|
1,204
|
|
2021
|
|
|
1,126
|
|
2022
|
|
|
974
|
|
2023
|
|
|
937
|
|
2024+
|
|
|
3,220
|
|
|
|
$
|
8,465
|
|
The difference between 2018 and 2019 future undiscounted cash flows is mainly due to the acquisition of Avista on January 2, 2019. See Note 4 for additional information on this acquisition.
22
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
(
1
2
)
|
Accumulated Other Comprehensive (Loss)/Income
|
The following tables provide the changes in Accumulated other comprehensive (loss)/income (“AOCI”) by component, net of tax for the three and six months ended June 30, 2019 and 2018:
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Interest
Rate
Swap
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of March 31, 2019
|
|
$
|
(32,514
|
)
|
|
$
|
(1,996
|
)
|
|
$
|
(32,160
|
)
|
|
$
|
(66,670
|
)
|
Other comprehensive income/(loss) before reclassifications
|
|
|
2,432
|
|
|
|
(2,729
|
)
|
|
|
-
|
|
|
|
(297
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
30
|
|
|
|
239
|
|
|
|
269
|
|
Net current-period other comprehensive income/(loss)
|
|
|
2,432
|
|
|
|
(2,699
|
)
|
|
|
239
|
|
|
|
(28
|
)
|
Balance as of June 30, 2019
|
|
$
|
(30,082
|
)
|
|
$
|
(4,695
|
)
|
|
$
|
(31,921
|
)
|
|
$
|
(66,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Interest
Rate
Swap
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of March 31, 2018
|
|
$
|
(9,111
|
)
|
|
$
|
-
|
|
|
$
|
(29,893
|
)
|
|
$
|
(39,004
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(13,465
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,465
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
206
|
|
|
|
206
|
|
Net current-period other comprehensive (loss)/income
|
|
|
(13,465
|
)
|
|
|
-
|
|
|
|
206
|
|
|
|
(13,259
|
)
|
Balance as of June 30, 2018
|
|
$
|
(22,576
|
)
|
|
$
|
-
|
|
|
$
|
(29,687
|
)
|
|
$
|
(52,263
|
)
|
23
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Interest
Rate
Swap
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of December 31, 2018
|
|
$
|
(27,736
|
)
|
|
$
|
-
|
|
|
$
|
(32,401
|
)
|
|
$
|
(60,137
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(2,346
|
)
|
|
|
(4,731
|
)
|
|
|
-
|
|
|
|
(7,077
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
36
|
|
|
|
480
|
|
|
|
516
|
|
Net current-period other comprehensive (loss)/income
|
|
|
(2,346
|
)
|
|
|
(4,695
|
)
|
|
|
480
|
|
|
|
(6,561
|
)
|
Balance as of June 30, 2019
|
|
$
|
(30,082
|
)
|
|
$
|
(4,695
|
)
|
|
$
|
(31,921
|
)
|
|
$
|
(66,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
|
Interest
Rate
Swap
|
|
|
Pension
Plans
|
|
|
Total
|
|
Balance as of December 31, 2017
|
|
$
|
(12,040
|
)
|
|
$
|
-
|
|
|
$
|
(30,188
|
)
|
|
$
|
(42,228
|
)
|
Other comprehensive loss before reclassifications
|
|
|
(10,536
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,536
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
-
|
|
|
|
-
|
|
|
|
501
|
|
|
|
501
|
|
Net current-period other comprehensive (loss)/income
|
|
|
(10,536
|
)
|
|
|
-
|
|
|
|
501
|
|
|
|
(10,035
|
)
|
Balance as of June 30, 2018
|
|
$
|
(22,576
|
)
|
|
$
|
-
|
|
|
$
|
(29,687
|
)
|
|
$
|
(52,263
|
)
|
The following table provides the reclassifications from AOCI by component for the three and six months ended June 30, 2019 and 2018:
Details about AOCI Components
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2019
|
|
Losses on cash flow hedge:
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
(30
|
)
|
|
$
|
(36
|
)
|
Tax benefit
|
|
|
-
|
|
|
|
-
|
|
Net of tax
|
|
|
(30
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Pension plan amortization of actuarial losses
|
|
|
(321
|
)
|
|
|
(644
|
)
|
Tax benefit
|
|
|
82
|
|
|
|
164
|
|
Net of tax
|
|
|
(239
|
)
|
|
|
(480
|
)
|
Total reclassification for the period
|
|
$
|
(269
|
)
|
|
$
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
24
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
Details about AOCI Components
|
|
Three Months Ended June 30, 2018
|
|
|
Six Months Ended June 30, 2018
|
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
Actuarial losses
|
|
$
|
(276
|
)
|
|
$
|
(680
|
)
|
Prior service credit
|
|
|
1
|
|
|
|
2
|
|
Total before tax
|
|
|
(275
|
)
|
|
|
(678
|
)
|
Tax benefit
|
|
|
69
|
|
|
|
177
|
|
Total reclassification for the period, net of tax
|
|
$
|
(206
|
)
|
|
$
|
(501
|
)
|
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. Interest rate swaps are recorded as “Interest expense, net” on the Company’s income statement.
(1
3
)
|
Stock Based Compensation
|
The Company recognizes compensation costs 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 during the three and six months ended June 30, 2019 was $16.40 and $15.72, respectively. The weighted-average fair value per share for the stock options granted to employees during the three and six months ended June 30, 2018 was $24.54.
For the three months ended June 30, 2019 and 2018, the Company recorded $1,255 and $1,149, respectively, in “Selling, general and administrative expenses” for stock options. For the six months ended June 30, 2019 and 2018, the Company recorded $2,317 and $2,188, respectively, in “Selling, general and administrative expenses” for stock options. As of June 30, 2019, the total compensation cost related to unvested stock options not yet recognized was $9,482. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 2.4 years.
25
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
The following table is a summary of the Company’s stock options:
Options
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2018
|
|
|
1,051,623
|
|
|
$
|
41.41
|
|
Granted
|
|
|
65,000
|
|
|
|
39.66
|
|
Exercised
|
|
|
(4,000
|
)
|
|
|
16.25
|
|
Forfeited or expired
|
|
|
(6,150
|
)
|
|
|
46.02
|
|
Outstanding at March 31, 2019
|
|
|
1,106,473
|
|
|
|
41.37
|
|
Granted
|
|
|
65,663
|
|
|
|
42.42
|
|
Exercised
|
|
|
(4,375
|
)
|
|
|
25.79
|
|
Forfeited or expired
|
|
|
(8,938
|
)
|
|
|
52.68
|
|
Outstanding at June 30, 2019
|
|
|
1,158,823
|
|
|
|
41.40
|
|
Exercisable at June 30, 2019
|
|
|
442,864
|
|
|
$
|
34.17
|
|
The aggregate intrinsic values for all stock options exercised for the three and six months ended June 30, 2019 were $77 and $166, respectively. The aggregate intrinsic values for all stock options exercised for the three and six months ended June 30, 2018 were $2,535 and $5,809, respectively. The aggregate intrinsic values for all stock options outstanding and exercisable as of June 30, 2019 were $7,948 and $5,815, respectively.
The following table is a summary of the Company’s nonvested stock options, restricted stock and performance shares for which the requisite service period has not been rendered but that are expected to vest on the achievement of a performance condition:
|
|
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, 2018
|
|
|
601,513
|
|
|
$
|
17.83
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
152,000
|
|
|
$
|
46.61
|
|
Granted
|
|
|
65,000
|
|
|
|
15.04
|
|
|
|
25,000
|
|
|
|
44.21
|
|
|
|
5,000
|
|
|
|
45.64
|
|
Vested during period
|
|
|
(7,000
|
)
|
|
|
9.26
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(5,900
|
)
|
|
|
17.36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,750
|
)
|
|
|
40.65
|
|
Nonvested at March 31, 2019
|
|
|
653,613
|
|
|
|
17.65
|
|
|
|
25,000
|
|
|
|
44.21
|
|
|
|
151,250
|
|
|
|
46.80
|
|
Granted
|
|
|
65,663
|
|
|
|
16.40
|
|
|
|
15,729
|
|
|
|
40.06
|
|
|
|
-
|
|
|
|
-
|
|
Vested during period
|
|
|
(1,250
|
)
|
|
|
16.32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(2,067
|
)
|
|
|
17.50
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,250
|
)
|
|
|
40.65
|
|
Nonvested at June 30, 2019
|
|
|
715,959
|
|
|
$
|
17.54
|
|
|
|
40,729
|
|
|
$
|
42.61
|
|
|
|
134,000
|
|
|
$
|
47.59
|
|
26
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
The Company granted restricted stock units during the six months ended June 30, 2019 to certain executives which will vest over a two year period. Annually, members of the Cambrex Board of Directors are awarded restricted stock units that vest over six months. For the three months ended June 30, 2019 and 2018, the Company recorded $354 and $177, respectively, in “Selling, general and administrative expenses” for restricted stock units. For the six months ended June 30, 2019 and 2018, the Company recorded $450 and $183, respectively, in “Selling, general and administrative expenses” for restricted stock units. As of June 30, 2019, total compensation cost related to nonvested restricted stock not yet recognized was $1,285. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.1 years.
The Company granted equity-settled performance shares (“PS”) 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. For the three months ended June 30, 2019 and 2018, the Company recorded benefit of $54 and expense of $227, respectively, in “Selling, general and administrative expenses” related to performance shares. For the six months ended June 30, 2019 and 2018, the Company recorded $447 and $832, respectively, in “Selling, general and administrative expenses” related to performance shares. As of June 30, 2019, total compensation cost related to nonvested performance shares not yet recognized was $3,168. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.4 years.
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.
Domestic Pension Plan
The components of net periodic benefit cost/(credit) for the Company’s domestic pension plan (which was frozen in 2007) for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Components of net periodic benefit cost/(credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
543
|
|
|
$
|
511
|
|
|
$
|
1,086
|
|
|
$
|
1,021
|
|
Expected return on plan assets
|
|
|
(683
|
)
|
|
|
(792
|
)
|
|
|
(1,365
|
)
|
|
|
(1,584
|
)
|
Recognized actuarial loss
|
|
|
208
|
|
|
|
180
|
|
|
|
415
|
|
|
|
359
|
|
Net periodic benefit cost/(credit)
|
|
$
|
68
|
|
|
$
|
(101
|
)
|
|
$
|
136
|
|
|
$
|
(204
|
)
|
27
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
International Pension Plan
The components of net periodic benefit cost for the Company’s international pension plan for the three and six months ended June 30, 2019 and 2018 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
270
|
|
|
$
|
253
|
|
|
$
|
548
|
|
|
$
|
523
|
|
Interest cost
|
|
|
162
|
|
|
|
182
|
|
|
|
329
|
|
|
|
376
|
|
Recognized actuarial loss
|
|
|
113
|
|
|
|
96
|
|
|
|
229
|
|
|
|
199
|
|
Amortization of prior service benefit
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
Net periodic benefit cost
|
|
$
|
545
|
|
|
$
|
530
|
|
|
$
|
1,106
|
|
|
$
|
1,096
|
|
(1
5
)
|
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.
Due to the acquisitions of Avista and Halo, and to be consistent with how the business is managed, the Company now reports its results in
three reportable segments,
Drug Substance (“DS”), Drug Product (“DP”) and Early Stage Development and Testing (“ESDT”). The DS segment is comprised of the legacy Cambrex API business excluding the High Point facility, which was moved to the ESDT segment. The DP segment includes the former Halo business. The ESDT segment includes the former Avista business, in addition to the High Point facility.
DS
The Company’s DS segment is comprised of the custom development and manufacture of pharmaceutical ingredients derived from organic chemistry. Products consist of APIs and pharmaceutical intermediates for use in the production of prescription and over-the-counter drug products.
DP
The Company’s DP 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.
ESDT
The Company’s ESDT segment provides a combination of analytical testing, early stage process chemistry, formulation development, manufacturing, and solid state chemistry services.
28
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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, corporate relations, 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:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net revenue by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DS
|
|
$
|
128,968
|
|
|
$
|
145,987
|
|
|
$
|
241,028
|
|
|
$
|
282,595
|
|
DP
|
|
|
24,358
|
|
|
|
-
|
|
|
|
48,842
|
|
|
|
-
|
|
ESDT
|
|
|
23,524
|
|
|
|
6,059
|
|
|
|
46,436
|
|
|
|
10,548
|
|
Total reported net revenue
|
|
|
176,850
|
|
|
|
152,046
|
|
|
|
336,306
|
|
|
|
293,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DS
|
|
|
39,138
|
|
|
|
48,939
|
|
|
|
70,319
|
|
|
|
84,305
|
|
DP
|
|
|
(371
|
)
|
|
|
-
|
|
|
|
(621
|
)
|
|
|
-
|
|
ESDT
|
|
|
(1,978
|
)
|
|
|
578
|
|
|
|
(4,495
|
)
|
|
|
178
|
|
Total segment operating profit
|
|
|
36,789
|
|
|
|
49,517
|
|
|
|
65,203
|
|
|
|
84,483
|
|
Corporate operating loss
|
|
|
(3,896
|
)
|
|
|
(4,865
|
)
|
|
|
(11,986
|
)
|
|
|
(9,450
|
)
|
Total reported operating profit
|
|
$
|
32,893
|
|
|
$
|
44,652
|
|
|
$
|
53,217
|
|
|
$
|
75,033
|
|
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.
29
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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.
In matters where 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 June 30, 2019, the reserves were $17,101 of which $16,462 is included in “Other non-current liabilities” on the Company’s balance sheet. At December 31, 2018, these reserves were $17,411, of which $16,599 is included in “Other non-current liabilities” on the Company’s balance sheet. The decrease in the reserves includes payments of $660 partially offset by adjustments to reserves of $350. The reserves are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes 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 does 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 June 30, 2019, the Company’s reserve was $533.
30
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 June 30, 2019, the Company’s reserve was $1,734.
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.
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 design 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 settlement 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 June 30, 2019, the Company’s reserve was $9,502. 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.
31
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 was completed with results submitted to the state on or about June 20, 2019. As of June 30, 2019, the Company’s reserve was $365, 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.
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 Company 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 letter 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 feasibility 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 addressed under the 1997 ROD based on the detection of those constituents at the Harriman Site and other properties in the area. The parties sought more information from the State of New York to evaluate the request, while also responding to NYSDEC that no further investigation was warranted. In April 2019, NYSDEC again asked the parties to collect additional groundwater samples for such constituents, and discussions with the State related thereto are ongoing.
32
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
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 June 30, 2019, 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 June 30, 2019, 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.
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 foreseeable when information will become available to provide a basis for adjusting or recording a reserve, should a reserve ultimately be required.
(1
7
)
|
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-
33
CAMBREX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share data)
(Unaudited)
tax loss on discontinued operations to the net loss on discontinued operations, as presented on the income statement:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Loss from discontinued operations, pre-tax
|
|
$
|
(119
|
)
|
|
$
|
(519
|
)
|
|
$
|
(271
|
)
|
|
$
|
(756
|
)
|
Income tax benefit
|
|
|
50
|
|
|
|
86
|
|
|
|
84
|
|
|
|
132
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(69
|
)
|
|
$
|
(433
|
)
|
|
$
|
(187
|
)
|
|
$
|
(624
|
)
|
As of June 30, 2019 and December 31, 2018, liabilities recorded on the Company’s balance sheet related to discontinued operations were $17,101 and $17,411 respectively. At this time, the Company cannot reasonably estimate the period of time during which the involvement is expected to continue. Net cash used in discontinued operations for the six months ended June 30, 2019 and 2018 were $462 and $431, respectively. Refer to Note 16 to the Company’s consolidated financial statements for further disclosures on the Company’s environmental contingencies.
(18)
Subsequent Event
On August 7, 2019, the Company entered into an Agreement and Plan of Merger (“the Merger Agreement”), pursuant to which the Company agreed to be acquired by an affiliate of the global investment firm Permira Funds subject to customary terms and conditions. Under the Merger Agreement, the Company’s stockholders will be entitled to receive $60.00 per share following the closing of the proposed merger. The merger, which is expected to close in the fourth quarter of 2019, is subject to approval by the Company’s stockholders, regulatory approvals and other customary closing conditions.
34
CAMBREX CORPORATION AND SUBSIDIARIES
(in thousands, except share data)