CAMBREX CORP - FORM 10-Q - November 7, 2017

Attached files

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EX-32 - EXHIBIT 32 - CAMBREX CORP	ex_98445.htm
EX-31.2 - EXHIBIT 31.2 - CAMBREX CORP	ex_98444.htm
EX-31.1 - EXHIBIT 31.1 - CAMBREX CORP	ex_98443.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended September 30, 2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from to

Commission file number 1-10638

CAMBREX CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	22-2476135
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073

(Address of principal executive offices)

(201) 804-3000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2017, there were 32,777,576 shares outstanding of the registrant’s Common Stock, $.10 par value.

Table of Contents

CAMBREX CORPORATION AND SUBSIDIARIES

Table of Contents

			Page No.
Part I	Financial Information		3

	Item 1.	Financial Statements	3

		Consolidated Balance Sheets	3

		Consolidated Income Statements	4

		Consolidated Statements of Comprehensive Income	5

		Consolidated Statements of Cash Flows	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31

	Item 4.	Controls and Procedures	31

Part II	Other Information		32

	Item 1.	Legal Proceedings	32

	Item 1A.	Risk Factors	32

	Item 6.	Exhibits	32

Signatures			33

Table of Contents

Forward-Looking Statements

This document contains and incorporates by reference forward-looking statements including statements regarding expected performance, including, but not limited to, the Company’s belief that cash flows from operations, along with funds available from the revolving line of credit, will be adequate to meet the operational and debt servicing needs of the Company, as well as other statements relating to expectations with respect to sales, the timing of orders, research and development expenditures, earnings per share, capital expenditures, the outcome of pending litigation (including environmental proceedings and remediation investigations) and related estimates of potential liability, acquisitions, divestitures, collaborations or other expansion opportunities. These statements may be identified by the fact that they use words such as “may,” “will,” “could,” “should,” “would,” “expect,” “anticipate,” “intend,” “estimate,” “believe” or similar expressions. Any forward-looking statements contained herein are based on current plans and expectations and involve risks and uncertainties that could cause actual outcomes and results to differ materially from current expectations. The factors described in Item 1A of Part I contained in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016, captioned “Risk Factors,” or otherwise described in the Company’s filings with the Securities and Exchange Commission, provide examples of such risks and uncertainties that may cause the Company’s actual results to differ materially from the expectations the Company describes in its forward-looking statements, including, but not limited to, pharmaceutical outsourcing trends, competitive pricing or product developments, government legislation and regulations (particularly environmental issues), tax rates, interest rates, technology, manufacturing and legal issues, including the outcome of outstanding litigation, changes in foreign exchange rates, uncollectible receivables, the timing of orders, loss on disposition of assets, cancellation or delays in renewal of contracts, lack of suitable raw materials or packaging materials, the Company’s ability to receive regulatory approvals for its products and continued demand in the U.S. for late stage clinical products or the successful outcome of the Company’s investment in new products.

The forward-looking statements are based on the beliefs and assumptions of Company management and the information available to Company management as of the date of this report. The Company cautions investors not to place significant reliance on expectations regarding future results, levels of activity, performance, achievements or other forward-looking statements. The information contained in this Quarterly Report on Form 10-Q is provided by the Company as of the date hereof, and, unless required by law, the Company does not undertake and specifically disclaims any obligation to update these forward-looking statements contained in this Quarterly Report on Form 10-Q as a result of new information, future events or otherwise.

Table of Contents

Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)

	September 30,			December 31,
	2017			2016
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	118,403		$	74,141
Trade receivables, net		81,776			110,622
Other receivables		7,901			6,748
Inventories, net		164,913			123,184
Prepaid expenses and other current assets		5,089			7,960
Total current assets		378,082			322,655

Property, plant and equipment, net		248,945			217,092
Goodwill		43,200			40,323
Intangible assets, net		14,229			14,800
Deferred income taxes		10,512			13,061
Other non-current assets		3,383			3,934

Total assets	$	698,351		$	611,865

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	39,874		$	42,873
Deferred revenue and advance payments		8,024			7,506
Taxes payable		463			9,469
Accrued expenses and other current liabilities		35,856			35,614
Total current liabilities		84,217			95,462

Advance payments		39,000			39,000
Deferred income taxes		9,103			6,921
Accrued pension benefits		44,267			43,109
Other non-current liabilities		23,887			21,946
Total liabilities		200,474			206,438

Stockholders' equity:
Common stock, $.10 par value; authorized 100,000,000, issued 34,207,225 and 33,927,595 shares at respective dates		3,421			3,393
Additional paid-in capital		162,140			153,681
Retained earnings		389,567			327,376
Treasury stock, at cost, 1,433,649 and 1,583,909 shares at respective dates		(12,221	)		(13,503	)
Accumulated other comprehensive loss		(45,030	)		(65,520	)

Total stockholders' equity		497,877			405,427

Total liabilities and stockholders' equity	$	698,351		$	611,865

See accompanying notes to unaudited consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Income Statements

(unaudited – in thousands, except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016

Gross sales	$	112,233		$	99,867		$	350,431		$	312,856
Commissions, allowances and rebates		225			565			1,468			1,901

Net sales		112,008			99,302			348,963			310,955

Other revenues, net		611			97			3,216			1,823

Net revenue		112,619			99,399			352,179			312,778

Cost of goods sold		65,730			61,797			200,963			187,720

Gross profit		46,889			37,602			151,216			125,058

Operating expenses:
Selling, general and administrative expenses		17,551			14,950			51,785			42,602
Research and development expenses		4,233			3,193			12,590			10,796
Total operating expenses		21,784			18,143			64,375			53,398

Operating profit		25,105			19,459			86,841			71,660

Other expenses/(income):
Interest expense, net		337			366			991			357
Other (income)/expenses, net		(6	)		(71	)		(149	)		143
Income before income taxes		24,774			19,164			85,999			71,160

Provision for income taxes		7,498			5,443			22,484			21,784

Income from continuing operations		17,276			13,721			63,515			49,376

Income/(loss) from discontinued operations, net of tax		20			(4,503	)		(1,324	)		(5,082	)

Net income	$	17,296		$	9,218		$	62,191		$	44,294

Basic earnings/(loss) per share of common stock:
Income from continuing operations	$	0.53		$	0.43		$	1.95		$	1.54
Income/(loss) from discontinued operations, net of tax	$	0.00		$	(0.14	)	$	(0.04	)	$	(0.16	)
Net income	$	0.53		$	0.29		$	1.91		$	1.38

Diluted earnings/(loss) per share of common stock:
Income from continuing operations	$	0.52		$	0.42		$	1.90		$	1.50
Income/(loss) from discontinued operations, net of tax	$	0.00		$	(0.14	)	$	(0.04	)	$	(0.15	)
Net income	$	0.52		$	0.28		$	1.86		$	1.35

Weighted average shares outstanding:
Basic		32,749			32,149			32,612			32,034
Effect of dilutive stock based compensation		763			850			839			871
Diluted		33,512			32,999			33,451			32,905

See accompanying notes to unaudited consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

	Three months ended				Nine months ended
	September 30,				September 30,
	2017		2016		2017		2016

Net income	$	17,296	$	9,218	$	62,191	$	44,294

Other comprehensive income:

Foreign currency translation adjustments		7,006		235		19,753		947

Pension plan amortization of net actuarial loss and prior service cost, net of tax of $118, $100, $350 and $300 at respective dates		250		202		737		606

Comprehensive income	$	24,552	$	9,655	$	82,681	$	45,847

See accompanying notes to unaudited consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Nine months ended
	September 30,
	2017		2016
Cash flows from operating activities:
Net income	$	62,191	$	44,294
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,023		17,717
Non-cash deferred revenue		(4,991)		(2,972)
Increase in inventory reserve		3,217		5,950
Stock based compensation		6,321		5,189
Deferred income tax provision		1,087		7,838
Other		516		265
Changes in assets and liabilities:
Trade receivables		35,995		44,213
Inventories		(38,245)		(40,088)
Prepaid expenses and other current assets		(70)		(2,144)
Accounts payable and other current liabilities		(16,422)		(8,504)
Deferred revenue and advance payments		512		39,363
Other non-current assets and liabilities		(2,282)		(2,764)
Discontinued operations:
Non-current liabilities		2,418		6,748
Net cash used in discontinued operations		(1,185)		(312)
Net cash provided by operating activities		72,085		114,793

Cash flows from investing activities:
Capital expenditures		(38,241)		(37,706)
Proceeds from sale of business		2,836		-
Other		-		13
Net cash used in investing activities		(35,405)		(37,693)

Cash flows from financing activities:
Repayment of debt		-		(30,000)
Proceeds from stock options exercised		3,448		2,116
Debt issuance costs		-		(2,515)
Net cash provided by/(used in) financing activities		3,448		(30,399)

Effect of exchange rate changes on cash and cash equivalents		4,134		61

Net increase in cash and cash equivalents		44,262		46,762

Cash and cash equivalents at beginning of period		74,141		43,974

Cash and cash equivalents at end of period	$	118,403	$	90,736

See accompanying notes to unaudited consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

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.

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, 2016.

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 current year presentation.

(2)	Impact of Recently Issued Accounting Pronouncements

The following accounting pronouncements became effective for the Company in the first nine months of 2017:

Simplification of Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09 which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and classification in the statement of cash flows. This standard became effective for the Company on January 1, 2017. The new standard requires recognition of excess tax benefits that had not previously been recognized. The Company had no remaining unrecognized excess tax benefits as of December 31, 2016. All excess tax benefits and deficiencies in future periods will be recorded as part of the current period tax provision within the Income Statement. This will result in increased volatility in the Company’s effective tax rate. During the first nine months of 2017, the Company recognized a tax benefit of $5,114 which lowered the effective tax rate by 6.0%. No other provisions in this new standard had a significant impact on the consolidated financial statements including the Company’s accounting policy election to account for forfeitures when they occur.

To conform to the current year presentation, the Company reclassified $2,958 of excess tax benefits under financing activities to operating activities for the nine months ended September 30, 2016 on the consolidated statement of cash flows.

Simplifying the Measurement of Inventory

In July 2015, the FASB issued ASU 2015-11 which requires that inventory be measured at the lower of cost and net realizable value, and eliminates the other two options that currently exist for market, replacement cost and net realizable value less an approximately normal profit margin. This update became effective on January 1, 2017 and did not have a material impact on the Company’s consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(2)

Impact of Recently Issued Accounting Pronouncements (continued)

The following recently issued accounting pronouncements will become effective for the Company in the future:

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. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its 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. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its consolidated financial statements.

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. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact 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 except short-term leases. On the income statement, leases will be classified as operating or finance leases. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. At this time, the Company has no financing leases and only a limited number of operating leases. The result of adoption will be an increase to assets and liabilities by the same amount for the identified operating leases. This adjustment will not be material to the Company, assuming there is not an increase in lease activity.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(2)

Impact of Recently Issued Accounting Pronouncements (continued)

Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09 that 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. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. Numerous updates were issued in 2016 that provide clarification on a number of specific issues as well as requiring additional disclosures. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company will adopt the new accounting standard for all contracts not completed as of the adoption date using the modified retrospective method. Certain sales that would have otherwise been reflected in the income statement in 2018 will now be recorded in equity as part of a cumulative effect adjustment. Additionally, a portion of certain products that will be in process at December 31, 2018 will be eligible for revenue recognition in 2018 as opposed to when they would ship in 2019 under previous guidance.

The Company continues to evaluate the impact of adoption of the new standard on revenue recognition policies, internal controls, reporting and disclosures. As part of this evaluation, the Company has identified the revenue streams and reviewed the related critical customer contract terms and provisions. The Company has concluded that the timing of the recognition of revenue for products to specific customers with no alternative use, that were previously recognized upon delivery, will be recognized over time utilizing a measure of progress toward satisfaction of the performance obligations. Generally, under these customer agreements, the Company is entitled to compensation for progress to date that includes an element of profit margin. Depending on the amount of these projects in process at the end of 2017, the cumulative adjustment could be significant, but at this time cannot be reasonably estimated. These products represented nearly half of 2016 net revenue. The Company will also record contract balances on the balance sheet and present all related disclosures in the notes to financial statements. The Company continues to assess the impact of the related disclosures as well as finalizing a methodology and process for recognizing product revenue over time.

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 (1) disaggregate the current-service-cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such subtotal is presented. The ASU also requires entities to disclose the income statement lines that contain the other components if they are not presented separately. The ASU’s amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have an impact on its consolidated financial statements.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(2)

Impact of Recently Issued Accounting Pronouncements (continued)

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.

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 amendment is effective for fiscal years beginning after December 15, 2017, 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.

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.

(3)	Net Inventories

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:

	September 30,		December 31,
	2017		2016

Finished goods	$	49,771	$	29,117
Work in process		64,168		54,463
Raw materials		44,355		33,841
Supplies		6,619		5,763
Total	$	164,913	$	123,184

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(4)	Goodwill and Intangible Assets

The change in the carrying amount of goodwill for the nine months ended September 30, 2017, is as follows:

Balance as of December 31, 2016	$	40,323
Translation effect		2,877
Balance as of September 30, 2017	$	43,200

Acquired intangible assets, which are amortized, consist of the following:

				As of September 30, 2017
	Amortization Period (in years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Internal-use software	3	-	7	$	6,971	$	(1,535	)	$	5,436
Technology-based intangibles		20			3,589		(1,346	)		2,243
Customer-related intangibles	10	-	15		7,597		(1,047	)		6,550
				$	18,157	$	(3,928	)	$	14,229

				As of December 31, 2016
	Amortization Period (in years)			Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

Internal-use software	3	-	7	$	6,444	$	(829	)	$	5,615
Technology-based intangibles		20			3,204		(1,082	)		2,122
Customer-related intangibles	10	-	15		7,522		(459	)		7,063
				$	17,170	$	(2,370	)	$	14,800

The change in the gross carrying amount is due to additions and the impact of foreign currency translation.

Amortization expense was $477 and $1,375 for the three and nine months ended September 30, 2017, respectively. Amortization expense was $227 and $614 for the three and nine months ended September 30, 2016, respectively.

Amortization expense related to intangible assets is expected to be approximately $1,881 for 2017, $2,019 for 2018 and 2019, and $2,003 for 2020 and 2021.

(5)	Income Taxes

Income tax expense from continuing operations for the three and nine months ended September 30, 2017 was $7,498 and $22,484, respectively, compared to $5,443 and $21,784 for the three and nine months ended September 30, 2016, respectively. The effective tax rate for the three and nine months ended September 30, 2017 was 30.3% and 26.1%, respectively, compared to 28.4% and 30.6% for the three and nine months ended September 30, 2016, respectively. Tax expense for the nine months ended September 30, 2017 was favorably impacted by $5,114 as a result of applying ASU 2016-09. The standard requires recognition immediately in the tax provision of certain effects of share-based payments that were possibly deferred under the previous guidance. Excluding the effects of applying the new standard, the effective tax rate for the nine months ended September 30, 2017 was 32.1%.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(6)	Derivatives

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 the nine months ended September 30, 2017 and 2016 were designated for hedge accounting treatment. The notional amounts of the Company’s outstanding foreign exchange forward contracts were $37,626 and $20,896 at September 30, 2017 and December 31, 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 gain of $193 and $125 at September 30, 2017 and December 31, 2016, respectively. Losses are recorded in “Accrued expenses and other current liabilities” and gains are recorded in “Prepaid expenses and other current assets” on the balance sheet and “Other revenues, net” on the income statement.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(7)	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 September 30, 2017 and December 31, 2016:

Fair Value - Level 2		September 30, 2017				December 31, 2016
Foreign currency forwards, assets		$	193			$	125

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.

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.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(8)	Accumulated Other Comprehensive Income/(Loss)

The following tables provide the changes in AOCI by component (pension, net of tax) for the three months ended September 30, 2017 and 2016:

	Foreign Currency Translation Adjustments			Pension Plans			Total
Balance as of June 30, 2017	$	(21,543	)	$	(30,743	)	$	(52,286	)
Other comprehensive income before reclassifications		7,006			-			7,006
Amounts reclassified from accumulated other comprehensive loss		-			250			250
Net current-period other comprehensive income		7,006			250			7,256
Balance as of September 30, 2017	$	(14,537	)	$	(30,493	)	$	(45,030	)

	Foreign Currency Translation Adjustments			Pension Plans			Total
Balance as of June 30, 2016	$	(25,168	)	$	(29,165	)	$	(54,333	)
Other comprehensive income before reclassifications		235			-			235
Amounts reclassified from accumulated other comprehensive loss		-			202			202
Net current-period other comprehensive income		235			202			437
Balance as of September 30, 2016	$	(24,933	)	$	(28,963	)	$	(53,896	)

The following tables provide the changes in AOCI by component (pension, net of tax) for the nine months ended September 30, 2017 and 2016:

	Foreign Currency Translation Adjustments			Pension Plans			Total
Balance as of December 31, 2016	$	(34,290	)	$	(31,230	)	$	(65,520	)
Other comprehensive income before reclassifications		19,753			-			19,753
Amounts reclassified from accumulated other comprehensive loss		-			737			737
Net current-period other comprehensive income		19,753			737			20,490
Balance as of September 30, 2017	$	(14,537	)	$	(30,493	)	$	(45,030	)

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(8)	Accumulated Other Comprehensive Income/(Loss) (continued)

	Foreign Currency Translation Adjustments			Pension Plans			Total
Balance as of December 31, 2015	$	(25,880	)	$	(29,569	)	$	(55,449	)
Other comprehensive income before reclassifications		947			-			947
Amounts reclassified from accumulated other comprehensive loss		-			606			606
Net current-period other comprehensive income		947			606			1,553
Balance as of September 30, 2016	$	(24,933	)	$	(28,963	)	$	(53,896	)

The following tables provide the reclassifications from AOCI by component for the three and nine months ended September 30, 2017 and 2016:

Details about AOCI Components	Three months ended September 30, 2017			Nine months ended September 30, 2017

Amortization of defined benefit pension items:
Actuarial losses	$	(355	)	$	(1,048	)
Prior service costs		(13	)		(39	)
Total before tax		(368	)		(1,087	)
Tax benefit		118			350
Net of tax	$	(250	)	$	(737	)

Total reclassification for the period	$	(250	)	$	(737	)

Details about AOCI Components	Three months ended September 30, 2016			Nine months ended September 30, 2016

Amortization of defined benefit pension items:
Actuarial losses	$	(288	)	$	(867	)
Prior service costs		(14	)		(39	)
Total before tax		(302	)		(906	)
Tax benefit		100			300
Net of tax	$	(202	)	$	(606	)

Total reclassification for the period	$	(202	)	$	(606	)

The Company recognizes net periodic benefit cost, which includes amortization of actuarial losses and gains, and prior service costs in both “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.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(9)	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 nine months ended September 30, 2017 was $20.14. The weighted-average fair value per share for the stock options granted to employees during the nine months ended September 30, 2016 was $13.82.

For the three months ended September 30, 2017 and 2016, the Company recorded $1,187 and $1,012, respectively, in “Selling, general and administrative expenses” for stock options. For the nine months ended September 30, 2017 and 2016, the Company recorded $3,313 and $2,836, respectively, in “Selling, general and administrative expenses” for stock options. As of September 30, 2017, the total compensation cost related to unvested stock options not yet recognized was $7,224. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.9 years.

The following table is a summary of the Company’s stock options:

Options	Number of Shares			Weighted Average Exercise Price

Outstanding at December 31, 2016		1,519,338		$	25.22
Granted		39,037			54.15
Exercised		(61,249	)		11.83
Outstanding at March 31, 2017		1,497,126			26.52
Granted		19,598			58.98
Exercised		(162,431	)		13.84
Outstanding at June 30, 2017		1,354,293			28.51
Exercised		(55,950	)		8.48
Outstanding at September 30, 2017		1,298,343			29.37
Exercisable at September 30, 2017		449,959		$	21.09

The aggregate intrinsic values for all stock options exercised for the three and nine months ended September 30, 2017 were $2,669 and $12,011, respectively. The aggregate intrinsic values for all stock options exercised for the three and nine months ended September 30, 2016 were $173 and $8,195, respectively. The aggregate intrinsic values for all stock options outstanding and exercisable as of September 30, 2017 were $33,350 and $15,256, respectively.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(9)	Stock Based Compensation (continued)

The following table is a summary of the Company’s unvested 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:

	Unvested Stock Options					Unvested Restricted Stock					Unvested 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

Unvested at December 31, 2016		817,540		$	12.50		260		$	41.05		316,750		$	30.08
Granted		39,037			21.02		-			-		-			-
Vested during period		(14,975	)		8.16		-			-		-			-
Unvested at March 31, 2017		841,602			12.97		260			41.05		316,750			30.08
Granted		19,598			18.37		9,496			58.98		5,750			41.36
Vested during period		(12,816	)		8.50		(260	)		41.05		-			-
Unvested at June 30, 2017		848,384			13.17		9,496			58.98		322,500			30.28
Vested during period		-			-		-			-		(150,000	)		17.81
Unvested at September 30, 2017		848,384		$	13.17		9,496		$	58.98		172,500		$	41.12

For the three months ended September 30, 2017 and 2016, the Company recorded $280 and $240, respectively, in “Selling, general and administrative expenses” for restricted stock awards. For the nine months ended September 30, 2017 and 2016, the Company recorded $474 and $406, respectively, in “Selling, general and administrative expenses” for restricted stock awards. As of September 30, 2017, total compensation cost related to unvested restricted stock not yet recognized was $93. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 0.1 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 September 30, 2017 and 2016, the Company recorded $821 and $637, respectively, in “Selling, general and administrative expenses” related to these PS awards. For the nine months ended September 30, 2017 and 2016, the Company recorded $2,534 and $1,947, respectively, in “Selling, general and administrative expenses” related to these PS awards. As of September 30, 2017, total compensation cost related to unvested performance shares not yet recognized was $3,143. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.3 years.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(10)

Retirement Plans

Domestic Pension Plan

The components of net periodic benefit cost for the Company’s domestic pension plan (which was frozen in 2007) for the three and nine months ended September 30, 2017 and 2016 were as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016

Components of net periodic benefit cost
Interest cost	$	553		$	597		$	1,661		$	1,792
Expected return on plan assets		(677	)		(662	)		(2,031	)		(1,986	)
Recognized actuarial loss		199			194			599			582
Net periodic benefit cost	$	75		$	129		$	229		$	388

The Company’s Supplemental Executive Retirement Plan (which was frozen in 2007) is non-qualified and unfunded. Net periodic benefit cost for the three months ended September 30, 2017 and 2016 were $77 and $65, respectively. Net periodic benefit cost for the nine months ended September 30, 2017 and 2016 were $231 and $194, respectively.

International Pension Plan

The components of net periodic benefit cost for the Company’s international pension plan for the three and nine months ended September 30, 2017 and 2016 were as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016

Components of net periodic benefit cost
Service cost	$	247		$	186		$	700		$	561
Interest cost		192			186			545			560
Recognized actuarial loss		94			49			268			147
Amortization of prior service benefit		(1	)		(1	)		(3	)		(3	)
Net periodic benefit cost	$	532		$	420		$	1,510		$	1,265

(11)	Contingencies

The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. 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.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11)	Contingencies (continued)

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 September 30, 2017, the reserves were $17,434, of which $16,881 is included in “Other non-current liabilities” on the Company’s balance sheet. At December 31, 2016, these reserves were $16,703, of which $15,441 is included in “Other non-current liabilities” on the Company’s balance sheet. The increase in the reserves includes adjustments to reserves of $2,419, partially offset by payments of $1,688. 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 has implemented a 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 remedial plan for the site including an estimate of the Company’s future liability for remediation costs. As of September 30, 2017, the Company’s reserve was $450.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11)	Contingencies (continued)

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 September 30, 2017, the Company’s reserve was $1,889.

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 interim 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 interim 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.

The scope of remedial activities in the initial interim remedy is currently being developed and based upon preliminary cost estimates, the Company’s reserve was $9,829 as of September 30, 2017. The estimated costs for the initial interim remedy may be further developed over the next several months and the Company’s accrual may change based upon the final remedy selected and revisions to cost estimates. 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 initial 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.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11)	Contingencies (continued)

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. In May 2017, the Company made a payment to USEPA in the amount of $363 for ongoing oversight costs. As of September 30, 2017, 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.

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 have requested more information from the State of New York to evaluate the request.

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.

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11)	Contingencies (continued)

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 September 30, 2017, the Company’s reserve was $3,465. 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 early 2018. As of September 30, 2017, the Company’s reserve was $762, of which approximately $488 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.

Litigation and Other Matters

Lorazepam and Clorazepate

In 1998, the Company and a subsidiary were named as defendants along with Mylan Laboratories, Inc. (“Mylan”) and Gyma Laboratories, Inc. (“Gyma”) in a proceeding instituted by the Federal Trade Commission in the United States District Court for the District of Columbia (the “District Court”). Suits were also commenced by several State Attorneys General and class action complaints by private plaintiffs in various state courts. The suits alleged violations of the Federal Trade Commission Act arising from exclusive license agreements between the Company and Mylan covering two APIs (Lorazepam and Clorazepate).

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CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11)	Contingencies (continued)

All cases have been resolved except for one brought by four health care insurers. In the remaining case, the District Court entered judgment after trial in 2008 against Mylan, Gyma and Cambrex. The judgment was appealed to the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) in 2011, resulting in a remand to the District Court. On remand, the District Court dismissed certain self-funded customer plaintiffs due to their failure to satisfy the requirements of federal jurisdiction. Subsequently, the District Court entered an order remitting certain damages. Without fees, costs, or post-judgment interest, the current judgment against Mylan, Gyma, and Cambrex is $67,260. Mylan, Gyma, and Cambrex have once again appealed to the D.C. Circuit and the appeal is currently pending.

In 2003, Cambrex paid $12,415 to Mylan in exchange for a release and full indemnity against future costs or liabilities in related litigation brought by the purchasers of Lorazepam and Clorazepate, as well as potential future claims related to the ongoing matter. In the event of a final settlement or final judgment, Cambrex expects any payment required by the Company to be made by Mylan under the indemnity described above.

(12)	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 income/(loss) on discontinued operations to the net income/(loss) on discontinued operations, as presented on the income statement:

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016

Pre-tax income/(loss) from discontinued operations	$	126		$	(6,928	)	$	(1,946	)	$	(7,819	)
Income tax (expense)/benefit		(106	)		2,425			622			2,737
Income/(loss) from discontinued operations, net of tax	$	20		$	(4,503	)	$	(1,324	)	$	(5,082	)

As of September 30, 2017 and December 31, 2016, liabilities recorded on the Company’s balance sheet related to discontinued operations were $17,434 and $16,703, 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 nine months ended September 30, 2017 and 2016 were $1,185 and $312, respectively. Refer to Note 11 to the Company’s consolidated financial statements for further disclosures on the Company’s environmental contingencies.

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CAMBREX CORPORATION AND SUBSIDIARIES

(in thousands, except share data)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

The following summarizes the Company’s performance for the third quarter of 2017:

●

Net revenue increased 13.3% on a reported basis compared to the third quarter of 2016. Net revenue, excluding currency impact, increased 12.2%.

●

Gross margins increased to 41.6% from 37.8% in the third quarter of 2016.

●

Net cash was $118,403 compared to $74,141 at December 31, 2016, an increase of $44,262.

Results of Operations

Comparison of Third Quarter 2017 versus Third Quarter 2016

Gross sales in the third quarter of 2017 of $112,233 were $12,366 or 12.4% higher than the third quarter of 2016. Excluding a 1.2% favorable impact of foreign exchange compared to the third quarter of 2016, sales increased 11.2% as a result of higher volumes (12.3%) partially offset by lower pricing (1.1%). The increase in volumes was driven by growth in all product categories as well as the addition of Cambrex High Point.

The following table reflects gross sales by geographic area for the third quarters of 2017 and 2016:

	Third quarter
	2017		2016

Europe	$	62,199	$	60,903
North America		44,792		31,414
Asia		2,864		4,645
Other		2,378		2,905
Total gross sales	$	112,233	$	99,867

Net revenue in the third quarter of 2017 of $112,619 was $13,220 or 13.3% higher than the third quarter of 2016. Excluding a 1.1% favorable impact of foreign exchange compared to the third quarter of 2016, net revenue increased 12.2%. The increase was the result of higher volumes as described above.

Gross margins in the third quarter of 2017 increased to 41.6% from 37.8% in the third quarter of 2016. The increase was primarily driven by high capacity utilization, manufacturing efficiency improvements and favorable product mix partially offset by lower pricing. Gross profit in the third quarter of 2017 was $46,889 compared to $37,602 in the same period last year.

Selling, general and administrative (“SG&A”) expenses of $17,551 in the third quarter of 2017 increased compared to $14,950 in the third quarter of 2016. The increase was mainly due to the addition of Cambrex High Point (approximately $1,200), medical expenses (approximately $400) and due diligence costs related to acquisition opportunities (approximately $300). SG&A, as a percentage of net revenue, was 15.6% and 15.0% in the third quarters of 2017 and 2016, respectively.

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Results of Operations (continued)

Comparison of Third Quarter 2017 versus Third Quarter 2016 (continued)

Research and development (“R&D”) expenses of $4,233 were 3.8% of net revenue in the third quarter of 2017, compared to $3,193 or 3.2% of net revenue in the third quarter of 2016. The increase was primarily driven by costs to develop new generic drug products.

Operating profit in the third quarter of 2017 was $25,105 compared to $19,459 in the third quarter of 2016. The increase in operating profit was due to higher gross profit partially offset by higher operating expenses as described above.

Net interest expense was $337 in the third quarter of 2017 compared to $366 in the third quarter of 2016. The Company did not have any debt outstanding as of September 30, 2017 and 2016.

Income tax expense from continuing operations in the third quarter of 2017 was $7,498 compared to $5,443 in the third quarter of 2016. The effective tax rate in the third quarter of 2017 was 30.3% compared to 28.4% in the third quarter of 2016. Tax expense in the third quarter of 2017 was favorably impacted by $735 from the adoption of ASU 2016-09. The standard requires recognition immediately in the tax provision of certain results of share-based payments that were possibly deferred under the previous guidance. Excluding the effects of applying the new standard, the effective tax rate for the three months ended September 30, 2017 was 33.2%.

Income from continuing operations in the third quarter of 2017 was $17,276, or $0.52 per diluted share, versus $13,721, or $0.42 per diluted share in the same period a year ago.

Comparison of First Nine Months of 2017 versus First Nine Months of 2016

Gross sales in the first nine months of 2017 of $350,431 were $37,575 or 12.0% higher than the first nine months of 2016. Excluding a 0.6% unfavorable impact of foreign exchange compared to the first nine months of 2016, sales increased 12.6% as a result of higher volumes (14.9%) partially offset by lower pricing (2.3%). The increase in volumes was driven by growth in all product categories as well as the addition of Cambrex High Point, partially offset by the divestiture of Zenara.

The following table reflects gross sales by geographic area for the first nine months of 2017 and 2016:

	First nine months
	2017		2016

Europe	$	197,503	$	184,852
North America		132,286		105,646
Asia		13,072		13,459
Other		7,570		8,899
Total gross sales	$	350,431	$	312,856

Net revenue in the first nine months of 2017 of $352,179 was $39,401 or 12.6% higher than the first nine months of 2016. Excluding a 0.9% unfavorable impact of foreign exchange compared to the first nine months of 2016, net revenue increased 13.5%. The increase was the result of higher volumes as described above and royalties of $1,000 recorded as “Other revenues, net” in the Company’s income statement.

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Comparison of First Nine Months of 2017 versus First Nine Months of 2016 (continued)

Gross margins in the first nine months of 2017 increased to 42.9% from 40.0% in the first nine months of 2016. The increase was primarily due to plant efficiencies, high capacity utilization and royalty income partially offset by lower pricing. Gross profit in the first nine months of 2017 was $151,216 compared to $125,058 in the same period last year.

Selling, general and administrative (“SG&A”) expenses of $51,785 in the first nine months of 2017 increased compared to $42,602 in the first nine months of 2016. The increase was mainly due to the addition of Cambrex High Point (approximately $3,300), higher personnel costs (approximately $2,400), medical expenses (approximately $1,800) and due diligence costs related to acquisition opportunities (approximately $700). SG&A, as a percentage of net revenue, was 14.7% and 13.6% in the first nine months of 2017 and 2016, respectively.

Research and development (“R&D”) expenses of $12,590 were 3.6% of net revenue in the first nine months of 2017, compared to $10,796 or 3.5% of net revenue in the first nine months of 2016. The increase was primarily related to lower absorption of R&D expenses into inventory and cost of goods sold and higher costs to develop new generic drug products.

Operating profit in the first nine months of 2017 was $86,841 compared to $71,660 in the first nine months of 2016. The increase in operating profit was due to higher gross profit partially offset by higher operating expenses as described above.

Net interest expense was $991 in the first nine months of 2017 compared to $357 in the first nine months of 2016. Higher interest expense was the result of higher amortization of debt issuance costs, higher commitment fees related to the new credit facility entered into during the second quarter of 2016 and lower capitalized interest as a result of the completion of several large projects in 2016. The Company did not have any debt outstanding as of September 30, 2017 and 2016.

Income tax expense from continuing operations in the first nine months of 2017 was $22,484 compared to $21,784 in the first nine months of 2016. The effective tax rate in the first nine months of 2017 was 26.1% compared to 30.6% in the first nine months of 2016. Tax expense in the first nine months of 2017 was favorably impacted by $5,114 from the adoption of ASU 2016-09. The standard requires recognition immediately in the tax provision of certain results of share-based payments that were possibly deferred under the previous guidance. Excluding the effects of applying the new standard, the effective tax rate for the nine months ended September 30, 2017 was 32.1%.

Income from continuing operations in the first nine months of 2017 was $63,515, or $1.90 per diluted share, versus $49,376, or $1.50 per diluted share in the same period a year ago.

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Liquidity and Capital Resources

During the first nine months of 2017, cash provided by operations was $72,085 versus $114,793 in the same period a year ago. This decrease was primarily due to a $39,000 advance payment received in the first quarter of 2016.

Cash flows used in investing activities in the first nine months of 2017 mostly related to capital expenditures of $38,241 compared to $37,706 in the same period a year ago. Capital expenditures in the first nine months of 2017 and 2016 primarily expanded the Company’s manufacturing capacity to support expected growth.

Cash flows provided by financing activities in the first nine months of 2017 were $3,448 compared to $30,399 used in financing activities in the same period a year ago. The 2016 cash flows primarily relate to the pay down of the Company’s debt.

The Company expects to spend approximately $65,000 to $70,000 on capital expenditures during 2017.

The Company has a $500,000 Senior Credit Facility. Borrowings under the Credit Facility bear interest at a rate per annum of LIBOR plus a margin ranging from 1.25% to 2%. The facility is currently undrawn.

The Company believes that cash flows from operations, along with funds available from the revolving line of credit, will be adequate to meet the operational and debt servicing needs of the Company for the foreseeable future.

The Company’s forecasted cash flow from future operations may be adversely affected by various factors including, but not limited to, declines in customer demand, increased competition, the deterioration in general economic and business conditions, increased environmental remediation, returns on assets within the Company’s domestic pension plans, as well as other factors. Our largest product (31.6% of 2016 sales), is used by our customer to produce an anti-viral drug. Our customer's sales of this drug have been trending downwards and, accordingly, we expect our sales of this product to our customer to also trend downwards over the next few years.

As discussed more fully in Note 11 to the Consolidated Financial Statements, the Company continually receives additional information to develop estimates to record reserves for remediation activities at Berry’s Creek and other environmental sites. 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 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.

See the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the period ended December 31, 2016 for further explanation of factors that may negatively impact the Company’s cash flows.

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Impact of Recent Accounting Pronouncements

The following accounting pronouncements became effective for the Company in the first nine months of 2017:

Simplification of Employee Share-Based Payment Accounting

Simplifying the Measurement of Inventory

The following recently issued accounting pronouncements will become effective for the Company in the future:

Business Combinations – Clarifying the Definition of a Business

Statement of Cash Flows – Restricted Cash

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Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments

Leases

Revenue from Contracts with Customers

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Presentation of Net Periodic Benefit Cost Related to Defined Benefit Plans

Simplifying the Test for Goodwill Impairment

Scope of Modification Accounting, Stock Based Compensation

Targeted Improvements to Accounting for Hedging Activities

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

There has been no significant change in the Company’s exposure to market risk during the first nine months of 2017. For a discussion of the Company’s exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter covered by this report that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

CAMBREX CORPORATION AND SUBSIDIARIES

Item 1.

Legal Proceedings

See the discussion under Part I, Item 1, Note 11 to the Company’s Consolidated Financial Statements.

Item 1A.

Risk Factors

There have been no material changes to the Company’s risk factors and uncertainties during the first nine months of 2017. For a discussion of the Risk Factors, refer to Part I, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the period ended December 31, 2016.

Item 6.

Exhibits

	Exhibit 31.1*	Section 302 Certification Statement of the Chief Executive Officer.

	Exhibit 31.2*	Section 302 Certification Statement of the Chief Financial Officer.

	Exhibit 32**	Section 906 Certification Statements of the Chief Executive Officer and Chief Financial Officer.

	Exhibit 101.INS*	XBRL Instance Document

	Exhibit 101.SCH*	XBRL Taxonomy Extension Schema

	Exhibit 101.CAL*	XBRL Taxonomy Extension Calculation Linkbase

	Exhibit 101.DEF*	XBRL Taxonomy Extension Definition Linkbase

	Exhibit 101.LAB*	XBRL Taxonomy Extension Label Linkbase

	Exhibit 101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

	* Filed herewith
	** Furnished herewith

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Consolidated Income Statements for the three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (v) Notes to Consolidated Financial Statements.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CAMBREX CORPORATION


	By	/s/Tom G. Vadaketh
		Tom G. Vadaketh
		Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as the Registrant's Principal Financial Officer)

Dated: November 7, 2017

CAMBREX CORP - FORM 10-Q - November 7, 2017

Attached files

CAMBREX CORP Reports