On May 2, 2019 Cambrex Corporation (NYSE: CBM), the leading small molecule company providing drug substance, drug product and analytical services across the entire drug lifecycle, reported results for the first quarter ended March 31, 2019 (Press release, Cambrex, MAY 2, 2019, View Source [SID1234535561]).
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First Quarter 2019 Highlights
Completed the acquisition of Avista Pharma Solutions ("Avista"), an early clinical phase contract development, manufacturing and testing organization, for approximately $252 million in total cash consideration. This transaction closed on January 2, 2019.
Net revenue was $159.5 million, an increase of 13% compared to the same quarter last year. Excluding the impact of currency, net revenue increased 17%.
Income from continuing operations was $10.5 million and Diluted EPS was $0.31 per share compared to $24.2 million and $0.72 per share, respectively, for the same quarter last year. Adjusted Income from continuing operations and Diluted EPS were $20.2 million and $0.60 per share compared to $25.8 million and $0.77 per share, respectively, for the same quarter last year (see table at the end of this press release).
Adjusted EBITDA was $41.1 million compared to $37.9 million in the same quarter last year (see table at the end of this press release).
Net debt excluding lease obligations was $430.0 million at the end of the quarter compared to $204.1 million at December 31, 2018. The change during the quarter was primarily the result of acquiring Avista and related expenses, positively offset by $28.7 million of Free cash flow. The Company entered into an $800 million amended credit facility in January of 2019 in connection with the Avista acquisition.
The Company continues to expect full year 2019 Net revenue, which excludes the impact of foreign currency, to be between 21% and 25% higher than 2018 Net revenue. Adjusted EBITDA is still expected to be between $150 and $160 million (see Financial Expectations – Continuing Operations section below for related explanations and additional financial guidance).
"The first quarter was a very productive quarter for Cambrex. Our financial performance was in line with our full year expectations, and we saw many examples of the synergies we anticipated when we acquired Halo and Avista. While there is still much work to be done, we took significant steps towards realizing our vision of building the leading fully integrated global small molecule CDMO. As our commercial team gains experience selling all of our services, and awareness of the full scope of our offering grows with existing and prospective customers, we expect the synergies to become more and more significant moving forward," commented Steven M. Klosk, President and Chief Executive Officer.
"We continue to invest in our facilities to ensure we have world class capabilities that position us to take advantage of ongoing positive CDMO market trends. During the quarter, we announced several new investments in our business including expanded cGMP liquid filling capacity at our Mirabel, Quebec facility, and expanded laboratories to facilitate increased generic API development capabilities at our site outside of Milan, Italy. In April, we completed construction of a new production area to manufacture highly potent drug substances at our Charles City, Iowa facility, and expect to begin production during the second quarter of 2019."
Basis of Reporting
The Company has provided a reconciliation of GAAP to adjusted (i.e. Non-GAAP) amounts at the end of this press release. Cambrex management believes that the adjustments provide useful information to investors due to the magnitude and nature of certain amounts recorded under GAAP.
As a result of the recent Halo and Avista acquisitions and consistent with how the business is managed, the Company has three reportable segments, Drug Substance ("DS"), which includes the legacy Cambrex API business excluding the High Point, North Carolina facility, Drug Product ("DP"), which includes the former Halo business, and Early Stage Development and Testing ("ESDT"), which includes the former Avista business in addition to the High Point facility.
First Quarter 2019 Operating Results – Consolidated, Continuing Operations
Net revenue was $159.5 million, an increase of $18.4 million, or 13%, from $141.1 million in the same quarter last year. Results include a 4% unfavorable impact of foreign exchange compared to the first quarter of 2018. Net revenue during the first quarter of 2019 includes the acquisitions of Halo and Avista. Compared to the same quarter last year, the Drug Substance segment revenues declined due to lower volumes.
Gross margin was 34% for the first quarter of 2019 compared to 36% in the same quarter last year.
Operating profit was $20.3 million for the first quarter of 2019 compared to $30.4 million in the same quarter last year. Operating profit for 2019 includes a $4.2 million increase in amortization expense for purchased intangibles and $6.1 million in acquisition and integration expenses. Adjusted EBITDA was $41.1 million compared to $37.9 million in the same quarter last year (see table at the end of this press release).
Income tax expense was $3.5 million resulting in an effective tax rate of 25% compared to $5.8 million and an effective tax rate of 19% in the same quarter last year. Income tax expense for the first quarter of 2018 would have been approximately 20% excluding the immediate recognition of certain effects of share-based compensation. The increase in the tax rate for 2019 as compared to 2018 is primarily due to higher state taxes as a result of state tax reform and the Company’s expanded state tax presence due to recent acquisitions, as well as the geographic mix of income.
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Income from continuing operations was $10.5 million, or $0.31 per diluted share, compared to $24.2 million, or $0.72 per diluted share, in the same quarter last year.
Adjusted Income from continuing operations was $20.2 million, or $0.60 per share, compared to $25.8 million, or $0.77 per share, in the same quarter last year.
Capital expenditures were $19.2 million and depreciation and amortization was $14.7 million compared to $23.8 million and $7.5 million, respectively, in the same quarter last year.
Net debt was $430.0 million at the end of the quarter compared to $204.1 million at December 31, 2018. The change during the quarter was primarily the result of acquiring Avista and related transaction and integration expenses, positively offset by $28.7 million of Free cash flow.
First Quarter 2019 Operating Results – Drug Substance ("DS") segment
Net revenue was $112.1 million compared to $136.6 in the same quarter last year, an 18% decrease. This includes a 4% unfavorable impact of foreign exchange compared to the first quarter of 2018. The decrease was due to lower volumes of certain branded APIs, primarily from Cambrex’s largest product, partially offset by higher sales of clinical phase products and generic APIs.
Gross profit in the first quarter of 2019 was $43.4 million compared to $50.0 million in the same quarter last year. Gross margin increased to 39% from 37% in the same quarter last year. The increase in margin was primarily driven by a favorable impact from foreign currency, favorable product mix related to generic APIs and lower inventory charges due to batch failures in 2018 partially offset by lower production volumes.
Selling, general and administrative ("SG&A") expenses were $9.4 million in the first quarter of 2019 compared to $11.5 million in the same quarter last year. The decrease was mainly due to lower consulting costs associated with a 2018 operational excellence initiative and the impact of foreign currency.
Operating profit was $31.2 million compared to $35.4 million in the first quarter of 2018. The decrease was due to lower gross profit partially offset by lower operating expenses as described above.
First Quarter 2019 Operating Results – Drug Product ("DP") segment
Net revenue in the first quarter of 2019 was $24.5 million. The former Halo business that comprises what is now the DP segment was acquired in September of 2018.
Gross profit was $6.0 million and gross margin was 25% in the first quarter of 2019.
SG&A expenses were $6.2 million in the first quarter of 2019, which includes amortization of purchased intangibles of $3.0 million.
Operating loss was $0.3 million in the first quarter of 2019 which includes amortization of purchased intangibles of $3.0 million.
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First Quarter 2019 Operating Results – Early Stage Development and Testing ("ESDT") segment
The Company’s Cambrex High Point ("CHP") facility is included in the ESDT segment for both periods presented. The former Avista businesses that comprise the majority of what is now the ESDT segment were acquired in January of 2019. The 2018 results for this segment include only the High Point facility, formerly part of Cambrex’s legacy API business.
Net revenue in the first quarter of 2019 was $22.9 million compared to $4.5 million in the same quarter last year. The increase is due to the acquisition of Avista and a 31% increase in CHP’s first quarter 2019 revenue.
Gross profit was $5.5 million in the first quarter of 2019 compared to $0.9 million in the same quarter last year. Gross margin was 24% in the first quarter of 2019 compared to 20% in the same period last year.
SG&A expenses were $6.5 million in the first quarter of 2019, which includes amortization of purchased intangibles of $1.4 million.
Operating loss was $2.5 million in the first quarter of 2019, which includes $1.2 million in integration expenses and $1.4 million of amortization of purchased intangible assets. Operating loss for the first quarter of 2018 was $0.4 million.
First Quarter 2019 Operating Results – Corporate Headquarters
SG&A expenses were $2.9 million in the first quarter of 2019 compared to $4.0 million in the same quarter last year. The decrease is primarily the result of lower due diligence costs related to mergers and acquisition activities.
Consolidated acquisition and integration expenses were $6.1 million for the first quarter of 2019, of which $4.9 million is reflected in the Corporate Headquarters cost center and $1.2 million is reflected in the ESDT segment. There were no acquisition and integration expenses during the first quarter of 2018.
Operating loss at Corporate in the first quarter of 2019 was $8.1 million compared to $4.6 million in the same quarter last year.
Financial Expectations – Continuing Operations
The following table shows the Company’s current expectations for its full year 2019 financial performance versus its expectations from the previous quarter. The expectations in the table below reflect expected results from the business including the recent acquisitions of Halo and Avista. All expectations for 2019, including growth relative to 2018, are based on actual and expected ASC 606 results for both years.
Consistent with the Company’s usual guidance practices, these financial expectations are for continuing operations and exclude the impact of any potential future acquisitions and related transaction and integration expenses, including expenses related to the recent acquisitions of Halo Pharma and Avista Pharma Solutions, divestitures, restructuring activities, certain tax items discussed below, and the impact of foreign currency on Net revenue.
EBITDA, Adjusted EBITDA and Adjusted Income from continuing operations per share for 2019 will be computed on a basis consistent with the reconciliation of the current quarter financial results in the tables at the end of this press release. Free cash flow is defined as the change in debt (excluding lease obligations, M&A and integration expenses), net of cash during the year. Adjusted effective tax rate excludes the immediate recognition of certain benefits of share-based compensation and certain other items adjusted for in the non-GAAP reconciliation tables at the end of this release.
The tax rate will be sensitive to the Company’s geographic mix of income, changes in the tax laws or rates within the countries in which the Company operates and the effects of certain share-based payments.
Cambrex expects M&A and related integration expenses for 2019 to be between $9 and $11 million. These amounts are excluded from the guidance for consolidated Adjusted EBITDA, Adjusted income from continuing operations per share and Free cash flow included above. These expenses include approximately $3.8 million of transaction and $2.3 million of integration expenses incurred in conjunction with the acquisition of Avista in early January and expected on-going integration expenses across most functional areas for the remainder of 2019. This estimate also includes certain anticipated expenses related to IT systems, but does not include costs to upgrade the two newly acquired businesses to Cambrex’s ERP software, which are planned to occur over the course of 2019 and 2020.
Expectations above include preliminary estimates for Depreciation and Amortization expense associated with purchase accounting for the Avista acquisition. Cambrex expects to finalize the purchase accounting for Avista during the second quarter of 2019. As a result, expected Depreciation and Amortization expense and its impact on expected Adjusted income from continuing operations per share in the table above could change when purchase accounting is finalized.
Refer to the tables at the end of this press release which include items typically adjusted to arrive at the Company’s non-GAAP results.
The financial information contained in this press release is unaudited, subject to revision and should not be considered final until the Company’s Form 10-Q for first quarter 2019 is filed with the Securities and Exchange Commission ("SEC").
Conference Call and Webcast
A conference call to discuss the Company’s first quarter 2019 results will begin at 8:30 a.m. Eastern Time on May 2, 2019 and can be accessed by calling 1-800-682-0995 for domestic and +1-334-323-0522 for international. Please use the passcode 2251796 and call approximately 10 minutes prior to the start time. A webcast will be available in the Investors section on the Cambrex website located at www.cambrex.com. A telephone replay of the conference call will be available through May 9, 2019 by calling 1-888-203-1112 for domestic and +1-719-457-0820 for international. Please use the passcode 2251796 to access the replay.