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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended June 30, 2019


☐	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $.10 par value

CBM

New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐ 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 July 30, 2019, the registrant had 33,660,390 shares of common stock, $.10 par value per share, outstanding.

CAMBREX CORPORATION AND SUBSIDIARIES

Table of Contents

			Page No.
Part I	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets	3

		Consolidated Income Statements	4

		Consolidated Statements of Comprehensive Income	5
		Consolidated Statements of Stockholders’ Equity	6
		Consolidated Statements of Cash Flows	8

		Notes to Consolidated Financial Statements	9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

	Item 4.	Controls and Procedures	43

Part II	Other Information

	Item 1.	Legal Proceedings	44

	Item 1A.	Risk Factors	44

	Item 6.	Exhibits	44

Signatures			45

Forward-Looking Statements

This document contains “forward-looking statements,” including statements or tables regarding expected performance. These and other forward-looking statements may be identified by the fact that they use words such as “guidance,” “expects,” “anticipates,” “intends,” “estimates,” “believes” 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 of the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 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, the possibility that the benefits from acquisitions (including Halo Pharma and Avista Pharma Solutions) may not be as anticipated, customer and product concentration, the Company’s ability to secure new customer contracts and renew existing contracts on favorable terms, significant declines in sales of products to the Company’s customers, pharmaceutical outsourcing trends, competitive pricing, product developments, market acceptance and adoption rate of customers’ products, government legislation and regulations (particularly environmental issues), tax rates, interest rates, technology, manufacturing and legal issues, including the outcome of outstanding litigation, environmental matters, changes in foreign exchange rates, uncollectible receivables, the timing and/or volume of orders or shipments and the Company’s ability to meet its production plan and customer delivery schedules, expected timing of completion of capacity expansions, our ability to successfully integrate acquired businesses, cancellations or delays in renewal of contracts, lack of suitable raw materials, the Company’s ability to receive regulatory approvals for its products, continued demand in the U.S. for late stage clinical products and the successful outcome of the Company’s investment in new products.

For further details and a discussion of these and other risks and uncertainties, investors are encouraged to review the Cambrex Annual Report on Form 10-K for the fiscal year ended December 31, 2018, including the Forward-Looking Statement sections therein, and other filings with the SEC. The Company cautions investors and potential investors not to place undue reliance on the forward-looking statements contained in this Quarterly Report on Form 10-Q and to give careful consideration to the risks and uncertainties listed above and contained in the Company’s SEC filings. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this document, and the Company undertakes no obligation to update or revise any of these statements.

Part I - FINANCIAL INFORMATION

Item 1.

Financial Statements

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)

	June 30,			December 31,
	2019			2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	59,383		$	95,852
Trade receivables, net		104,304			146,330
Contract assets		96,722			33,490
Other receivables		13,029			5,198
Inventories, net		109,586			111,062
Prepaid expenses and other current assets		17,788			18,160
Total current assets		400,812			410,092
Property, plant and equipment, net		402,202			360,528
Right of use assets		36,474			-
Goodwill		408,013			261,095
Intangible assets, net		252,742			187,205
Other non-current assets		5,535			3,099
Deferred income taxes		9,979			1,409
Total assets	$	1,515,757		$	1,223,428

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	38,847		$	47,012
Contract liabilities, current		56,145			11,713
Taxes payable		6,909			1,651
Operating lease liabilities, current		2,937			-
Current portion of long-term debt		10,000			-
Accrued expenses and other current liabilities		49,315			44,036
Total current liabilities		164,153			104,412
Contract liabilities, non-current		4,724			42,701
Long-term debt		495,000			300,000
Deferred income taxes		76,715			57,276
Operating lease liabilities, non-current		33,840			-
Accrued pension benefits		41,305			42,218
Other non-current liabilities		23,435			23,094
Total liabilities		839,172			569,701
Stockholders' equity:
Common stock, $.10 par value; authorized 100,000,000, issued 34,924,499 and 34,870,124 shares at respective dates		3,492			3,487
Additional paid-in capital		186,078			182,691
Retained earnings		564,490			538,463
Treasury stock, at cost, 1,264,109 and 1,264,109 shares at respective dates		(10,777	)		(10,777	)
Accumulated other comprehensive loss		(66,698	)		(60,137	)
Total stockholders' equity		676,585			653,727
Total liabilities and stockholders' equity	$	1,515,757		$	1,223,428

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Income Statements

(unaudited – in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Product sales	$	145,273		$	142,993		$	269,518		$	278,452
Service revenue		29,923			4,221			63,898			7,892
Gross sales		175,196			147,214			333,416			286,344
Commissions, allowances and rebates		331			192			618			401
Net sales		174,865			147,022			332,798			285,943
Other revenues, net		1,985			5,024			3,508			7,200
Net revenue		176,850			152,046			336,306			293,143
Cost of goods sold - product sales		89,719			83,557			168,524			170,140
Cost of goods sold - service revenue		24,303			3,697			50,071			7,356
Total cost of goods sold		114,022			87,254			218,595			177,496
Gross profit		62,828			64,792			117,711			115,647
Operating expenses:
Selling, general and administrative expenses		25,695			15,668			50,736			32,523
Research and development expenses		3,678			4,133			7,140			7,752
Acquisition and integration expenses		562			339			6,618			339
Total operating expenses		29,935			20,140			64,494			40,614
Operating profit		32,893			44,652			53,217			75,033
Other expenses/(income):
Interest expense, net		5,746			17			11,370			99
Unrealized loss/(gain) on investment in equity securities		3,235			(5,146	)		3,804			(5,146	)
Other expenses, net		353			181			425			445
Income before income taxes		23,559			49,600			37,618			79,635
Provision for income taxes		7,872			8,748			11,404			14,534
Income from continuing operations		15,687			40,852			26,214			65,101
Loss from discontinued operations, net of tax		(69	)		(433	)		(187	)		(624	)
Net income	$	15,618		$	40,419		$	26,027		$	64,477
Basic earnings/(loss) per share of common stock:
Income from continuing operations	$	0.47		$	1.23		$	0.78		$	1.97
Loss from discontinued operations, net of tax	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Net income	$	0.46		$	1.22		$	0.77		$	1.95
Diluted earnings/(loss) per share of common stock:
Income from continuing operations	$	0.46		$	1.21		$	0.78		$	1.94
Loss from discontinued operations, net of tax	$	(0.00	)	$	(0.01	)	$	(0.00	)	$	(0.02	)
Net income	$	0.46		$	1.20		$	0.77		$	1.92
Weighted average shares outstanding:
Basic		33,657			33,085			33,645			32,990
Effect of dilutive stock based compensation		116			557			122			628
Diluted		33,773			33,642			33,767			33,618

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(unaudited – in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net income	$	15,618		$	40,419		$	26,027		$	64,477
Other comprehensive income/(loss):
Foreign currency translation adjustments		2,432			(13,465	)		(2,346	)		(10,536	)
Interest rate swap, net of tax of $1,053, $0, $1,832 and $0 at respective dates		(2,699	)		-			(4,695	)		-
Pension plan amortization of net actuarial loss and prior service cost, net of tax of $82, $69, $164 and $177 at respective dates		239			206			480			501
Comprehensive income	$	15,590		$	27,160		$	19,466		$	54,442

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(unaudited – in thousands, except share data)

	Common Stock
	Shares Issued		Par Value ($.10)		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at March 31, 2019		34,920,124	$	3,492	$	184,410		$	548,872	$	(10,777	)	$	(66,670	)	$	659,327
Net income									15,618								15,618
Other comprehensive loss														(28	)		(28	)
Exercise of stock options		4,375				113											113
Stock option expense						1,255											1,255
Restricted stock expense						354											354
Performance share benefit						(54	)										(54	)
Balance at June 30, 2019		34,924,499	$	3,492	$	186,078		$	564,490	$	(10,777	)	$	(66,698	)	$	676,585



	Common Stock
	Shares Issued		Par Value ($.10)		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at March 31, 2018		34,383,644	$	3,438	$	170,340		$	470,103	$	(12,140	)	$	(39,004	)	$	592,737
Net income									40,419								40,419
Other comprehensive loss														(13,259	)		(13,259	)
Exercise of stock options		93,500		10		1,867											1,877
Vested restricted stock						(2	)				2						-
Vested performance shares						(1,278	)				1,278						-
Stock option expense						1,149											1,149
Restricted stock expense						177											177
Performance share expense						227											227
Balance at June 30, 2018		34,477,144	$	3,448	$	172,480		$	510,522	$	(10,860	)	$	(52,263	)	$	623,327

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Continued)

(unaudited – in thousands, except share data)

	Common Stock
	Shares Issued		Par Value ($.10)		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2018		34,870,124	$	3,487	$	182,691		$	538,463	$	(10,777	)	$	(60,137	)	$	653,727
Net income									26,027								26,027
Other comprehensive loss														(6,561	)		(6,561	)
Exercise of stock options		8,375				178											178
Issuance of performance shares		46,000		5		(5	)										-
Stock option expense						2,317											2,317
Restricted stock expense						450											450
Performance share expense						447											447
Balance at June 30, 2019		34,924,499	$	3,492	$	186,078		$	564,490	$	(10,777	)	$	(66,698	)	$	676,585



	Common Stock
	Shares Issued		Par Value ($.10)		Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
Balance at December 31, 2017		34,270,975	$	3,427	$	165,979		$	429,826	$	(12,140	)	$	(42,228	)	$	544,864
Impact of change in accounting policy		-		-		-			16,219		-			-			16,219
Adjusted balance at January 1, 2018		34,270,975	$	3,427	$	165,979		$	446,045	$	(12,140	)	$	(42,228	)	$	561,083
Net income									64,477								64,477
Other comprehensive income														(10,035	)		(10,035	)
Exercise of stock options		206,169		21		4,578											4,599
Vested restricted stock						(2	)				2						-
Vested performance shares						(1,278	)				1,278						-
Stock option expense						2,188											2,188
Restricted stock expense						183											183
Performance share expense						832											832
Balance at June 30, 2018		34,477,144	$	3,448	$	172,480		$	510,522	$	(10,860	)	$	(52,263	)	$	623,327

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited – in thousands)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net income	$	26,027		$	64,477
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,980			15,019
Non-cash deferred revenue		(7,197	)		(1,114	)
Increase in inventory reserve		4,623			4,202
Unrealized loss/(gain) on investment in equity securities		3,804			(5,146	)
Non-cash lease expense		2,377			-
Unrealized gain on foreign currency contracts		(259	)		(1,724	)
Stock based compensation		3,214			3,203
Deferred income tax provision		5,008			3,729
Other		843			(76	)
Changes in assets and liabilities:
Trade receivables		51,069			(26,417	)
Contract assets		(59,135	)		(56,245	)
Inventories		(4,562	)		(1,033	)
Prepaid expenses and other current assets		(3,332	)		6,594
Accounts payable and other current liabilities		(9,797	)		10,197
Contract liabilities, current		7,143			3,017
Operating lease liabilities		(2,062	)		-
Other non-current assets and liabilities		(625	)		(1,549	)
Discontinued operations:
Non-current liabilities		270			799
Net cash used in discontinued operations		(462	)		(431	)
Net cash provided by operating activities		45,927			17,502
Cash flows from investing activities:
Capital expenditures		(35,088	)		(32,733	)
Acquisition of businesses, net of cash acquired		(248,468	)		-
Net cash used in investing activities		(283,556	)		(32,733	)
Cash flows from financing activities:
Borrowings		230,000			-
Repayments		(25,000	)		-
Debt issuance costs		(2,836	)		-
Principal payments under finance lease obligations		(527	)		-
Proceeds from stock options exercised		178			4,599
Net cash provided by financing activities		201,815			4,599
Effect of exchange rate changes on cash and cash equivalents		(655	)		(1,304	)
Net decrease in cash and cash equivalents		(36,469	)		(11,936	)
Cash and cash equivalents at beginning of period		95,852			183,284
Cash and cash equivalents at end of period	$	59,383		$	171,348

See accompanying notes to unaudited consolidated financial statements.

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.

On September 12, 2018 the Company acquired Halo Pharma (“Halo”) and on January 2, 2019 the Company acquired Avista Pharma Solutions (“Avista”). The results of Halo and Avista have been included in the consolidated results since their respective acquisition dates. Due to the acquisitions and to be consistent with how the business is managed, the Company now reports its results in three segments, Drug Substance (“DS”), Drug Product (“DP”) and Early Stage Development and Testing (“ESDT”). See Note 4 for additional information on the acquisitions and Note 15 for additional segment information.

The accompanying unaudited consolidated financial statements have been prepared from the records of the Company. In the opinion of management, the financial statements include all adjustments, which are of a normal and recurring nature, except as otherwise described herein, and are necessary for a fair statement of financial position and results of operations in conformity with U.S. generally accepted accounting principles (“GAAP”). These interim financial statements should be read in conjunction with the financial statements for the year ended December 31, 2018.

The results of operations of any interim period are not necessarily indicative of the results expected for the full year.

For all periods presented, financial results for discontinued operations relate to environmental investigation and remediation at sites of divested businesses.

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

(2)	Impact of Recently Issued Accounting Pronouncements

The following accounting pronouncements became effective for the Company January 1, 2019:

Leases

In February 2016, the FASB issued ASU 2016-02 which requires lessees to recognize right of use assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months. Several updates were issued in 2018 and 2019 that provide clarification on a number of specific issues and reporting requirements. This standard became effective for the Company on January 1, 2019. As a result of adopting this update, right of use assets of $37,903 and operating lease liabilities of a similar amount were recorded on the balance sheet for identified operating leases. See Note 11.

Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU 2018-07 which aligns the accounting for share-based payment awards issued to nonemployees with those issued to employees. Under the new guidance, the nonemployee awards will be measured on the grant date and compensation costs will be recognized when achievement of the performance condition is probable. The update became effective on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12 which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The standard also makes certain targeted improvements to simplify the application of the hedge accounting guidance. The update became effective on January 1, 2019 and did not have a material impact on the Company’s consolidated financial statements.

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

Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13 which modifies the disclosure requirements for recurring and nonrecurring fair value measurements, primarily those surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.

Changes to the Disclosure Requirements for Defined Benefit Plans

In August 2018, the FASB issued ASU 2018-14 which adds, modifies and removes certain disclosure requirements to improve the effectiveness of disclosures for defined benefit plans. The new standard is effective for fiscal years beginning after December 15, 2020, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

In August 2018, the FASB issued ASU 2018-15 which states entities should apply the guidance in ASC 350-40 when capitalizing implementation costs related to a hosting arrangement that is a service contract. The capitalized implementation costs should be classified as prepaid expenses and then expensed over the hosting arrangement’s term, with the expense recorded on the same line of the income statement as the service contract. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04 which simplifies the goodwill impairment test by eliminating Step 2 in the determination of whether goodwill should be considered impaired. Instead, an impairment charge should equal the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the new guidance and does not expect it to have an impact on its consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. In November 2018, April 2019 and May 2019, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses.

(3)

Revenue

The Company disaggregates its revenue from customers with contracts by revenue streams. The Company’s revenue streams are presented in the following table:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Single-use products	$	82,823	$	76,399	$	145,088	$	149,177
Multi-use products		62,450		66,594		124,430		129,275
Service revenue		29,923		4,221		63,898		7,892
Total gross sales	$	175,196	$	147,214	$	333,416	$	286,344

Revenue is recognized when control over a product or service is transferred to a customer. Revenue is measured as the amount of consideration expected in exchange for transferring goods or providing services.

Sales terms to certain customers include rebates if certain conditions are met. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates and returns at the time of sale based on the terms of agreements with customers and historical experience and estimated orders. The Company recognizes revenue net of these estimated costs which are classified as allowances and rebates.

The Company does not have any unsatisfied performance obligations for contracts greater than one year. The costs incurred to obtain or fulfill a contract are not material.

For variable consideration arrangements where the transaction price fluctuates based on quantity, the most likely estimated quantity is assumed using forecasts provided by the customer.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Single-use products

In most single-use product sales, a quantity is ordered and manufactured according to the customer’s specifications and typically only one performance obligation is included. The Company also manufactures early phase product that can be included in a contract with services. These services are distinct and separated from the product performance obligations and are shown as a service revenue stream. The products are manufactured exclusively for a specific customer and have no alternative use. Generally, under these customer agreements, the Company is entitled to consideration for progress to date that includes an element of profit margin. To the extent an agreement did not include an element of profit margin for progress to date, it would be recognized at a point in time. Revenues that are recognized over time utilize a measure of progress toward satisfaction of the performance obligations. The Company measures progress using an input method which compares the cost of cumulative work in process to date to the most current estimates for the entire performance obligation. The raw materials are excluded from this measurement due to the high value and inclusion in the early stages of the project that would otherwise overstate progress to date.

Multi-use products

The Company’s multi-use product sales can be sold to multiple customers and have an alternative use. Both the transaction sales price and shipping terms are agreed upon in the contract. For these products, all revenue is recognized at a point in time, generally when title to products and risk of loss is transferred to the customer based upon shipping terms. These arrangements typically include only one performance obligation.

Service revenue

The service revenue stream represents services provided to a customer to assist with early stages of the regulatory approval process. The customer owns the drug details and process. The Company works with its customers to develop, validate and document the production process in order to comply with the regulatory approval process. These custom development projects could have one or more performance obligations with no alternative use. The contracts are structured to ensure the Company is paid for in-process work, including a profit margin. Revenues related to this stream are recognized over time by allocating to each performance obligation the best estimate of the standalone selling price of each service. Standalone selling prices are generally based on the prices charged to customers or based on an expected cost-plus margin. The Company measures progress using an input method which compares the cumulative work in process to date to the most current estimates for the entire performance obligation.

Contract balances

The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer advances and deferred revenue). For each reporting period presented, the Company reports contract balances in a net contract asset or liability position on a contract-by-contract basis. Contract assets are recorded when the right to consideration is conditioned on something other than the passage of time. When an entity’s right to consideration is unconditional, the receivable is recorded within Trade receivables on the balance sheet. Contract liabilities represent advance payments from customers, and deferred revenue. Contract assets will convert to trade receivables or cash and current contract liabilities will convert into revenue within a one-year period.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Payment terms can vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, payment prior to satisfaction of a performance obligation can be required, and results in recording a contract liability.

The following table details the significant changes in contract assets:

	2019			2018
Balance as of January 1,	$	33,490		$	51,896
Contract assets acquired		4,243			-
Revenue recognized from performance obligations satisfied		155,225			145,820
Transferred to trade receivables		(95,848	)		(89,551	)
Currency impact		(388	)		(1,082	)
Balance as of June 30,	$	96,722		$	107,083

The Company recognized in revenue $7,197 and $1,114, during the six months ended June 30, 2019 and 2018, respectively, for which the contract liability was recorded in a prior period.

(4)	Acquisitions

On January 2, 2019, the Company completed the acquisition of 100% of Avista Pharma Solutions (“Avista”), a contract development, manufacturing, and testing organization with sites located in Durham, NC, Longmont, CO, Agawam, MA and Edinburgh, Scotland U.K. The purchase price of $252,000 was funded with a combination of cash on hand and borrowings under the credit facility. See Note 8 for details on the amended and restated credit facility.

Avista offers a broad suite of scientifically differentiated services ranging from early stage API and drug product development and cGMP manufacturing to stand-alone analytical, microbiology testing and solid state sciences.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the acquisition date. Cambrex is in the process of obtaining third-party valuations of certain tangible and intangible assets; therefore the provisional measurements of property, plant and equipment, intangible assets, goodwill and deferred income taxes are subject to change. Additionally, finalization of the working capital adjustment has not been completed.

	January 2, 2019
Cash	$	4,125
Trade receivables		6,786
Contract assets		4,243
Inventories		21
Other current assets		1,159
Property, plant and equipment		34,172
Right of use assets		31,497
Goodwill		148,481
Intangible assets (Customer relationships)		73,000
Other non-current assets		532
Total assets acquired		304,016
Operating lease liabilities, current		2,053
Other current liabilities		11,422
Operating lease liabilities, non-current		29,444
Other non-current liabilities		8,826
Total liabilities assumed	$	51,745

Acquisition and integration expenses recorded on the Company’s income statement totaled $562 and $6,618 for the three and six months ended June 30, 2019, respectively. Acquisition and integration expenses were $339 for the three and six months ended June 30, 2018.

The consolidated income statement for the six months ending June 30, 2019 includes revenue from Avista of $35,274, and a net loss of $3,159. These results include integration costs of $1,248, primarily consisting of a one-time charge for severance.

On September 12, 2018, the Company completed the acquisition of 100% of Halo Pharma, a finished dosage form contract development and manufacturing organization.

(5)	Net Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Net inventories consist of the following:

	June 30, 2019		December 31, 2018
Finished goods	$	41,615	$	30,904
Work in process		18,473		27,513
Raw materials		42,060		44,705
Supplies		7,438		7,940
Total	$	109,586	$	111,062

(6)	Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2019 are as follows:

Balance as of December 31, 2018	$	261,095
Acquisition of business (see Note 4)		146,357
Translation effect		561
Balance as of June 30, 2019	$	408,013

As of June 30, 2019, goodwill of $217,301 relates to the DP segment and $157,527 relates to the ESDT segment. The remaining goodwill relates to the DS segment.

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

As of June 30, 2019

Amortization

Period

Gross

Carrying

Amount

Accumulated

Amortization

Net Carrying

Amount

Internal-use software

3 - 7 years

CAMBREX CORP 10-Q