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~~September 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~~October 3028, 2019, the registrant had 33,~~660~~724,~~390~~367 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 Comprehensive (Loss)/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	3536
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4243
	Item 4.	Controls and Procedures	4344
Part II	Other Information
	Item 1.	Legal Proceedings	4445
	Item 1A.	Risk Factors	4445
	Item 6.	Exhibits	4447
Signatures			4548

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 merger with an affiliate of the Permira funds occurs later than expected or not at all, 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,
	September 30,			December 31,
	2019			2018
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5980,~~383~~833		$	95,852
Trade receivables, net		~~104~~84,~~304~~649			146,330
Contract assets		96100,~~722~~786			33,490
Other receivables		1316,~~029~~961			5,198
Inventories, net		~~109~~114,~~586~~717			111,062
Prepaid expenses and other current assets		178,~~788~~003			18,160
Total current assets		~~400~~405,~~812~~949			410,092
Property, plant and equipment, net		~~402~~392,~~202~~565			360,528
Right of use assets		3635,~~474~~615			-
Goodwill		~~408~~406,~~013~~139			261,095
Intangible assets, net		~~252~~247,~~742~~699			187,205
Other non-current assets		57,~~535~~108			3,099
Deferred income taxes		911,~~979~~485			1,409
Total assets	$	1,~~515~~506,~~757~~560		$	1,223,428
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	3843,~~847~~317		$	47,012
Contract liabilities, current		5657,~~145~~577			11,713
Taxes payable		65,~~909~~380			1,651
Operating lease liabilities, current		23,~~937~~014			-
Current portion of long-term debt		10,000			-
Accrued expenses and other current liabilities		4951,~~315~~822			44,036
Total current liabilities		~~164~~171,~~153~~110			104,412
Contract liabilities, non-current		4,~~724~~653			42,701
Long-term debt		~~495~~482,~~000~~500			300,000
Deferred income taxes		76,~~715~~884			57,276
Operating lease liabilities, non-current		33,~~840~~099			-
Accrued pension benefits		4139,~~305~~725			42,218
Other non-current liabilities		2322,~~435~~699			23,094
Total liabilities		~~839~~830,~~172~~670			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
Common stock, $.10 par value; authorized 100,000,000, issued 34,988,476 and 34,870,124 shares at respective dates		3,499			3,487
Additional paid-in capital		~~186~~189,~~078~~392			182,691
Retained earnings		~~564~~574,~~490~~036			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		(6680,~~698~~260	)		(60,137	)
Total stockholders' equity		~~676~~675,~~585~~890			653,727
Total liabilities and stockholders' equity	$	1,~~515~~506,~~757~~560		$	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~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
	2019			2018			2019			2018
Product sales	$	~~145~~118,~~273~~698		$	~~142~~97,~~993~~518		$	~~269~~388,~~518~~216		$	~~278~~375,~~452~~970
Service revenue		2927,~~923~~357			46,~~221~~713			6391,~~898~~255			714,~~892~~605
Gross sales		~~175~~146,~~196~~055			~~147~~104,~~214~~231			~~333~~479,~~416~~471			~~286~~390,~~344~~575
Commissions, allowances and rebates		~~331~~220			~~192~~240			~~618~~838			~~401~~641
Net sales		~~174~~145,~~865~~835			~~147~~103,~~022~~991			~~332~~478,~~798~~633			~~285~~389,~~943~~934
Other revenues, net		12,~~985~~728			~~5,024~~627			36,~~508~~236			7,~~200~~827
Net revenue		~~176~~148,~~850~~563			~~152~~104,~~046~~618			~~336~~484,~~306~~869			~~293~~397,~~143~~761
Cost of goods sold - product sales		8974,~~719~~493			8365,~~557~~926			~~168~~243,~~524~~017			~~170~~236,~~140~~066
Cost of goods sold - service revenue		2423,~~303~~169			35,~~697~~967			5073,~~071~~240			713,~~356~~323
Total cost of goods sold		~~114~~97,~~022~~662			8771,~~254~~893			~~218~~316,~~595~~257			~~177~~249,~~496~~389
Gross profit		6250,~~828~~901			6432,~~792~~725			~~117~~168,~~711~~612			~~115~~148,~~647~~372
Operating expenses:
Selling, general and administrative expenses		25,~~695~~583			1514,~~668~~514			5076,~~736~~319			3247,~~523~~037
Research and development expenses		3,~~678~~427			4,~~133~~191			710,~~140~~567			711,~~752~~943
Acquisition and integration expenses		562			339			6,618			339
Merger, acquisition and integration expenses		4,431			7,388			11,049			7,727
Total operating expenses		2933,~~935~~441			2026,~~140~~093			6497,~~494~~935			4066,~~614~~707
Operating profit		3217,~~893~~460			446,~~652~~632			5370,~~217~~677			7581,~~033~~665
Other expenses/(income):
Interest expense, net		5,~~746~~584			17725			1116,~~370~~954			99824
Unrealized loss/(gain) on investment in equity securities		3,235			(5,146	)		3,804			(5,146	)
Loss/(gain) on investment in equity securities		540			(5,611	)		4,344			(10,757	)
Other expenses, net		~~353~~296			~~181~~109			~~425~~721			~~445~~554
Income before income taxes		2311,~~559~~040			4911,~~600~~409			3748,~~618~~658			7991,~~635~~044
Provision for income taxes		7,872			8,748			11,404			14,534
Provision for/(benefit from) income taxes		2,692			(15,406	)		14,096			(872	)
Income from continuing operations		158,~~687~~348			4026,~~852~~815			2634,~~214~~562			6591,~~101~~916
Loss from discontinued operations, net of tax		(69	)		(433	)		(187	)		(624	)
Income/(loss) from discontinued operations, net of tax		1,198			(86	)		1,011			(710	)
Net income	$	159,~~618~~546		$	4026,~~419~~729		$	2635,~~027~~573		$	6491,~~477~~206
Basic earnings/(loss) per share of common stock:
Income from continuing operations	$	0.4725		$	10.2380		$	01.7803		$	12.9777
Loss from discontinued operations, net of tax	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)
Income/(loss) from discontinued operations, net of tax	$	0.03		$	(0.00	)	$	0.03		$	(0.02	)
Net income	$	0.4628		$	10.2280		$	01.7706		$	12.9575
Diluted earnings/(loss) per share of common stock:
Income from continuing operations	$	0.4625		$	10.2179		$	01.7802		$	12.9473
Loss from discontinued operations, net of tax	$	(0.00	)	$	(0.01	)	$	(0.00	)	$	(0.02	)
Income/(loss) from discontinued operations, net of tax	$	0.03		$	(0.00	)	$	0.03		$	(0.02	)
Net income	$	0.4628		$	10.2079		$	01.7705		$	12.9271
Weighted average shares outstanding:
Basic		33,~~657~~683			33,~~085~~406			33,~~645~~658			3233,~~990~~130
Effect of dilutive stock based compensation		~~116~~225			~~557~~486			~~122~~152			~~628~~573
Diluted		33,~~773~~908			33,~~642~~892			33,~~767~~810			33,~~618~~703

See accompanying notes to unaudited consolidated financial statements.

CAMBREX CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss)/Income

(unaudited – in thousands)

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
	2019			2018			2019			2018
Net income	$	159,~~618~~546		$	4026,~~419~~729		$	2635,~~027~~573		$	6491,~~477~~206
Other comprehensive income/(loss):
Other comprehensive (loss)/income:
Foreign currency translation adjustments		2(13,~~432~~114	)		~~(13,465~~32	)		(215,~~346~~460	)		(10,~~536~~504	)
Interest rate swap, net of tax of $1,053, $0, $1,832 and $0 at respective dates		(2,699	)		-			(4,695	)		-
Interest rate swap, net of tax of $267, $0, $2,099 and $0 at respective dates		(685	)		-			(5,380	)		-
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
Pension plan amortization of net actuarial loss and prior service cost, net of tax of $81, $69, $245 and $246 at respective dates		237			202			717			703
Comprehensive income	$	15,590		$	27,160		$	19,466		$	54,442
Comprehensive (loss)/income	$	(4,016	)	$	26,963		$	15,450		$	81,405

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
Net income									9,546								9,546
Other comprehensive loss														(13,562	)		(13,562	)
Exercise of stock options		63,977		7		1,563											1,570
Stock option expense						1,294											1,294
Restricted stock expense						459											459
Performance share benefit						(2	)										(2	)
Balance at September 30, 2019		34,988,476	$	3,499	$	189,392		$	574,036	$	(10,777	)	$	(80,260	)	$	675,890
	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
Net income									26,729								26,729
Other comprehensive income														234			234
Exercise of stock options		336,805		33		8,052											8,085
Stock option expense						994											994
Restricted stock expense						262											262
Performance share benefit						(353	)										(353	)
Balance at September 30, 2018		34,813,949	$	3,481	$	181,435		$	537,251	$	(10,860	)	$	(52,029	)	$	659,278

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									2635,~~027~~573								2635,~~027~~573
Other comprehensive loss														(620,~~561~~123	)		(620,~~561~~123	)
Exercise of stock options		872,~~375~~352		7		~~178~~1,741											~~178~~1,748
Issuance of performance shares		46,000		5		(5	)										-
Stock option expense						23,~~317~~611											23,~~317~~611
Restricted stock expense						~~450~~909											~~450~~909
Performance share expense						~~447~~445											~~447~~445
Balance at June 30, 2019		34,924,499	$	3,492	$	186,078		$	564,490	$	(10,777	)	$	(66,698	)	$	676,585
Balance at September 30, 2019		34,988,476	$	3,499	$	189,392		$	574,036	$	(10,777	)	$	(80,260	)	$	675,890
	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									6491,~~477~~206								6491,~~477~~206
Other comprehensive income														(10,035	)		(10,035	)
Other comprehensive loss														(9,801	)		(9,801	)
Exercise of stock options		~~206~~542,~~169~~974		2154		412,~~578~~630											412,~~599~~684
Vested restricted stock						(2	)				2						-
Vested performance shares						(1,278	)				1,278						-
Stock option expense						23,~~188~~182											23,~~188~~182
Restricted stock expense						~~183~~445											~~183~~445
Performance share expense						~~832~~479											~~832~~479
Balance at June 30, 2018		34,477,144	$	3,448	$	172,480		$	510,522	$	(10,860	)	$	(52,263	)	$	623,327
Balance at September 30, 2018		34,813,949	$	3,481	$	181,435		$	537,251	$	(10,860	)	$	(52,029	)	$	659,278

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,
	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	2635,~~027~~573		$	6491,~~477~~206
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2843,~~980~~943			1524,~~019~~203
Non-cash deferred revenue		(78,~~197~~689	)		(1,~~114~~116	)
Increase in inventory reserve		46,~~623~~931			45,~~202~~687
Unrealized loss/(gain) on investment in equity securities		3,804			(5,146	)
Loss/(gain) on investment in equity securities		4,344			(10,757	)
Non-cash lease expense		2,377			-
Acquisition and integration expenses		3,830			-
Unrealized gain on foreign currency contracts		(259	)		(1,724	)
Non-cash lease expense		494			-
Stock based compensation		3,214			3,203
Unrealized gain on foreign currency contracts		(234	)		(1,582	)
Deferred income tax provision		5,008			3,729
Stock based compensation		4,965			4,106
Other		843			(76	)
Deferred income tax provision		4,025			(14,025	)
Other		2,353			(146	)
Changes in assets and liabilities:
Trade receivables		5170,~~069~~442			~~(26~~12,~~417~~144	)
Contract assets		(5965,~~135~~007	)		(5658,~~245~~147	)
Inventories		(415,~~562~~434	)		(1,~~033~~747	)
Prepaid expenses and other current assets		(36,~~332~~107	)		6,~~594~~446
Accounts payable and other current liabilities		(94,~~797~~132	)		10(17,~~197~~476	)
Contract liabilities, current		78,~~143~~922			~~3,017~~471
Operating lease liabilities		(2,062	)		-
Other non-current assets and liabilities		(517	)		(3,338	)
Other non-current assets and liabilities		(625	)		(1,549	)
Discontinued operations:
Non-current liabilities		~~270~~(1,805	)		~~799~~898
Net cash used in discontinued operations		(~~462~~666	)		(~~431~~557	)
Net cash provided by operating activities		4583,~~927~~231			1739,~~502~~764
Cash flows from investing activities:
Capital expenditures		(3545,~~088~~563	)		(3243,~~733~~545	)
Acquisition of businesses, net of cash acquired		(248,468	)		-(418,963	)
Net cash used in investing activities		(283,556	)		(32,733	)
Sale of investment in equity securities		7,780			-
Net cash used in investing activities		(286,251	)		(462,508	)
Cash flows from financing activities:
Borrowings		230,000			-325,000
Repayments		(2537,~~000~~500	)		-
Debt issuance costs		(2,836	)		-
Principal payments under finance lease obligations		(~~527~~760	)		-
Proceeds from stock options exercised		~~178~~1,748			412,~~599~~685
Net cash provided by financing activities		~~201~~190,~~815~~652			4337,~~599~~685
Effect of exchange rate changes on cash and cash equivalents		(~~655~~2,651	)		(1,~~304~~090	)
Net decrease in cash and cash equivalents		(3615,~~469~~019	)		(1186,~~936~~149	)
Cash and cash equivalents at beginning of period		95,852			183,284
Cash and cash equivalents at end of period	$	5980,~~383~~833		$	~~171~~97,~~348~~135

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 August 7, 2019, the Company entered into an Agreement and Plan of Merger (“the Merger Agreement”), pursuant to which the Company agreed to be acquired by an affiliate of the global investment firm Permira Funds subject to customary terms and conditions. Under the Merger Agreement, the Company’s stockholders will be entitled to receive $60.00 per share following the closing of the proposed merger. The merger, which is expected to close in the fourth quarter of 2019, is subject to regulatory approvals and other customary closing conditions.

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)

Improvements to Nonemployee Share-Based Payment Accounting

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)

Simplifying the Test for Goodwill Impairment

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,

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Single-use products

8254,~~823~~157

7658,~~399~~454

~~145~~199,~~088~~245

~~149~~207,~~177~~631

Multi-use products

6264,~~450~~541

6639,~~594~~064

~~124~~188,~~430~~971

~~129~~168,~~275~~339

Service revenue

2927,~~923~~357

46,~~221~~713

6391,~~898~~255

714,~~892~~605

Total gross sales

~~175~~146,~~196~~055

~~147~~104,~~214~~231

~~333~~479,~~416~~471

~~286~~390,~~344~~575

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)

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

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

Single-use products

In most single-use product sales, a quantity is ordered and manufactured according to the customer’s specifications and typically only one performance obligation is included. The Company also manufactures early phase product that can be included in a contract with services. These services are distinct and separated from the product performance obligations and are shown as a service revenue stream. The products are manufactured exclusively for 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~~Generally, 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 typically 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 drug development and 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			-3,749
Revenue recognized from performance obligations satisfied		~~155~~214,~~225~~534			~~145~~201,~~820~~210
Transferred to trade receivables		(95149,~~848~~273	)		(89143,~~551~~094	)
Currency impact		(~~388~~2,208	)		(~~1,082~~916	)
Balance as of June 30,	$	96,722		$	107,083
Balance as of September 30,	$	100,786		$	112,845

The Company recognized in revenue $78,~~197~~689 and $1,~~114~~116, during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively, for which the contract liability was recorded in a prior period.

(4) ~~Acquisitions~~Merger, Acquisition and Integration

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~~248,~~000~~146 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 ~~finalization~~ of the working capital adjustment ~~has~~was ~~not~~completed ~~been~~in ~~completed~~the third quarter of 2019 and accordingly, $1,200 was recorded as a reduction of goodwill.

	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~~015
Right of use assets		31,497
Goodwill		~~148~~147,~~481~~281
Intangible assets (Customer relationships)		73,000
Other non-current assets		532
Total assets acquired		~~304~~302,~~016~~659
Operating lease liabilities, current		2,053
Other current liabilities		11,~~422~~373
Operating lease liabilities, non-current		29,444
Other non-current liabilities		8,~~826~~718
Total liabilities assumed	$	51,~~745~~588

~~Acquisition~~Merger, acquisition and integration expenses recorded on the Company’s income statement totaled $~~562~~4,431 and $611,~~618~~049 for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. ~~Acquisition~~The 2019 expense primarily relates to the acquisition of Avista in January 2019 and the pending Merger Agreement, as well as ongoing integration costs. Merger, acquisition and integration expenses were $~~339~~7,388 and $7,727 for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively. The 2018 expense primarily relates to the acquisition of Halo in September 2018 and integration costs.

The consolidated income statement for the ~~six~~nine months ending ~~June~~September 30, 2019 includes revenue from Avista of $3552,~~274~~791, and a net loss of $34,~~159~~736. These results include integration costs of $1,~~248~~263, 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)

(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.

Net inventories consist of the following:

	June 30, 2019		December 31, 2018
	September 30, 2019		December 31, 2018
Finished goods	$	4129,~~615~~973	$	30,904
Work in process		1836,~~473~~956		27,513
Raw materials		4237,~~060~~666		44,705
Supplies		710,~~438~~122		7,940
Total	$	~~109~~114,~~586~~717	$	111,062

(6)	Goodwill and Intangible Assets

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

Balance as of December 31, 2018	$	261,095
Acquisition of business (see Note 4)		~~146~~145,~~357~~821
Translation effect		~~561~~(777	)
Balance as of June 30, 2019	$	408,013
Balance as of September 30, 2019	$	406,139

As of ~~June~~September 30, 2019, goodwill of $217,~~301~~744 relates to the DP segment and $~~157~~156,~~527~~327 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

As of September 30, 2019

Amortization Period

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Internal-use software

3 - 7 years

78,~~985~~132

(3,~~487~~833

)

4,~~498~~299

Technology-based intangibles

20 years

3,~~460~~310

(1,~~600~~572

)

1,~~860~~738

Customer-related intangibles

10 - 15 years

260,~~776~~416

(1418,~~392~~754

)

~~246~~241,~~384~~662

~~272~~271,~~221~~858

(1924,~~479~~159

)

~~252~~247,~~742~~699

		As of December 31, 2018
	Amortization Period	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Internal-use software	3 - 7 years	$	7,026	$	(2,912	)	$	4,114
Technology-based intangibles	20 years		3,481		(1,523	)		1,958
Customer-related intangibles	10 - 15 years		186,698		(5,565	)		181,133
		$	197,205	$	(10,000	)	$	187,205

The change in the gross carrying amount in 2019 is mainly due to the recognition of customer-related intangibles of $73,000 from the acquisition of Avista in January 2019, the impact of foreign currency translation and additions to internal-use software.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

~~Amortization~~The ~~expense~~change ~~was~~in ~~$4,726 and $9,456 for~~ the ~~three~~gross ~~and~~carrying ~~six~~amount ~~months~~in ~~ended June 30,~~ 2019, ~~respectively. Amortization~~is ~~expense~~mainly ~~for~~due ~~the three and six months ended June 30, 2019 includes $2,994 and $5,990, respectively, related~~ to the ~~acquisition~~recognition of ~~Halo~~customer-related ~~and~~intangibles ~~$1,216~~of ~~and~~ $273,~~433,~~000 ~~respectively,~~from ~~related to~~ the acquisition of Avista~~. Amortization~~ ~~expense~~in ~~was~~January ~~$510 and $1~~2019,~~023~~ ~~for~~ the ~~three~~impact ~~and~~of ~~six~~foreign ~~months~~currency ~~ended~~translation ~~June~~and ~~30,~~additions ~~2018,~~to ~~respectively~~internal-use software.

Amortization expense ~~related~~was to$4,808 ~~intangible~~and ~~assets~~$14,264 isfor ~~expected~~the tothree beand ~~approximately~~nine ~~$18~~months ended September 30,~~919~~ 2019, respectively. Amortization expense for ~~2019~~the three and nine months ended September 30, 2019 includes $183,~~903~~075 ~~for~~and ~~2020~~$9,065, ~~$18~~respectively,~~897~~ ~~for~~related ~~2021~~to the acquisition of Halo and $1,217 and $183,~~458~~650, ~~for~~respectively, ~~2022~~related to the acquisition of Avista. Amortization expense was $1,134 and $172,~~844~~157 for ~~2023~~the three and nine months ended September 30, 2018, respectively. This includes amortization expense of $627 related to the acquisition of Halo.

Amortization expense related to intangible assets is expected to be approximately $19,074 for 2019, $19,210 for 2020, $19,212 for 2021, $18,648 for 2022, and $17,852 for 2023.

(7)	Income Taxes

Income tax expense from continuing operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019 was $72,~~872~~692 and $1114,~~404~~096, respectively, compared to an income tax benefit of $815,~~748~~406 and $~~14,534~~872 for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively. The effective tax rate for the three and ~~six~~nine months ended ~~June~~September 30, 2019 was 3324.4% and 3029.30%, respectively,. The ~~compared~~2018 tax benefit was primarily due to ~~17.6%~~New ~~and~~Jersey ~~18.3%~~tax ~~for~~reform enacted during the ~~three~~third ~~and~~quarter ~~six~~of ~~months~~2018 ~~ended~~that ~~June~~resulted ~~30,~~in ~~2018,~~a ~~respectively.~~release of valuation allowance against certain state net operating losses and state net deferred tax assets. The tax rate for the three and ~~six~~nine months ended ~~June~~September 30, 2019 would have been 2524.97% and 25.49%, respectively, excluding the impact of certain effects of share-based compensation, ~~amortization of purchased intangibles,~~ acquisition ~~and integration~~ expenses, ~~and unrealized~~ loss on investment in equity securities. ~~The~~and ~~increase~~a change in ~~the~~estimate ~~tax~~related ~~rate for 2019 as compared~~ to ~~2018~~federal ~~is primarily due to state~~ tax reform ~~and the Company’s expanded state presence due to the Halo and Avista acquisitions, and the geographic mix of income~~.

(8)	Long-term Debt

On January 2, 2019, the Company amended and restated its Credit Facility by entering into an $800,000 five-year Syndicated Senior Credit Facility (“Credit Facility”), comprising of a $600,000 Revolving Credit Facility and $200,000 Term Loan A. The Company is required to make minimum quarterly principal payments on the Term Loan A of $2,500 through December 2020, $3,750 through December 2022 and $5,000 through December 2023. The remainder of the principal is due on January 2, 2024. The Company pays interest on the Credit Facility at LIBOR plus 1.25% - 2.00% based upon certain financial measurements. The Credit Facility also includes financial covenants regarding interest coverage and leverage ratios. The Company was in compliance with all financial covenants at ~~June~~September 30, 2019 and December 31, 2018. As of ~~June~~September 30, 2019, there was $~~505~~492,~~000~~500 outstanding on the Credit Facility, of which $10,000 was recorded as current in the consolidated balance sheet. As of December 31, 2018, there was $300,000 outstanding on the Credit Facility. For the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, the weighted average interest rate for long-term bank debt was 4.2% and 3.6%, respectively.

(9)	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.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Foreign Currency Forward Contracts

The Company periodically enters into foreign currency forward contracts to protect against currency fluctuations of forecasted cash flows and existing balance sheet exposures at its foreign operations, as deemed appropriate. The Company may or may not elect to designate certain forward contracts for hedge accounting treatment.

For derivatives that are not designated for hedge accounting treatment, changes in the fair value are immediately recognized in earnings. This treatment has the potential to increase volatility of the Company’s earnings.

None of the foreign currency forward contracts entered into during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 were designated for hedge accounting treatment. The notional amounts of the Company’s outstanding foreign exchange forward contracts were $4240,~~079~~666 and $35,734 at ~~June~~September 30, 2019 and December 31, 2018, respectively. The Company does not hold or purchase any foreign currency forward contracts for trading or speculative purposes and no contractual term is greater than twelve months.

The fair value of the Company’s foreign exchange forward contracts outstanding was a gain of $~~259~~234 and a loss of $430 at ~~June~~September 30, 2019 and December 31, 2018, respectively. Losses are reflected under the caption “Accrued expenses and other current liabilities” and gains are reflected under the caption “Prepaid expenses and other current assets” on the Company’s balance sheet and “Other revenues, net” on the Company’s income statement.

Interest Rate Swap

The Company entered into an interest rate swap in February 2019 to reduce the impact of changes in interest rates on its floating rate debt through February 2023. The swap is a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional debt amount.

The swap contract outstanding at ~~June~~September 30, 2019 has been designated as a cash flow hedge and, accordingly, changes in the fair value of this derivative are not recorded in earnings but are recorded each period in AOCI and reclassified into earnings as interest expense in the same period during which the hedged transaction affects earnings. The ineffective portion of the interest rate swap is recognized in earnings and has been immaterial to the Company's financial results.

As of ~~June~~September 30, 2019, the interest rate swap had a notional value of $200,000, at a fixed rate of 2.54%. The fair value of this swap is based on quoted market prices and was in a loss position of $67,~~527~~479 at ~~June~~September 30, 2019. The Company did not have an interest rate swap outstanding at December 31, 2018. Losses are reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities.”

At ~~June~~September 30, 2019, the Company’s interest rate swap fixed 3940.6% of the variable interest rate debt. Holding all other variables constant, if the LIBOR portion of the weighted average interest rate in the variable debt increased by 100 basis points, the effect on the Company would have been higher interest expense of $12,~~851~~614 for the ~~six~~nine months ended ~~June~~September 30, 2019.

Assuming current market conditions continue, a loss of $1,~~381~~803 is expected to be reclassed out of AOCI into earnings within the next twelve months.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(10)	Fair Value Measurements

Accounting standards establish a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value, measured on a recurring basis:

Fair Value - Level 2	~~June~~September 30, 2019			December 31, 2018
Interest rate swap, liability	$	(67,~~527~~479	)	$	-
Foreign currency forwards, assets/(liabilities)		~~259~~234			(430	)
Investment in equity securities, asset		~~8,741~~-			13,048
	$	2(7,~~473~~245	)	$	12,618

The fair value of the interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rate and the expected cash flows at current market interest rates using observable benchmarks for the LIBOR forward rates at the end of the period. The Company’s credit risk and its counterparty’s credit risk is also evaluated to estimate fair value.

The Company’s foreign currency forward contracts are measured at fair value using observable market inputs such as forward rates, the Company’s credit risk and its counterparties’ credit risks. Based on the Company’s continued ability to enter into forward contracts, the Company considers the markets for its fair value instruments to be active.

AsThe ~~of the second quarter of 2018, the~~ Company ~~owns~~owned a 16.3% equity investment in a European company. ~~The~~In the third quarter of 2019, the Company ~~has~~sold ~~elected~~its toshares ~~record~~of this ~~investment~~company atfor ~~fair value~~$7,780. The fair value of the Company’s shares, which ~~are~~were recorded as “Prepaid expenses and other current assets” on the balance sheet ~~decreased~~were to $~~8,741 during the six months ended June 30, 2019 compared to $~~13,048 at December 31, 2018. AnA ~~unrealized~~ loss of $~~3,235~~540 and $34,~~804~~344 for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, and ana ~~unrealized~~ gain of $5,~~146~~611 and $10,757 for the three and ~~six~~nine months ended ~~June~~September 30, 2018, ~~was~~respectively, were recorded as “~~Unrealized loss~~Loss/(gain) on investment in equity securities” on the income statement. ~~Since~~The ~~the shares owned by the~~ Company ~~are~~recorded ~~substantially~~this ininvestment ~~excess~~at offair ~~the daily trade volumes of the stock, it could be difficult to sell the shares in a timely manner and it is possible the ultimate~~ value ~~to be realized by the Company could be significantly less upon a sale of the securities~~.

The Company’s financial instruments also include cash and cash equivalents, accounts receivables and accounts payables. The carrying amount of these instruments approximates fair value because of their short-term nature.

(11)

Leases

In February 2016 the FASB issued ASU 2016-02, Leases (“ASC 842”), which requires lessees to recognize right of use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms greater than twelve months. Lease obligations are measured at the present value of remaining lease payments and accounted for using the effective interest method. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(11) Leases

The Company adopted the new lease standard on January 1, 2019 by applying the new transition alternative. As such, the Company initially applied the new standard to all leases existing at the beginning of the period of adoption. Prior period financial results were not updated and the disclosures required under the new standard were not provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected the package of practical expedients permitted under the transition guidance within the new standard, that allows the Company (1) to not reassess whether any expired or existing contracts are or contain leases, (2) to not reassess the lease classification for any expired or existing leases, and (3) to not reassess initial direct costs for any existing leases. The Company has also elected, for its vehicle and equipment leases, the practical expedient that permits the ability to choose not to separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component.

Further, the Company has made an accounting policy election to keep leases with an initial term of twelve months or less off the balance sheet. This policy applies to all classes of the underlying assets. The Company will recognize those lease payments in the consolidated income statement over the lease term.

The determination of the incremental borrowing rate used to calculate the present value of the ROU assets and lease liabilities depends on whether an interest rate is specified in the lease or not. If the lease specifies a rate, that rate is used when calculating the present value of lease payments. If the rate is not readily determinable, which is generally the case for the Company, the Company’s incremental borrowing rate (“IBR”) as of the date of inception is used (for initial measurement, the IBR was determined as of the adoption date of the standard). The incremental borrowing rate is the estimated rate of interest that Cambrex would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.

The Company’s leases that contain variable payments are not material.

Operating Leases:

The Company has operating leases expiring on various dates through the year 2032 with options to extend beyond this date. The leases are primarily for the rental of manufacturing, office and warehouse space in addition to vehicles, forklifts and equipment. The Company generally enters into operating leases when it doesn’t have the desire to own the asset.

The Company’s operating leases related to the rental of manufacturing, office and warehouse space often contain one or more options to extend the lease, typically for a period of three to five years each and based on the then prevailing market rental rate. The Company will generally exercise these options to extend the lease for its manufacturing space due to the significant costs to install and remove the manufacturing equipment should the Company decide to vacate the building. As such, the lease terms used in calculating the value of the ROU assets and lease liabilities for these types of leases will include the periods covered under any renewal options.

The Company’s equipment, vehicle and forklift leases may or may not contain an option to extend the lease but as a general rule, the Company doesn’t exercise these options because there are no associated costs to return the equipment and either purchase or lease new equipment. As a result, these extension options aren’t considered in the calculation of ROU assets and lease liabilities. If or when circumstances change and the Company becomes reasonably certain that it is going to exercise the extension option, the ROU asset and lease liability would be remeasured at that time.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

For operating leases, expense is recognized evenly over the term of the lease as either cost of goods sold or selling, general and administrative expense, depending on the leased asset, in the Company’s income statement.

As of ~~June~~September 30, 2019, ROU assets related to operating leases were $3635,~~474~~615 and reflected in the Company’s balance sheet under the caption “Right of use assets.” As of ~~June~~September 30, 2019, short-term operating lease liabilities were $23,~~937~~014 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, current” and long-term operating lease liabilities were $33,~~840~~099 and reflected in the Company’s balance sheet under the caption “Operating lease liabilities, non-current.”

The Company’s largest leases are described below:

The Company leases its manufacturing and office facilities in Longmont, Colorado. This facility is part of the ESDT segment. The lease expires in May 2025 and includes two five year extension options at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,700 per year.

The Company leases its manufacturing and office facilities in Durham, North Carolina and is part of the ESDT segment. The lease expires in March 2023 and includes one five year extension option at prevailing market rates. Rent expense is recognized on a straight-line basis and is approximately $1,300 per year.

The Company leases office space in East Rutherford, New Jersey for its corporate headquarters. The lease expires in November 2029. This lease includes one five year extension option at prevailing market rates but at this time, the expiration date is too far in the future to be reasonably certain that the lease will be extended. Rent expense is recognized on a straight-line basis and is approximately $400 per year.

Finance leases:

The Company has finance leases expiring on various dates through the year 2023. The leases are primarily for the rental of manufacturing equipment. These leased assets are amortized on a straight-line basis and recorded as depreciation expense and the financing component is recorded as interest expense in the income statement resulting in higher expense in the earlier part of the lease term.

For finance leases, the depreciation expense is recognized evenly over the term of the lease as cost of goods sold and selling, general and administrative expense in the Company’s income statement. The interest expense component is recognized separately as interest expense in the Company’s income statement.

As of September 30, 2019, ROU assets related to finance leases were $3,309 and reflected in the Company’s balance sheet under the caption “Property, plant and equipment, net.” As of September 30, 2019, short-term finance lease liabilities were $1,136 and reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities” and long-term finance lease liabilities were $803 and reflected in the Company’s balance sheet under the caption “Other non-current liabilities.”

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

~~For~~The ~~finance~~following ~~leases,~~tables ~~the~~summarize ~~depreciation expense is recognized evenly over~~ the ~~term of the~~ lease asactivity ~~cost~~for ofthe ~~goods~~three ~~sold~~ and ~~selling,~~nine ~~general~~months ~~and~~ended ~~administrative~~September ~~expense~~30, ~~in the Company’s income statement. The interest expense component is recognized separately as interest expense in the Company’s income statement.~~2019:

As of June 30, 2019, ROU assets related to finance leases were $3,471 and reflected in the Company’s balance sheet under the caption “Property, plant and equipment, net.” As of June 30, 2019, short-term finance lease liabilities were $1,118 and reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities” and long-term finance lease liabilities were $1,132 and reflected in the Company’s balance sheet under the caption “Other non-current liabilities.”

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Lease cost:
Operating lease cost	$	1,089	$	3,466
Finance lease cost
Amortization of ROU assets		71		215
Interest on lease liabilities		31		119
Short-term lease cost		283		849
Total lease cost	$	1,474	$	4,649

The following tables summarize the lease activity for the three and six months ended June 30, 2019:

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Supplemental cash flow information:
Operating cash flows from operating leases	$	(909	)	$	(2,971	)
Operating cash flows from finance leases		(68	)		(119	)
Financing cash flows from finance leases		(233	)		(760	)

				September 30, 2019
Supplemental balance sheet information:
Weighted-average remaining lease term - operating leases (yrs)					9.8
Weighted-average remaining lease term - finance leases (yrs)					2.4
Weighted-average discount rate - operating leases					4.2	%
Weighted-average discount rate - finance leases					6.3	%

	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease cost:
Operating lease cost	$	1,191	$	2,377
Finance lease cost
Amortization of ROU assets		72		144
Interest on lease liabilities		41		88
Short-term lease cost		349		566
Total lease cost	$	1,653	$	3,175

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Supplemental cash flow information:
Operating cash flows from operating leases	$	(995	)	$	(2,062	)
Operating cash flows from finance leases		(38	)		(51	)
Financing cash flows from finance leases		(251	)		(527	)
				June 30, 2019
Supplemental balance sheet information:
Weighted-average remaining lease term - operating leases (yrs)					9.9
Weighted-average remaining lease term - finance leases (yrs)					2.6
Weighted-average discount rate - operating leases					4.2	%
Weighted-average discount rate - finance leases					4.1	%

The following table represents the Company’s undiscounted lease maturities over the next five years and beyond for its operating and finance leases. The undiscounted cash flows disclosed below represent full years for all periods presented.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Below is a reconciliation of the Company’s undiscounted cash flows to the operating and finance lease liabilities recognized in the consolidated balance sheet.

	Total Undiscounted Cash Flows
	Operating Leases		Finance Leases
2019	$	4,~~746~~139	$	1,126
2020		54,~~142~~654		1,033
2021		54,~~068~~716		596
2022		4,~~972~~677		201
2023		4,~~977~~699		43
2024+		26,~~428~~138		-
		51,333		2,999
		49,023		2,999
Present values ("PV"):
Lease liabilities, current		23,~~937~~014		1,~~118~~136
Lease liabilities, non-current		33,~~840~~099		~~1,132~~803
Total PV of lease liabilities		36,~~777~~113		21,~~250~~939
Difference between undiscounted cash flows and discounted cash flows	$	1412,~~556~~910	$	~~749~~1,060

At December 31, 2018, under ASC 840, the Company had operating leases expiring on various dates through the year 2029. The leases were primarily for the rental of office space. At December 31, 2018, future minimum commitments under non-cancelable operating lease arrangements were as follows:

	Total Undiscounted Cash Flows
2019	$	1,004
2020		1,204
2021		1,126
2022		974
2023		937
2024+		3,220
	$	8,465

The difference between 2018 and 2019 future undiscounted cash flows is mainly due to the acquisition of Avista on January 2, 2019. See Note 4 for additional information on this acquisition.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(12)	Accumulated Other Comprehensive (Loss)/Income

The following tables provide the changes in Accumulated other comprehensive (loss)/income (“AOCI”) by component, net of tax for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018:

	Foreign Currency Translation Adjustments			Interest Rate Swap			Pension Plans			Total
Balance as of March 31, 2019	$	(32,514	)	$	(1,996	)	$	(32,160	)	$	(66,670	)
Other comprehensive income/(loss) before reclassifications		2,432			(2,729	)		-			(297	)
Amounts reclassified from accumulated other comprehensive loss		-			30			239			269
Net current-period other comprehensive income/(loss)		2,432			(2,699	)		239			(28	)
Balance as of June 30, 2019	$	(30,082	)	$	(4,695	)	$	(31,921	)	$	(66,698	)
Other comprehensive loss before reclassifications		(13,114	)		(789	)		-			(13,903	)
Amounts reclassified from accumulated other comprehensive loss		-			104			237			341
Net current-period other comprehensive (loss)/income		(13,114	)		(685	)		237			(13,562	)
Balance as of September 30, 2019	$	(43,196	)	$	(5,380	)	$	(31,684	)	$	(80,260	)
	Foreign Currency Translation Adjustments			Interest Rate Swap			Pension Plans			Total
Balance as of March 31, 2018	$	(9,111	)	$	-		$	(29,893	)	$	(39,004	)
Other comprehensive loss before reclassifications		(13,465	)		-			-			(13,465	)
Amounts reclassified from accumulated other comprehensive loss		-			-			206			206
Net current-period other comprehensive (loss)/income		(13,465	)		-			206			(13,259	)
Balance as of June 30, 2018	$	(22,576	)	$	-		$	(29,687	)	$	(52,263	)
Other comprehensive income before reclassifications		32			-			-			32
Amounts reclassified from accumulated other comprehensive loss		-			-			202			202
Net current-period other comprehensive income		32			-			202			234
Balance as of September 30, 2018	$	(22,544	)	$	-		$	(29,485	)	$	(52,029	)

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

	Foreign Currency Translation Adjustments			Interest Rate Swap			Pension Plans			Total
Balance as of December 31, 2018	$	(27,736	)	$	-		$	(32,401	)	$	(60,137	)
Other comprehensive loss before reclassifications		(215,~~346~~460	)		(45,~~731~~510	)		-			(720,~~077~~970	)
Amounts reclassified from accumulated other comprehensive loss		-			36130			~~480~~717			~~516~~847
Net current-period other comprehensive (loss)/income		(215,~~346~~460	)		(45,~~695~~380	)		~~480~~717			(620,~~561~~123	)
Balance as of June 30, 2019	$	(30,082	)	$	(4,695	)	$	(31,921	)	$	(66,698	)
Balance as of September 30, 2019	$	(43,196	)	$	(5,380	)	$	(31,684	)	$	(80,260	)
	Foreign Currency Translation Adjustments			Interest Rate Swap			Pension Plans			Total
Balance as of December 31, 2017	$	(12,040	)	$	-		$	(30,188	)	$	(42,228	)
Other comprehensive loss before reclassifications		(10,~~536~~504	)		-			-			(10,~~536~~504	)
Amounts reclassified from accumulated other comprehensive loss		-			-			~~501~~703			~~501~~703
Net current-period other comprehensive (loss)/income		(10,~~536~~504	)		-			~~501~~703			(109,~~035~~801	)
Balance as of June 30, 2018	$	(22,576	)	$	-		$	(29,687	)	$	(52,263	)
Balance as of September 30, 2018	$	(22,544	)	$	-		$	(29,485	)	$	(52,029	)

The following table provides the reclassifications from AOCI by component for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018:

Details about AOCI Components	Three Months Ended ~~June~~September 30, 2019			~~Six~~Nine Months Ended ~~June~~September 30, 2019
Losses on cash flow hedge:
Interest rate swap	$	(30144	)	$	(36180	)
Tax benefit		-40			-50
Net of tax		(30104	)		(36130	)
Pension plan amortization of actuarial losses		(~~321~~318	)		(~~644~~962	)
Tax benefit		8281			~~164~~245
Net of tax		(~~239~~237	)		(~~480~~717	)
Total reclassification for the period	$	(269	)	$	(516	)
Total reclassification for the period, net of tax	$	(341	)	$	(847	)

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Details about AOCI Components	Three Months Ended ~~June~~September 30, 2018			~~Six~~Nine Months Ended ~~June~~September 30, 2018
Amortization of defined benefit pension items:
Actuarial losses	$	(~~276~~273	)	$	(~~680~~953	)
Prior service credit		12			24
Total before tax		(~~275~~271	)		(~~678~~949	)
Tax benefit		69			~~177~~246
Total reclassification for the period, net of tax	$	(~~206~~202	)	$	(~~501~~703	)

The Company recognizes all components of net periodic benefit cost except service costs in “Other expenses, net” in its income statement. Service costs are recognized in “Selling, general and administrative expenses” and “Cost of goods sold” in its income statement depending on the functional area of the underlying employees included in the plan. Interest rate swaps are recorded as “Interest expense, net” on the Company’s income statement.

(13)	Stock Based Compensation

The Company recognizes compensation costs for stock options awarded to employees based on their grant-date fair value. The value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value per share for the stock options granted to employees during the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2019 was $~~16.40 and $~~15.72~~, respectively~~. The weighted-average fair value per share for the stock options granted to employees during the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2018 was $24.54.

For the three months ended ~~June~~September 30, 2019 and 2018, the Company recorded $1,~~255~~294 and $1994,~~149,~~ respectively, in “Selling, general and administrative expenses” for stock options. For the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, the Company recorded $23,~~317~~611 and $23,~~188~~182, respectively, in “Selling, general and administrative expenses” for stock options. As of ~~June~~September 30, 2019, the total compensation cost related to unvested stock options not yet recognized was $98,~~482~~089. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 2.42 years.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

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

Options	Number of Shares			Weighted Average Exercise Price
Outstanding at December 31, 2018		1,051,623		$	41.41
Granted		65,000			39.66
Exercised		(4,000	)		16.25
Forfeited or expired		(6,150	)		46.02
Outstanding at March 31, 2019		1,106,473			41.37
Granted		65,663			42.42
Exercised		(4,375	)		25.79
Forfeited or expired		(8,938	)		52.68
Outstanding at June 30, 2019		1,158,823			41.40
Exercisable at June 30, 2019		442,864		$	34.17
Exercised		(63,977	)		24.55
Forfeited or expired		(4,815	)		47.84
Outstanding at September 30, 2019		1,090,031			42.37
Exercisable at September 30, 2019		378,887		$	35.80

The aggregate intrinsic values for all stock options exercised for the three and ~~six~~nine months ended ~~June~~September 30, 2019 were $772,264 and $~~166~~2,430, respectively. The aggregate intrinsic values for all stock options exercised for the three and ~~six~~nine months ended ~~June~~September 30, 2018 were $212,~~535~~685 and $518,~~809~~494, respectively. The aggregate intrinsic values for all stock options outstanding and exercisable as of ~~June~~September 30, 2019 were $718,~~948~~677 and $58,~~815~~980, respectively.

The following table is a summary of the Company’s nonvested stock options, restricted stock and performance shares for which the requisite service period has not been rendered but that are expected to vest on the achievement of a performance condition:

	Nonvested
	Stock Options					Restricted Stock				Performance Shares
	Number of Shares			Weighted- Average Grant-Date Fair Value		Number of Shares		Weighted- Average Grant-Date Fair Value		Number of Shares			Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2018		601,513		$	17.83		-	$	-		152,000		$	46.61
Granted		65,000			15.04		25,000		44.21		5,000			45.64
Vested during period		(7,000	)		9.26		-		-		-			-
Forfeited		(5,900	)		17.36		-		-		(5,750	)		40.65
Nonvested at March 31, 2019		653,613			17.65		25,000		44.21		151,250			46.80
Granted		65,663			16.40		15,729		40.06		-			-
Vested during period		(1,250	)		16.32		-		-		-			-
Forfeited		(2,067	)		17.50		-		-		(17,250	)		40.65
Nonvested at June 30, 2019		715,959		$	17.54		40,729	$	42.61		134,000		$	47.59

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

The ~~Company~~following ~~granted~~table ~~restricted~~is ~~stock units during the six months ended June 30, 2019 to certain executives which will vest over~~ a ~~two~~summary ~~year period. Annually, members~~ of the ~~Cambrex~~Company’s ~~Board~~nonvested ~~of Directors are awarded restricted~~ stock ~~units that vest over six months. For the three months ended June 30~~options, ~~2019 and 2018, the Company recorded $354 and $177, respectively, in “Selling, general and administrative expenses” for~~ restricted stock ~~units. For the six months ended June 30, 2019~~ and ~~2018,~~performance ~~the~~shares ~~Company recorded $450 and $183, respectively, in “Selling, general and administrative expenses”~~ for ~~restricted~~which ~~stock~~the ~~units.~~requisite Asservice ofperiod ~~June~~has ~~30, 2019, total compensation cost related to nonvested restricted stock~~ not ~~yet~~been ~~recognized~~rendered ~~was~~but ~~$1,285. The~~that ~~cost~~are ~~will~~expected beto ~~amortized~~vest on ~~a straight-line basis over~~ the ~~remaining~~achievement ~~weighted-average vesting period~~ of ~~1.1~~a ~~years.~~performance condition:

The Company granted equity-settled performance shares (“PS”) to certain executives. PS awards provide the recipient the right to receive a certain number of shares of the Company’s common stock in the future, which depends on the Company’s level of achievement of net revenue and EBITDA growth as compared to the net revenue and EBITDA growth of the members of a specified peer group of companies over a three year period. For the three months ended June 30, 2019 and 2018, the Company recorded benefit of $54 and expense of $227, respectively, in “Selling, general and administrative expenses” related to performance shares. For the six months ended June 30, 2019 and 2018, the Company recorded $447 and $832, respectively, in “Selling, general and administrative expenses” related to performance shares. As of June 30, 2019, total compensation cost related to nonvested performance shares not yet recognized was $3,168. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.4 years.

	Nonvested
	Stock Options					Restricted Stock				Performance Shares
	Number of Shares			Weighted- Average Grant-Date Fair Value		Number of Shares		Weighted- Average Grant-Date Fair Value		Number of Shares			Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2018		601,513		$	17.83		-	$	-		152,000		$	46.61
Granted		65,000			15.04		25,000		44.21		5,000			45.64
Vested during period		(7,000	)		9.26		-		-		-			-
Forfeited		(5,900	)		17.36		-		-		(5,750	)		40.65
Nonvested at March 31, 2019		653,613			17.65		25,000		44.21		151,250			46.80
Granted		65,663			16.40		15,729		40.06		-			-
Vested during period		(1,250	)		16.32		-		-		-			-
Forfeited		(2,067	)		17.50		-		-		(17,250	)		40.65
Nonvested at June 30, 2019		715,959			17.54		40,729		42.61		134,000			47.59
Forfeited		(4,815	)		18.00		-		-		(15,750	)		43.82
Nonvested at September 30, 2019		711,144		$	17.54		40,729	$	42.61		118,250		$	48.10

~~(14)~~The ~~Retirement~~Company ~~Plans~~granted restricted stock units during the nine months ended September 30, 2019 to certain executives which will vest over a two year period. Annually, members of the Cambrex Board of Directors are awarded restricted stock units that vest over six months. For the three months ended September 30, 2019 and 2018, the Company recorded $459 and $262, respectively, in “Selling, general and administrative expenses” for restricted stock units. For the nine months ended September 30, 2019 and 2018, the Company recorded $909 and $445, respectively, in “Selling, general and administrative expenses” for restricted stock units. As of September 30, 2019, total compensation cost related to nonvested restricted stock not yet recognized was $826. The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 0.8 years.

The Company ~~recognizes~~granted ~~all~~equity-settled ~~components~~performance ofshares ~~net~~(“PS”) ~~periodic~~to ~~benefit~~certain ~~cost~~executives. PS ~~except~~awards ~~service~~provide ~~costs~~the recipient the right to receive a certain number of shares of the Company’s common stock in ~~“Other~~the ~~expenses~~future, which depends on the Company’s level of achievement of net” inrevenue ~~its~~and ~~income~~EBITDA ~~statement~~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. ~~Service~~For ~~costs~~the ~~are~~three ~~recognized~~months ended September 30, 2019 and 2018, the Company recorded a benefit of $2 and $353, respectively, in “Selling, general and administrative expenses” related to performance shares. For the nine months ended September 30, 2019 and 2018, the Company recorded $445 and $479, respectively, in “~~Cost~~Selling, ofgeneral ~~goods~~and ~~sold~~administrative expenses” inrelated ~~its~~to ~~income~~performance ~~statement~~shares. ~~depending~~As of September 30, 2019, total compensation cost related to nonvested performance shares not yet recognized was $2,480. The cost will be amortized on ~~the~~a ~~functional~~straight-line ~~area~~basis ofover the ~~underlying~~remaining ~~employees~~weighted-average ~~included~~vesting inperiod ~~the~~of ~~plan~~1.2 years.

Domestic Pension Plan

The components of net periodic benefit cost/(credit) for the Company’s domestic pension plan (which was frozen in 2007) for the three and six months ended June 30, 2019 and 2018 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Components of net periodic benefit cost/(credit)
Interest cost	$	543		$	511		$	1,086		$	1,021
Expected return on plan assets		(683	)		(792	)		(1,365	)		(1,584	)
Recognized actuarial loss		208			180			415			359
Net periodic benefit cost/(credit)	$	68		$	(101	)	$	136		$	(204	)

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(14)	Retirement Plans

Domestic Pension Plan

The components of net periodic benefit cost/(credit) for the Company’s domestic pension plan (which was frozen in 2007) for the three and nine months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Components of net periodic benefit cost/(credit)
Interest cost	$	543		$	511		$	1,629		$	1,532
Expected return on plan assets		(682	)		(792	)		(2,047	)		(2,376	)
Recognized actuarial loss		207			180			622			539
Net periodic benefit cost/(credit)	$	68		$	(101	)	$	204		$	(305	)

International Pension Plan

The components of net periodic benefit cost for the Company’s international pension plan for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Components of net periodic benefit cost
Service cost	$	~~270~~266	$	~~253~~245		$	~~548~~814	$	~~523~~768
Interest cost		~~162~~160		~~182~~176			~~329~~489		~~376~~552
Recognized actuarial loss		~~113~~111		9693			~~229~~340		~~199~~292
Amortization of prior service benefit		-		(1	)		-		(23	)
Net periodic benefit cost	$	~~545~~537	$	~~530~~513		$	1,~~106~~643	$	1,~~096~~609

(15)	Segment Information

Cambrex is a life sciences company that provides products and services that accelerate and improve the development and commercialization of new and generic therapeutics. The Company primarily supplies its products and services worldwide to innovator and generic pharmaceutical companies.

Due to the acquisitions of Avista and Halo, and to be consistent with how the business is managed, the Company now reports its results in three reportable segments, Drug Substance (“DS”), Drug Product (“DP”) and Early Stage Development and Testing (“ESDT”). The DS segment is comprised of the legacy Cambrex API business excluding the High Point facility, which was moved to the ESDT segment. The DP segment includes the former Halo business. The ESDT segment includes the former Avista business, in addition to the High Point facility.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

The Company’s DS segment is comprised of the custom development and manufacture of pharmaceutical ingredients derived from organic chemistry. Products consist of APIs and pharmaceutical intermediates for use in the production of prescription and over-the-counter drug products.

The Company’s DP segment consists of contract development and commercial manufacturing of finished dosage form products including oral solids, liquids and creams, and sterile and non-sterile ointments.

ESDT

The Company’s ESDT segment provides a combination of analytical testing, early stage process chemistry, formulation development, manufacturing, and solid state chemistry services.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

The Company evaluates the performance of its segments based on segment operating profit. Transactions between reportable segments are not material. The Company does not allocate interest expense or income taxes to the operating segments. Discontinued operations are not recorded by the reportable segments. The Company accounts for total assets on a consolidated basis and does not allocate or disclose it for each reportable segment. The chief operating decision maker does not review segment’s assets.

The following table summarizes the Company’s financial information by reportable segment:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

Net revenue by segment

~~128~~103,~~968~~584

~~145~~94,~~987~~062

~~241~~344,~~028~~612

~~282~~376,~~595~~657

2422,~~358~~464

-5,154

4871,~~842~~306

-5,154

ESDT

2322,~~524~~515

65,~~059~~402

4668,~~436~~951

1015,~~548~~950

Total reported net revenue

~~176~~148,~~850~~563

~~152~~104,~~046~~618

~~336~~484,~~306~~869

~~293~~397,~~143~~761

Operating profit/(loss) by segment

3930,~~138~~756

4816,~~939~~575

70101,~~319~~075

84100,~~305~~881

(~~371~~3,194

)

-114

(~~621~~3,815

)

-114

ESDT

(12,~~978~~216

)

~~578~~297

(46,~~495~~711

)

~~178~~475

Total segment operating profit

3625,~~789~~346

4916,~~517~~986

6590,~~203~~549

84101,~~483~~470

Corporate operating loss

(37,~~896~~886

)

(410,~~865~~354

)

(1119,~~986~~872

)

(919,~~450~~805

)

Total reported operating profit

3217,~~893~~460

446,~~652~~632

5370,~~217~~677

7581,~~033~~665

(16) 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.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

(16)	Contingencies

Environmental

In connection with laws and regulations pertaining to the protection of the environment, the Company and its subsidiaries are a party to several environmental proceedings and remediation activities and along with other companies, have been named a potentially responsible party (“PRP”) for certain waste disposal sites ("Superfund sites"). All of the liabilities currently recorded on the Company’s balance sheet for environmental proceedings are associated with discontinued operations. The Company had insurance policies in place at certain of the discontinued operations for certain years that the Company believes should cover some portion of the recorded liabilities or potential future liabilities and the Company expects the net cash impact related to the contingencies described below to be reduced by the applicable income tax rate.

It is the Company’s policy to record appropriate liabilities for environmental matters where remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are based on the Company’s estimate of the undiscounted future costs required to complete the remedial work. Each of these matters is subject to various uncertainties, and it is possible that some of these matters will be decided against the Company. The resolution of such matters often spans several years and frequently involves regulatory oversight or adjudication. Additionally, many remediation requirements are fluid and are likely to be affected by future technological, site and regulatory developments. It is not possible at this time for the Company to determine fully the effect of all asserted and unasserted claims on its consolidated financial condition, results of operations or liquidity; however, to the extent possible, where asserted and unasserted claims can be estimated and where such claims are considered probable, the Company would record a liability. Consequently, the ultimate liability with respect to such matters, as well as the timing of cash disbursements, is uncertain.

In matters where the Company is able to reasonably estimate the probable and estimable costs associated with environmental proceedings, the Company accrues for the estimated costs associated with the study and remediation of applicable sites. At ~~June~~September 30, 2019, the reserves were $1716,~~101~~315 of which $1615,~~462~~806 is included in “Other non-current liabilities” on the Company’s balance sheet. At December 31, 2018, these reserves were $17,411, of which $16,599 is included in “Other non-current liabilities” on the Company’s balance sheet. The decrease in the reserves includes payments of $~~660~~933 ~~partially~~and ~~offset by~~ adjustments to reserves of $~~350~~163. The reserves are adjusted periodically as remediation efforts progress or as additional technical, regulatory or legal information becomes available. Given the uncertainties regarding the outcome of investigative and study activities, the status of laws, regulations, enforcement, policies, the impact of other PRPs, technology and information related to individual sites, the Company does not believe it is possible to currently develop an estimate of the range of reasonably possible environmental loss in excess of its reserves.

Bayonne

As a result of the sale of a Bayonne, New Jersey facility, the Company became obligated to investigate site conditions and conduct required remediation under the New Jersey Industrial Site Recovery Act. The Company is completing an investigation and sampling plan at the property pursuant to the New Jersey Department of Environmental Protection’s (“NJDEP”) private oversight program. The results will be used to develop a proposed remedial action work plan for the site. Among other things, the remedial plan is anticipated to set forth further details of the proposed cleanup, including the removal and/or encapsulation of certain impacted soils and implementation of engineering controls and deed restrictions. As of June 30, 2019, the Company’s reserve was $533.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

Bayonne

Clifton and Carlstadt

The Company has implemented a sampling and pilot program in Clifton and Carlstadt, New Jersey pursuant to the NJDEP private oversight program. The results of the sampling and pilot program to date have been used to develop an estimate of the Company's future liability for remediation costs, and the Company continues to move forward with the projects at each site in accordance with the established schedules and work plans. As of ~~June~~September 30, 2019, the Company’s reserve was $1,~~734~~705.

Berry’s Creek

The Company received a notice from the United States Environmental Protection Agency (“USEPA”) that two subsidiaries of the Company are considered PRPs at the Berry’s Creek Study Area in New Jersey. These subsidiaries are among many other PRPs that were listed in the notice. Pursuant to the notice, the PRPs have been asked to perform a remedial investigation (“RI”) and feasibility study (“FS”) of the Berry’s Creek site. The Company has joined the group of PRPs and entered into an Administrative Settlement Agreement (“Agreement”) and Order on Consent with the USEPA agreeing to jointly conduct or fund an appropriate remedial investigation and feasibility study of the Berry’s Creek site with the other PRPs in the Agreement. The PRPs have engaged consultants to perform the work specified in the Agreement and develop a method to allocate related costs among the PRPs.

In June 2016, the PRPs received a request from USEPA to amend the RI/FS Work Plan to accommodate a phased, iterative approach to the Berry’s Creek remediation. USEPA requested an initial Phase I remedy that focuses on a portion of the site, namely, sediments in Upper and Middle Berry’s Creek and the marsh in Upper Peach Island Creek. Any subsequent remedial action will occur after the implementation and performance monitoring of this Phase I remedy and the extent of future action is expected to be at least partially determined by the outcome of this initial phase. In April 2017, USEPA approved the requested addendum to the RI/FS Work Plan, which included the description of the phased and adaptive management approach to the Berry’s Creek remedy.

In September 2018, USEPA issued its Record of Decision (“ROD”) for an interim remedy at Berry’s Creek. The interim remedy calls for, among other things, dredging and capping of contaminated sediments. The next step in the process is to design the remedy (“Remedial Design”). USEPA issued a letter to the Berry’s Creek PRP Group in September 2018 that provided notice of potential liability and a request that the PRP Group agree to perform the Remedial Design. ~~USEPA~~In ~~provided~~September a2019, ~~draft settlement agreement and statement of work to implement~~ the ~~Remedial Design. As a member of the Berry’s Creek~~ PRP Group, including the Company, ~~will~~entered ~~participate~~into inan ~~the~~administrative ~~PRP~~settlement ~~Group’s~~agreement ~~engagement~~ with USEPA onto ~~Remedial~~perform ~~Design,~~the ~~and~~Remedial ~~is coordinating with PRP Group members and PRP Group common counsel accordingly~~Design.

The estimated costs for the interim remedy may be further developed and the Company’s accrual may change based upon revisions to cost estimates. As of June 30, 2019, the Company’s reserve was $9,502. At this time it is not known when the costs for the complete remediation plan will be estimable, and as such, no accrual beyond the interim remedy has been recorded. The Company’s share has been preliminarily estimated by the PRP group at 2.4%. While the Company will defend its position that its share should be reduced from the current level, its share could be increased or decreased depending on the outcome of the final allocation process that will take place in future periods.

While any resolution of this matter is not expected to materially impact the Company’s operations or financial position, it could be material to the financial statements in the period recorded.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

The estimated costs for the interim remedy may be further developed and the Company’s accrual may change based upon revisions to cost estimates. As of September 30, 2019, the Company’s reserve was $9,500. At this time it is not known when the costs for the complete remediation plan will be estimable, and as such, no accrual beyond the interim remedy has been recorded. The Company’s share has been preliminarily estimated by the PRP group at 2.4%. While the Company will defend its position that its share should be reduced from the current level, its share could be increased or decreased depending on the outcome of the final allocation process that will take place in future periods.

While any resolution of this matter is not expected to materially impact the Company’s operations or financial position, it could be material to the financial statements in the period recorded.

In July 2014, the Company received a notice from the U.S. Department of the Interior, U.S. Fish & Wildlife Service, regarding the Company’s potential liability for natural resource damages at the Berry’s Creek site and inviting the Company to participate in a cooperative assessment of natural resource damages. Most members of the Berry’s Creek PRP group received such notice letters, and the PRP Group coordinated a joint response, which was to decline participation in a cooperative assessment at this time, given existing investigation work at the site. The cost of any future assessment and the ultimate scope of natural resource damage liability are not yet known.

Maybrook Site

A subsidiary of Cambrex is named a PRP of a site in Hamptonburgh, New York by the USEPA in connection with the discharge, under appropriate permits, of wastewater at that site prior to Cambrex's acquisition in 1986. The PRPs implemented soil remediation which was completed in 2012 pending approval by the USEPA. The PRPs will continue implementing the ground water remediation at the site. USEPA completed its 5-year review report in August 2018, and USEPA’s review of the site remedy is on-going. It is unclear if such review, together with an agreed proposed modification to the USEPA Consent Decree, will result in any additional site work. In November 2018, under a statewide initiative, the New York State Department of Environmental Conservation (“NYSDEC”) requested that the PRPs perform additional sampling for certain “emerging contaminants.” NYSDEC approved the PRPs work plan in December 2018, and the sampling was completed with results submitted to the state onin ~~or about~~ June ~~20,~~ 2019. As of ~~June~~September 30, 2019, the Company’s reserve was $~~365~~341, to cover long-term ground water monitoring and related costs.

Harriman Site

Subsidiaries of Cambrex and Pfizer are named as responsible parties for the Company’s former Harriman, New York production facility by the New York State Department of Environmental Conservation (“NYSDEC”). A final Record of Decision (“ROD”) describing the Harriman site remediation responsibilities for Pfizer and the Company was issued in 1997 (the “1997 ROD”) and incorporated into a federal court Consent Decree in 1998 (the “Consent Decree”). In December 2013, the Company, Pfizer and the NYSDEC entered into a federal court stipulation, which the court subsequently endorsed as a court order, resolving certain disputes with the NYSDEC about the scope of the obligations under the Consent Decree and the 1997 ROD, and requiring the Company and Pfizer to carry out an environmental investigation and study of certain areas of the Harriman Site.

Site clean-up work under the 1997 ROD, the Consent Decree and the 2013 stipulation is ongoing and is being jointly performed by Pfizer and the Company, with NYSDEC oversight. Since 2014, Pfizer and the Company have performed supplemental remedial investigation measures requested by the NYSDEC, and the findings have been submitted to NYSDEC in various reports, including a study evaluating the feasibility of certain remedial alternatives in August 2016. By letter dated January 5, 2017, NYSDEC disapproved such feasibility study report and requested certain revisions to the report. The Company and Pfizer engaged in further discussions with NYSDEC and have agreed to submit a revised version of the August 2016 feasibility study to address certain of NYSDEC’s requests. In September 2017, the NYSDEC requested that Pfizer, the Company and the current owner of the Harriman Site, ELT Harriman LLC (“ELT”), conduct an investigation of additional constituents not addressed under the 1997 ROD based on the detection of those constituents at the Harriman Site and other properties in the area. The parties sought more information from the State of New York to evaluate the request, while also responding to NYSDEC that no further investigation was warranted. In April 2019, NYSDEC again asked the parties to collect additional groundwater samples for such constituents, and discussions with the State related thereto are ongoing.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

further discussions with NYSDEC and have agreed to submit a revised version of the August 2016 feasibility study to address certain of NYSDEC’s requests. In September 2017, the NYSDEC requested that Pfizer, the Company and the current owner of the Harriman Site, ELT Harriman LLC (“ELT”), conduct an investigation of additional constituents not addressed under the 1997 ROD based on the detection of those constituents at the Harriman Site and other properties in the area. The parties sought more information from the State of New York to evaluate the request, while also responding to NYSDEC that no further investigation was warranted. In April 2019, NYSDEC again asked the parties to collect additional groundwater samples for such constituents, and discussions with the State related thereto are ongoing.

As it is too soon to determine whether the NYSDEC’s requests or the reports and remedial plans, when finalized, will result in any significant changes to the Company’s responsibilities, no change to the reserve has been made. ELT is conducting other investigation and remediation activities under a separate NYSDEC directive.

No final remedy for the site has been determined, which will follow further discussions with the NYSDEC. The Company estimates the range for its share of the liability at the site to be between $2,000 and $7,000. As of ~~June~~September 30, 2019, the Company’s reserve was $3,~~365~~357. 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.

Separately, by service dated September 9, 2019, the Company received a Complaint, styled Village of Harriman vs. Nepera, Inc., Warner-Lambert Company, Warner-Lambert Company, LLC, and ELT Harriman, LLC, alleging, among other things, that owners/operators of the Nepera Plant are responsible for the release of hazardous substances containing per and poly-fluoroalkyl susbstances (PFAS), which in turn contaminated certain groundwater from which Harriman reportedly draws its water supply. The Complaint further alleges damages including costs related to water treatment systems, providing alternative water supplies, and sampling, monitoring, and remediating existing impacted water. The Company intends to timely deny the allegations, vigorously defend the litigation, and assert counter and crossclaims, as appropriate. The Company further gave notice and tendered its demand for indemnification under the 2007 Settlement Agreement and Release to ELT Harriman and Vertellus Specialties UK Ltd and Vertellus Specialties Holdings UK Ltd.

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~~A ~~the~~final ~~Company~~allocation ~~continues~~of toSCP ~~dispute~~Site ~~the~~costs ~~methodology~~(excluding ~~used~~Berry’s byCreek ~~the~~costs) ~~PRP~~was ~~group~~finalized toin ~~arrive~~September at2019. As ~~its~~a ~~interim~~result ~~allocation~~of ~~for~~the ~~cash~~final ~~contributions~~allocation, the Company ~~has~~recorded ~~paid~~a ~~the~~benefit ~~funding~~to ~~requests. A~~lower ~~final~~the ~~allocation~~allocated percentage of ~~SCP~~the ~~Site costs (excluding Berry’s Creek costs) is expected to be finalized in 2019~~remediation. As of ~~June~~September 30, 2019, the Company’s reserve was $~~732, of which approximately $468 is expected to be covered by insurance~~64.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

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.

~~(17)~~Litigation ~~Discontinued~~and ~~Operations~~Other Matters

~~For~~Litigation ~~all~~Related ~~periods presented, financial results for discontinued operations relate~~ to ~~environmental~~the ~~investigation~~Acquisition ~~and~~by ~~remediation~~an ~~expenses~~affiliate ~~for divested sites. The following table is a reconciliation~~ of the ~~pre-~~Permira Funds

33There are three stockholder lawsuits currently pending against the Company and the individual members of the Board of Directors, captioned Stein v. Cambrex Corporation. et al., Thompson v. Cambrex Corp. et al., and Patel v. Cambrex Corp. et al. (collectively, the “Complaints”). Each of the plaintiffs in the Merger Litigation alleges violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder and seeks various forms of injunctive and declaratory relief, as well as an award of costs and attorneys’ fees. The Company believes the allegations in the Complaints to be without merit and intends to vigorously defend against them.

CAMBREX CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(in thousands, except share data)

(Unaudited)

~~tax~~(17) ~~loss~~Discontinued ~~on discontinued operations to the net loss on discontinued operations, as presented on the income statement:~~Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Loss from discontinued operations, pre-tax	$	(119	)	$	(519	)	$	(271	)	$	(756	)
Income tax benefit		50			86			84			132
Loss from discontinued operations, net of tax	$	(69	)	$	(433	)	$	(187	)	$	(624	)

For all periods presented, financial results for discontinued operations relate to environmental investigation and remediation expenses for divested sites. The Company recorded a benefit in the current quarter as a result of the finalization of the allocation percentage for the remediation of a site. Refer to Note 16 to the Company’s consolidated financial statements for further disclosures on the Company’s environmental contingencies.

As of ~~June~~September 30, 2019 and December 31, 2018, liabilities recorded on the Company’s balance sheet related to discontinued operations were $1716,~~101~~315 and $17,411 respectively. At this time, the Company cannot reasonably estimate the period of time during which the involvement is expected to continue. Net cash used in discontinued operations for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 were $~~462~~666 and $~~431~~557, respectively. ~~Refer~~ ~~to Note 16 to the Company’s consolidated financial statements for further disclosures on the Company’s environmental contingencies.~~

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,
	2019			2018			2019			2018
Income/(loss) from discontinued operations, pre-tax	$	1,678		$	(99	)	$	1,407		$	(855	)
Income tax (expense)/benefit		(480	)		13			(396	)		145
Income/(loss) from discontinued operations, net of tax	$	1,198		$	(86	)	$	1,011		$	(710	)

(18)Subsequent Event

On ~~August~~October 723, 2019, the Company ~~entered~~held ~~into~~a anspecial ~~Agreement~~meeting ~~and~~of ~~Plan~~stockholders of ~~Merger~~Cambrex ~~(“the~~Corporation ~~Merger Agreement”), pursuant~~ to ~~which~~vote ~~the~~on ~~Company~~a ~~agreed~~proposal to beadopt ~~acquired~~the byAgreement anand ~~affiliate~~Plan of ~~the~~Merger, ~~global~~dated ~~investment~~as ~~firm~~of ~~Permira~~August ~~Funds~~7, ~~subject~~2019 ~~to customary terms and conditions. Under~~ (the “Merger Agreement”), ~~the~~by ~~Company’s~~and ~~stockholders~~among ~~will~~Catalog beIntermediate ~~entitled to receive $60~~Inc.00 ~~per~~(“Parent”), ~~share~~Catalog ~~following~~Merger ~~the~~Sub ~~closing of the proposed merger~~Inc. ~~The~~ ~~merger,~~(“Merger ~~which~~Sub”) isand ~~expected to close in~~ the ~~fourth~~Company. ~~quarter~~The ofstockholders ~~2019,~~approved ~~is subject to approval by~~ the ~~Company’s~~Merger ~~stockholders, regulatory approvals and other customary closing conditions~~Agreement.

3435

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

In January 2019, the Company purchased Avista Pharma Solutions (“Avista”), an early clinical phase contract development, manufacturing and testing organization. In September 2018, the Company completed the acquisition of Halo Pharma (“Halo”). As a result, and consistent with how the business is managed, the Company has three reportable segments, Drug Substance (“DS”), Drug Product (“DP”) and Early Stage Development & Testing (“ESDT”).

The following summarizes the Company’s performance for the ~~second~~third quarter of 2019:

• Net revenue increased 1642.30% on a reported basis compared to the ~~second~~third quarter of 2018. Net revenue, excluding currency impact, increased 1942.5%.

• Gross margins ~~decreased~~increased to 3534.53% from 4231.63% in the ~~second~~third quarter of 2018.

• Net debt was $~~445~~411,~~617~~667 compared to $~~429~~445,~~961~~617 at ~~March~~June 3130, 2019. The change is primarily due to cash flow generated from operating activities and the ~~result~~cash proceeds from the sale of ~~capital~~an ~~spending~~equity investment.

Results of Operations

Comparison of ~~Second~~Third Quarter 2019 versus ~~Second~~Third Quarter 2018

Net revenue in the ~~second~~third quarter of 2019 of $~~176~~148,~~850~~563 was $2443,~~804~~945 or 1642.30% higher than the ~~second~~third quarter of 2018. Excluding a 30.25% unfavorable impact of foreign exchange compared to the ~~second~~third quarter of 2018, net revenue increased 1942.5% primarily due to the acquisitions of Halo and Avista, and higher sales of controlled substances partially offset by lower volumes within the DS segment.

The following table reflects net revenue by geographic area for the ~~second~~third quarters of 2019 and 2018:

	Second quarter
	Third quarter
	2019		2018
Europe	$	7949,~~326~~718	$	9862,~~221~~146
North America		8687,~~613~~721		4335,~~764~~903
Asia		5,~~433~~739		3,~~182~~394
Other		5,~~478~~385		63,~~879~~175
Total net revenue	$	~~176~~148,~~850~~563	$	~~152~~104,~~046~~618

Gross margins in the ~~second~~third quarter of 2019 ~~decreased~~increased to 3534.53% from 4231.63% in the ~~second~~third quarter of 2018. Gross profit in the ~~second~~third quarter of 2019 was $6250,~~828~~901 compared to $6432,~~792~~725 in the same period last year. Margins ~~decreased~~increased in the DS segment as discussed below.

Drug Substance

Net revenue in the ~~second~~third quarter of 2019 of $~~128~~103,~~968~~584 was $179,~~019~~522 or 1110.71% ~~lower~~higher than the ~~second~~third quarter of 2018. Excluding a 30.36% unfavorable impact of foreign exchange compared to the ~~second~~third quarter of 2018, net revenue ~~decreased~~increased 810.47% primarily due to ~~lower~~higher ~~volumes~~sales of ~~certain~~controlled ~~branded~~substances ~~APIs,~~and ~~primarily~~generic ~~our~~APIs ~~largest product,~~ partially offset by ~~higher~~lower ~~sales~~volumes of ~~controlled~~certain ~~substances~~branded ~~compared~~APIs, toprimarily ~~the~~our ~~second~~largest ~~quarter of 2018~~product. Excluding the Company’s largest product, revenues in this segment increased 329.61%.

3536

Gross margins in the ~~second~~third quarter of 2019 ~~decreased~~increased to 4042.51% from 4331.24% in the ~~second~~third quarter of 2018. Gross profit in the ~~second~~third quarter of 2019 was $5243,~~226~~584 compared to $6329,~~006~~574 in the same period last year. The ~~decrease~~increase in margins was primarily driven by ahigher ~~one-time~~production ~~contract~~volumes ~~termination payment of $3,200 in the second quarter of 2018 which contributed approximately 2.2% to gross margin in that period~~ and ~~lower~~favorable ~~production~~product ~~volumes~~mix.

Selling, general and administrative (“SG&A”) expenses of $9,~~884~~857 in the ~~second~~third quarter of 2019 ~~decreased~~were relatively flat compared to ~~$10,457 in~~ the ~~second~~third quarter of 2018. ~~The decrease was mainly due to the impact of foreign currency (approximately $400).~~ SG&A, as a percentage of DS net revenue, was 79.75% in the ~~second~~third quarter of 2019 compared to 710.21% in the ~~second~~third quarter of 2018.

Research and development (“R&D”) expenses of $32,~~205~~970 were 2.59% of DS net revenue in the ~~second~~third quarter of 2019, compared to $3,~~610~~459 or 23.57% in the ~~second~~third quarter of 2018. The decrease was primarily driven by ~~the~~higher ~~impact~~absorption of ~~foreign~~R&D ~~currency~~expenses into inventory and cost of goods sold.

Operating profit in the ~~second~~third quarter of 2019 was $3930,~~138~~756 compared to $4816,~~939~~575 in the ~~second~~third quarter of 2018. The ~~decrease~~increase in operating profit was due to ~~lower~~higher gross profit ~~partially offset by lower operating expenses~~ as described above.

Drug Product

Halo was purchased in September 2018 and comprises all of the DP segment.

Net revenue in the ~~second~~third quarter of 2019 was $2422,~~358~~464.

Gross margins in the ~~second~~third quarter of 2019 were 2212.15%. Gross profit in the ~~second~~third quarter of 2019 was $52,~~391~~805.

SG&A expenses were $5,~~754~~972 in the ~~second~~third quarter of 2019 which includes amortization of purchased intangibles of $23,~~994~~075. SG&A, as a percentage of DP net revenue, was 2326.6%. R&D expenses were negligible.

DP had an operating loss in the ~~second~~third quarter of 2019 of $~~371~~3,194.

Early Stage Development & Testing

The ESDT segment consists of Avista, which was purchased on January 2, 2019 and Cambrex’s High Point facility.

Net revenue in the ~~second~~third quarter of 2019 was $2322,~~524~~515 compared to $65,~~059~~402 in the ~~second~~third quarter of 2018. The increase is attributable to the acquisition of Avista.

Gross margins in the ~~second~~third quarter of 2019 were 2220.20% compared to 2927.57% in the ~~second~~third quarter of 2018. Gross profit in the ~~second~~third quarter of 2019 was $54,~~211~~512 compared to $1,~~786~~499 in the same period last year.

SG&A expenses were $6,~~780~~396 in the ~~second~~third quarter of 2019 which includes amortization of purchased intangibles of $1,~~390~~389. SG&A, as a percentage of ESDT net revenue, was 28.84%. R&D expenses were $~~368~~317 in the ~~second~~third quarter of 2019.

ESDT had an operating loss in the ~~second~~third quarter of 2019 of $12,~~978~~216. Operating profit for the ~~second~~third quarter of 2018 was $~~578~~297.

Corporate

The Company’s Corporate headquarters provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, ~~and~~ information technology and finance departments. The Company allocates certain corporate expenses to each of its segments. SG&A expenses of $3,~~277~~358 in the ~~second~~third quarter of 2019 ~~decreased~~increased compared to $42,~~003~~632 in the ~~second~~third quarter of 2018. The ~~decrease~~increase was primarily due to ~~lower~~higher ~~due diligence costs and~~ personnel related expenses. R&D expenses of $~~110~~113 in the ~~second~~third quarter of 2019 decreased compared to $~~523~~729 in the same quarter last year. The decrease is due to a reduction of activities for the development of generic drug ~~product~~products.

All acquisition and integration costs related to the Halo and Avista acquisitions have been expensed and totaled $562 and $339 for the three months ended June 30, 2019 and 2018, respectively. Corporate’s results include $509 and $339 for the three months ended June 30 2019 and 2018, respectively. These costs have been recorded to “Acquisition and integration expenses” on the Company’s income statement.

The Company recorded an unrealized loss of $3,235 and an unrealized gain of $5,146 for the three months ended June 30, 2019 and 2018, respectively, related to its 16.3% investment in a European company, as “Unrealized loss/(gain) on investment in equity securities” on the Company’s income statement. Since the shares owned by the Company are substantially in excess of the daily trade volumes of the stock, it could be difficult to sell the shares in a timely manner and it is possible the ultimate value to be realized by the Company could be significantly less upon a sale of the securities. The fair value of the Company’s share of the company was $8,741 at June 30, 2019.

Net interest expense was $5,746 in the second quarter of 2019 compared to $17 in the second quarter of 2018. The increase is due to interest expense on borrowings to fund the Halo and Avista acquisitions. There was $505,000 outstanding on the Credit Facility at June 30, 2019. The average interest rate on debt was 4.2% in the second quarter of 2019. The Company did not have any debt outstanding as of June 30, 2018.

Income tax expense from continuing operations for the three months ended June 30, 2019 and 2018 was $7,872 and $8,748, respectively. The effective tax rate for the three months ended June 30, 2019 and 2018 was 33.4% and 17.6%, respectively. The tax rate for the three months ended June 30, 2019 would have been 25.9% excluding the impact of immediate recognition of certain effects of share-based compensation, amortization of purchased intangibles, acquisition and integration expenses, and unrealized loss on investment in equity securities. The increase in the tax rate for 2019 as compared to 2018 is primarily due to state tax reform and the Company’s expanded state presence due to the Halo and Avista acquisitions, and the geographic mix of income.

Income from continuing operations in the second quarter of 2019 was $15,687, or $0.46 per diluted share, versus $40,852, or $1.21 per diluted share, in the same period a year ago.

Comparison of First Six Months of 2019 versus First Six Months of 2018

Net revenue in the first six months of 2019 of $336,306 was $43,163 or 14.7% higher than the first six months of 2018. Excluding a 3.2% unfavorable impact of foreign exchange compared to the first six months of 2018, net revenue increased 17.9% primarily due to the acquisitions of Halo and Avista, partially offset by lower volumes within the DS segment.

~~The~~All ~~following~~merger, ~~table~~acquisition ~~reflects~~and ~~net~~integration ~~revenue~~costs byrelated ~~geographic~~to ~~area~~the Halo and Avista acquisitions and pending merger have been expensed and totaled $4,431 and $7,388 for the ~~first~~three ~~six~~months ended September 30, 2019 and 2018, respectively. Corporate’s results include $4,415 and $6,993 for the three months ofended September 30 2019 and 2018:, respectively. These costs have been recorded to “Merger, acquisition and integration expenses” on the Company’s income statement.

	First six months
	2019		2018
Europe	$	140,661	$	184,959
North America		173,306		91,438
Asia		11,490		7,852
Other		10,849		8,894
Total net revenue	$	336,306	$	293,143

The Company recorded a loss of $540 and a gain of $5,611 for the three months ended September 30, 2019 and 2018, respectively, related to its 16.3% investment in a European company as “Loss/(gain) on investment in equity securities” on the Company’s income statement. The Company sold its stake in the company during the third quarter of 2019 for $7,780 resulting in a loss of $540 in the current quarter.

~~Gross~~Net ~~margins~~interest expense was $5,584 in the ~~first~~third ~~six~~quarter ~~months~~ of 2019 ~~decreased~~compared to ~~35.0%~~$725 ~~from 39.5%~~ in the ~~first~~third ~~six~~quarter ~~months~~ of 2018. ~~Gross~~ ~~profit~~The inincrease is due to interest expense on borrowings to fund the ~~first~~Halo ~~six~~and ~~months~~Avista ofacquisitions. ~~2019~~There was $~~117~~492,~~711~~500 ~~compared~~and to $~~115~~325,~~647~~000 inoutstanding on the ~~same~~Credit ~~period~~Facility ~~last~~at ~~year~~September 30, 2019 and 2018, respectively. ~~Margins~~ ~~decreased~~The average interest rate on debt was 4.1% and 3.6% in the DSthird ~~segment~~quarters asof ~~discussed~~2019 ~~below~~and 2018, respectively.

Income tax provision from continuing operations for the three months ended September 30, 2019 and 2018 was expense of $2,692 and a benefit of $15,406, respectively. The effective tax rate for the three months ended September 30, 2019 was 24.4%. The 2018 tax benefit was primarily due to New Jersey tax reform enacted during the third quarter of 2018 that resulted in a release of valuation allowance against certain state net operating losses and state net deferred tax assets. The tax rate for the three months ended September 30, 2019 would have been 24.7% excluding the impact of certain effects of share-based compensation, acquisition expenses, loss on investment in equity securities, and a change in estimate related to federal tax reform.

Income from continuing operations in the third quarter of 2019 was $8,348, or $0.25 per diluted share, versus $26,815, or $0.79 per diluted share, in the same period a year ago.

Comparison of First Nine Months of 2019 versus First Nine Months of 2018

Net revenue in the first nine months of 2019 of $484,869 was $87,108 or 21.9% higher than the first nine months of 2018. Excluding a 2.3% unfavorable impact of foreign exchange compared to the first nine months of 2018, net revenue increased 24.2% primarily due to the acquisitions of Halo and Avista, and higher sales of controlled substances and generic APIs.

The following table reflects net revenue by geographic area for the first nine months of 2019 and 2018:

	First nine months
	2019		2018
Europe	$	190,379	$	247,105
North America		261,027		127,341
Asia		17,229		11,246
Other		16,234		12,069
Total net revenue	$	484,869	$	397,761

Gross margins in the first nine months of 2019 decreased to 34.8% from 37.3% in the first nine months of 2018. Gross profit in the first nine months of 2019 was $168,612 compared to $148,372 in the same period last year.

Drug Substance

Net revenue in the first ~~six~~nine months of 2019 of $~~241~~344,~~028~~612 was $4132,~~567~~045 or 148.75% lower than the first ~~six~~nine months of 2018. Excluding a 32.35% unfavorable impact of foreign exchange compared to the first ~~six~~nine months of 2018, net revenue decreased 116.40% primarily due to lower volumes of certain branded APIs, primarily our largest product, partially offset by higher sales of ~~clinical phase products and~~ controlled substances ~~compared~~and togeneric ~~the first six months of 2018~~APIs. Excluding the Company’s largest product, revenues in this segment increased 1012.60%.

Gross margins in the first ~~six~~nine months of 2019 ~~decreased~~increased to 3940.74% from 4037.08% in the first ~~six~~nine months of 2018. Gross profit in the first ~~six~~nine months of 2019 was $95139,~~589~~173 compared to $~~112~~142,~~966~~540 in the same period last year. The ~~decrease~~increase in margins was primarily driven by afavorable ~~one-time~~product ~~contract~~mix ~~termination~~and ~~payment~~higher ~~of $3,200 in the second quarter of 2018~~pricing.

Selling, general and administrative (“SG&A”) expenses of $1929,~~300~~157 in the first ~~six~~nine months of 2019 decreased compared to $2131,~~992~~531 in the first ~~six~~nine months of 2018. The decrease was mainly due to lower consulting costs associated with a 2018 operational excellence initiative (approximately $1,200) and the impact of foreign currency (approximately $1,~~100~~400). SG&A, as a percentage of DS net revenue, was 8.05% in the first ~~six~~nine months of 2019 and 7.8.4% in the same period a year ago.

Research and development (“R&D”) expenses of $58,~~971~~941 were 2.56% of DS net revenue in the first ~~six~~nine months of 2019, compared to $610,~~669~~128 or 2.47% in the first ~~six~~nine months of 2018. The decrease was primarily driven by higher absorption of R&D expenses into inventory and cost of goods sold and the impact of foreign currency.

Operating profit in the first ~~six~~nine months of 2019 was $70101,~~319~~075 compared to $84100,~~305~~881 in the first ~~six~~nine months of 2018. The ~~decrease~~increase in operating profit was due to lower ~~gross~~operating ~~profit~~expenses partially offset by lower ~~operating~~gross ~~expenses~~profit as described above.

Drug Product

Halo was purchased in September 2018 and comprises all of the DP segment.

Net revenue in the first ~~six~~nine months of 2019 was $4871,~~842~~306.

Gross margins in the first ~~six~~nine months of 2019 were 2319.39%. Gross profit in the first ~~six~~nine months of 2019 was $1114,~~388~~193.

SG&A expenses were $1117,~~924~~896 in the first ~~six~~nine months of 2019 which includes amortization of purchased intangibles of $59,~~990~~065. SG&A, as a percentage of DP net revenue, was 2425.41%. R&D expenses were negligible.

38DP had an operating loss in the first nine months of 2019 of $3,815.

DP had an operating loss in the first six months of 2019 of $621.

Early Stage Development & Testing

The ESDT segment consists of Avista, which was purchased on January 2, 2019 and Cambrex’s High Point facility.

Net revenue in the first ~~six~~nine months of 2019 was $4668,~~436~~951 compared to $1015,~~548~~950 in the first ~~six~~nine months of 2018. The increase is primarily attributable to the acquisition of Avista.

Gross margins in the first ~~six~~nine months of 2019 were 2322.1% compared to 2526.42% in the first ~~six~~nine months of 2018. Gross profit in the first ~~six~~nine months of 2019 was $1015,~~734~~246 compared to $24,~~681~~180 in the same period last year.

SG&A expenses were $13,297 in the first six months of 2019 which includes amortization of purchased intangibles of $2,778. SG&A, as a percentage of ESDT net revenue, was 28.6%. R&D expenses were $684 in the first six months of 2019.

ESDT had an operating loss in the first six months of 2019 of $4,495 which includes integration expenses of $1,248. Operating profit for the first six months of 2018 was $178.

Corporate

The Company’s Corporate headquarters provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, and information technology and finance departments. The Company allocates certain corporate expenses to each of its segments. SG&A expenses of $6,215 in the first six months of 2019 decreased compared to $8,028 in the first six months of 2018. The decrease was primarily due to lower due diligence costs (approximately $900) and personnel related expenses (approximately $600). R&D expenses of $422 in the first six months of 2019 decreased compared to $1,083 in the same quarter last year. The decrease is due to a reduction of activities for the development of generic drug products.

All acquisition and integration costs related to the Halo and Avista acquisitions have been expensed and totaled $6,618 and $339 for the six months ended June 30, 2019 and 2018, respectively. Of this amount, $5,349 is reflected in Corporate’s 2019 results and $1,248 is reflected in the ESDT segment’s 2019 results. These costs have been recorded to “Acquisition and integration expenses” on the Company’s income statement.

The Company recorded an unrealized loss of $3,804 and an unrealized gain of $5,146 for the six months ended June 30, 2019 and 2018, respectively, related to its 16.3% investment in a European company, as “Unrealized loss/(gain) on investment in equity securities” on the Company’s income statement. Since the shares owned by the Company are substantially in excess of the daily trade volumes of the stock, it could be difficult to sell the shares in a timely manner and it is possible the ultimate value to be realized by the Company could be significantly less upon a sale of the securities. The fair value of the Company’s share of the company was $8,741 at June 30, 2019.

Net interest expense was $11,370 in the first six months of 2019 compared to $99 in the first six months of 2018. The increase is due to interest expense on borrowings to fund the Halo and Avista acquisitions. There was $505,000 outstanding on the Credit Facility at June 30, 2019. The average interest rate on debt was 4.3% in the first six months of 2019. The Company did not have any debt outstanding as of June 30, 2018.

~~Income~~SG&A ~~tax~~expenses ~~expense~~were ~~from continuing operations for the six months ended June 30, 2019 and 2018 was~~ $1119,~~404~~693 ~~and~~in ~~$14,534, respectively. The effective tax rate for~~ the ~~six~~first ~~months~~nine ~~ended June 30, 2019 and 2018 was 30.3% and 18.3%, respectively. The tax rate for the six~~ months ~~ended~~of ~~June 30,~~ 2019 ~~would~~which ~~have~~includes ~~been 25.4% excluding the impact of immediate recognition of certain effects of share-based compensation,~~ amortization of purchased intangibles, ~~acquisition~~of ~~and integration expenses~~$4, ~~and unrealized loss on investment in equity securities~~167. ~~The~~SG&A, ~~increase in the tax rate for 2019~~ as ~~compared~~a topercentage ~~2018~~of isESDT ~~primarily~~net ~~due~~revenue, towas ~~state~~28.6%. ~~tax~~R&D ~~reform~~expenses ~~and~~were ~~the Company’s expanded state presence due to the Halo and Avista acquisitions~~$1,001 ~~and~~in the ~~geographic~~first ~~mix~~nine months of ~~income~~2019.

~~Income~~ESDT ~~from~~had ~~continuing~~an ~~operations~~operating loss in the first ~~six~~nine months of 2019 ~~was~~of $266,~~214,~~711 orwhich ~~$0.78~~includes ~~per~~integration ~~diluted~~expenses ~~share,~~of ~~versus~~ $~~65,101, or $~~1,263.94 ~~per~~Operating ~~diluted~~profit ~~share,~~for in the ~~same~~first ~~period~~nine amonths ~~year~~of ~~ago~~2018 was $475.

Corporate

The Company’s Corporate headquarters provides management and administrative services to support the Company, and consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, information technology and finance departments. The Company allocates certain corporate expenses to each of its segments. SG&A expenses of $9,573 in the first nine months of 2019 decreased compared to $10,660 in the first nine months of 2018. The decrease was primarily due to lower due diligence costs (approximately $900). R&D expenses of $535 in the first nine months of 2019 decreased compared to $1,812 in the same quarter last year. The decrease is due to a reduction of activities for the development of generic drug products.

All merger, acquisition and integration costs related to the Halo and Avista acquisitions and pending merger have been expensed and totaled $11,049 and $7,727 for the nine months ended September 30, 2019 and 2018, respectively. Of this amount, $9,764 and $7,333 are reflected in Corporate’s 2019 and 2018 results, respectively, and $1,263 is reflected in the ESDT segment’s 2019 results. These costs have been recorded to “Merger, acquisition and integration expenses” on the Company’s income statement.

The Company recorded a loss of $4,344 and a gain of $10,757 for the nine months ended September 30, 2019 and 2018, respectively, related to its 16.3% investment in a European company, as “Loss/(gain) on investment in equity securities” on the Company’s income statement. The Company sold its stake in the company during the third quarter of 2019 for $7,780 resulting in a loss of $540 during the current quarter.

Net interest expense was $16,954 in the first nine months of 2019 compared to $824 in the first nine months of 2018. The increase is due to interest expense on borrowings to fund the Halo and Avista acquisitions. There was $492,500 and $325,000 outstanding on the Credit Facility at September 30, 2019 and 2018, respectively. The average interest rate on debt was 4.2% and 3.6% for the first nine months of 2019 and 2018, respectively.

Income tax provision from continuing operations for the nine months ended September 30, 2019 and 2018 was expense of $14,096 and a benefit of $872, respectively. The effective tax rate for the nine months ended September 30, 2019 was 29.0%. The 2018 tax benefit was primarily due to New Jersey tax reform enacted during the third quarter of 2018 that resulted in a release of valuation allowance against certain state net operating losses and state net deferred tax assets. The tax rate for the nine months ended September 30, 2019 would have been 25.9% excluding the favorable impact of certain effects of share-based compensation, acquisition expenses, loss on investment in equity securities, and a change in estimate related to federal tax reform.

Income from continuing operations in the first nine months of 2019 was $34,562, or $1.02 per diluted share, versus $91,916, or $2.73 per diluted share, in the same period a year ago.

Liquidity and Capital Resources

During the first ~~six~~nine months of 2019, cash provided by operations was $4583,~~927~~231 versus $1739,~~502~~764 in the same period a year ago. This increase was primarily due to the timing of accounts receivable collections and advance payments from customers partially offset by ~~lower~~higher ~~accounts~~inventory ~~payable~~production. Contract assets represent unbilled revenue recognized.

Cash flows used in investing activities in the first six months of 2019 were $283,556 versus $32,733 in the same period a year ago. The 2019 cash flows include the acquisition of Avista for $248,146, a residual payment for the Halo acquisition for $322 and capital expenditures of $35,088. The 2018 cash flows represent capital expenditures. Capital expenditures in the first six months of 2019 and 2018 primarily expanded the Company’s manufacturing capacity to support expected growth. 40

Cash flows ~~provided~~used byin ~~financing~~investing activities in the first ~~six~~nine months of 2019 were $~~201~~286,~~815~~251 ~~compared~~versus to $4462,~~599~~508 in the same period a year ago. The 2019 cash flows include ~~borrowings~~the acquisition of Avista for $~~230~~248,~~000~~146, toa ~~fund~~residual payment for the ~~Avista~~Halo acquisition ~~partially~~for ~~offset~~$322, bycapital ~~the~~expenditures ~~pay~~of ~~down~~$45,563 and the sale of ~~debt~~an equity investment of $257,~~000~~780. The 2018 cash flows ~~represent~~include ~~proceeds~~the ~~from~~acquisition ~~stock~~of ~~options~~Halo ~~exercised~~for $418,963 and capital expenditures of $43,545. Capital expenditures in the first nine months of 2019 and 2018 primarily expanded the Company’s manufacturing capacity to support expected growth.

Cash flows provided by financing activities in the first nine months of 2019 were $190,652 compared to $337,685 in the same period a year ago. The 2019 cash flows include borrowings of $230,000 to fund the Avista acquisition partially offset by the pay down of debt of $37,500. The 2018 cash flows include borrowings of $325,000 to fund the acquisition of Halo.

The Company expects to spend approximately $60,000 to $70,000 on capital expenditures during 2019, excluding acquisitions.

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, interest rates, returns on assets within the Company’s domestic pension plans, tax payments, as well as other factors. Our largest product (23.5%, or $120,989 of 2018 sales) is used by our customer to produce an anti-viral drug. Our sales of this product declined significantly in 2018 and we expect sales of approximately $50,000 - $55,000 in 2019, and approximately $15,000 - $20,000 in 2020, the final year of the 5-year supply agreement.

As discussed more fully in Note 16 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 this Form 10-Q for the period ended September 30, 2019 and the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 for further explanation of factors that may negatively impact the Company’s cash flows.

Impact of Recent 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,~~984~~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

Targeted Improvements to Accounting for Hedging Activities

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

Changes to the Disclosure Requirements for Fair Value Measurement

Changes to the Disclosure Requirements for Defined Benefit Plans

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

Simplifying the Test for Goodwill Impairment

Measurement of Credit Losses on Financial Instruments

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 ~~six~~nine months of 2019. 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, 2018.

4243

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.

4344

PART II - OTHER INFORMATION

CAMBREX CORPORATION AND SUBSIDIARIES

Item 1.

Legal Proceedings

See the discussion under Part I, Item 1, Note 16 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 ~~six~~nine months of 2019~~. For~~ aexcept ~~discussion~~as ofset ~~the~~forth ~~Risk~~below. ~~Factors,~~Refer ~~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, 2018.

We may not complete the merger with an affiliate of the Permira funds within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results, and/or operations.

On August 7, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Catalog Intermediate Inc., a Delaware corporation (“Parent”), and Catalog Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are controlled by investment funds advised by Permira Advisers LLC (“Permira”). Completion of the Merger is subject to certain closing conditions, including receipt of certain required regulatory approvals. Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Merger Agreement. In addition, the Merger Agreement may be terminated under certain specific circumstances. As a result, we cannot assure you that the Merger will be completed within the expected time frame or will be completed at all.

Further, as described in Note 16, “Contingencies,” to the accompanying financial statements, there are three stockholder lawsuits relating to the Merger currently pending against us and the individual members of our board of directors. Each of the plaintiffs in such lawsuits alleges violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder and seeks various forms of injunctive and declaratory relief, as well as an award of costs and attorneys’ fees. The outcome of these lawsuits or any other lawsuit that may be filed challenging the Merger is uncertain. If this lawsuit or any future lawsuit is successful in obtaining an order enjoining consummation of the Merger, then such order may prevent the Merger from being consummated, or from being consummated within the expected time frame, and could result in substantial costs to us including, but not limited to, costs associated with the indemnification of directors and officers.

If the Merger is not completed within the expected time frame or at all, we may be subject to a number of material risks. Our stock price may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. We could be required to pay a termination fee if the Merger Agreement is terminated under specific circumstances set forth in the Merger Agreement. In addition, the failure to complete the Merger may result in negative publicity and negatively affect our relationship with our stockholders, employees, and customers.

The pendency of the Merger could materially adversely affect our operations and the future of our business or result in a loss of employees.

In connection with the pending Merger, it is possible that some customers, suppliers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the Merger, which could negatively impact our revenues, earnings and cash flows, regardless of whether the Merger is completed. Similarly, current and prospective employees may experience uncertainty about their future roles with us following completion of the Merger, which may materially adversely affect our ability to attract and retain key employees. In addition, the attention of management and employees may be diverted from ongoing business operations as they focus on matters relating to the Merger. The Merger Agreement also subjects us to restrictions on our business activities, and we must generally operate our business in the ordinary course, subject to specific limitations, which may delay or prevent us from undertaking business opportunities that may arise before the completion of the Merger and that, absent the Merger Agreement, we might have pursued.

As a result of the contemplated Merger, our common stock has been trading, and may continue to trade, within a narrow price range, which could limit possible returns on any new investment in our common stock.

Beginning with the first trading date following the announcement of the Merger Agreement and the contemplated Merger, August 7, 2019, and continuing through the date hereof, our common stock has traded within a narrow price range: from a low closing price of $59.14 to a high closing price of $60.15. This constricted trading range surrounding the merger consideration of $60.00 per share is typical with respect to proposed transactions such as the Merger, where the trading market may perceive that the likelihood of legal or regulatory impediments to the transaction is low. Such a narrow trading range would very likely limit the returns, if any, on any investment in our common stock until the closing or abandonment of the Merger.

Item 6.

Exhibits

Exhibit 10.1*		Dorothy Brienza Offer of Employment Letter
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 32.1**		Section 906 Certification Statements of the Chief Executive Officer and Chief Financial Officer.
Exhibit 101.INS*		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH*		Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith

**	Furnished herewith

Filed herewith as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~June~~September 30, 2019 and December 31, 2018, (ii) Consolidated Income Statements for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive (Loss)/Income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, (iv) Consolidated Statements of Stockholders’ Equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, and (vi) 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/Gregory P. Sargen
		Gregory P. Sargen
		Chief Financial Officer, Executive Vice President Corporate Development & Strategy

		(On behalf of the Registrant and as the
		Registrant's Principal Financial Officer)

Dated: ~~August~~October 731, 2019

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