On November 4, 2016 Cambrex Corporation (NYSE: CBM), a leading manufacturer of small molecule innovator and generic Active Pharmaceutical Ingredients (APIs), reported results for the third quarter ended September 30, 2016 (Press release, Cambrex, NOV 4, 2016, View Source [SID1234516262]).

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Highlights

Sales increased 8% to $99.9 million compared to $92.4 million in the same quarter last year.
GAAP Diluted EPS from continuing operations was $0.42 compared to $0.36 in the same quarter last year and Adjusted Diluted EPS was $0.47 compared to $0.40 in the same quarter last year, representing 17% and 18% increases, respectively.
Operating Profit increased 8% to $19.5 million compared to $18.0 million and Adjusted EBITDA increased 11% to $26.3 million compared to $23.7 million in the same quarter last year (see table at the end of this release).
Net cash was $90.7 million at the end of the third quarter, an increase of $38.3 million during the quarter.
In October, the Company acquired PharmaCore Inc., a privately-owned North Carolina based company specializing in developing, manufacturing and scaling up small molecule APIs for clinical phase projects, for approximately $25 million.
The Company increased its financial guidance for full year sales and Adjusted EBITDA. The Company expects full year 2016 sales, excluding the impact of foreign currency, to increase between 12% and 14% compared to 2015. The Company expects Adjusted EBITDA to be between $147 and $151 million, a 14% to 17% increase compared to 2015 (see Financial Expectations – Continuing Operations section below).
"Based on our excellent year to date results, expectations for a strong fourth quarter and the addition of PharmaCore, renamed Cambrex High Point, we are increasing our sales and profit guidance for 2016," commented Steven M. Klosk, President and Chief Executive Officer of Cambrex.

"During the third quarter, we made announcements regarding investments at each of our three main manufacturing facilities. We are expanding our large scale, multi-purpose manufacturing capabilities at our Karlskoga, Sweden facility, we validated a newly opened pilot plant at our Milan, Italy location and early in the quarter we began production at our new large scale manufacturing facility within our Charles City, Iowa site. We believe these investments, among others, position us for continued growth and we continue to evaluate additional investments to ensure we have the capacity and flexibility to match our customers’ needs. We are also excited about our acquisition of PharmaCore, which adds world class capabilities to complete early phase clinical projects, expands our customer base and broadens our funnel for potential commercial projects when some of those therapeutics obtain regulatory approval."

Basis of Reporting

The Company has provided a reconciliation of GAAP amounts to adjusted (i.e. Non-GAAP) amounts at the end of this press release. Cambrex management believes that the adjusted amounts provide useful information to investors due to the magnitude and nature of certain expenses recorded in the GAAP amounts.

Third Quarter 2016 Operating Results – Continuing Operations

Sales were $99.9 million, compared to $92.4 million in the same period last year, an 8% increase. Foreign exchange had a negligible effect on sales. The sales increase primarily reflects higher volumes in our Innovator product category, partially offset by lower pricing and lower sales of generic APIs and controlled substances.

Gross margins decreased to 38% from 39% compared to the same quarter last year. The decrease was primarily due to lower pricing and unfavorable product mix. Foreign exchange had a negligible effect on gross margins.

Selling, general and administrative expenses were $15.0 million, compared to $14.0 million in the same quarter last year. The increase was mainly due to higher personnel costs and higher costs related to the recent acquisition of Cambrex High Point, partially offset by lower costs associated with the implementation of a new ERP system.

Research and development expenses were $3.2 million, compared to $3.7 million in the same quarter last year. The decrease was primarily related to timing of costs to develop new generic drug products.

Operating profit increased to $19.5 million from $18.0 million in the same quarter last year. The increase was primarily the result of higher gross profit, partially offset by higher operating expenses as described above. Adjusted EBITDA was $26.3 million compared to $23.7 million in the same quarter last year (see table at the end of this release).

Income tax expense was $5.4 million resulting in an effective tax rate of 28% compared to expense of $5.3 million and an effective tax rate of 31% in the same quarter last year. The decrease was primarily related to a small amount of tax benefits recorded this quarter.

Income from continuing operations was $13.7 million or $0.42 per share compared to $11.9 million or $0.36 per share in the same quarter last year. Adjusted income from continuing operations was $15.6 million or $0.47 per share, compared to $13.1 million or $0.40 per share in the same quarter last year (see table at the end of this release).

Capital expenditures and depreciation were $11.7 million and $6.2 million, respectively, compared to $14.5 million and $5.4 million, respectively, in the same quarter last year.

Net cash was $90.7 million at the end of the third quarter, an increase of $38.3 million during the quarter. The increase was primarily due to the timing of accounts receivable collections, partially offset by capital spending and increased inventory levels in anticipation of strong fourth quarter sales.

Financial Expectations – Continuing Operations

The following table shows the Company’s current expectations for its full year 2016 financial performance compared to its previous expectations:

Current
Expectations Previous
Expectations
Gross sales increase 12% – 14% 10% – 13%
Adjusted EBITDA $147 – $151 million $144 – $149 million
Adjusted income from continuing operations per share $2.67 – $2.75 $2.49 – $2.61
Free cash flow $65 – $75 million $60 – $70 million
Capital expenditures $67 – $72 million $70 – $75 million
Depreciation $24 – $25 million $25 – $27 million
Effective tax rate 31% – 33% 32% – 34%

Consistent with prior guidance for the full year 2016, these financial expectations are for continuing operations and exclude the impact of any potential acquisitions, divestitures, restructuring activities, outcomes of tax disputes and any charges related to any future sale of the Company’s Zenara business located in Hyderabad, India. Current expectations include the acquisition of PharmaCore, which was completed in early October 2016. Sales expectations exclude the impact of foreign exchange. EBITDA, Adjusted EBITDA and Adjusted income from continuing operations per share for 2016 will be computed on a basis consistent with the reconciliation of the third quarter 2016 financial results in the tables at the end of this release. Free cash flow is the change in debt, net of cash during the year. The tax rate will be sensitive to the Company’s geographic mix of income.

The financial information contained in this press release is unaudited, subject to revision and should not be considered final until the Company’s third quarter 2016 Form 10-Q is filed with the SEC.