Albany Molecular Research
ALBANY MOLECULAR RESEARCH INC (Form: 10-Q, Received: 11/08/2013 16:53:58)
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended September 30, 2013
 
 
 
o
 
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:   0-25323
 
ALBANY MOLECULAR RESEARCH, INC.  
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
14-1742717
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
26 Corporate Circle
Albany, New York   12212
(Address of principal executive offices)
 
(518) 512-2000
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
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    x
 
No    o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes    x
 
No    ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.   See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes    o
 
No    x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at October 31, 2013
Common Stock, $.01 par value
 
31,616,834 excluding treasury shares of 5,425,031
 
 
 
 

ALBANY MOLECULAR RESEARCH, INC.
 
INDEX
 
Part I.
 
Financial Information
 
3
 
 
 
 
 
 
 
 
 
Item 1.
 
Condensed Consolidated Financial Statements (Unaudited)
 
3
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations
 
3
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
4
 
 
 
 
Condensed Consolidated Balance Sheets
 
5
 
 
 
 
Condensed Consolidated Statements of Cash Flows
 
6
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
7
 
 
 
 
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
17
 
 
 
 
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
25
 
 
 
 
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
25
 
 
 
 
 
 
 
Part II.
 
Other Information
 
26
 
 
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
26
 
 
 
 
 
 
 
 
 
Item 1A.
 
Risk Factors
 
26
 
 
 
 
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
26
 
 
 
 
 
 
 
 
 
Item 6.
 
Exhibits
 
27
 
 
 
 
 
 
 
Signatures
 
 
 
28
 
 
 
 
 
 
 
Exhibit Index
 
 
 
 
 
 
 
2

 
 
PART I — FINANCIAL INFORMATION
 
Item 1.     Condensed Consolidated Financial Statements (Unaudited)
 
Albany Molecular Research, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
(Dollars in thousands, except for per share data)
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract revenue
 
$
53,029
 
$
45,627
 
$
150,286
 
$
130,727
 
Recurring royalties
 
 
7,726
 
 
9,393
 
 
29,167
 
 
27,907
 
Milestone revenue
 
 
 
 
750
 
 
 
 
840
 
Total revenue
 
 
60,755
 
 
55,770
 
 
179,453
 
 
159,474
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of contract revenue
 
 
44,548
 
 
43,660
 
 
124,820
 
 
119,581
 
Technology incentive award
 
 
571
 
 
621
 
 
2,254
 
 
2,473
 
Research and development
 
 
94
 
 
196
 
 
370
 
 
800
 
Selling, general and administrative
 
 
9,249
 
 
10,774
 
 
31,252
 
 
30,461
 
Restructuring charges
 
 
276
 
 
1,616
 
 
6,108
 
 
3,743
 
Property and equipment impairment charges
 
 
 
 
 
 
1,440
 
 
3,967
 
Total operating expenses
 
 
54,738
 
 
56,867
 
 
166,244
 
 
161,025
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
6,017
 
 
(1,097)
 
 
13,209
 
 
(1,551)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
 
 
(81)
 
 
(109)
 
 
(244)
 
 
(364)
 
Other income (expense), net
 
 
98
 
 
(445)
 
 
871
 
 
(1,101)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
6,034
 
 
(1,651)
 
 
13,836
 
 
(3,016)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 
2,104
 
 
492
 
 
5,648
 
 
2,677
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
3,930
 
$
(2,143)
 
$
8,188
 
$
(5,693)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic income (loss) per share
 
$
0.13
 
$
(0.07)
 
$
0.27
 
$
(0.19)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per share
 
$
0.12
 
$
(0.07)
 
$
0.26
 
$
(0.19)
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
3

 
Albany Molecular Research, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Net income (loss)
 
$
3,930
 
$
(2,143)
 
$
8,188
 
$
(5,693)
 
Unrealized loss on marketable securities, net
    of taxes
 
 
 
 
 
 
 
 
(1)
 
Foreign currency translation (loss) gain, net
    of taxes
 
 
(247)
 
 
1,010
 
 
(2,912)
 
 
1,732
 
Net actuarial gain on pension and postretirement
    benefits, net of taxes
 
 
134
 
 
124
 
 
401
 
 
373
 
Total comprehensive income (loss)
 
$
3,817
 
$
(1,009)
 
$
5,677
 
$
(3,589)
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
4

 
Albany Molecular Research, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
 
(Dollars and shares in thousands, except for per share data)
 
 
September 30,
2013
 
 
December 31,
2012
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
39,720
 
$
23,293
 
Restricted cash
 
 
714
 
 
702
 
Accounts receivable, net
 
 
43,691
 
 
42,496
 
Royalty income receivable
 
 
7,778
 
 
8,180
 
Inventory
 
 
34,460
 
 
28,216
 
Prepaid expenses and other current assets
 
 
9,568
 
 
7,337
 
Deferred income taxes
 
 
2,450
 
 
3,200
 
Total current assets
 
 
138,381
 
 
113,424
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
128,369
 
 
135,519
 
 
 
 
 
 
 
 
 
Restricted cash
 
 
3,988
 
 
4,524
 
Intangible assets and patents, net
 
 
3,057
 
 
3,065
 
Equity investment in unconsolidated affiliates
 
 
956
 
 
956
 
Deferred income taxes
 
 
1,780
 
 
3,520
 
Other assets
 
 
875
 
 
1,854
 
Total assets
 
$
277,406
 
$
262,862
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
28,887
 
$
23,566
 
Income taxes payable
 
 
1,064
 
 
1,148
 
Arbitration reserve
 
 
1,693
 
 
2,717
 
Deferred revenue and licensing fees
 
 
9,668
 
 
7,365
 
Accrued pension benefits
 
 
260
 
 
414
 
Current installments of long-term debt
 
 
1,024
 
 
776
 
Total current liabilities
 
 
42,596
 
 
35,986
 
 
 
 
 
 
 
 
 
Long-term liabilities:
 
 
 
 
 
 
 
Long-term debt, excluding current installments
 
 
6,384
 
 
7,227
 
Deferred licensing fees
 
 
1,786
 
 
2,857
 
Deferred income taxes
 
 
859
 
 
753
 
Pension and postretirement benefits
 
 
8,363
 
 
8,691
 
Other long-term liabilities
 
 
1,755
 
 
1,207
 
Total liabilities
 
 
61,743
 
 
56,721
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
Common stock, $0.01 par value, 50,000 shares authorized, 37,024 shares issued as of
     September 30, 2013, and 36,326 shares issued as of December 31, 2012
 
 
370
 
 
363
 
Additional paid-in capital
 
 
211,779
 
 
207,784
 
Retained earnings
 
 
83,365
 
 
75,177
 
Accumulated other comprehensive loss, net
 
 
(12,806)
 
 
(10,295)
 
 
 
 
282,708
 
 
273,029
 
Less, treasury shares at cost, 5,425 shares as of September 30, 2013 and 5,411 shares as
     of December 31, 2012
 
 
(67,045)
 
 
(66,888)
 
Total stockholders’ equity
 
 
215,663
 
 
206,141
 
Total liabilities and stockholders’ equity
 
$
277,406
 
$
262,862
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
5

 
Albany Molecular Research, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 
 
 
Nine Months Ended
 
(Dollars in thousands)
 
September 30, 2013
 
September 30, 2012
 
 
 
 
 
 
 
 
 
Operating activities
 
 
 
 
 
 
 
Net income (loss)
 
$
8,188
 
$
(5,693)
 
Adjustments to reconcile net income (loss) to net cash provided by
  operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
11,951
 
 
13,058
 
Deferred income tax benefit
 
 
2,410
 
 
2,425
 
Loss on disposal of property, plant and equipment
 
 
195
 
 
156
 
Property and equipment impairment
 
 
1,440
 
 
3,967
 
Stock-based compensation expense
 
 
1,808
 
 
1,435
 
Excess tax benefit of stock option exercises
 
 
(692)
 
 
 
Provision for bad debt
 
 
137
 
 
148
 
Changes in assets and liabilities that provide (use) cash:
 
 
 
 
 
 
 
Accounts receivable
 
 
(1,332)
 
 
(4,891)
 
Royalty income receivable
 
 
402
 
 
(2,441)
 
Inventory
 
 
(6,244)
 
 
(7,152)
 
Prepaid expenses and other assets
 
 
643
 
 
(1,525)
 
Accounts payable and accrued expenses
 
 
3,669
 
 
1,472
 
Income taxes payable
 
 
608
 
 
4,411
 
Deferred revenue and licensing fees
 
 
1,232
 
 
(331)
 
Pension and postretirement benefits
 
 
135
 
 
(695)
 
Other long-term liabilities
 
 
(891)
 
 
81
 
Net cash provided by operating activities
 
 
23,659
 
 
4,425
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
Proceeds from sales and maturities of investment securities
 
 
 
 
213
 
Purchase of property, plant and equipment
 
 
(7,654)
 
 
(7,125)
 
Payments for patent applications and other costs
 
 
(316)
 
 
(448)
 
Proceeds from disposal of property, plant and equipment
 
 
169
 
 
447
 
Net cash used in investing activities
 
 
(7,801)
 
 
(6,913)
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
Principal payments on long-term debt
 
 
(595)
 
 
(2,838)
 
Borrowings on long-term debt
 
 
 
 
5,000
 
Change in restricted cash
 
 
524
 
 
(5,000)
 
Proceeds from sale of common stock
 
 
1,505
 
 
531
 
Excess tax benefit of stock option exercises
 
 
692
 
 
 
Purchases of treasury stock
 
 
(157)
 
 
 
Net cash provided by (used in) financing activities
 
 
1,969
 
 
(2,307)
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash
 
 
(1,400)
 
 
484
 
 
 
 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
 
16,427
 
 
(4,311)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
 
23,293
 
 
19,984
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
 
$
39,720
 
$
15,673
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
6

 
(All amounts in thousands, except per share amounts, unless otherwise noted)
 
Note 1 — Summary of Operations and Significant Accounting Policies

Nature of Business and Operations
 
Albany Molecular Research, Inc. (the “Company”) provides scientific services, technologies and products focused on improving the quality of life. With locations in the U.S., Europe, and Asia, the Company provides customers with a range of services and cost models.   The Company’s core business consists of a fee-for-service contract services platform encompassing drug discovery, development and manufacturing.   The Company also owns a portfolio of proprietary technologies which have resulted from its internal programs, including drug discovery and niche generic products and manufacturing process efficiencies, some of which are licensed to third parties, and some of which benefit the Company’s operations.  
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.
 
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Unrealized gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive loss in the accompanying unaudited condensed consolidated balance sheets.
 
Use of Management Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.   The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the valuation of inventory, intangible assets, and long-lived assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans, the amount and realizabilty of deferred tax assets, assumptions utilized in determining stock-based compensation, assumptions related to the collectability of receivables, and assumptions associated with legal contingencies. Actual results can vary from these estimates.
 
Contract Revenue Recognition
 
The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Reimbursed expenses consist of chemicals and other project specific costs. Generally, the Company’s contracts may be terminated by the customer upon 30  days’ to two year’s prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the FASB’s Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate accounting is based on the fair value of the respective elements.
   
 
7

 
The Company generates contract revenue on the following basis:
 
Full-time Equivalent (“FTE”). An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but often have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.
 
These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.
 
Time and Materials . Under a time and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.
 
Fixed-Fee . Under a fixed-fee contract, the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons.   In these instances, the revenue recognition process is considered complete when project documents have been delivered to the customer.
 
Up-Front License Fees, Milestone and Recurring Royalties Revenue Recognition  
 
The Company has discovered and conducted the early development of several new drug candidates, with a view to out- licensing these candidates to partners for further development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.
 
The Company has entered into such agreements with Bristol-Myers Squibb (“BMS”) and Genentech, Inc. (“Genentech”).   Under the terms of the agreements, the Company received upfront licensing fees and research funding to further develop the licensed compounds.   In addition, the Company is eligible to receive development and regulatory milestones for each licensed compound, as well as royalties on sales of commercialized compounds, if any.
 
Under the terms of the agreements with BMS and Genentech, the Company may receive milestone payments for each compound advanced by BMS and Genentech upon achievement of certain clinical and regulatory milestones as follows:
 
·
Up to $ 14,000 in clinical development milestones; and
 
·
Up to $ 30,000 in regulatory milestones, due upon acceptance and/or approval of new drug application filings with regulatory agencies in various jurisdictions.
 
For both the three and nine months ended September 30, 2013, no milestone revenue was recognized by the Company.   The Company recognized $ 750 and $ 840 of milestone revenue for the three and nine months ended September 30, 2012, respectively.
 
Recurring Royalties Revenue.   Recurring royalties include royalties under a license agreement with Sanofi based on the worldwide net sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s authorized or licensed generics and sales by certain authorized sub-licensees. The Company records royalty revenue in the period in which the net sales of Allegra/Telfast occur, because it can reasonably estimate such royalties. Royalty payments from Sanofi are due within 45  days after each calendar quarter and are determined based on net sales of Allegra/Telfast and Teva Pharmaceuticals’ net sales of generic D-12 in that quarter.   The Company receives additional royalties in conjunction with a Development and Supply Agreement with Actavis, Inc (“Actavis”).   These royalties, which the Company began receiving in the third quarter of 2012, are earned on net sales of generic products sold by Actavis, who received FDA approval for these generic products.   The Company records royalty revenue in the period in which the net sales of these products occur.   Royalty payments are due within 60 days after each calendar quarter and are determined based on sales of the qualifying products in that quarter.
 
 
8

 
Up-Front License Fees, Milestone, and Royalty Revenue .   The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.
 
Cash, Cash Equivalents and Restricted Cash
 
Cash equivalents consist of money market accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
Upon entering into a new credit agreement in April 2012, the Company was required to maintain a $ 5,000 restricted cash balance to partially collateralize the revolving line of credit.   In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement is directly reduced by the amount of principal payments made on the term loan which began in May 2013.   The restricted cash balance at September 30, 2013 was $ 4,702 .
 
Long-Lived Assets
 
The Company assesses the impairment of a long-lived asset group whenever events or changes in circumstances indicate that the asset s  carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, among others, the following:
 
·
a significant change in the extent or manner in which a long-lived asset group is being used;
 
·
a significant change in the business climate that could affect the value of a long-lived asset group; or
 
·
a significant decrease in the market value of assets.
 
If the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated.   An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of the long-lived assets. 

Note 2 — Earnings Per Share
 
The shares used in the computation of the Company’s basic and diluted earnings per share are as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Weighted average common shares outstanding - basic
 
 
31,041
 
 
30,414
 
 
30,854
 
 
30,273
 
Dilutive effect of share-based compensation
 
 
975
 
 
 
 
873
 
 
 
Weighted average common shares outstanding - diluted
 
 
32,016
 
 
30,414
 
 
31,727
 
 
30,273
 
 
The Company has excluded certain outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three and nine months ended September 30, 2013 because of anti-diluted effects. The Company has excluded all outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three and nine months ended September 30, 2012 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive.   The weighted average number of anti-dilutive options and restricted shares outstanding (before the effects of the treasury stock method) was 189 and 2,983 for the three months ended September 30, 2013 and 2012, respectively, and 502 and 3,142 for the nine months ended September 30, 2013 and 2012, respectively.   These amounts are not included in the calculation of weighted average common shares outstanding.
 
 
9

 
Note 3 — Inventory
 
Inventory consisted of the following at September 30, 2013 and December 31, 2012:
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
Raw materials
 
$
5,753
 
$
8,575
 
Work in process
 
 
2,449
 
 
2,949
 
Finished goods
 
 
26,258
 
 
16,692
 
Total
 
$
34,460
 
$
28,216
 

Note 4 –Debt
 
In April 2012, the Company entered into a $ 20,000 credit facility consisting of a 4 -year, $ 5,000 term loan and a $ 15,000 revolving line of credit.   The Company used a portion of the initial proceeds borrowed under the term loan to repay all amounts due under its prior credit agreement.   As of September 30, 2013, the Company had no amounts outstanding on the revolving line of credit and $ 6,508 of outstanding letters of credit secured by this line of credit.   The amount available to be borrowed under the revolving line of credit at September 30, 2013 is $ 8,492 .
 
Borrowings under this agreement will bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25 %; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75 %.   As of September 30, 2013, the interest rate on the term loan was 3.625 %.  
 
The credit facility contains financial covenants, including a minimum fixed charge coverage ratio which commenced in 2013 and extends for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations.   As of September 30, 2013, the Company was in compliance with its current financial covenants.   
 
The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021.   Interest payments are due monthly with a current interest rate of 0.17% at September 30, 2013.   The amount outstanding as of September 30, 2013 was $ 2,695 .
 
The following table summarizes long-term debt:
 
 
 
September 30, 
2013
 
December 31,
2012
 
Term loan
 
$
4,703
 
$
5,000
 
Industrial development authority bonds
 
 
2,695
 
 
2,990
 
Miscellaneous loan
 
 
10
 
 
13
 
 
 
 
7,408
 
 
8,003
 
Less current portion
 
 
(1,024)
 
 
(776)
 
Total long-term debt
 
$
6,384
 
$
7,227
 
 
The aggregate maturities of long-term debt at September 30, 2013 are as follows:
 
2013 (remaining)
 
$
180
2014
 
 
1,024
2015
 
 
1,029
2016
 
 
1,034
2017
 
 
2,711
Thereafter
 
 
1,430
Total
 
$
7,408
 
 
10

 
Note 5 — Restructuring and Impairment
 
During 2012, the Company announced its decisions to cease operations at its Budapest, Hungary and Bothell, Washington facilities. The goal of these restructuring activities is to advance the Company’s continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing its location footprint.   In connection with these activities, the Company recorded restructuring charges in its Discovery, Drug Development and Small Scale Manufacturing (“DDS”) operating segment of $ 6,108 in the first nine months of 2013 and $ 4,355 during 2012. These amounts primarily consist of $ 1,742 for termination benefits, $ 445 for repayment of government incentive programs and $ 8,180 for lease termination settlements and fees and other administrative costs, including charges in the second quarter of 2013 consisting of $ 822 of additional costs associated with terminating the Budapest lease and $ 2,903 relating to the Bothell, WA lease termination.
 
The Company exited the Hungary facility in the third quarter of 2012.   During the second quarter of 2013, the Company reached agreement with the landlord of that facility requiring AMRI Hungary to pay approximately $1,890 to settle the litigation in Hungary that resulted from the termination of the lease following the cessation of operations in Budapest, Hungary.   Of this amount, $ 1,100 was recorded in 2012 as the Company’s initial estimate of its liability under this lease.   The remaining $ 822 is included in the restructuring charge taken during the second quarter of 2013.    $ 1,600 of this settlement amount was paid in the third quarter of 2013, with the remainder to be paid upon removal of the remaining assets.  
 
The following table displays the restructuring activity and liability balances for the nine-month period ended and as of September 30, 2013:  
 
 
 
 
 
 
 
 
 
Foreign
Currency
 
 
 
 
 
 
 
 
 
 
 
 
Translation &
 
 
 
 
 
 
Balance at
 
 
 
 
 
Other
 
Balance at
 
 
 
January 1,
 
Charges/
 
Amounts
 
Adjustments
 
September 30,
 
 
 
2013
 
(reversals)
 
Paid
 
(1)
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Termination benefits and personnel realignment
 
$
386
 
$
570
 
$
(636)
 
 
-
 
$
320
 
Lease termination and relocation charges
 
 
1,405
 
 
5,443
 
 
(3,939)
 
 
1,116
 
 
4,025
 
Other
 
 
470
 
 
95
 
 
(95)
 
 
-
 
 
470
 
Total
 
$
2,261
 
 
6,108
 
$
(4,670)
 
$
1,116
 
$
4,815
 
 
(1)
Included in lease termination and relocation charges adjustments are reclassifications of unamortized deferred rent balances from accrued expenses into the restructuring reserve of $ 1,148 .
 
Termination benefits and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring.   Lease termination charges relate to estimated costs associated with exiting a facility, net of estimated sublease income.
 
Restructuring charges are included under the caption “Restructuring charges” in the consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the consolidated balance sheets at September 30, 2013 and December 31, 2012.
 
Anticipated cash outflow related to the restructuring reserves as of September 30, 2013for the remainder of 2013 is approximately $ 969 .  
 
In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $ 1,440 in the first nine months of 2013 and $ 3,967 in the first nine months of 2012 in the DDS segment. Included in the 2013 charges are $ 906 of additional impairment charges taken in the second quarter relating to updated assumptions regarding the expected disposition of certain movable equipment currently located at the former Hungary facility.   These charges are included under the caption “Property and equipment impairment charges” on the Consolidated Statement of Operations for the nine months ended September 30, 2013 and 2012.
 
 
11

 
Note 6 —Intangible Assets
 
The components of intangible assets are as follows:
 
 
 
 
 
Accumulated
 
 
 
Amortization
 
 
 
Cost
 
Amortization
 
Net
 
Period
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Patents and Licensing Rights
 
$
4,649
 
$
(1,871)
 
$
2,778
 
2 -16 years
 
Customer Relationships
 
 
815
 
 
(536)
 
 
279
 
5 years
 
Total
 
$
5,464
 
$
(2,407)
 
$
3,057
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Patents and Licensing Rights
 
$
4,333
 
$
(1,669)
 
$
2,664
 
2-16 years
 
Customer Relationships
 
 
815
 
 
(414)
 
 
401
 
5 years
 
Total
 
$
5,148
 
$
(2,083)
 
$
3,065
 
 
 
 
Amortization expense related to intangible assets was $ 103 and $ 82 for the three months ended September 30, 2013 and 2012, respectively, and $ 319 and $ 307 for the nine months ended September 30, 2013 and 2012, respectively.
 
The following chart represents estimated future annual amortization expense related to intangible assets:
 
Year ending December 31,
 
 
 
2013 (remaining)
 
$
214
2014
 
 
421
2015
 
 
292
2016
 
 
257
2017
 
 
257
Thereafter
 
 
1,616
Total
 
$
3,057

Note 7 — Share-Based Compensation
 
During the three and nine months ended September 30, 2013, the Company recognized total share based compensation cost of $ 630 and $ 1,808 , respectively, as compared to total share based compensation cost for the three and nine months ended September 30, 2012 of $ 369 and $ 1,435 , respectively.
 
The Company grants share-based compensation, including restricted shares, under its 2008 Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase Plan.
 
Restricted Stock
 
A summary of unvested restricted stock activity during the nine months ended September 30, 2013 is presented below:
 
 
 
 
 
Weighted
 
 
 
 
 
Average Grant Date
 
 
 
Number of
 
Fair Value Per
 
 
 
Shares
 
Share
 
Outstanding, January 1, 2013
 
468
 
$
5.85
 
Granted
 
246
 
$
6.91
 
Vested
 
(174)
 
$
6.89
 
Forfeited
 
(20)
 
$
5.82
 
Outstanding, September 30, 2013
 
520
 
$
6.01
 
 
The weighted average fair value of restricted shares per share granted during the nine months ended September 30, 2013 and 2012 was $ 6.91 and $ 3.12 , respectively.   As of September 30, 2013, there was $ 2,472 of total unrecognized compensation cost related to non-vested restricted shares.   That cost is expected to be recognized over a weighted-average period of 2.1 years.   Of the 520 restricted shares outstanding, we currently expect 497 shares to vest.  
 
 
12

 
Stock Options
 
The fair value of each stock option award is estimated at the date of grant using the Black-Scholes valuation model based on the following assumptions:
 
 
 
For the Nine Months Ended
 
 
 
September 30, 2013
 
 
September 30, 2012
 
Expected life in years
 
5
 
 
5
 
Risk free interest rate
 
0.82
%
 
0.85
%
Volatility
 
56
%
 
57
%
Dividend yield
 
 
 
 
 
A summary of stock option activity under the Company’s Stock Option and Incentive Plans during the nine month period ended September 30, 2013 is presented below:
 
 
 
 
 
 
 
 
Weighted Average
 
 
 
 
 
 
 
 
Weighted Average
 
Remaining
 
Aggregate
 
 
 
Number of
 
Exercise
 
Contractual Term
 
Intrinsic
 
 
 
Shares
 
Price Per Share
 
(Years)
 
Value
 
Outstanding, January 1, 2013
 
2,389
 
$
5.90
 
 
 
 
 
 
Granted
 
314
 
 
5.99
 
 
 
 
 
 
Exercised
 
(301)
 
 
3.02
 
 
 
 
 
 
Forfeited
 
(117)
 
 
8.12
 
 
 
 
 
 
Expired
 
(174)
 
 
15.25
 
 
 
 
 
 
Outstanding, September 30, 2013
 
2,111
 
$
5.43
 
7.3
 
$
16,155
 
Options exercisable, September 30, 2013
 
779
 
$
8.22
 
5.5
 
$
4,062
 
 
The weighted average fair value of stock options granted for the nine months ended September 30, 2013 and 2012 was $ 2.86 and $ 1.46 , respectively.   As of September 30, 2013, there was $ 1,759 of total unrecognized compensation cost related to non-vested stock options.   That cost is expected to be recognized over a weighted-average period of 1.5 years.   Of the 2,111 stock options outstanding, we currently expect 2,041 options to vest.
 
Employee Stock Purchase Plan
 
During the nine months ended September 30, 2013 and 2012, 163 and 182 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan (“ESPP”).  
 
During the nine months ended September 30, 2013 and 2012, cash received from stock option exercises and employee stock purchases was $ 1,505 and $ 531 , respectively.   The excess tax benefit realized for the tax deductions from share based compensation was $ 692 and $ 0 for the nine months ended September 30, 2013 and 2012, respectively.

Note 8 — Operating Segment Data
 
The Company has organized its sales, marketing and production activities into the DDS and Large-Scale Manufacturing (“LSM”) segments based on the criteria set forth in ASC 280, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s management relies on an internal management accounting system to report results of the segments. The system includes revenue and cost information by segment. The Company’s management makes financial decisions and allocates resources based on the information it receives from this internal system.
 
DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. LSM includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing.   Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments.
 
 
13

 
The following table contains earnings data by operating segment, reconciled to totals included in the unaudited condensed consolidated financial statements:
 
 
 
 
 
 
Milestone &
 
 
 
 
 
 
 
 
 
 
 
Recurring
 
Income (Loss)
 
Depreciation
 
 
 
Contract
 
Royalty
 
from
 
and
 
 
 
Revenue
 
Revenue
 
Operations
 
Amortization
 
For the three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
DDS
 
$
19,402
 
$
5,709
 
$
7,322
 
$
1,775
 
LSM
 
 
33,627
 
 
2,017
 
 
7,944
 
 
2,043
 
Corporate
 
 
 
 
 
 
(9,249)
 
 
 
Total
 
$
53,029
 
$
7,726
 
$
6,017
 
$
3,818
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
DDS
 
$
16,293
 
$
6,817
 
$
4,673
 
$
2,206
 
LSM
 
 
29,334
 
 
3,326
 
 
5,004
 
 
1,952
 
Corporate
 
 
 
 
 
 
(10,774)
 
 
 
Total
 
$
45,627
 
$
10,143
 
$
(1,097)
 
$
4,158
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
DDS
 
$
59,011
 
$
22,547
 
$
21,240
 
$
5,913
 
LSM
 
 
91,275
 
 
6,620
 
 
23,221
 
 
6,038
 
Corporate
 
 
 
 
 
 
(31,252)
 
 
 
Total
 
$
150,286
 
$
29,167
 
$
13,209
 
$
11,951
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
DDS
 
$
52,410
 
$
25,331
 
$
15,682
 
$
7,247
 
LSM
 
 
78,317
 
 
3,416
 
 
13,228
 
 
5,811
 
Corporate
 
 
 
 
 
 
(30,461)
 
 
 
Total
 
$
130,727
 
$
28,747
 
$
(1,551)
 
$
13,058
 
 
The following table summarizes other information by segment as of and for the nine month period ended September 30, 2013:
 
 
 
DDS
 
LSM
 
Total
 
Total assets
 
$
102,547
 
$
174,859
 
$
277,406
 
Investments in unconsolidated affiliates
 
 
956
 
 
 
 
956
 
Capital expenditures
 
 
2,419
 
 
5,235
 
 
7,654
 
 
The following table summarizes other information by segment as of and for the nine month period ended September 30, 2012:
 
 
 
DDS
 
LSM
 
Total
 
Total assets
 
$
134,126
 
$
130,341
 
$
264,467
 
Investments in unconsolidated affiliates
 
 
956
 
 
 
 
956
 
Capital expenditures
 
 
2,405
 
 
4,720
 
 
7,125
 

Note 9 — Financial Information by Customer Concentration and Geographic Area
 
Total contract revenue from DDS’s three largest customers each represented approximately 11 %, 8 % and   8 %, of DDS’s total contract revenue for the three months ended September 30, 2013, and 9 %, 8 % and 7 % of DDS’s total contract revenue for the three months ended September 30, 2012.   Total contract revenue from DDS’s three largest customers represented approximately 9 %, 8 % and  8 % of DDS’s total contract revenue for the nine months ended September 30, 2013, and 10 %, 7 % and 6 % of DDS’s total contract revenue for the nine months ended September 30, 2012.  
 
 
14

 
Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 29 % LSM’s total contract revenue for both the three months ended September 30, 2013 and 2012 and 27 % of LSM’s total contract revenue for both the nine months ended September 30, 2013 and 2012.    GE accounted for approximately 16 % of the Company’s total contract revenue for both the nine months ended September 30, 2013 and 2012, respectively.   LSM’s second largest customer in 2013 represented 13 % and 11 % of LSM’s total contract revenue for the three months ended September 30, 2013 and 2012, respectively and 18 % and 13 % of LSM’s total contract revenue for the nine months ended September 30, 2013 and 2012, respectively.   Additionally, this customer represented 11 % of the Company’s total contract revenue for the nine months ended September 30, 2013.
 
The Company’s total contract revenue for the three and nine months ended September 30, 2013 and 2012 was recognized from customers in the following geographic regions:
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
September 30,
 
 
September 30,
 
 
 
2013
 
 
2012
 
 
2013
 
 
2012
 
United States
 
 
60
%
 
 
55
%
 
 
66
%
 
 
57
%
Europe
 
 
22
 
 
 
25
 
 
 
19
 
 
 
22
 
Asia
 
 
13
 
 
 
17
 
 
 
11
 
 
 
17
 
Other
 
 
5
 
 
 
3
 
 
 
4
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
100
%
 
 
100
%
 
 
100
%
 
 
100
%
 
Long-lived assets by geographic region are as follows:
 
 
 
September 30,
2013
 
December  31, 
2012
 
United States
 
$
107,613
 
$
112,268
 
Asia
 
 
17,592
 
 
19,076
 
Europe
 
 
6,221
 
 
7,240
 
Total long-lived assets
 
$
131,426
 
$
138,584
 

Note 10 — Legal Proceedings
 
The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business.   Except as noted below, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
 
As of early in the first quarter of 2013, the Company had settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and   Allegra-D products, with the exception of certain proceedings pending in the United States related to two affiliated defendants’ production and sale of generic versions of Allegra and Allegra-D products.   All of the other pending legal proceedings have been settled to the mutual satisfaction of the parties and the related litigation have been dismissed by the mutual consent of the parties.   The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, has been involved in legal proceedings with several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company will receive royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until its expiration in November 2013 and royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid.   The Company is also entitled to receive certain royalties from Sanofi and certain approved sub-licensees in certain foreign countries and with respect to certain foreign patents through mid-2015, unless certain patents are earlier determined to be invalid.  
 
In November 2012, the Company was named in a lawsuit by a former vendor related to a contract cancellation. In considering the facts and circumstances surrounding the litigation, the potential outcome, the costs expected to be incurred in defending the Company’s position, the distraction to management and the potential reputational risk to the Company, management decided to enter into discussions to settle this matter in the second quarter of 2013. The Company recorded a charge of $ 1,920 in the second quarter of 2013 representing the estimated payment to be made upon finalizing the settlement agreement. The Company completed the settlement in the third quarter of 2013 and the litigation was terminated.
 
 
15

 
 
 
Note 11 – Fair Value
 
The Company determines its fair value of financial instruments using the following methods and assumptions:
 
Cash and cash equivalents, restricted cash, receivables, and accounts payable: The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.
 
Long-term debt: The carrying value of long-term debt approximated fair value at September 30, 2013 and December 31, 2012 due to the resetting dates of the variable interest rates.
 
The Company uses a framework for measuring fair value in generally accepted accounting principles and making disclosures about fair value measurements.  A three-tiered fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.  
 
These tiers include:  
Level 1 – defined as quoted prices in active markets for identical instruments;
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Nonrecurring Fair Value Measurements:
 
In the second quarter of 2013, the Company recorded property and equipment impairment charges of $ 906 in its DDS segment in connection with its actions to optimize its location footprint.   The fair market values of these long-lived assets were determined using quoted prices for assets similar in nature and condition (Level 2).

Note 12 – Accumulated Other Comprehensive Income (Loss)
 
The activity related to accumulated other comprehensive income (loss) was as follows:
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Accumulated
 
 
 
Pension and
 
Foreign
 
Other
 
 
 
postretirement
 
currency
 
Comprehensive
 
 
 
benefit plans
 
adjustments
 
Loss
 
Balance at December 31, 2012, net of tax
 
$
(5,687)
 
$
(4,608)
 
$
(10,295)
 
Net current period change, net of tax
 
 
401
 
 
(2,912)
 
 
(2,511)
 
Balance at September 30, 2013, net of tax
 
$
(5,286)
 
$
(7,520)
 
$
(12,806)
 

The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive income (loss):
 
 
 
Three Months
 
Nine Months
 
 
 
Ended
 
Ended
 
 
 
September 30, 2013
 
September 30, 2013
 
Amortization of pension and other postretirement benefits (a)
 
 
 
 
 
 
 
Actuarial losses
 
$
206
 
$
617
 
Total before tax effect
 
 
206
 
 
617
 
Tax benefit on amounts reclassified into earnings
 
 
(72)
 
 
(216)
 
 
 
$
134
 
$
401
 
 
(a)    Amounts represent amortization of net actuarial loss from shareholders’ equity into postretirement benefit plan cost.  
 This amount was primarily recognized as cost of contract revenue in the consolidated statement of operations.
 
16

 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning pension and postretirement benefit costs, the Company’s relationship with its largest customers, the Company’s collaborations with Bristol-Myers Squibb (“BMS”) and Genentech , future acquisitions or divestitures , earnings, contract revenues, costs and margins, patent protection, Allegra® and Actavis royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, long-lived asset impairment, competition and tax rates.   Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on March 18, 2013, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q.   All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.
 
Strategy and Overview  
 
We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients (“API”) and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.
 
We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. Our service offerings range from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia.   We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market.   Compounds discovered and/or developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.
 
Additionally, we offer our customers a fully integrated manufacturing process for sterile injectable drugs.   This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product.   We continue to make investments to build and recover our formulation business, as we believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis.
 
In addition to providing our customers our hybrid services model for outsourcing, we offer the option of insourcing.   With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the customer to cost-effectively leverage their unused laboratory space.
 
 
17

 
As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. AMRI SMARTSOURCING™ is a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI’s people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long term growth and profitability.
 
In 2011, we made a decision to cease activities related to our internal proprietary compound discovery R&D programs.   Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing.   Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.
 
In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012.   In November 2012, we approved a restructuring plan to cease all operations at our Bothell, WA facility.   The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing its location footprint.
 
Our backlog of open manufacturing orders and accepted service contracts was $127.6 million at September 30, 2013, as compared to $117.3 million at September 30, 2012.   Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.
 
We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons.   First, contracts vary in duration, and as such the timing and amount of revenues recognized from backlog can vary from period to period.   Second, the Company’s manufacturing and services contracts are of a nature that a customer may, at its option, cancel or delay the timing of delivery, which would change our projections concerning the timing and extent to which revenue may be recognized.   In addition, the value of the Company’s services contracts that are conducted on a time and materials or full-time equivalent basis are based on estimates, from which actual revenue generated could vary.   Finally, there is no assurance that projects included in backlog will not be terminated or delayed at any time by customers or regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.
 
Our total revenue for the quarter ended September 30, 2013 was $60.8 million, which included $53.0 million from our contract service business and $7.7 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc. (“Actavis”).    Consolidated gross margin was 16.0% for the quarter ended September 30, 2013 as compared to 4.3% for the quarter ended September 30, 2012.
 
During the nine months ended September 30, 2013, cash provided by operations was $23.7 million compared to $4.4 million for the same period of 2012.   This change from the nine months ended September 30, 2012 resulted primarily from increases in the Company’s revenue and margins.   During the nine months ended September 30, 2013, we spent $7.7 million on capital expenditures, primarily related to growth and maintenance of our existing facilities.   As of September 30, 2013, we had $44.4 million in cash, cash equivalents and restricted cash and $7.4 million in bank and other related debt.
 
 
18

 
Results of Operations – Three and Nine Months ended September 30, 2013 Compared to Three and Nine Months Ended September 30, 2012
 
Revenues
 
Total contract revenue
 
Contract revenue consists primarily of  amounts earned from delivery of products and services  under contracts with our third party customers.   Our contract revenues for each of our Discovery, Drug Development and Small Scale Manufacturing (“DDS”) and Large-Scale Manufacturing (“LSM”) segments were as follows:
 
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30,
 
(in thousands)
 
2013
 
2012
 
2013
 
2012
 
DDS
 
$
19,402
 
$
16,293
 
$
59,011
 
$
52,410
 
LSM
 
 
33,627
 
 
29,334
 
 
91,275
 
 
78,317
 
Total
 
$
53,029
 
$
45,627
 
$
150,286
 
$
130,727
 
 
DDS contract revenues for the three months ended September 30, 2013 increased from the same period in 2012.   This increase was primarily due to an increase in demand for U.S. chemistry services and U.S. small-scale development services.
 
DDS contract revenues for the nine months ended September 30, 2013 increased from the same period in 2012 primarily due to an increase in demand for chemistry services and small-scale development services, offset in part by reduced U.S. biology business due to the closure of our Bothell facility.
 
We currently expect DDS contract revenue for full year 2013 to increase from amounts recognized in 2012 primarily due to continued growth in demand for our U.S. chemistry services.
 
LSM revenue increased for the three months ended September 30, 2013 from the same period in 2012 primarily due to an increase in commercial manufacturing services at our large scale facilities worldwide.
 
LSM revenue increased for the nine months ended September 30, 2013 from the same period in 2012 primarily due to an increase in commercial manufacturing services at our Rensselaer, NY, United Kingdom and Aurangabad, India facilities, offset in part by decreases in our clinical supply manufacturing services.
 
We currently expect continued growth in LSM contract revenue for full year 2013 due to anticipated growth in all of our large-scale facilities.
 
Recurring royalty revenue
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
 
 
$
7,726
 
$
9,393
 
$
29,167
 
$
27,907
 
 
The largest portion of our recurring royalties are based on the worldwide sales of Allegra/Telfast, as well as on sales of Sanofi over-the-counter (“OTC”) product and authorized generics.   Additionally, beginning in the third quarter of 2012 we earned recurring royalty revenue in conjunction with a Development and Supply Agreement with Actavis at the Company’s Rensselaer, NY manufacturing facility.
 
Recurring royalties decreased during the three months ended September 30, 2013 from the same period in 2012 primarily due to a decrease in Actavis royalties as amounts from the third quarter of 2012 included launch quantities of this product.
 
Recurring royalties increased during the nine months ended September 30, 2013 from the same period in 2012 primarily due to the receipt of Actavis royalties, offset in part by lower Allegra royalties.
 
We currently expect full year 2013 recurring royalties to approximate amounts recognized in 2012 primarily due to incremental royalties from Actavis, offset by lower Allegra royalties.
 
The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows.   We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.   We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes.   These U.S. patents begin to expire in November 2013.   The international patents begin to expire in 2014 and most of these patents are covered by our license agreements with Sanofi.
 
 
19

 
Milestone revenue
 
Three Months Ended  
September 30,
 
Nine Months Ended  
September 30,
 
2013
 
2012
 
2013
 
 
2012
 
 
(in thousands)
 
 
 
 
$
 
$
750
 
$
 
$
840
 
 
Milestone revenue for the three months ended September 30, 2012 was recognized in conjunction with the Company’s license and research agreement with BMS for advancing a fourth compound into preclinical development.   Additionally, milestone revenue for the nine months ended September 30, 2012 includes $0.1 million recognized in the first half of 2012 in conjunction with the Actavis agreement.
 
During the third quarter,  the Company was informed by BMS, of its decision to terminate development of BMS-820836, an investigational triple reuptake inhibitor in phase II clinical development for Treatment Resistant Depression (“TRD”) .   A third ongoing  clinical study is being discontinued. According to BMS, this decision was made based on the drug’s failure to achieve the primary endpoint in two phase IIb studies in patients with TRD.  The Company has learned that BMS intends to share further data from the two phase IIb studies at an appropriate scientific forum and/or in a scientific publication at a future date. This decision by BMS may impact  the Company’s ability to receive future milestones and royalties under the BMS agreement but will have no impact on 2013.
 
Costs and Expenses
 
Cost of contract revenue
 
Cost of contract revenue consists of compensation and associated fringe benefits for employees, chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:
 
Segment
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
(in thousands)
 
2013
 
 
2012
 
 
2013
 
 
2012
 
DDS
 
$
16,858
 
 
$
16,090
 
 
$
50,581
 
 
$
51,238
 
LSM
 
 
27,690
 
 
 
27,570
 
 
 
74,239
 
 
 
68,343
 
Total
 
$
44,548
 
 
$
43,660
 
 
$
124,820
 
 
$
119,581
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DDS Gross Margin
 
 
13.2
%
 
 
1.3
%
 
 
14.3
%
 
 
2.2
%
LSM Gross Margin
 
 
17.7
%
 
 
6.0
%
 
 
18.7
%
 
 
12.7
%
Total Gross Margin
 
 
16.0
%
 
 
4.3
%
 
 
16.9
%
 
 
8.5
%
 
DDS contract revenue gross margin percentage increased for the three and nine months ended September 30, 2013 compared to contract revenue gross margin percentage for the same periods in 2012.   These increases are primarily due to previously announced cost savings initiatives as well as an increase in facility utilization.
 
We currently expect DDS contract margins for 2013 to improve over amounts recognized in 2012 due to the impact of full year cost savings initiatives in our global discovery services platform along with increased facility utilization.
 
LSM contract revenue gross margin percentages improved for the three and   nine months ended September 30, 2013 compared to the same period in 2012 primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.
 
We currently expect full year improvement in LSM contract margins for 2013 as compared to 2012 driven by an increase in capacity utilization.
 
 
20

 
Technology incentive award
 
We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees.   This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards.   Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D’Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended  
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
571
 
$
621
 
$
2,254
 
$
2,473
 
 
Technology incentive award expense decreased for the three and nine months ended September 30, 2013 from the same periods in 2012 as a direct result of the decreases in Allegra royalty revenue in 2013.
 
We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.
 
Research and development
 
Research and development (“R&D”) expense consists of compensation and benefits for scientific personnel for work performed on proprietary technology R&D projects, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.
 
During the fourth quarter of 2011, the Company made a decision to cease activities related to its internal discovery research and development programs, excluding generic programs.
 
Research and development expenses were as follows:
 
Three Months Ended  
September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012