Albany Molecular Research
ALBANY MOLECULAR RESEARCH INC (Form: 10-Q, Received: 11/10/2014 17:23:55)

 

 

 

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, 2014
     
¨   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: 001-3356220

 

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    ¨

 

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 ¨   Accelerated filer x  
Non-accelerated filer ¨   Smaller reporting company ¨  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes    ¨   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, 2014
Common Stock, $.01 par value   32,606,725 excluding treasury shares of 5,465,098

 

 

 

 
 

 

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 (Loss) Income   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   22
             
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk   30
             
    Item 4.   Controls and Procedures   30
             
Part II.   Other Information   31
             
    Item 1.   Legal Proceedings   31
             
    Item 1A.   Risk Factors   31
             
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   31
             
    Item 6.   Exhibits   32
             
Signatures       33
             
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
September 30,
    Nine Months Ended
September 30,
 
(Dollars in thousands, except for per share data)   2014     2013     2014     2013  
                         
Contract revenue   $ 57,481     $ 53,029     $ 169,993     $ 150,286  
Recurring royalties     4,990       7,726       19,978       29,167  
Total revenue     62,471       60,755       189,971       179,453  
                                 
Cost of contract revenue     56,414       44,548       143,062       124,820  
Technology incentive award     260       571       1,277       2,254  
Research and development     568       94       775       370  
Selling, general and administrative     11,568       9,249       34,944       31,252  
Postretirement benefit plan settlement gain     -       -       (1,285 )     -  
Restructuring charges     2,164       276       3,436       6,108  
Property and equipment impairment charges     1,232       -       4,950       1,440  
Total operating expenses     72,206       54,738       187,159       166,244  
                                 
(Loss) income from operations     (9,735 )     6,017       2,812       13,209  
                                 
Interest expense, net     (2,575 )     (138 )     (8,256 )     (411 )
                                 
Other income (expense), net     235       155       3       1,038  
                                 
Income (loss) before income taxes     (12,075 )     6,034       (5,441 )     13,836  
                                 
Income tax (benefit) expense     (3,434 )     2,332       (4,024 )     6,332  
                                 
Net income (loss)   $ (8,641 )   $ 3,702     $ (1,417 )   $ 7,504  
                                 
Basic income (loss) per share   $ (0.27 )   $ 0.12     $ (0.05 )   $ 0.24  
                                 
Diluted income (loss) per share   $ (0.27 )   $ 0.12     $ (0.05 )   $ 0.24  

 

See notes to unaudited condensed consolidated financial statements.

 

3
 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
Net (loss)  income   $ (8,641 )   $ 3,702     $ (1,417 )   $ 7,504  
Foreign currency translation loss     (1,475 )     (247 )     (467 )     (2,912 )
Net actuarial gain of pension and postretirement benefits     112       134       298       401  
Total comprehensive (loss) income   $ (10,004 )   $ 3,589     $ (1,586 )   $ 4,993  

 

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, 2014     December 31, 2013  
Assets                
Current assets:                
Cash and cash equivalents   $ 18,416     $ 175,928  
Restricted cash     5,483       714  
Accounts receivable, net     56,205       52,216  
Royalty income receivable     4,987       7,523  
Income taxes receivable     319       -  
Inventory     56,020       31,991  
Prepaid expenses and other current assets     13,235       7,061  
Deferred income taxes     4,311       3,586  
Total current assets     158,976       279,019  
                 
Property and equipment, net     165,926       127,775  
Notes hedges     102,946       22,654  
Goodwill     62,047       -  
Restricted cash     -       3,810  
Intangible assets and patents, net     35,455       3,042  
Deferred income taxes     2,377       2,047  
Other assets     5,309       6,921  
Total assets   $ 533,036     $ 445,268  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable and accrued expenses   $ 41,081     $ 30,174  
Deferred revenue and licensing fees     11,931       6,588  
Arbitration reserve     669       1,351  
Income taxes payable     -       8,901  
Accrued pension benefits     546       811  
Current installments of long-term debt     407       1,024  
Total current liabilities     54,634       48,849  
Long-term liabilities:                
Long-term debt, excluding current installments     123,571       123,135  
Notes conversion derivative     102,946       22,654  
Deferred licensing fees     480       1,926  
Pension and postretirement benefits     4,318       6,059  
Deferred income taxes     -       631  
Other long-term liabilities     1,888       1,257  
Total liabilities     287,837       204,511  
Commitments and contingencies                
Stockholders’ equity:                
Preferred stock, $0.01 par value, 2,000 shares authorized, none issued or outstanding     -       -  
Common stock, $0.01 par value, 50,000 shares authorized, 38,004 shares issued as of September 30, 2014 and 37,023 shares issued as of December 31, 2013     380       370  
Additional paid-in capital     242,365       235,806  
Retained earnings     81,493       82,910  
Accumulated other comprehensive loss, net     (11,446 )     (11,277 )
      312,792       307,809  
Less, treasury shares at cost, 5,463 shares as of September 30, 2014 and 5,425 shares as of December 31, 2013     (67,593 )     (67,052 )
Total stockholders’ equity     245,199       240,757  
Total liabilities and stockholders’ equity   $ 533,036     $ 445,268  

 

See notes to unaudited condensed consolidated financial statements.

 

5
 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

    Nine Months Ended September 30,  
(Dollars in thousands)   2014     2013  
Operating activities                
Net (loss) income   $ (1,417 )   $ 7,504  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:                
Depreciation and intangible amortization     13,066       11,951  
Deferred financing amortization     1,276       -  
Accretion of discount on long-term debt     4,280       -  
Deferred income tax (expense) benefit     (2,487 )     2,410  
Loss on disposal of property, plant and equipment     124       195  
Property and equipment impairment     4,950       1,440  
Stock-based compensation expense     2,975       1,808  
Gain on settlement of post-retirement liability     (1,285 )     -  
Excess tax benefit of stock option exercises     (1,456 )     (692 )
Provision for bad debt     64       137  
Changes in assets and liabilities that provide (use) cash, net of acquisitions:                
Accounts receivable     3,054       (1,332 )
Royalty income receivable     2,536       402  
Inventory     (14,107 )     (6,244 )
Prepaid expenses and other assets     (3,043 )     643  
Accounts payable and accrued expenses     150       3,669  
Income taxes     (7,179 )     1,292  
Deferred revenue and licensing fees     2,465       1,232  
Pension and postretirement benefits     (261 )     135  
Other long-term liabilities     209       (891 )
Net cash provided by operating activities     3,914       23,659  
                 
Investing activities                
Purchase of businesses, net of cash acquired     (145,803 )     -  
Purchase of property, plant and equipment     (12,013 )     (7,654 )
Payments for patent applications and other costs     (292 )     (316 )
Proceeds from disposal of property, plant and equipment     80       169  
Net cash used in investing activities     (158,028 )     (7,801 )
                 
Financing activities                
Principal payments on long-term debt     (5,027 )     (595 )
Deferred financing costs     (232 )     -  
Change in restricted cash     (959 )     524  
Proceeds from sale of common stock     2,135       1,505  
Purchases of treasury stock     (541 )     (157 )
Excess tax benefit of stock option exercises     1,456       692  
Net cash (used in) provided by financing activities     (3,168 )     1,969  
Effect of exchange rate changes on cash     (230 )     (1,400 )
(Decrease) increase in cash and cash equivalents     (157,512 )     16,427  
Cash and cash equivalents at beginning of period     175,928       23,293  
Cash and cash equivalents at end of period   $ 18,416     $ 39,720  

 

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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of September 30, 2014. 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. When necessary, prior years’ unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

 

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 plan, the amount and realizabilty of deferred tax assets, assumptions utilized in determining stock-based compensation, assumptions utilized in determining the value of both the notes hedges and the notes conversion derivative and assumptions related to the collectability of receivables. 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. Reimbursed expenses consist of chemicals and other project specific costs. 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. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’ 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 separate selling prices determined for each component, and total contract consideration is then allocated pro rata across the components of the arrangement. If separate selling prices are not available, the Company will use the best estimate of selling price, consistent with the overall pricing strategy and after consideration of relevant market factors.

 

7
 

 

The Company generates contract revenue under the following types of contracts:

 

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, as required under the arrangement, or other customer-specific contractual conditions have been satisfied.

 

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 typically 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.

 

Recurring Royalties, Up-Front License Fees and Milestone Revenue Recognition

 

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 Actavis’ net sales of a generic product. The Company records royalty revenue in the period in which the net sales of this product occur. Royalty payments from Actavis are due within 60 days after each calendar quarter and are determined based on sales of the qualifying product in that quarter.

 

Up-Front License Fees and Milestone 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.

 

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.

 

On October 20, 2005, the Company entered into a License and Research Agreement with Bristol-Myers Squibb (“BMS”) for a program of compounds that encompass biogenic amine reuptake inhibitors in development for the treatment of depression and other central nervous system disorders. As amended, the agreement is referred to herein as the “BMS Agreement”.

 

On December 20, 2010, the Company entered into a Research Collaboration and License Agreement with Genentech, Inc. (“Genentech”) (the “Genentech Agreement”, and collectively with the BMS Agreement, the “Agreements”) for a family of antibacterial compounds discovered from the Company’s proprietary research of its natural products sample collection.

 

8
 

 

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, 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.

 

The Company has determined the milestones contained in these Agreements to be substantive milestones in accordance with ASC 605-28-25. In evaluating the milestones included in the Agreements, the Company considered the following:

 

· The Company considered each individual milestone to be commensurate with the enhanced value of the underlying licensed intellectual property as it is advanced from the development stage to a commercialized product, and considered them to be reasonable when evaluated in relation to the total agreement consideration, including other milestones.

 

· The milestones are deemed to relate solely to past performance, as each milestone is payable to the Company only after the achievement of the related event defined in the agreement, and is not refundable if additional future success events do not occur.

 

For both the three and nine months ended September 30, 2014 and 2013, no milestone revenue was recognized by the Company.

 

Cash, Cash Equivalents and Restricted Cash

 

Cash equivalents consist of money market accounts and overnight deposits. Some of our cash is deposited with financial institutions located throughout the U.S. and at banks in foreign countries where we operate subsidiary offices and at times may exceed insured limits. 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 was directly reduced by the amount of principal payments made on the term loan which began in May 2013. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating the term loan liability. In June 2014 the Company terminated the credit agreement while still maintaining the letters of credit, thus requiring the Company to continue to maintain a restricted cash balance to collateralize these letters of credit. Restricted cash as of September 30, 2014 was $5,483.

 

Long-Lived Assets

 

The Company assesses the impairment of a long-lived asset group whenever events or changes in circumstances indicate that its 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 of the above 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.

 

9
 

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivatives in accordance with FASB ASC Topic 815, Derivative and Hedging , which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value. Additionally, changes in the derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.

 

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
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
Weighted average common shares outstanding - basic     31,631       31,041       31,468       30,854  
Dilutive effect of share-based compensation     -       975       -       873  
Weighted average common shares outstanding - diluted     31,631       32,016       31,468       31,727  

 

The Company has excluded certain outstanding stock options, non-vested restricted stock and warrants from the calculation of diluted earnings per share for the three and nine months ended September 30, 2013 because of anti-dilutive 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, 2014 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 common equivalents outstanding (before the effects of the treasury stock method) was 3,453 and 189 for the three months ended September 30, 2014 and 2013, respectively, and 2,930 and 502 for the nine months ended September 30, 2014 and 2013, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

Note 3 - Business Acquisitions

 

On July 1, 2014, the Company completed the purchase of Oso Biopharmaceuticals Manufacturing, LLC (“OsoBio”), a contract manufacturer of highly complex injectable drug products located in Albuquerque, NM. The preliminary estimated aggregate purchase price is $109,194.

 

A final valuation will be completed to determine the fair value of the acquired property and equipment and any potential identifiable intangibles, which may result in changes to their estimated fair values, as well as changes to the allocated goodwill fair value. The following table summarizes the preliminary allocation of the purchase price to the fair value of the net assets acquired:

 

    July 1, 2014  
Assets Acquired        
Cash   $ 2,223  
Accounts receivable     6,270  
Inventory     6,459  
Prepaid expenses and other current assets     1,992  
Property and equipment     35,476  
Goodwill     44,879  
Intangible assets     20,600  
Total assets acquired   $ 117,899  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 7,129  
Deferred revenue     943  
Other long-term liabilities     633  
Total liabilities assumed     8,705  
Net assets acquired   $ 109,194  

 

10
 

 

On April 4, 2014, the Company completed the purchase of all of the outstanding shares of Cedarburg Pharmaceuticals, Inc. (“Cedarburg”), a contract developer and manufacturer of technically complex active pharmaceutical ingredients (“API’s”) for both generic and branded customers, located in Grafton, WI. The aggregate purchase price was $39,079.

 

The following table summarizes the final allocation of the purchase price to the fair value of the net assets acquired:

 

    April 4, 2014  
Assets Acquired        
Cash   $ 247  
Accounts receivable     837  
Inventory     3,463  
Prepaid expenses and other current assets     549  
Property and equipment     8,133  
Goodwill     17,168  
Intangible assets     12,500  
Total assets acquired   $ 42,897  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 1,697  
Deferred revenue     489  
Capital lease obligations     566  
Restructuring liabilities     1,038  
Deferred tax liabilities     28  
Total liabilities assumed     3,818  
Net assets acquired   $ 39,079  

 

Revenue and net loss from OsoBio for the period July 1, 2014 to September 30, 2014 was $6,459 and $(2,670) respectively. Revenue and net income from Cedarburg for the period April 4, 2014 to September 30, 2014 was $7,451 and $308 respectively.

 

The following table shows the unaudited combined condensed pro forma statements of income for the three and nine months ended September 30, 2014 and 2013, respectively, as if the OsoBio and Cedarburg acquisitions had occurred on January 1, 2013. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisitions had occurred as of the date indicated or what such results would be for any future periods.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
    (Unaudited)     (Unaudited)  
Total revenues   $ 62,471     $ 75,552     $ 215,824     $ 229,862  
Net (loss) income     (8,333 )     2,246       (3,115 )     5,712  
(Loss) Earnings per share:                                
Basic   $ (0.26 )   $ 0.07     $ (0.10 )   $ 0.19  
Diluted   $ (0.26 )   $ 0.07     $ (0.10 )   $ 0.18  

 

For the three and nine months ended September 30, 2014 pre-tax net income was adjusted by reducing expenses by $473 and $3,662, respectively, for acquisition related costs. For the nine months ended September 30, 2013 pre-tax net income was adjusted by increasing expenses by $1,380 for acquisition related costs.

 

For the nine months ended September 30, 2014 pre-tax net income was adjusted by increasing expenses by $1,231 for purchase accounting related depreciation and amortization. For the three and nine months ended September 30, 2013 pre-tax net income was adjusted by increasing expenses by $753 and $2,260, respectively, for purchase accounting related depreciation and amortization.

 

For the nine months ended September 30, 2014 pre-tax net income was adjusted by decreasing interest expense by $43, respectively, to reflect certain debt paid off at the closing. For the three and nine months ended September 30, 2013 pre-tax net income was adjusted by decreasing interest expense by $24 and $75, respectively, to reflect certain debt paid off at the closing. For the three and nine months ended September 30, 2013 pre-tax net income was adjusted by decreasing interest expense by $5 and $16, respectively, to reflect interest expense associated with OsoBio Holdings, LLC and subsidiaries that were not related to the OsoBio Manufacturing business acquired by the Company.

 

11
 

 

The Company funded the acquisition of Cedarburg in April 2014 and the acquisition of OsoBio in July 2014 utilizing a portion of the proceeds from a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”) that was completed in December 2013. The Company did not have sufficient cash on hand to complete these acquisitions as of January 1, 2013. For the purposes of presenting the pro forma combined condensed statement of operations for the three and nine months ended September 30, 2013, the Company has included the assumption of bridge financing as of January 1, 2013 to fund the acquisition of Cedarburg and OsoBio as of that date. The pro forma combined condensed statement of operations for the three and nine months ended September 30, 2013 reflects the recognition of interest expense on the assumed bridge financing for the period January 1, 2013 to December 4, 2013 using the rate of interest that the Company paid on its term loan facility, at which point it is further assumed that a portion of the Notes financing would have been utilized to satisfy the bridge financing. For the three and nine months ended September 30, 2013, pre-tax net income was adjusted by $2,519 and $7,556 of pro forma interest expense on the bridge financing.

 

Note 4 –Debt

 

The following table summarizes long-term debt:

 

    September 30,     December 31,  
    2014     2013  
Convertible senior notes, net of unamortized debt discount   $ 121,212     $ 116,931  
Term loan     -       4,524  
Industrial development authority bond     2,390       2,695  
Capital leases - equipment     371       -  
Miscellaneous loan     5       9  
      123,978       124,159  
Less current portion     (407 )     (1,024 )
Total long-term debt   $ 123,571     $ 123,135  

 

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $28,788 at September 30, 2014, are as follows:

 

2014 (remaining)   $ 36  
2015     447  
2016     448  
2017     397  
2018     150,348  
Thereafter     1,090  
Total   $ 152,766  

 

Convertible Senior Notes

 

On December 4, 2013, the Company completed a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”), dated as of December 4, 2013 between the Company and Wilmington Trust, National Association, as Trustee.  The Notes will mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date and interest will be paid in arrears semiannually on each May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the " Securities Act ").

 

12
 

 

The Notes are not convertible into the Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount in cash equal to the settlement amount, determined in the manner set forth in the indenture.

 

The initial conversion rate is 63.9844   shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment in some events as described in the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in the indenture.

 

The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

 

The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC Topic 815, Derivatives and Hedging , and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the three and nine months ended September 30, 2014, the Company recorded $1,457 and $4,280, respectively of amortization of the debt discount as interest expense based upon an effective rate of 7.69%.

 

The components of the Notes were as follows:

 

    September 30,
2014
    December 31,
2013
 
Principal amount   $ 150,000     $ 150,000  
Unamortized debt discount     28,788       33,069  
Net carrying amount of Notes   $ 121,212     $ 116,931  

 

In connection with the pricing of the Notes, on November 19, 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating to a notional number of shares of the Company's common stock underlying the Notes to be issued by the Company with two counterparties (the " Option Counterparties "). The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that the Company would be required to make upon conversion of the Notes in excess of the principal amount of converted notes if our common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with ASC Topic 815. The aggregate cost of the note hedge transaction was $33,600.

 

At the same time, the Company also entered into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares of the Company's common stock underlying the note hedge transactions. The cash convertible note hedge transactions are intended to offset cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the warrants. The initial strike price of the warrants is $18.9440   per share, which is 60% above the last reported sale price of the Company's common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received from the Option Counterparties from the sale of the warrants.

 

13
 

 

Aside from the initial payment of a $33,600 premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.

 

Neither the Notes Conversion Derivative nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized immediately in the statement of operations. As of September 30, 2014, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal, therefore there was no change in fair market value that was recognized in the accompanying condensed consolidated statement of operations.

 

The following table summarizes the fair value and the presentation in the condensed consolidated balance sheet:

 

    Location on Balance Sheet   September 30,
2014
    December 31,
2013
 
Notes Hedges   Long-term assets   $ 102,946     $ 22,654  
Notes Conversion Derivative   Long-term liabilities   $ (102,946 )   $ (22,654 )

 

Term Loan and Revolving Credit Facility

 

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. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating the term loan liability. In June 2014 the Company terminated the credit agreement while still maintaining the letters of credit, thus requiring the Company to continue to maintain restricted cash to collateralize these letters of credit.

 

The balance required to be maintained as restricted cash must be at least 110% of the maximum potential amount of the outstanding letters of credit.  As of September 30, 2014, the Company had $4,823 of outstanding letters of credit secured by restricted cash.

 

On October 24, 2014, the Company entered into a $50,000 senior secured credit agreement (the “Credit Agreement”) consisting of a 3-year, $50,000 revolving credit facility, which includes a $15,000 sublimit for the issuance of standby letters of credit and a $5,000 sublimit for swing line loans. The Credit Agreement also includes an accordion feature that, subject to securing additional commitments from existing lenders or new lending institutions, will allow the Company to increase the aggregate commitments under the Credit Agreement by up to $10,000.

 

IDA Bonds

 

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 0.15% at September 30, 2014. The amount outstanding as of September 30, 2014 was $2,390.

 

Note 5 - Inventory

Inventory consisted of the following as of September 30, 2014 and December 31, 2013:

 

    September 30,
2014
    December 31,
2013
 
Raw materials   $ 22,446     $ 13,294  
Work in process     10,296       3,314  
Finished goods     23,278       15,383  
Total inventories, at cost   $ 56,020     $ 31,991  

 

14
 

 

Note 6 — Restructuring and Impairment

 

In the third quarter of 2014, the Company recorded restructuring charges related to optimizing the Singapore facility’s footprint. In April 2014, the Company announced a restructuring plan transitioning Discovery and Development Services (“DDS”) activities at its Syracuse, N.Y. site to other sites within AMRI and ceased operations in Syracuse at the end of June 2014. The actions taken are consistent with the Company’s ongoing efforts to consolidate its facility resources to more effectively utilize its discovery and development resource pool and to further reduce its facility cost structure.

 

Restructuring charges for the three and nine months ended September 30, 2014 of $2,164 and $3,436, respectively, consist primarily of lease termination charges associated with optimizing the Singapore facility’s footprint and termination benefits and personnel realignment costs associated with the closure of the Syracuse site.

 

The following table displays the restructuring activity and liability balances for the nine month period ended and as of September 30, 2014:

 

    Balance at
January 1,
2014
    Charges/
(reversals)
    Amounts
Paid
    Foreign
Currency
Translation &
Other
Adjustments
(1)
    Balance at
September 30,
2014
 
Termination benefits and personnel realignment   $ 323     $ 1,676     $ (1,422 )   $ (3 )   $ 574  
Lease termination and relocation charges     3,582       1,657       (2,303 )     1,121       4,057  
Other     471       103       (576 )     2       -  
Total   $ 4,376     $ 3,436     $ (4,301 )   $ 1,120     $ 4,631  

 

(1) Included in lease termination and relocation charges adjustments are restructuring accruals assumed in conjunction with the Cedarburg acquisition in the second quarter of 2014.

 

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 condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the condensed consolidated balance sheets at September 30, 2014 and December 31, 2013.

 

Anticipated cash outflow related to the restructuring reserves as of September 30, 2014 for the remainder of 2014 is approximately $709.

 

In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $4,950 and $1,440 in the first nine months of 2014 and 2013, respectively, in the DDS segment. These charges are included under the caption “Property and equipment impairment charges” on the condensed consolidated statement of operations for the three months and nine months ended September 30, 2014 and 2013.

 

Note 7 — Goodwill and Intangible Assets

 

The carrying amounts of goodwill and intangible assets as of September 30, 2014 and December 31, 2013 are as follows:

 

    Amortization
Period
    December 31,
2013
    Acquisitions     Additions     Amortization     September 30,
2014
 
Patents and Licensing Rights     2-16 years     $ 2,804     $ -     $ 292     $ (212 )   $ 2,884  
Trademarks     5 years       -       1,600       -       (100 )     1,500  
Customer Relationships     5-20 years       238       31,500       -       (667 )     31,071  
Goodwill     -       -       62,047       -       -       62,047  
Total           $ 3,042     $ 95,147     $ 292     $ (979 )   $ 97,502  

 

15
 

 

Amortization expense related to intangible assets was $587 and $102 for the three months ended September 30, 2014 and 2013, respectively, and $979 and $319 for the nine months ended September 30, 2014 and 2013, respectively. The weighted average amortization period is 18.2 years.

 

The following chart represents estimated future annual amortization expense related to intangible assets:

 

Year  ending December 31,      
2014 (remaining)   $ 584  
2015     2,249  
2016     2,175  
2017     2,174  
2018     2,170  
Thereafter     26,103  
Total   $ 35,455  

 

Note 8 — Share-Based Compensation

 

During the three and nine months ended September 30, 2014, the Company recognized total share based compensation cost of $1,018 and $2,975, respectively, as compared to total share based compensation cost for the three and nine months ended September 30, 2013 of $630 and $1,808, 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, 2014 is presented below:

 

    Number of
Shares
    Weighted
Average Grant
Date Fair Value
per Share
 
Outstanding, January 1, 2014     509     $ 6.28  
Granted     609     $ 11.98  
Vested     (199 )   $ 5.56  
Forfeited     (47 )   $ 8.24  
Outstanding, September 30, 2014     872     $ 10.32  

 

As of September 30, 2014, there was $6,982 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.7 years. Of the 872 restricted shares outstanding, the Company currently expects 862 shares to vest.

  

16
 

 

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, 2014     September 30, 2013  
Expected life in years     5       5  
Risk free interest rate     1.52 %     0.82 %
Volatility     53 %     56 %
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, 2014 is presented below:

 

    Number of
Shares
    Weighted Average
Exercise
Price Per Share
    Weighted Average
Remaining
Contractual Term
(Years)
    Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2014     2,046     $ 5.62                  
Granted     326       10.37                  
Exercised     (342 )     4.31                  
Forfeited     (96 )     6.47                  
Expired     (92 )     15.76                  
Outstanding, September 30, 2014     1,842     $ 6.15       7.3     $ 29,325  
Options exercisable, September 30, 2014     884     $ 5.82       6.3     $ 15,220  

 

The weighted average fair value of stock options granted for the nine months ended September 30, 2014 and 2013 was $4.85 and $2.86, respectively. As of September 30, 2014, there was $2,081 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.4 years. Of the 1,842 stock options outstanding, the Company currently expects 1,811 options to vest.

 

Employee Stock Purchase Plan

 

During the nine months ended September 30, 2014 and 2013, 74 and 163 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan (“ESPP”).

 

During the nine months ended September 30, 2014 and 2013, cash received from stock option exercises and employee stock purchases was $2,135 and $1,505, respectively. The excess tax benefit realized for the tax deductions from share based compensation was $1,456 and $692 for the nine months ended September 30, 2014 and 2013, respectively.

 

Note 9 — Operating Segment Data

 

In the third quarter of 2014, the Company completed the purchase of OsoBio, an aseptic fill and finish contract manufacturer of injectable sterile liquid, suspension and lyophilized biologic and pharmaceutical products. With the addition of these capabilities, the Company’s aseptic finished dose manufacturing business, which consists of OsoBio and AMRI Burlington, has become material to the financial and operational results of the Company. As a result, the Company has realigned the internal operations management personnel, resources, and financial planning and reporting of its operations, resulting in a change to its reportable segments based on the criteria set forth in ASC 280, “Disclosures about Segments of an Enterprise and Related Information”.

 

Prior to this acquisition, the Company organized its operations into the DDS and LSM segments. The DDS segment remains unchanged and includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment has been separated into the Large Scale API (“API”) and Drug Product segments. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. Drug Product includes pre-clinical through commercial sale production of complex liquid-filled and lyophilized parenteral formulations and includes operations at AMRI Burlington and OsoBio. Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments. Prior period disclosures have been adjusted to reflect the change in reportable segments.

 

17
 

 

The following table contains earnings data by operating segment, reconciled to totals included in the unaudited condensed consolidated financial statements:

 

 

  Contract Revenue     Milestone & Recurring
Royalty
    Income (Loss)
from
Operations
    Depreciation
and Intangible Amortization
 
For the three months ended September 30, 2014                        
DDS   $ 17,982     $ 2,603     $ 2,078     $ 1,525  
API     29,674       2,387       2,515       2,468  
Drug Product     9,825       -       (2,760 )     1,048  
Corporate     -       -       (11,568 )      
Total   $ 57,481     $ 4,990     $ (9,735 )   $ 5,041  
                                 
For the three months ended September 30, 2013                                
DDS   $ 19,402     $ 5,709     $ 7,322     $ 1,775  
API     31,793       2,017       8,808       1,760  
Drug Product     1,834       -       (864 )     283  
Corporate     -       -       (9,249 )     -  
Total   $ 53,029     $ 7,726     $ 6,017     $ 3,818  
                                 

 

 

    Contract
Revenue
    Milestone &
Recurring
Royalty
    Income (Loss)
from
Operations
    Depreciation
and Intangible
Amortization
 
For the nine months ended September 30, 2014                                
DDS   $ 56,995     $ 12,817     $ 13,093     $ 5,210  
API     98,146       7,161       28,283       6,234  
Drug Product     14,852               (3,620 )     1,622  
Corporate     -       -       (34,944 )     -  
Total   $ 169,993     $ 19,978     $ 2,812     $ 13,066  
                                 
For the nine months ended September 30, 2013                                
DDS   $ 59,011     $ 22,547     $ 21,240     $ 5,913  
API     87,573       6,620       26,912       4,908
Drug Product     3,702       -       (3,691 )     1,130  
Corporate     -       -       (31,252 )     -  
Total   $ 150,286     $ 29,167     $ 13,209     $ 11,951  

 

The following table summarizes other information by segment as of and for the nine month period ended September 30, 2014:

 

    DDS     API     Drug
Product
    Total  
Total assets   $ 133,709     $ 266,461     $ 132,866     $ 533,036  
Goodwill included in total assets     -       17,168       44,879       62,047  
Investments in unconsolidated affiliates     956       -       -       956  
Capital expenditures     3,300       7,776       937       12,013  

 

The following table summarizes other information by segment as of and for the nine month period ended September 30, 2013:

 

    DDS     API     Drug
Product
    Total  
Total assets   $ 90,050     $ 173,170     $ 14,186     $ 277,406  
Investments in unconsolidated affiliates     956       -       -       956  
Capital expenditures     2,419       5,060       175       7,654  

 

Note 10 — Financial Information by Customer Concentration and Geographic Area

 

Total contract revenue from DDS’s three largest customers each represented approximately 11%, 8% and 7% for the three months ended September 30, 2014, and approximately 11%, 8% and 8%, of DDS’s total contract revenue for the three months ended September 30, 2013. Total contract revenue from DDS’s three largest customers represented approximately 9%, 8% and 7%, individually, of DDS’s total contract revenue for the nine months ended September 30, 2014, and approximately 9%, 8% and 8%, of DDS’s total contract revenue for the nine months ended September 30, 2013.

 

Total contract revenue from API’s largest customer, GE Healthcare (“GE”), represented 37% and 31% of API’s total contract revenue for the three months ended September 30, 2014 and 2013, respectively. GE accounted for approximately 27% and 28% of API’s total contract revenue for the nine months ended September 30, 2014 and 2013, respectively. GE accounted for approximately 16% of the Company’s total contract revenue for both the nine months ended September 30, 2014 and 2013. API’s second largest customer represented 14% of API’s total contract revenue for both the three months ended September 30, 2014 and 2013 and 11% and 19% of API’s total contract revenue for the nine months ended September 30, 2014 and 2013, respectively. Additionally, this customer represented 7% and 11% of the Company’s total contract revenue for the nine months ended September 30, 2014 and 2013, respectively.

 

18
 

 

Total contract revenue from Drug Product’s three largest customers each represented approximately 20%, 15% and 10% for the three months ended September 30, 2014 and 30%, 18% and 15% for the three months ended September 30, 2013, respectively. Total contract revenue from Drug Product’s three largest customers represented 13%, individually, of Drug Product’s total contract revenue for the nine months ended September 30, 2014, and 25%, 19% and 9% for the nine months ended September 30, 2013, respectively.

 

The Company’s total contract revenue for the three and nine months ended September 30, 2014 and 2013 was recognized from customers in the following geographic regions:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
                         
United States     62 %     60 %     65 %     66 %
Europe     27 %     22 %     22 %     19 %
Asia     10 %     13 %     9 %     11 %
Other     1 %     5 %     4 %     4 %
Total     100 %     100 %     100 %     100 %

 

Long-lived assets by geographic region are as follows:

 

    September 30,     December 31,  
    2014     2013  
United States   $ 241,434     $ 107,403  
Asia     15,802       17,449  
Europe     6,192       5,965  
Total long-lived assets   $ 263,428     $ 130,817  

 

Note 11 — 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.

 

Allegra:

 

The Company has settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and Allegra-D products. All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties. The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against 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 received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and will receive 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 through mid-2015, unless the relevant patent(s) are earlier determined to be invalid.

 

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Note 12 – 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.

 

Convertible senior notes, derivatives and hedging instruments: The fair values of the Company’s Notes, which differ from their carrying values, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs. The estimated fair value of the Notes at September 30, 2014 was $230,625. The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.

 

Long-term debt, other than convertible senior notes:  The carrying value of long-term debt approximated fair value at September 30, 2014 and December 31, 2013 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.

 

Note 13 – Accumulated Other Comprehensive Income (Loss)

 

The activity related to accumulated other comprehensive income (loss) was as follows:

 

    Pension and
postretirement
benefit plans
    Foreign
currency
adjustments
    Total
Accumulated
Other
Comprehensive
Loss
 
Balance at December 31, 2013, net of tax   $ (4,140 )   $ (7,137 )   $ (11,277 )
Net current period change, net of tax     298       (467 )     (169 )
Balance at September 30, 2014, net of tax   $ (3,842 )   $ (7,604 )   $ (11,446 )

 

The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive income (loss):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
Amortization of pension and other postretirement benefits (a)                                
Actuarial losses   $ 148     $ 206     $ 460     $ 617  
Total before tax effect     148       206       460       617  
Tax benefit on amounts reclassified into earnings     (53 )     (72 )     (162 )     (216 )
    $ 95     $ 134     $ 298     $ 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.

 

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Note 14 – Employee Benefit Plans

 

In the first quarter of 2014, the union ratified an action to settle the medical component of the post-retirement benefit plan, significantly reducing the level of benefits available to the participants. As a result, the Company recorded $1,285 of operating income in the first quarter of 2014 due to the settlement of this obligation.

 

Note 15 - Revision of Prior Period Financial Statements

 

During the second quarter of fiscal year 2014, we identified an error in our accounting for income tax expense recorded in fiscal years 2006 to 2013. We assessed the materiality of the error on prior periods’ financial statements and concluded that the error was not material to any of our prior period annual or interim financial statements. We elected to revise previously issued consolidated financial statements the next time they are filed. As each subsequent filing is made in the future, the previous period consolidated financial statements affected by the error will be revised. We have revised the condensed consolidated balance sheet as of December 31, 2013 included herein to reflect the correct balances by increasing income taxes payable and decreasing retained earnings each by $4,947. We have also revised the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 by increasing income tax expense by $228 and $684, respectively, resulting in a decrease in net income for the same periods by $228 and $684, respectively. For the three months ended September 30, 2013, income per basic share decreased by $0.01. For the nine months ended September 30, 2013 income per basic and diluted share decreased by $0.03 and $0.02, respectively.

 

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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 the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”) and Genentech, expected benefits from the acquisitions of Cedarburg Pharmaceuticals, Inc. and Oso Biopharmaceuticals Manufacturing, LLC, the business interruption event at the OsoBio site during the third quarter of 2014, 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, pension costs, 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, 2013, as filed with the Securities and Exchange Commission on March 17, 2014, 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 uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers. Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large-scale manufacturing projects throughout our global network of research and manufacturing facilities. We believe we have a unique portfolio of service offerings ranging from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia. We believe this product and geographic mix will continue to allow us to increase multi-year strategic relationships and enhance our revenue growth with a variety of customers.

 

As part of our strategy to accomplish these objectives, the recent appointment of some of our highly experienced, key personnel, underscores AMRI’s dedication to client service, operational excellence, and growth. We have enhanced and unified our sales and marketing organization under new global leadership to optimize selling opportunities and management of key accounts across our business segments. We believe our strengthened organizational structure, combined with more focused sales and marketing efforts, should enable us to drive long term growth across diversified segments and increased sustainable profitability.

 

Market trends continue to point to outsourcing as an increasingly important part of business strategies for our customers across the discovery, development and API and formulation manufacturing areas, including both generic and branded products. We believe our ability to offer a full service model, which also allows customers to use a combination of our U.S., Europe and Asia based facilities, will result in an increase in demand for our services globally. We also offer our customers the option of insourcing, a strategic relationship that embeds AMRI scientists into the customer’s facility, allowing them to cost-effectively leverage their unused laboratory space.

 

We are also continuing to focus our efforts on other important customer segments: small and large biotech companies, non-profit/government entities and related industries such as the agricultural, nutraceutical and food industries. We believe maintaining a balance within our customer portfolio between large pharmaceutical, non-profit/government, biotech and other companies will help support sustained sales and reduce risk.

 

In April 2014, we announced the transitioning of our Discovery, Drug Development and Small Scale Manufacturing (“DDS”) activities at our Syracuse, NY site to other sites within the Company and ceased operations in Syracuse at the end of June 2014. These actions are consistent with our ongoing efforts to consolidate our facility resources to more effectively utilize its discovery and development resource pool and to further reduce our facility cost structure. The cost base of our manufacturing and research facilities is largely fixed in nature. However, we continue to seek opportunities to minimize these fixed costs, with a focus on gaining flexibility and improving efficiency, cost structure and margin.

 

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Although we suspended substantial investments and halted proprietary compound R&D activities in 2011, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value. Our goal is to partner these programs in return for a 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. One compound was successfully partnered in early 2013. We are continuing to focus on partnering other programs.

 

We may consider acquisitions that enhance or complement our existing service offerings. In addition to growing the Company organically, any acquisitions would generally be expected to contribute to AMRI’s growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle.

 

In April 2014, we completed the acquisition of Cedarburg Pharmaceuticals, Inc. (“Cedarburg”), a contract developer and manufacturer of technically complex API for both generic and branded customers. Customers will benefit from access to a greater breadth of resources, including development of complex API, expanded scale-up capabilities and large scale manufacturing in lower cost environments.

 

In July 2014, we announced the completion of the acquisition of Oso Biopharmaceuticals Manufacturing, LLC (“OsoBio”), a contract manufacturer of highly complex injectable drug products with expertise in large-scale commercial production. The addition of OsoBio is complementary to our early stage drug product manufacturing capabilities. Customers will benefit from access to a single source to address their sterile fill/finish needs from Phase 1 development to commercial supply.

 

The Cedarburg and OsoBio transactions are consistent with our strategy to be the preeminent supplier of custom and complex drug development services and product to both the branded and generic pharmaceutical industry.

 

With the addition of the OsoBio business capabilities, the Company’s aseptic finished dose manufacturing business, which consists of OsoBio and AMRI Burlington, has become material to the financial and operational results of the Company. As a result, the Company has realigned the internal operations, management, personnel, resources, and financial planning and reporting of its operations, resulting in a change to its reportable segments.

 

Prior to this acquisition, the Company organized its operations into the DDS and LSM segments. The DDS segment remains unchanged and includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment has been separated into the Large Scale API (“API”) and Drug Product segments. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. Drug Product includes pre-clinical through commercial sale production of complex liquid-filled and lyophilized parenteral formulations and includes operations at AMRI Burlington and OsoBio. Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments. Prior period disclosures have been adjusted to reflect the change in reportable segments.

 

Our backlog of open manufacturing orders and accepted service contracts was $151.1 million at September 30, 2014 as compared to $127.6 million at September 30, 2013. 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, 2014 was $62.5 million, which included $57.5 million from our contract service business and $5.0 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis. Consolidated gross margin was 1.9% for the quarter ended September 30, 2014 as compared to 16.0% for the quarter ended September 30, 2013.

 

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During the nine months ended September 30, 2014, cash provided by operations was $3.9 million compared to cash provided by operations of $23.7 million for the same period of 2013. The change from the nine months ended September 30, 2013 was primarily driven by a decrease in income from operations, as well as changes in working capital items. During the nine months ended September 30, 2014, we spent $12.0 million on capital expenditures, primarily related to growth and maintenance of our existing facilities. During the nine months ended September 30, 2014, we spent $38.8 million to acquire Cedarburg Pharmaceuticals and $107.0 million to acquire OsoBio. As of September 30, 2014, we had $23.9 million in cash, cash equivalents, and restricted cash and $124.0 million in bank and other related debt, of which the largest portion is a result of an offering of senior convertible notes sold by us in the fourth quarter of 2013.

 

Results of Operations – Three and Nine Months ended September 30, 2014 Compared to Three and Nine Months Ended September 30, 2013

 

Revenues

 

Total contract revenue

 

Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Our contract revenues for each of our DDS, API and Drug Product segments were as follows:

 

    Three Months Ended     Nine Months Ended  
    September  30,     September  30,  
(in thousands)   2014     2013     2014     2013  
DDS   $ 17,982     $ 19,402     $ 56,995     $ 59,011  
API     29,674       31,793       98,146       87,573  
Drug Product     9,825       1,834       14,852       3,702  
Total   $ 57,481     $ 53,029     $ 169,993     $ 150,286  

 

DDS contract revenues for the three months ended September 30, 2014 decreased from the same period in 2013 primarily due to decreases in U.S. chemistry and U.S. development and small-scale services. DDS contract revenues for the nine months ended September 30, 2014 decreased from the same period in 2013 primarily due to decreases in U.S. chemistry and biology services offset by an increase in U.S. development and small-scale services. We currently expect DDS contract revenue for full year 2014 to remain consistent with amounts recognized for the full year of 2013 due to a decrease in demand for U.S. discovery services, offset by an increase in development services.

 

API revenue for the three months ended September 30, 2014 decreased from the same period in 2013 primarily due to a decrease in commercial manufacturing services as a result of timing of customer shipments, partially offset by incremental revenues from the Cedarburg acquisition in the second quarter of 2014. API contract revenues for the nine months ended September 30, 2014 increased from the same period in 2013 primarily due to an increase in demand at our UK manufacturing facility as well as incremental revenues from the Cedarburg acquisition. We currently expect growth in API contract revenue for full year 2014 due to on-going demand for our existing commercial manufacturing services and clinical supply manufacturing services worldwide, as well as incremental revenues expected as a result of the acquisition of Cedarburg Pharmaceuticals.

 

Drug Product revenue increased for the three and nine months ended September 30, 2014 from the same period in 2013 due to increased demand at our Burlington, MA manufacturing facility, as well as incremental revenues from the acquisition of OsoBio in the third quarter of 2014. As a result, we expect a significant increase in Drug Product contract revenue for full year 2014 as compared to full year 2013.

 

Recurring royalty revenue

 

Three Months Ended     Nine Months Ended  
September  30,     September  30,  
2014     2013     2014     2013  
(in thousands)  
$ 4,990     $ 7,726     $ 19,978     $ 29,167  

 

The largest portion of our recurring royalties relates to worldwide sales of Allegra/Telfast and Sanofi over-the-counter (“OTC”) product and authorized generics. Additionally, beginning in the third quarter of 2012 we have earned recurring royalty revenue in conjunction with a Development and Supply Agreement with Actavis at the Company’s Rensselaer, NY manufacturing facility.

 

24
 

 

 

Recurring royalties decreased during the three and nine months ended September 30, 2014 from the same periods in 2013 primarily due to the incremental effect of the introduction of generic fexofenadine in Japan in the later part of the first quarter of 2013. Additionally, there was a decrease in Allegra royalties as a result of patent expirations that began in late 2013, as well as a less severe allergy season in Japan in 2014.

 

We currently expect full year 2014 recurring royalties to decrease from amounts recognized in 2013, as previously announced, primarily due to patent expirations of Allegra that began in 2013 along with the introduction of generic fexofenadine in Japan during the first quarter of 2013. These decreases will be partially offset by a slight increase in Actavis 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 have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These U.S. patents began to expire in November 2013. The international patents began to expire in June 2014 and most of these patents are covered by our license agreements with Sanofi. 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.

 

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, API and Drug Product segments were as follows:

 

    Three Months Ended     Nine Months Ended  
Segment   September 30,     September 30,  
(in thousands)   2014     2013     2014     2013  
                         
DDS   $ 14,829     $ 16,858     $ 46,905     $ 50,581  
API     29,000       24,990       77,685       67,164  
Drug Product     12,585       2,700       18,472       7,075  
Total   $ 56,414     $ 44,548     $ 143,062     $ 124,820  
                                 
DDS Gross Margin     17.5 %     13.2 %     17.7 %     14.3 %
API Gross Margin     2.3 %     21.4 %     20.8 %     23.3 %
Drug Product Gross Margin     (28.1 )%     (47.2 )%     (24.4 )%     (91.1 )%
Total Gross Margin     1.9 %     16.0 %     15.8 %     16.9 %

 

DDS contract revenue gross margin percentage increased for the three and nine months ended September 30, 2014 compared to contract revenue gross margin percentage for the same periods in 2013. These increases are primarily due to on-going cost management. As a result, we currently expect DDS contract margin percentage for full year 2014 to improve over amounts recognized in 2013.

 

API’s contract revenue gross margin percentages decreased for the three and nine months ended September 30, 2014 compared to the same periods in 2013 due to lower capacity utilization as well as an increase in lower margin commercial sales.

 

We currently expect API contract margins for full year 2014 to remain consistent with amounts recognized for the full year 2013 including the expected accretive benefit of gross margin percentages from the Cedarburg Pharmaceuticals acquisition, offset by lower margin commercial sales.

 

Drug Product contract revenue gross margin percentages improved for the three and nine months ended September 30, 2014 from the same periods in 2013 primarily due to increases in Burlington revenues in relation to their fixed costs. Drug Product cost of contract revenue includes $3.1 million business interruption charges at our OsoBio facility for the three and nine months ended September 30, 2014 which led to a decrease in Drug Product contract gross margin.

 

25
 

 

We currently expect Drug Product contract margins for full year 2014 to significantly improve from amounts recognized for the full year 2013 driven by an increase in capacity utilization at our Burlington facility, as well as the expected accretive benefit of gross margin percentages from the OsoBio acquisition, offset in part by business interruption charges at our OsoBio facility.

 

Technology incentive award

 

We maintained a Technology Development Incentive Plan, the purpose of which was to stimulate and encourage novel innovative technology developments by our employees. This plan allowed 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. The incentive awards were as follows:

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 260     $ 571     $ 1,277     $ 2,254  

 

We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods. Technology incentive award expense decreased for the three and nine months ended September 30, 2014 as compared to the same periods in the prior year due to the decrease in Allegra recurring royalty revenue as discussed above.

 

Research and development

 

Research and development (“R&D”) expense consists of compensation and benefits for scientific personnel for work performed on various generic programs, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs.

 

Research and development expenses were as follows:

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 568     $ 94     $ 775     $ 370  

 

R&D expense for the three and nine months ended September 30, 2014 increased from the same periods in 2013 relating primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants. As a result, we currently expect full year 2014 R&D expense to increase from amounts recognized in 2013.

 

Selling, general and administrative

 

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 11,568     $ 9,249     $ 34,944     $ 31,252  

 

26
 

 

SG&A increased for the three and nine months ended September 30, 2014 as compared to the same periods in the prior year, primarily due to costs associated with merger and acquisition activities, including the acquisitions of Cedarburg and OsoBio as well as incremental SG&A costs from their associated businesses. SG&A for the nine months ended September 30, 2013 includes a one-time charge of $1.92 million for the settlement of a U.S. litigation matter. As a result, we currently expect SG&A costs for the full year of 2014 to increase from amounts recognized in 2013.

 

Postretirement benefit plan settlement gain

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ -     $ -     $ (1,285 )   $ -  

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ -     $ -     $ (1,285 )   $ -  

 

In the first quarter of 2014, we recognized a gain on settlement of post-retirement liability in the API segment.

 

Restructuring

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 2,164     $ 276     $ 3,436     $ 6,108  

 

In the third quarter of 2014, the Company recorded restructuring charges related to optimizing the Singapore facility’s footprint. In April 2014, the Company announced a restructuring plan transitioning DDS activities at its Syracuse, N.Y. site to other sites within AMRI and ceased operations in Syracuse at the end of June 2014. These actions taken are consistent with AMRI’s ongoing efforts to consolidate its facility resources to more effectively utilize its discovery and development resource pool and to further reduce its facility cost structure.

 

Restructuring charges for the three months ended September 30, 2014 consist primarily of lease termination charges associated with optimizing the Singapore facility’s footprint. The nine months ended September 30, 2014 also include termination benefits and personnel realignment costs associated with the closure of the Syracuse site.

 

During the first nine months of 2013, we recorded $6.1 million of restructuring charges primarily related to the closure of our Bothell, WA and Budapest, Hungary facilities.

 

Property and Equipment Impairment

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 1,232     $ -     $ 4,950     $ 1,440  

 

27
 

 

In the third quarter of 2014, we recorded property and equipment impairment charges of $1.2 million in our DDS segment associated with the Company’s consolidation of facility resources at our Singapore site. In the second quarter of 2014, we recorded property and equipment impairment charges of $3.7 million in our DDS segment associated with the Company’s decision to cease operations at our Syracuse, New York facility.

 

In the first quarter of 2013, we recorded property and equipment impairment charges of $0.5 million in our DDS segment associated with the Company’s decision to cease operations at our Bothell, Washington facility. In the second quarter of 2013, as a result of resolving the termination of the lease at our former Hungary facility, we recorded property and equipment impairment charges of $0.9 million in our DDS segment related to certain moveable equipment located at the former Hungary facility.

 

Interest expense, net

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
(in thousands)   2014     2013     2014     2013  
Interest expense   $ (2,575 )   $ (141 )   $ (8,259 )   $ (419 )
Interest income     -       3       3       8  
Interest expense, net   $ (2,575 )   $ (138 )   $ (8,256 )   $ (411 )

 

Net interest expense increased for the three and nine months ended September 30, 2014 from the same periods in 2013 primarily due to interest on our convertible senior debt entered into in the fourth quarter of 2013. Interest expense for the nine months ended September 30, 2014 also includes $0.4 million related to the write-off of deferred financing assets in conjunction with the termination of our term loan and revolving credit facility.

 

Other income (expense), net

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ 235     $ 155     $ 3     $ 1,038  

 

Other income for the three months ended September 30, 2014 was primarily related to the fluctuation in exchange rates associated with foreign currency transactions. This income was offset by a write-off of a litigation settlement receivable balance for the nine months ended September 30, 2014.

 

Other income for the three months ended September 30, 2013 was primarily related to the fluctuation in exchange rates associated with foreign currency transactions. Included in other income for the nine months ended September 30, 2013 was an insurance demutualization gain of $0.4 million.

 

Income tax (benefit) expense

 

Three Months Ended     Nine Months Ended  
September 30,     September 30,  
2014     2013     2014     2013  
(in thousands)  
$ (3,434 )   $ 2,332     $ (4,024 )   $ 6,332  

 

28
 

 

The Company recognized a tax benefit for the three and nine months ended September 30, 2014 due primarily to the pre-tax loss. Additionally for the nine months ended September 30, 2014, the Company recognized an additional tax benefit due to the reversal of a valuation allowance on a net operating loss deferred tax asset for the Company’s U.K. operations of $2.8 million due to a change in estimate regarding the recoverability of those assets resulting from improved profitability.

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first nine months of 2014, we generated cash from operating activities of $3.9 million compared to $23.7 million in the same period in 2013. This change was primarily driven by a decrease in income from operations, as well as changes in working capital items.

 

During the first nine months of 2014, cash used in investing activities was $158.0 million, resulting primarily from the use of $38.8 million in cash to acquire Cedarburg Pharmaceuticals, $107.0 million in cash to acquire OsoBio and $12.0 million for the acquisition of property and equipment. Additionally, during the first nine months of 2014, we used $3.2 million in cash in financing activities, relating primarily to payments made on our credit facilities, offset by proceeds from the sale of common stock.

 

Working capital, defined as current assets less current liabilities, was $104.3 million at September 30, 2014 as compared to $230.2 million as of December 31, 2013. This decrease primarily relates to the use of cash to acquire Cedarburg and OsoBio during 2014.

 

In December 2013, we issued $150 million of 2.25% Cash Convertible Senior Notes (the “Notes”), which generated net proceeds of $134.8 million, which includes the associated warrants, convertible note hedges and bank fees. In connection with the offering of these notes, we entered into convertible note hedging transactions with two counterparties. We also entered into warrant transactions in which we sold warrants of our common stock to the counterparties. We paid the counterparties approximately $33.6 million for the convertible note hedge and received approximately $23.1 million from the counterparties for the warrants. See Note 4 for additional information regarding these transactions.

 

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. Under the terms of the April 2012 credit agreement, the Company was required to maintain a $5.0 million 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 was directly reduced by the amount of principal payments made on the term loan which began in May 2013. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating both the term loan liability and releasing the restricted cash.

 

In June 2014, the Company terminated its credit facility. In conjunction with the termination of the credit facility, the balance required to be maintained as restricted cash must be at least 110% of the maximum potential amount of the outstanding letters of credit.  As of September 30, 2014, the Company had $4,823 of outstanding letters of credit secured by restricted cash.

 

On October 24, 2014, the Company entered into a $50.0 million senior secured credit agreement (the “Credit Agreement”) consisting of a 3-year, $50.0 million revolving credit facility, which includes a $15.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swing line loans. The Credit Agreement also includes an accordion feature that, subject to securing additional commitments from existing lenders or new lending institutions, will allow the Company to increase the aggregate commitments under the Credit Agreement by up to $10.0 million. The Company expects to use the proceeds of any borrowings under the Credit Agreement for working capital and other general corporate purposes of the Company and its subsidiaries, subject to the terms and conditions set forth in the Credit Agreement.

 

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes to our contractual obligations since December 31, 2013, other than the repayment of the principal outstanding under the aforementioned term loan in April 2014, which was fully collateralized by the restricted cash. As of September 30, 2014, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

We expect that additional future capital expansion and acquisition activities, if any, could be funded with cash on hand, cash from operations, borrowings under our credit facility and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold discussions regarding such potential acquisitions. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods.

 

29
 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, derivative instruments and hedging activities, pension and postretirement benefit plans, income taxes and contingencies, among other effects. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes or modifications to the policies since December 31, 2013.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the Company’s last fiscal quarter our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer regarding the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the Company’s last fiscal quarter, our disclosure controls and procedures were effective in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. We intend to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

 

Changes in Internal Control Over Financial Reporting

 

We acquired Cedarburg in the second quarter of 2014 and OsoBio in the third quarter of 2014. The Cedarburg business is included in our unaudited condensed consolidated financial statements as of June 30, 2014 and September 30, 2014, and the OsoBio business is included in our unaudited condensed consolidated financial statements as of September 30, 2014. As these acquisitions occurred in the second and third quarters of 2014, the scope of our assessment of our internal control over financial reporting does not include these businesses. The exclusion is in accordance with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.

 

Other than the changes noted above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

30
 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Please refer to Part 1 – Note 11 to the condensed consolidated financial statements for details and history on outstanding litigation.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, other than as previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table represents share repurchases during the three months ended September 30, 2014:

 

    (a)     (b)     (c)   (d)
Period   Total Number of
Shares Purchased
(1)
    Average Price Paid
Per Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
  Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Program
July 1, 2014 – July 31, 2014     -     $ -     N/A   N/A
August 1, 2014 – August 31, 2014     -     $ -     N/A   N/A
September 1, 2014 – September 30, 2014     5,406     $ 22.05     N/A   N/A
Total     5,406     $ 22.05     N/A   N/A

 

(1) Consists of shares repurchased by the Company for certain employee’s restricted stock that vested to satisfy minimum tax withholding obligations that arose on the vesting of the restricted stock.

 

31
 

 

Item 6. Exhibits

 

Exhibit    
Number   Description
     
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
     
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101   XBRL (eXtensible Business Reporting Language).  The following materials from Albany Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

 

* This certification is not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.

 

32
 

 

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.

 

  ALBANY MOLECULAR RESEARCH, INC.
     
Date: November 10, 2014 By: /s/ Michael M. Nolan  
    Michael M. Nolan
    Senior Vice President, Chief Financial Officer and Treasurer
(Duly Authorized Officer and Principal Financial Officer)

 

33

 

Exhibit 31.1

 

CERTIFICATION

 

I, William S. Marth certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Albany Molecular Research, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date November 10, 2014 /s/ William S. Marth  
  Name: William S. Marth  
  Title: President and Chief Executive Officer
  Principal Executive Officer

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Michael M. Nolan certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Albany Molecular Research, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date November 10, 2014 /s/ Michael M. Nolan  
  Name: Michael M. Nolan
  Title: Senior Vice President, Chief Financial Officer and Treasurer
  Principal Financial Officer

 

 

 

Exhibit 32.1

 

CERTIFICATION

 

The undersigned officer of Albany Molecular Research, Inc. (the “Company”) hereby certifies to his knowledge that the Company’s Quarterly Report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

Date November 10, 2014  
  /s/ William S. Marth  
  Name: William S. Marth
  Title: President and Chief Executive Officer

 

 

 

Exhibit 32.2

 

CERTIFICATION

 

The undersigned officer of Albany Molecular Research, Inc. (the “Company”) hereby certifies to his knowledge that the Company’s Quarterly Report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

Date: November 10, 2014 /s/ Michael M. Nolan  
  Name: Michael M. Nolan
  Title: Senior Vice President, Chief Financial Officer and Treasurer