Albany Molecular Research
ALBANY MOLECULAR RESEARCH INC (Form: 10-Q, Received: 08/05/2016 16:05:00)

 

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 June 30, 2016
     
¨   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: 001-35622

 

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 12203

(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 July 29, 2016
Common Stock, $.01 par value   42,869,771 excluding treasury shares of 5,564,251

 

 

 

 

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 24
           
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk 30
           
    Item 4.   Controls and Procedures 31
           
Part II.   Other Information 32
           
    Item 1.   Legal Proceedings 32
           
    Item 1A.   Risk Factors 32
           
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 33
           
    Item 6.   Exhibits 34
           
Signatures     35
           
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 June 30,     Six Months Ended June 30,  
(Dollars in thousands, except for per share data)   2016     2015     2016     2015  
                         
Contract revenue   $ 116,457     $ 85,226     $ 219,295     $ 160,358  
Recurring royalties     4,353       4,322       7,094       11,007  
Total revenue     120,810       89,548       226,389       171,365  
                                 
Cost of contract revenue     82,214       64,668       161,577       122,807  
Technology incentive award           179             560  
Research and development     3,479       384       6,647       875  
Selling, general and administrative     27,924       16,518       52,525       33,992  
Restructuring and other charges     526       1,632       3,126       3,119  
Impairment charges     201             201       2,615  
Total operating expenses     114,344       83,381       224,076       163,968  
                                 
Income from operations     6,466       6,167       2,313       7,397  
                                 
Interest expense, net     (7,064 )     (3,179 )     (14,200 )     (6,214 )
Other (expense) income, net     (5,661 )     634       (6,657 )     1,103  
                                 
(Loss) income before income taxes     (6,259 )     3,622       (18,544 )     2,286  
                                 
Income tax expense     15,008       1,315       12,791       2,202  
                                 
Net (loss) income   $ (21,267 )   $ 2,307     $ (31,335 )   $ 84  
                                 
Basic (loss) income per share   $ (0.61 )   $ 0.07     $ (0.90 )   $ 0.00  
                                 
Diluted (loss) income per share   $ (0.61 )   $ 0.07     $ (0.90 )   $ 0.00  

 

See notes to unaudited condensed consolidated financial statements.

 

3

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2016     2015     2016     2015  
Net (loss) income   $ (21,267 )   $ 2,307     $ (31,335 )   $ 84  
Foreign currency translation (loss) gain     (5,761 )     1,742       33       596  
Net actuarial gain on pension and postretirement benefits     115       154       230       308  
Total comprehensive (loss) income   $ (26,913 )   $ 4,203     $ (31,072 )   $ 988  

 

See notes to unaudited condensed consolidated financial statements.

 

4

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited) 

 

(All amounts in thousands, except per share data)   June 30,
2016
    December 31,
2015
 
Assets                
Current assets:                
Cash and cash equivalents   $ 30,675     $ 49,343  
Restricted cash     713       2,966  
Accounts receivable, net     100,589       110,427  
Royalty income receivable     5,992       6,184  
Inventory     93,174       89,231  
Prepaid expenses and other current assets     22,504       16,159  
Income taxes receivable     1,449       5,419  
Property and equipment held for sale     1,557       516  
Total current assets     256,653       280,245  
                 
Property and equipment, net     222,011       209,508  
Notes hedges     37,316       76,393  
Goodwill     170,702       169,471  
Intangible assets and patents, net     117,035       120,204  
Deferred income taxes           6,342  
Other assets     2,789       3,404  
Total assets   $ 806,506     $ 865,567  
Liabilities and Stockholders’ Equity                
Current liabilities:                
Accounts payable and accrued expenses   $ 72,479     $ 68,209  
Deferred revenue and licensing fees     10,317       14,718  
Accrued pension benefits     436       578  
Hedge liability     6,401        
Current installments of long-term debt     13,082       15,591  
Total current liabilities     102,715       99,096  
Long-term liabilities:                
Long-term debt, excluding current installments, net     370,798       373,692  
Notes conversion derivative     37,316       76,393  
Income taxes payable     2,101       2,956  
Pension and postretirement benefits     6,627       6,909  
Deferred income taxes     20,166       16,405  
Other long-term liabilities     3,851       2,893  
Total liabilities     543,574       578,344  
                 
Commitments and contingencies                
                 
Stockholders’ equity:                
Preferred stock, $0.01 par value, authorized 2,000 shares, none issued or outstanding            
Common stock, $0.01 par value, authorized 100,000 shares, 41,345 shares issued as of June 30, 2016 and 41,130 shares issued as of December 31, 2015     413       411  
Additional paid-in capital     303,886       296,337  
Retained earnings     45,996       77,331  
Accumulated other comprehensive loss, net     (18,138 )     (18,401 )
      332,157       355,678  
Less, treasury shares at cost, 5,560 shares as of June 30, 2016 and 5,512 shares as of December 31, 2015     (69,225 )     (68,455 )
Total stockholders’ equity     262,932       287,223  
Total liabilities and stockholders’ equity   $ 806,506     $ 865,567  
                 

 

See notes to unaudited condensed consolidated financial statements.

 

5

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

    Six Months Ended June 30,  
(Dollars in thousands)   2016     2015  
             
Operating activities                
Net (loss) income   $ (31,335 )   $ 84  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:                
Depreciation and intangible asset amortization     16,280       11,762  
Deferred financing costs amortization     1,938       534  
Accretion of discount on long-term debt     3,649       3,057  
Unrealized loss on hedge instrument     6,401        
Deferred income taxes     9,667       826  
(Gain) loss on disposal of property and equipment     (139 )     101  
Impairment charges     201       2,615  
Allowance for bad debts     275       509  
Stock-based compensation expense     4,630       3,019  
Excess tax benefit of stock option exercises           (1,727 )
Changes in operating assets and liabilities that provide (use) cash, net of impact of business combinations:                
Accounts receivable     9,886       43  
Royalty income receivable     274       611  
Inventory     (3,203 )     (10,481 )
Prepaid expenses and other assets     (5,729 )     456  
Accounts payable and accrued expenses     1,180       10,318  
Income taxes     3,969       1,894  
Deferred revenue and licensing fees     (4,225 )     (3,573 )
Pension and postretirement benefits     (70 )     36  
Other long-term liabilities     1,592       (72 )
Net cash provided by operating activities     15,241       20,012  
                 
Investing activities                
Purchases of businesses, net of cash acquired     (1,056 )     (59,656 )
Purchases of property and equipment     (24,966 )     (7,541 )
Payments for patent applications and other costs     (158 )     (54 )
Proceeds from disposal of property and equipment     675       31  
Net cash used in investing activities     (25,505 )     (67,220 )
                 
Financing activities                
Borrowings on long-term debt     250       39,000  
Principal payments on long-term debt     (10,773 )     (376 )
Deferred financing costs           (11 )
Change in restricted cash     2,253       1,052  
Proceeds from sale of common stock     903       2,087  
Purchases of treasury stock     (770 )     (617 )
Excess tax benefit of stock option exercises           1,727  
Net cash (used in) provided by financing activities     (8,137 )     42,862  
                 
Effect of exchange rate changes on cash and cash equivalents     (267 )     (93 )
                 
Decrease in cash and cash equivalents     (18,668 )     (4,439 )
                 
Cash and cash equivalents at beginning of period     49,343       46,995  
                 
Cash and cash equivalents at end of period   $ 30,675     $ 42,556  
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest   $ 8,603     $ 2,316  
Income taxes   $ 1,101     $ 276  

 

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”) is a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. It supplies a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”) and the development and manufacturing of drug product for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. With locations in the United States, Europe, and Asia, the Company maintains geographic proximity to its customers and flexible cost models.

 

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 six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for any other period or for the year ending December 31, 2016. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of and for the three and six month periods ended June 30, 2016. 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. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in the unaudited condensed consolidated statements of comprehensive (loss) income and 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, assumptions associated with the Company’s accounting for business combinations and goodwill impairment assessment, and the amount and realizability of deferred tax assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans, assumptions utilized in determining stock-based compensation, as well as those utilized in determining the value of both the notes hedges and the notes conversion derivative and the 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 Financial Accounting Standards Board’s (the “FASB”) 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 its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant market factors.

 

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

 

7

 

 

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 and when delivery is made or title and risk of loss otherwise 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 materials 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 Royalty and Milestone Revenues

 

Recurring Royalty Revenue . Recurring royalties have historically related to 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. These royalty payments ceased in May 2015 due to the expiration of patents under the license agreement. The Company currently receives royalties on net sales of generic products sold by Allergan, plc (“Allergan”) in conjunction with a Development and Supply Agreement. The Company records royalty revenue in the period in which the net sales of the product occur. Royalty payments from Allergan are due within 60 days after each calendar quarter and are determined based on sales of the qualifying products in that quarter. The Company also receives royalties on certain other products.

 

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.

 

In 2014, the Company entered into development and supply agreements with Genovi Pharmaceuticals Limited, which have subsequently been transferred to HBT Labs, Inc. (“HBT”), to manufacture select generic parenteral drug products for registration and subsequent commercialization in the U.S., Europe, and select emerging markets. 

 

Under the terms of these HBT agreements, the Company may receive milestone payments for each drug product candidate upon achievement of certain development milestones including technology transfer activities, analytical development activities, and manufacture of regulatory submission batches.  Following U.S. Food and Drug Administration approval, the Company will supply generic parenteral drug products to HBT pursuant to the HBT agreements and receive payments based on HBT’s sales of such products.

 

The Company has determined these milestones payments to be substantive milestones in accordance with ASC 605-28-25, “Revenue Recognition – Milestone Method”. In evaluating these milestones, the Company considered the following:

 

 

 

 

· Each individual milestone is considered to be commensurate with the enhanced value of the underlying licensed intellectual property or drug product candidate as they are 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 six months ended June 30, 2016 and 2015, no milestone revenue was recognized by the Company.

 

Proprietary Drug Development Arrangements

 

The Company has discovered and conducted the early development of several new drug candidates, and has out-licensed certain of 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 the Company’s intellectual property are successfully developed into new drugs and reach the market. The Company does not anticipate milestone or recurring royalty payments under its current license arrangements to have a significant impact on the Company’s consolidated operating results, financial position, or cash flows.

 

8

 

 

Cash, Cash Equivalents and Restricted Cash

 

Cash equivalents consist of money market accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash and cash equivalents are held principally at four financial institutions and at times may exceed insured limits.  The Company has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.

 

Restricted cash balances at June 30, 2016 and December 31, 2015 are required as collateral for the letters of credit associated with the Company’s debt agreements.

 

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.

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivatives in accordance with FASB ASC Topic 815, “Derivatives 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 a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met. If the specific hedge accounting criteria are met, then changes in fair value are recorded in accumulative other comprehensive loss, net.

 

Recently Issued Accounting Pronouncements

 

In March 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and ASU No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”. These amendments provide additional clarification and implementation guidance on the previously issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which is discussed below.

The amendments in ASU No. 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. ASU No. 2016-10 clarifies the following two aspects of ASU No. 2014-09; identifying performance obligations and licensing implementation guidance. ASU No. 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for consideration given by a vendor to a customer, as well as accounting for shipping and handling fees and freight services. ASU No. 2016-12 provides clarification to Topic 606 on how to assess collectability, present sales tax, treat noncash consideration, and account for completed and modified contracts at the time of transition. In addition, ASU No. 2016-12 clarifies that an entity retrospectively applying the guidance in Topic 606 is not required to disclose the effect of the accounting change in the period of adoption. The effective date and transition requirements for these amendments are the same as the effective date and transition requirements of ASU No. 2014-09, which is effective for calendar years beginning after December 15, 2017. The Company is currently assessing the impact of these ASUs on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”, which changes the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016 and for interim periods therein with early adoption permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

9

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement is effective for annual reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: (Topic 606).” This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of ASC Topic 360, “Property, Plant, and Equipment,” and intangible assets within the scope of ASC Topic 350, “Intangibles-Goodwill and Other”) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of ASU 2014-09. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. Early adoption is not permitted. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The adoption of this ASU as of January 1, 2016 did not have a material impact on the Company’s consolidated financial statements.

 

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 June 30,     Six Months Ended June 30,  
    2016     2015     2016     2015  
Weighted average common shares outstanding - basic     34,935       32,124       34,826       31,999  
Dilutive effect of warrants           179             90  
Dilutive effect of share-based compensation           923             950  
Weighted average common shares outstanding - diluted     34,935       33,226       34,826       33,039  

 

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 six months ended June 30, 2016 and 2015 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents outstanding (before the effects of the treasury stock method) was 11,662 and 271 for the three months ended June 30, 2016 and 2015, respectively, and 11,765 and 194 for the six months ended June 30, 2016 and 2015, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

10

 

 

Note 3 — Business Acquisitions

 

Glasgow

On January 8, 2015, the Company completed the purchase of all of the outstanding equity interests of Aptuit’s Glasgow, U.K. business, now Albany Molecular Research (Glasgow) Limited (“Glasgow”), for total consideration of $23,805 (net of cash acquired of $146). The Glasgow facility extends the Company’s capabilities to sterile injectable drug product pre-formulation, formulation and clinical stage manufacturing. Glasgow has been assigned to the Drug Product Manufacturing (“DPM”) segment.

 

SSCI

On February 13, 2015, the Company completed the purchase of assets and assumed certain liabilities of Aptuit’s Solid State Chemical Information business, now AMRI SSCI, LLC (“SSCI”), for total consideration of $35,850. SSCI brings extensive material science knowledge and technology and expands the Company’s capabilities in analytical testing to include peptides, proteins and oligonucleotides. SSCI has been assigned to the Discovery and Development Services (“DDS”) segment.

 

Gadea Grupo

On July 16, 2015, the Company completed the purchase of Gadea Grupo Farmaceutico, S.L. (“Gadea”), a contract manufacturer of complex active pharmaceutical ingredients (“APIs”) and finished drug product. Gadea operates within the Company’s API and DPM segments. The aggregate net purchase price was $127,572 (net of cash acquired of $10,961), which included the issuance of 2,200 shares of common stock, valued at $40,568, with the balance comprised of $96,961 in cash, plus a working capital adjustment of $1,004. The purchase price has been allocated based on an estimate of the fair value of assets and liabilities acquired as of the acquisition date. The following table summarizes the final allocation of the aggregate purchase price to the estimated fair value of the net assets acquired:

 

    July 16, 2015  
Assets Acquired        
Accounts receivable   $ 23,756  
Prepaid expenses and other current assets     3,334  
Inventory     47,400  
Property and equipment     29,420  
Deferred tax assets     1,115  
Intangible assets     58,200  
Goodwill     51,358  
Other long term-assets     1,760  
Total assets acquired   $ 216,343  
         
Liabilities Assumed        
Accounts payable and accrued expenses   $ 18,103  
Debt     44,523  
Income taxes payable     5,422  
Deferred income taxes     19,179  
Other long-term liabilities     1,544  
Total liabilities assumed     88,771  
Net assets acquired   $ 127,572  

 

The purchase price was adjusted in the first quarter of 2016 by $676 due to the finalization of the net working capital adjustment. The purchase price allocation was adjusted in the first quarter of 2016, primarily due to the recognition of an environmental remediation liability of $1,542, and a corresponding indemnification receivable from the seller of $771. These adjustments resulted in a net increase of goodwill of approximately $1,400.

 

The purchase price allocation was adjusted in the second quarter of 2016 to reduce the estimated uncertain tax position liabilities associated with pre-acquisition tax years by $498, and to reduce the corresponding indemnification receivable from the seller by $293. These adjustments resulted in a net decrease of goodwill of $205.

 

The Company has attributed the goodwill of $51,358 to an expanded global footprint and additional market opportunities that the Gadea business offers. The goodwill has been allocated between business segments, with API of $30,879 and DPM of $20,479, and is not deductible for tax purposes. Intangible assets acquired consisted of customer relationships of $24,000 (with an estimated life of 13 years), a tradename of $4,100 (with an indefinite estimated life), intellectual property of $11,900 (with an estimated life of 15 years), in-process research and development of $18,000 (with an indefinite estimated life), and $200 of order backlog.

 

Whitehouse Laboratories

On December 15, 2015, the Company acquired all the outstanding equity interests of Whitehouse Analytical Laboratories, LLC (“Whitehouse”), a leading provider of testing services that includes chemical and material analysis, method development and validation and quality control verification services to the pharmaceutical, medical device and personal care industries. Whitehouse offers a comprehensive array of testing solutions for life sciences from materials and excipients, container qualification and container closure integrity testing, routine analytical chemistry, drug delivery systems and device qualification programs, packaging, distribution, and stability and storage programs. The aggregate net purchase price was $55,986 (net of cash acquired of $377), which included the issuance of 137 shares of common stock, valued at $1,800, with the balance comprised of $53,924 in cash, plus a working capital adjustment of $262. 

 

The purchase price was increased in the first quarter of 2016 by $262 due to the finalization of the net working capital adjustment. The purchase price was reduced in the first quarter of 2016 to recognize the discount associated with the 137 shares of restricted shares issued in conjunction with the Whitehouse acquisition in the amount of $200. These adjustments resulted in a net increase of goodwill of $62.

 

11

 

 

The following table shows the unaudited pro forma statements of operations for the three and six months ended June 30 2015, as if the Gadea, Whitehouse, Glasgow and SSCI acquisitions had occurred on January 1, 2014. 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     Six months ended  
    June 30, 2015     June 30, 2015  
Total revenues   $ 117,687     $ 222,327  
Net income     7,462       7,305  
                 
Pro forma weighted average basic shares     34,461       34,336  
Pro forma weighted average diluted shares     35,563       35,376  
                 
Pro forma earnings per share:                
Basic   $ 0.22     $ 0.21  
Diluted   $ 0.21     $ 0.21  

 

The following table shows the pro forma adjustments made to the weighted average shares outstanding for the three and six months ended June 30, 2015:

 

    Three months ended     Six months ended  
    June 30, 2015     June 30, 2015  
Weighted average common shares outstanding - basic     32,124       31,999  
Pro forma impact of acquisition consideration     2,337       2,337  
Pro forma weighted average common shares outstanding -basic     34,461       34,336  
Dilutive effect of warrants     179       90  
Dilutive effect of share-based compensation     923       950  
Pro forma weighted average common shares outstanding -diluted     35,563       35,376  

 

For the three and six month periods ended June 30, 2015, pre-tax net income was adjusted by reducing expenses by $247 and $1,232, respectively, for acquisition related costs and increasing expenses by $1,133 and $2,440, respectively, for purchase accounting related depreciation and amortization.

 

The Company partially funded the acquisition of Whitehouse utilizing the proceeds from a $30,000 revolving line of credit. For purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2015, the Company has assumed that it borrowed on the revolving line of credit on January 1, 2014 for an amount sufficient to fund the cash consideration to acquire Whitehouse as of that date. The pro forma statements of operations for the three and six months ended June 30, 2015 reflects the recognition of interest expense that would have been incurred on the revolving line of credit had it been entered into on January 1, 2014. The Company has recorded $425 and $850, respectively, of pro forma interest expense on the revolving line of credit for the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2015.

 

The Company partially funded the acquisition of Gadea utilizing the proceeds from a $200,000 term loan that was provided for in conjunction with a $230,000 senior secured credit agreement (the “Credit Agreement”) with Barclays Bank PLC that was completed in July 2015 (see note 5). The Company did not have sufficient cash on hand to complete the acquisition as of January 1, 2014. For the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2015, the Company has assumed that it entered into the Credit Agreement on January 1, 2014 for an amount sufficient to fund the preliminary cash consideration to acquire Gadea as of that date. The pro forma statements of operations for the three and six months ended June 30, 2015 reflect the recognition of interest expense that would have been incurred on the Credit Agreement had it been entered into on January 1, 2014. The Company has recorded $2,100 and $4,200, respectively of pro forma interest expense on the Credit Agreement for the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2015. 

 

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Note 4 — Inventory

 

Inventory consisted of the following as of June 30, 2016 and December 31, 2015:

 

    June 30,
2016
    December 31,
2015
 
Raw materials   $ 42,398     $ 37,483  
Work in process     22,182       29,341  
Finished goods     28,594       22,407  
Total inventory   $ 93,174     $ 89,231  

 

Note 5 — Debt

 

The following table summarizes long-term debt:

 

    June 30,
2016
    December 31,
2015
 
Convertible senior notes, net of unamortized debt discount   $ 132,225     $ 128,917  
Term loan, net of unamortized discount     197,186       198,343  
Revolving credit facility     30,000       30,000  
Industrial development authority bonds           2,080  
Various borrowings with institutions, Gadea loans     33,031       39,655  
Capital leases – equipment & other     282       111  
      392,724       399,106  
Less deferred financing fees     (8,844 )     (9,823 )
Less current portion     (13,082 )     (15,591 )
Total long-term debt   $ 370,798     $ 373,692  

 

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $19,089 at June 30, 2016, are as follows:

 

2016 (remaining)   $ 6,417  
2017     11,835  
2018     354,561  
2019     5,944  
2020     31,996  
Thereafter     1,060  
Total   $ 411,813  

 

Term Loan

 

The components of the term loan under the Company’s Second Amended and Restated Credit Agreement with Barclays Bank PLC, dated as of August 19, 2015 (the “Second Restated Credit Agreement”) were as follows:

 

    June 30,
2016
    December 31,
2015
 
Principal amount – term loan   $ 198,500     $ 200,000  
Unamortized debt discount     (1,314 )     (1,657 )
Net carrying amount of term loan   $ 197,186     $ 198,343  

 

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”).  The Notes mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date and interest is 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”).

 

13

 

 

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 months ended June 30, 2016 and 2015, the Company recorded $1,664 and $1,542, respectively, and for the six months ended June 30, 2016 and 2015, the Company recorded $3,308 and $3,057, 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:

 

    June 30,
2016
    December 31,
2015
 
Principal amount   $ 150,000     $ 150,000  
Unamortized debt discount     (17,775 )     (21,083 )
Net carrying amount of Notes   $ 132,225     $ 128,917  

 

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 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 it is required to make upon conversion of the Notes in excess of the principal amount of converted Notes if the Company’s 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 Hedges. The cash convertible Note Hedges 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 was 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.

 

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 June 30, 2016 and December 31, 2015, 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 statement of operations.

 

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

 

    Location on Balance
Sheet
  June 30,
2016
    December 31,
2015
 
Notes Hedges   Other assets   $ 37,316     $ 76,393  
Notes Conversion Derivative   Other liabilities   $ (37,316 )   $ (76,393 )

 

14

 

 

IDA Bonds

 

In May 2016, the sale of the Company’s Syracuse, NY facility, within the DDS operating segment, was completed for $675. Commensurate with the sale of the facility, the industrial development authority (“IDA”) bonds associated with the facility were repaid in full, with a final payment of $1,760.

 

Note 6 — Facilities Impairment, Restructuring and Other Charges

 

In April 2015, the Company announced a restructuring plan with respect to certain operations in the U.K. within its API business segment. In connection with the restructuring plan, the Company ceased all operations at its Holywell, U.K. facility in the fourth quarter of 2015. The Company recorded $569 and $1,565 in charges for reduction in force and termination benefits and other restructuring-related charges related to the U.K. facility during the three and six months ended June 30, 2016, respectively. In conjunction with the Company’s actions to cease operations at its Holywell, U.K. facility, the Company also recorded property and equipment impairment charges in the API segment of $2,550 in the first quarter of 2015. These charges are included under the caption “impairment charges” on the consolidated statement of operations. Also in 2015, the Company made additional resource changes at its Singapore site (within the DDS segment) to optimize the cost profile of the facility, which resulted in restructuring charges of $491 and $1,918 during the three and six months ended June 30, 2016. Equipment that was not transferred or recovered through sale was subject to accelerated depreciation over the remaining operating period of the facility, which terminated in the first quarter of 2016.

 

In the second quarter of 2016, Cedarburg Pharmaceuticals, Inc. entered into a sublease for a closed facility. The previously recorded restructuring charges and associated liability were reversed for an amount of $634, which is equivalent to the sublease payments. Other restructuring and other charges for various sites at the three and six months ended June 30, 2016, were $100 and $277, respectively.

 

Restructuring and other charges for the three months ended June 30, 2016 and 2015 were $526 and $1,632, respectively, and for the six months ended June 30, 2016 and 2015 were $3,126 and $3,119, respectively, consisting primarily of U.K. termination charges and costs associated with the transfer of continuing products from the Holywell, U.K. facility to the Company’s other manufacturing locations, resource optimization charges at the Company’s Singapore facility and lease termination and other charges associated with the previously announced restructuring at the Company’s Syracuse, NY facility.

 

The following table displays the restructuring activity and liability balances for the six-month period ended as of June 30, 2016:

 

    Balance at
January 1,
2016
    Charges/
(reversals) (1)
   

Amounts

Paid

    Foreign
Currency
Translation &
Other
Adjustments (1)
   

Balance at
June 30,
2016

 
                               
Termination benefits and personnel realignment   $ 539     $ 615       (1,021 )     (48 )   $ 85  
Lease termination and relocation charges     2,153       (39 )     (2,023 )     58       149  
Other           2,550       (1,354 )     (1,102 )     94  

Total

 

  $ 2,692     $ 3,126       (4,398 )     (1,092 )   $ 328  
(1) Included in other restructuring charges are non-cash accelerated depreciation charges of $1,145 related to our Singapore facility.

 

Termination benefits and personnel realignment costs related to severance packages, outplacement services, and career counseling for employees affected by the restructuring. Lease termination charges related to estimated costs associated with exiting a facility, net of estimated sublease income.

 

Restructuring charges are included under the caption “Restructuring and other charges” in the consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the consolidated balance sheets at June 30, 2016 and December 31, 2015.

 

Anticipated cash outflow related to the above restructuring liability as of June 30, 2016 for the remainder of 2016 is approximately $228.

 

The Company is currently marketing its Holywell, U.K. facility for sale. The facility is an asset of the API operating segment and is classified as for held for sale with the long-lived assets segregated to a separate line on the consolidated balance sheets until they are sold. Depreciation expense on the facility has ceased. The carrying value of the facility is $1,557 at June 30, 2016. The Company expects to sell the facility within one year.

 

Note 7 — Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2016 were as follows:

 

    DDS     API     DPM     Total  
Balance as of December 31, 2015   $ 45,987     $ 46,182     $ 77,302     $ 169,471  
Measurement period adjustments     62       1,211             1,273  
Foreign exchange translation           647       (689 )     (42 )
Balance as of June 30, 2016   $ 46,049     $ 48,040     $ 76,613     $ 170,702  

 

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The components of intangible assets are as follows:

 

    Cost     Impairment    

Accumulated
Amortization

    Foreign
exchange
translation
    Net     Amortization
Period
June 30, 2016                                            
Patents and Licensing Rights   $ 20,511     $ (2,709 )   $ (3,454 )   $ (352 )   $ 13,996     2-16 years
Customer Relationships     86,774             (7,357 )     58       79,475     5-20 years
Tradename     4,100                   34       4,134     indefinite
In-Process Research and Development     18,000                   151       18,151     indefinite
Trademarks     2,200             (921 )           1,279     5 years
Order Backlog     200             (202 )     2           n/a
Total   $ 131,785     $ (2,709 )   $ (11,934 )   $ (107 )   $ 117,035      

 

    Cost     Impairment     Accumulated
Amortization
    Foreign
exchange
translation
    Net     Amortization
Period
December 31, 2015                                            
Patents and Licensing Rights   $ 20,352     $ (2,508 )   $ (3,004 )   $ (165 )   $ 14,675     2-16 years
Customer Relationships     86,774             (4,303 )     (408 )     82,063     5-20 years
Tradename     4,100                   (57 )     4,043     indefinite
In-Process Research and Development     18,000                   (250 )     17,750     indefinite
Trademarks     2,200             (727 )           1,473     5 years
Order Backlog     200                         200     n/a
Total   $ 131,626     $ (2,508 )   $ (8,034 )   $ (880 )   $ 120,204      

 

Amortization expense related to intangible assets was $1,958 and $677 for the three months ended June 30, 2016 and 2015, respectively, and $3,900 and $1,427 for the six months ended June 30, 2016 and 2015, respectively. The weighted average amortization period is 12.4 years.

 

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

 

Year  ending December 31,      
2016 (remaining)   $ 3,724  
2017     7,622  
2018     7,617  
2019     7,611  
2020     7,598  
Thereafter     60,578  
Total   $ 94,750  

 

Note 8 — Income Taxes

 

During the three month period ended June 30, 2016, the Company established a valuation allowance against its U.S. deferred tax assets in the amount of $8,467.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income, either in prior years available for carryback claims or in the future. Management considers all available evidence in support of its ability to utilize its deferred tax assets, including the following:

 

· Cumulative income or loss in recent years

 

· Taxable income in recent years against which future losses may be carried back

 

· Future reversals of existing temporary differences

 

· Forecasted future taxable income

 

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· Tax planning strategies

 

In evaluating this evidence, management considered the appropriate weighting to be assigned regarding each source of income, including the following facts:

 

· The Company is in a cumulative loss position.

 

· The analysis takes into consideration the fact that all taxable income realized in prior years has previously been fully absorbed by the Company’s net operating loss generated in 2015.

 

· Future reversals of temporary differences are not significant when both deferred tax assets and deferred tax liabilities are considered.

 

· As of the period ended March 31, 2016, the Company had forecasted sufficient future income to realize its net operating loss carryovers by December 31, 2019. However, the Company did not achieve forecasted U.S. taxable income results for the three month period ended June 30, 2016 and reduced its 2016 full year forecasted U.S. taxable income estimates.

 

Based upon the level and weighting of available evidence, including cumulative losses in recent years and reduced weighting on forecasted future earnings, management concluded that it is more likely than not that all of the U.S. deferred tax assets will not be realized and a full valuation allowance was recorded as of June 30, 2016.

 

Although not considered in determining the need to recognize a valuation allowance against its U.S. deferred tax assets as of June 30, 2016, the Company acquired Euticals on July 11, 2016 (see Note 16 for additional details). As a result of additional U.S. debt borrowed to execute the acquisition of Euticals, the Company expects to incur substantial interest expense in future periods, which will substantially reduce U.S. taxable income in the future, making it less likely that the U.S. deferred tax assets will be realized. The Company will continue to evaluate all positive and negative evidence in support of its deferred tax assets in the future, as changes in temporary differences, tax laws, and operating performance may require a change in the need for a valuation allowance. If the Company determines the valuation allowance should be reversed in a future period, the resulting adjustment would be recorded as a tax benefit in the Consolidated Statements of Operations, and such amount may be material.

 

Note 9 — Share-Based Compensation

 

During the three and six months ended June 30, 2016, the Company recognized total share based compensation cost of $2,484 and $4,630, respectively, as compared to total share-based compensation cost for the three and six months ended June 30, 2015 of $1,464 and $3,019, respectively.

 

The Company grants share-based compensation, including restricted shares, under its 1998 Stock Option Plan, its 2008 Stock Option and Incentive Plan, as amended, as well as its 1998 Employee Stock Purchase Plan, as amended (“ESPP”). The 1998 Stock Option Plan, the 2008 Stock Option and Incentive Plan and ESPP are together referred to as the “Stock Option and Incentive Plans”.

 

Restricted Stock

 

A summary of unvested restricted stock activity during the six months ended June 30, 2016 is presented below:

 

    Number of
Shares
    Weighted
Average Grant Date
Fair Value Per
Share
 
Outstanding, January 1, 2016     1,020     $ 13.71  
Granted     444     $ 14.75  
Vested     (184 )   $ 13.16  
Forfeited     (25 )   $ 10.21  
Outstanding, June 30, 2016     1,255     $ 14.23  

 

As of June 30, 2016, there was $13,755 of total unrecognized compensation cost related to unvested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.81 years. 302 restricted shares outstanding have market-based vesting provisions. The grant date fair value assumptions for these shares contain a vesting probability factor to reflect the Company’s expectation that not all shares will vest. Of the remaining 953 restricted shares outstanding, the Company currently expects all shares to vest.

 

17

 

 

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 Six Months Ended June 30,  
    2016     2015  
Expected life in years     5       5  
Risk free interest rate     1.25 %     1.59 %
Volatility     42 %     42 %
Dividend yield            

 

A summary of stock option activity under the Company’s Stock Option and Incentive Plans during the six months ended June 30, 2016 is presented below:

 

    Number of
Shares
    Weighted
Average
Exercise
Price Per Share
    Weighted Average
Remaining
Contractual Term
(Years)
    Aggregate
Intrinsic
Value
 
Outstanding, January 1, 2016     1,439     $ 8.20                  
Granted     295     $ 15.77                  
Exercised     (64 )   $ 4.67                  
Forfeited     (31 )   $ 2.93                  
Expired                            
Outstanding, June 30, 2016     1,639     $ 9.80       5.72     $ 7,546  
Options exercisable, June 30, 2016     1,023     $ 7.25       5.90     $ 6,935  

 

The weighted average fair value of stock options granted for the six months ended June 30, 2016 and 2015 was $5.98 and $6.51, respectively. As of June 30, 2016, there was $2,781 of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 2.80 years. Of the 1,639 stock options outstanding, the Company currently expects all options to vest.

 

Employee Stock Purchase Plan

 

During the six months ended June 30, 2016 and 2015, 54 and 46 shares, respectively, were issued under the Company’s ESPP.

 

During the six months ended June 30, 2016 and 2015, cash received from stock option exercises and employee stock purchases under the ESPP was $903 and $2,087, respectively. The excess tax benefit realized for the tax deductions from share-based compensation was $0 and $1,727 for the six months ended June 30, 2016 and 2015, respectively.

 

Note 10 — Operating Segment Data

 

The Company has organized its operations into the DDS, API and DPM segments. The DDS segment includes activities such as drug lead discovery, optimization, drug development, analytical services and small scale commercial manufacturing. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. DPM includes pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized injectable formulations. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

 

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

 

    Contract
Revenue
    Recurring
Royalty
Revenue
    Income
(Loss) 
from
Operations
    Depreciation
and
Amortization
 
For the three months ended June 30, 2016                                
DDS   $ 25,820     $     $ 6,534     $ 2,448  
API     65,447       4,353       21,430       3,449  
DPM     25,190             6,426       1,859  
Corporate (a)                 (27,924 )      
Total   $ 116,457     $ 4,353     $ 6,466     $ 7,756  

 

18

 

 

    Contract
Revenue
    Recurring
Royalty
Revenue
    Income
(Loss) 
from
Operations
    Depreciation
and
Amortization
 
For the three months ended June 30, 2015                                
DDS (b)   $ 21,399     $ 1,787     $ 6,902     $ 2,134  
API     39,997       2,535       12,174       2,301  
DPM (b)     23,830             3,609       1,842  
Corporate (a)                 (16,518 )      
Total   $ 85,226     $ 4,322     $ 6,167     $ 6,277  

 

    Contract
Revenue
    Recurring
Royalty
Revenue
    Income
(Loss) 
from
Operations
    Depreciation
and
Amortization
 
For the six months ended June 30, 2016                                
DDS   $ 49,023     $     $ 11,086     $ 6,039  
API     120,149       7,094       34,056       6,571  
DPM     50,123             9,696       3,670  
Corporate (a)                 (52,525 )      
Total   $ 219,295     $ 7,094     $ 2,313     $ 16,280  

 

    Contract
Revenue
    Recurring
Royalty
Revenue
    Income
(Loss) 
from
Operations
    Depreciation
and
Amortization
 
For the six months ended June 30, 2015                                
DDS (b)   $ 39,273     $ 5,604     $ 14,252     $ 3,960  
API     77,845       5,403       20,005       4,723  
DPM (b)     43,240             7,132       3,079  
Corporate (a)                 (33,992 )      
Total   $ 160,358     $ 11,007     $ 7,397     $ 11,762  

 

(a) Corporate consists primarily of the general and administrative activities of the Company.

(b) A portion of the 2015 amounts were reclassified from DDS to DPM to better align business activities within segments. This reclassification impacted contract revenue and income (loss) from operations for 2015.

 

The following table summarizes other information by segment as of, and for the six-month period ended June 30, 2016:

 

    DDS     API     DPM     Total  
Long-lived assets including goodwill   $ 139,521     $ 210,998     $ 159,229     $ 509,748  
Total assets     176,664       452,327       177,515       806,506  
Goodwill included in total assets     46,049       48,040       76,613       170,702  
Investments in unconsolidated affiliates     956                   956  
Capital expenditures     7,205       13,707       4,054       24,966  

 

The following table summarizes other information by segment as of December 31, 2015 and for capital expenditures for the six-month period ended June 30, 2015:

 

    DDS     API     DPM     Total  
Long-lived assets including goodwill   $ 136,387     $ 201,219     $ 161,577     $ 499,183  
Total assets     174,203       523,036       168,328       865,567  
Goodwill included in total assets     45,987       46,182       77,302       169,471  
Investments in unconsolidated affiliates     956                   956  
Capital expenditures (six months ended June 30, 2015)     2,433       3,929       1,179       7,541  

 

19

 

 

Note 11 — Financial Information by Customer Concentration and Geographic Area

 

Total percentages of contract revenues by each segment’s three largest customers for the three and six months ended June 30, 2016 and 2015 are indicated in the following table:

 

    Three Months Ended June 30,   Six Months Ended June 30,
    2016   2015   2016   2015
         
DDS   10%, 4%, 4%   10%, 8%, 4%   11%, 4%, 4%   11%, 9%, 4%
API   16%, 12%, 8%   23%, 12%, 10%   17%, 11%, 6%   24%, 14%, 10%
DPM   12%, 11%, 10%   20%, 12%, 7%   12%, 7%, 7%   16%, 12%, 7%

 

Total contract revenue from GE Healthcare (“GE”), the Company’s largest customer, represented 9% of total contract revenue for the three and six months ended June 30, 2016, respectively. Total contract revenue from GE represented 11% and 13% of total contract revenue for the three and six months ended June 30, 2015, respectively.

 

The Company’s total contract revenue for the three and six months ended June 30, 2016 and 2015 was recognized from customers in the following geographic regions:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2016     2015     2016     2015  
United States     59 %     68 %     61 %     69 %
Europe     31       24       30       24  
Asia     6       6       5       5  
Other     4       2       4       2  
                                 
Total     100 %     100 %     100 %     100 %

 

Long-lived assets, including goodwill, by geographic region are as follows:

 

   

June 30,

2016

    December 31,
2015
 
United States   $ 334,983     $ 323,151  
Asia     13,761       14,336  
Europe     161,004       161,696  
Total long-lived assets   $ 509,748     $ 499,183  

 

Note 12 — Legal Proceedings and Other

 

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.

 

On November 12, 2014, a purported class action lawsuit, John Gauquie v. Albany Molecular Research, Inc., et al. , No. 14-cv-6637, was filed against the Company and certain of its current and former officers in the United States District Court for the Eastern District of New York. An amended complaint was filed on March 31, 2015. The amended complaint alleges claims under the Securities Exchange Act of 1934 arising from the Company’s alleged failure to disclose in its August 5, 2014 announcement of its financial results for the second quarter of 2014 that one of the manufacturing facilities experienced a power interruption in July 2014. The amended complaint alleges that the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and seeks unspecified monetary damages and attorneys’ fees and costs. The defendants submitted on July 29, 2015 a motion to dismiss lead plaintiffs’ amended complaint. Lead plaintiffs submitted an opposition on October 7, 2015, and defendants submitted a reply on November 20, 2015. On July 26, 2016, the court denied the defendants motion to dismiss. The Company is evaluating its options with respect to further proceedings regarding this matter and has updated its insurers as to this development.

 

20

 

 

Note 13 — Fair Value of Financial Instruments

 

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.

 

The Company determines the fair value of its 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 value of the Company’s Notes, which differ from their carrying value, 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 June 30, 2016 was $152,997. 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.

 

Interest rate swaps: At June 30, 2016, the Company had contracted a derivative financial instrument to reduce the impact of fluctuations in variable interest rates on a loan that a financial institution granted in February 2015. The estimated fair value of the swap at June 30, 2016 was $70. The Company hedges the interest rate risk of the initial amount of the aforementioned bank loan through an interest rate swap. In this arrangement, the interest rates are exchanged so that the Company receives from the financial institution a variable rate of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal amount (0.3%). The variable interest rate received for the derivative offsets the interest payment on the hedged transaction, with the end result being a fixed interest payment on the hedged financing. At June 30, 2016, the derivative financial instrument had not been designated as a hedge.

 

To determine the fair value of the interest rate swap, the Company uses cash flow discounting based on the implicit rates determined by the euro interest rate curve, according to market conditions at the valuation date, which are level 2 inputs.

 

Instrument   Nominal Amount
at 6/30/2016
    Contract
Date
  Contract
Date
Expiration
  Interest
Rate
Payable
  Interest Rate
Receivable
Interest rate swap   $ 5,748     2/19/2015   2/19/2020   3-month Euribor   Fixed rate of 0.30%

 

Euticals acquisition hedge: In May 2016, the Company entered into a forward contract to hedge the foreign currency exposure related to the purchase price of the Euticals acquisition (see Note 16 for additional details regarding the Euticals acquisition). In this arrangement, the Company is obligated to purchase €150,000 at a fixed price on July 8, 2016. In connection with the closing of the Euticals acquisition, the forward contract was settled on July 8, 2016, at which time the Company recognized a realized loss of approximately $6,491 related to this contract.

 

As of June 30, 2016, the fair value of the forward contract was an unrealized loss of approximately $6,401, which has been recorded in Hedge liability on the Condensed Consolidated Balance Sheets. The forward contract does not qualify as a hedging instrument in accordance with ASC 815, Derivatives and Hedging . Consequently, the unrealized loss of $6,401 was recognized in Other (expense) income, net on the Condensed Consolidated Statements of Operations. The fair value is based on inputs other than quoted prices in active markets that either directly or indirectly observable.

 

Long-term debt, other than convertible senior notes: The carrying value of long-term debt approximated fair value at June 30, 2016 due to the resetting dates of the variable interest rates.

 

Note 14 — Accumulated Other Comprehensive Loss, Net

 

The activity related to accumulated other comprehensive loss, net was as follows:

 

    Pension and
postretirement
benefit plans
    Foreign
currency
adjustments
    Total
Accumulated
Other
Comprehensive
Loss
 
Balance at December 31, 2015, net of tax   $ (5,581 )   $ (12,820 )   $ (18,401 )
Net current period change, net of tax     230       33       263  
Balance at June 30, 2016, net of tax   $ (5,351 )     (12,787 )     (18,138 )

 

21

 

 

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

  

    Three Months Ended     Six Months Ended  
    June 30,
2016
    June 30,
2015
    June 30,
2016
    June 30,
2015
 
Actuarial losses before tax effect (a)   $ 177     $ 237     $ 354     $ 474  
Tax benefit on amounts reclassified into earnings     (62 )     (83 )     (124 )     (166 )
    $ 115     $ 154     $ 230     $ 308  

 

(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 statements of operations.

 

Note 15 — Collaboration Arrangements

 

The Company enters into collaboration arrangements with third parties for the development and manufacture of certain products and/or product candidates. Although each of these arrangements is unique in nature, both parties are active participants in the activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements typically include research and development and manufacturing. The rights and obligations of the parties can be global or limited to geographic regions and the activities under these collaboration agreements are performed with no guarantee of either technological or commercial success.

 

The Company is obligated under these arrangements to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component of the arrangement commences during the development activities and continues through the commercial stage of each product, during which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the Company generally has the right to receive payment for all development costs incurred through the date of termination. Additionally, in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to a third party on a contract research and manufacturing basis provided that it does not use the technology developed during the collaboration arrangements. None of the product candidates associated with these collaboration arrangements have reached the contract manufacturing or commercial and profit sharing stages.

 

These arrangements may include non-refundable, upfront payments, milestone payments and cost sharing arrangements during the development stage, payments for manufacturing based on a cost plus an agreed percentage, as well as profit sharing payments during the product’s commercial stage.

 

The Company recognizes revenue for payments received for services performed under these arrangements as contract revenue in accordance with ASC Topic 605, “Revenue Recognition”. Development stage payments are recognized using the milestone method when the contractual milestones are determined to be substantive and have been achieved. Certain contractual milestones are deemed to be achieved upon the occurrence of the contractual performance events. Other non-performance based milestones, including the filing of an Abbreviated new Drug Application (ANDA) and approval by the Food and Drug Administration (FDA), which are generally events that occur at the end of the development period, are recognized upon occurrence of the related event. Contractual milestones that are deemed not substantive are recognized using proportional performance over the remaining development period. Upfront, non-refundable payments are recognized over the term of the development period using the proportional performance recognition model. Revenue associated with payments received for contract manufacturing services will be recognized upon delivery of the product to the Company’s collaborative partners. Revenue associated with payments received for profit sharing payments will be recognized when earned based on the terms of the agreements.

 

The Company recognizes costs as incurred during the performance of development activities and classifies these costs as Research and development (“R&D”) expense. Costs incurred by the Company during the performance of the contract manufacturing activities will be classified as Cost of contract revenue when the related revenue is recognized.

 

Contract revenue and R&D expense associated with these collaboration arrangements recognized during the three and six months ended June 30, 2016 and 2015 is as follows:

 

    Three months ended     Six months ended  
    June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
Contract revenue   $ 3,151     $ 1,803     $ 4,420     $ 2,450  
R&D expense   $ 1,584     $ 1,729 (a)   $ 4,022     $ 1,771 (a)

 

(a) Amounts recorded in cost of contract revenue in the condensed consolidated statements of operations for the three and six month periods ended June 30, 2015.

 

22

 

 

Contract revenue for the three and six months ended June 30, 2016 includes $2,484 of termination revenue related to the early termination of one of the Company’s collaboration arrangements. The Company is actively negotiating to secure a new collaboration partner for this program.

 

Note 16 — Subsequent Events

 

Acquisition

 

On July 11, 2016, the Company purchased from Lauro Cinquantasette S.p.A. (the “Seller”) all of the capital stock of Prime European Therapeuticals S.p.A., (“Euticals”) (“the Euticals Acquisition” or the “Transaction”), a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and the manufacture of active pharmaceutical ingredients with a network of facilities located primarily in Italy, Germany, the U.S. and France.

 

The consideration paid by the Company consisted of cash, common stock of the Company and the issuance of debt to the Seller. Specifically, upon the closing of the Transaction, the Company (i) paid approximately $182,115 (€164 million) in cash, subject to certain working capital, net debt and transaction expenses adjustments (the “Cash Consideration”), (ii) issued approximately 7,051 unregistered shares of common stock of the Company; and (iii) paid approximately $61,075 (€55 million) in deferred cash consideration payable to the Seller in the form of two Seller notes (the “Euticals Seller Notes”).

 

The Euticals Seller Notes are unsecured promissory notes, guaranteed by the Company, and are subject to customary representations and warranties and events of default with repayment to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the Euticals Acquisition closing date. The repayment is subject to certain set off rights of the Company relating to the seller’s indemnification obligations. The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which shall be due and payable in cash on the first day of January, April, July and October during each calendar year.

 

Financing

 

In connection with the Euticals Acquisition, on July 7, 2016, the Second Amended and Restated Credit Agreement was amended and the Company entered into the Third Amended and Restated Credit Agreement with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. The Third Amended and Restated Credit Agreement (i) provides incremental senior secured first lien term loans in an aggregate principal amount of $230,000 which increases the aggregate principal amount of senior secured first lien term loans under the Third Amended and Restated Credit Agreement to $428,500 and (ii) increases the first lien revolving credit facility commitments by $5,000 to $35,000. The Company used the proceeds of the Third Amended and Restated Credit Agreement to: (i) pay a portion of the Cash Consideration for the Transaction; (ii) pay various fees and expenses incurred in connection with the Euticals Acquisition and related financing activities; and (iii) repay the $30,000 first lien revolving credit facility and certain other indebtedness of the Company, Euticals and their subsidiaries.

   

The term loans under the Third Amended and Restated Credit Agreement mature and are payable on July 16, 2021 and the revolving credit facility commitments thereunder terminate and all amounts then outstanding thereunder are payable on July 16, 2020, subject, in each case, to earlier acceleration (i) to six months prior to the scheduled maturity date of the Company’s 2.25% Cash Convertible Senior Notes if on such date both (x) more than $25,000 of the Cash Convertible Senior Notes shall remain outstanding and (y) the ratio the secured debt of the Company and its subsidiaries to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00 and (ii) to April 7, 2019, April 7, 2020 or April 7, 2021, respectively, in each case to the extent that at any such date the Company has not (x) prepaid or otherwise satisfied the amortization or final maturity payment amounts to next come due under each Euticals Seller Note then outstanding or (y) refinanced such amortization or final maturity payment amount to next come due under each Euticals Seller Note then outstanding in a manner permitted by the Third Amended and Restated Credit Agreement.

 

At the Company’s election, loans made under the Third Amended and Restated Credit Agreement bear interest at (a) the one-month, three-month or six-month LIBOR rate subject to a floor of 1.0% (the “LIBOR Rate”) or (b) a base rate determined by reference to the highest of (i) the United States federal funds rate plus 0.50%, (ii) the rate of interest quoted by The Wall Street Journal as the “Prime Rate”, and (iii) a daily rate equal to the one-month LIBOR Rate plus 1.0%, subject to a floor of 2.0% (the “Base Rate”), plus an applicable margin of 4.75% per annum for LIBOR Rate loans and 3.75% per annum for Base Rate loans.

 

The obligations under the Third Amended and Restated Credit Agreement are guaranteed by each material domestic subsidiary of the Company (each a “Guarantor”) and are secured by first priority liens on, and security interests in, substantially all of the present and after-acquired assets of the Company and each Guarantor subject to certain customary exceptions.

 

23

 

 

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

 

Forward-Looking Statements

 

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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “plans,” “intend,” “expect,” “anticipate,” “predicts,” “potential,” “believe,” and “continue” or similar words, although not all forward-looking statements contain these identifying words. Forward looking statements include, but are not limited to, statements concerning our expectations of future periods and full-year 2016 for revenue and contract margins in each of our operating segments and for R&D and SG&A expense; the planned integration of Prime European Therapeuticals S.p.A., (“Euticals”) and the expected financial impact of this acquisition; and statements regarding the impact of pending litigation matters, government regulation, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, long-lived asset impairment, ability to utilize deferred tax assets, pension and postretirement benefit costs, competition and tax rates. Readers should not place undue reliance on these forward-looking statements. Our actual results may differ materially from such forward-looking statements as a result of numerous factors, some of which we may not be able to predict and may not be within our control. Factors that could cause such differences include, but are not limited to, changes in our relationships with our largest customers; ongoing headwinds in the U.S. economy which could lead to overall softness in the markets we serve; difficultly in raising new capital to support our business; trends in pharmaceutical and biotechnology companies’ outsourcing of manufacturing services and chemical research and development, including softness in these markets; the risk that we will not be able to replicate either in the short or long term the revenue stream that has been derived from the royalties payable under the Allegra® license agreements; the risk that clients may terminate or reduce demand under any strategic or multi-year deal; our ability to enforce our intellectual property and technology rights; our ability to access sources of liquidity to provide for our cash needs, including our debt obligations and capital expenditures; our ability to successfully integrate and to achieve the expected benefits, synergies and financial results from past or future acquisitions, including Cedarburg Pharmaceuticals, Inc., Albany Molecular Research (Glasgow) Limited (“Glasgow”), AMRI SSCI, LLC (“SSCI”), Oso Biopharmaceuticals Manufacturing, LLC (“OsoBio”), Gadea Grupo Farmaceutico, S.L. (“Gadea”), Whitehouse Analytical Laboratories, LLC (“Whitehouse”) and Euticals; our ability to take advantage of proprietary technology and expand the scientific tools available to it; as well as those risks discussed elsewhere in this report and in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the Securities and Exchange Commission on March 30, 2016, and Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 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. 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.

 

Overview

 

We are a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of active pharmaceutical ingredients and the manufacturing of drug product for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. In addition, we offer analytical and testing services to the medical device and personal care industry. With locations in the United States, Europe, and Asia, we maintain geographic proximity to our customers and flexible cost models.

 

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs. Our service offerings range from early stage discovery through formulation and manufacturing. We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Compounds developed in our contract research facilities can then be more easily transitioned to production at our large-scale manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.  

 

In addition to providing an integrated services model for outsourcing, we offer our customers the option of insourcing. With our world class expertise in managing high performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the customer to cost-effectively leverage their unused laboratory space.

 

As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. We use a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging the Company’s people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery, development or manufacturing process. We have also aligned our sales and marketing organization to optimize selling opportunities within our respective business segments, underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long-term growth and profitability.

 

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Over the last few years, we have implemented a number of organizational and rationalization initiatives and acquired new businesses to better align our operations to most efficiently support our customers’ needs and grow our revenue and overall profitability. The goal of these restructuring activities has been to advance our strategy of increasing our global competitiveness and managing costs by aligning resources to meet shifting customer demand and market preferences, while optimizing our location footprint. Our acquisitions enhance and complement our existing service offerings and have contributed to our growth.

 

We may consider additional acquisitions that enhance or complement our existing service offerings. In addition to growing organically, strategic acquisitions would generally be expected to contribute to our growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle. During 2015, we entered into acquisition transactions with Whitehouse Labs in December, Gadea in July, SSCI in February and Glasgow in January, all of which have contributed to our results of operations and which we believe will continue to contribute to our future operations. Additionally, on July 11, 2016, we acquired Euticals, a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and the manufacture of active pharmaceutical ingredients with a network of facilities located primarily in Italy, Germany, the U.S. and France. See Note 16 to the condensed consolidated financial statements for more details.

 

Backlog

 

Our backlog of open manufacturing orders and accepted service contracts was $200.1 million at June 30, 2016 as compared to $176.7 million at June 30, 2015. 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 therefore 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.

 

Results of Operations – Three and Six Months ended June 30, 2016 Compared to Three and Six Months Ended June 30, 2015

 

Our total revenue for the quarter ended June 30, 2016 was $120.8 million, which included $116.5 million from our contract service business and $4.4 million from royalties on sales of certain products. Our total revenue for the quarter ended June 30, 2015 was $89.5 million, which included $85.2 million from our contract service business and $4.3 million from royalties on sales of certain products. Consolidated gross margin was 29.4% for the quarter ended June 30, 2016 as compared to 24.1% for the quarter ended June 30, 2015. Our net loss was $21.3 million during the three months ended June 30, 2016, compared to net income of $2.3 million during the same period in 2015.

 

Our total revenue for the six months ended June 30, 2016 was $226.4 million, which included $219.3 million from our contract service business and $7.1 million from royalties on sales of certain products. Our total revenue for the six months ended June 30, 2015 was $171.4 million, which included $160.4 million from our contract service business and $11.0 million from royalties on sales of certain products. Consolidated gross margin was 26.3% for the six months ended June 30, 2016 as compared to 23.4% for the six months ended June 30, 2015. Our net loss was $31.3 million during the six months ended June 30, 2016, compared to net income of $0.1 million during the same period in 2015.

 

During the six months ended June 30, 2016, cash provided by operations was $15.2 million compared to $20.0 million for the same period of 2015. The decrease in cash provided by operations was primarily driven by changes in working capital. During the six months ended June 30, 2016, we spent $25.0 million on capital expenditures compared to $7.5 million during the six months ended June 30, 2015, primarily related to growth of our existing facilities, including the acquisition of Gadea which was not completed until the third quarter of 2015, as well as the execution of certain strategic projects including the upgrade and implementation of our enterprise resource planning (“ERP”) system and the purchase of a facility that provides additional sterile API capacity in Spain. During the six months ended June 30, 2016, we did not acquire any new businesses (a $1.1 million payment was made in the period by the Company for a net working capital adjustment related to the Gadea acquisition), while during the six months ended June 30, 2015, we spent $23.6 million to acquire Glasgow and $36.0 million to acquire SSCI. Additionally, during the six months ended June 30, 2016, cash used in financing activities was $8.1 million, relating primarily to $10.8 million in principal payments on long-term debt, offset by a $2.3 million release of restricted cash. During the same period in 2015, we generated cash of $42.9 million from financing activities, relating primarily to borrowings on our revolving credit facility and proceeds from stock issuances resulting from exercises of stock options and employee stock purchase plan purchases.

 

Operating Segment Data

 

We organize our operations into the Discovery and Development Services (“DDS”), Active Pharmaceutical Ingredients (“API”) and Drug Product Manufacturing (“DPM”) segments. DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. DPM includes pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable and ophthalmic formulations. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments. 

 

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Revenue

 

Total contract revenue

 

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

  

    Three Months Ended June 30,     Six Months Ended June 30,  
(in thousands)   2016     2015     2016     2015  
                         
DDS   $ 25,820     $ 21,399     $ 49,023     $ 39,273  
API     65,447       39,997       120,149       77,845  
DPM     25,190       23,830       50,123       43,240  
Total   $ 116,457     $ 85,226     $ 219,295     $ 160,358  

 

DDS contract revenue for the three months ended June 30, 2016 increased from the prior year period due to incremental revenue of $3.1 million from our acquisition of Whitehouse in December 2015, and increased demand in U.S. chemical development and analytical services. This was partially offset by a decrease in revenue from our Singapore facility following the expiration of a key customer contract. For the six months ended June 30, 2016, DDS revenue was higher as a result of the Whitehouse acquisition, which contributed incremental revenue of $5.8 million. We currently expect DDS revenue for full year 2016 to increase from amounts in 2015 driven by continued demand for our services, the launch and ramp up of the integrated discovery facility in Buffalo, NY, improved facility utilization at all of our sites, and incremental revenue from our acquisition of Whitehouse.

 

API contract revenue for the three months ended June 30, 2016 increased from the prior year period primarily from our acquisition of Gadea in July 2015, which provided revenue of $28.1 million. For the six months ended June 30, 2016, API revenue was higher due to the acquisition of Gadea, which contributed revenue of $48.1 million. We currently expect continued growth in API contract revenue for full year 2016 due to on-going demand for our clinical and commercial manufacturing services worldwide, and a full year of revenue from our acquisition of Gadea.

 

DPM contract revenue for the three months ended June 30, 2016 increased from the prior year period due to $2.5 million of contract termination revenue related to the early termination of one of the Company’s collaboration arrangements, and increased demand at our Glasgow, U.K. facility. For the six months ended June 30, 2016, DPM revenues increased as a result of growth at each of our four manufacturing facilities. We currently expect continued growth in DPM contract revenue due to continued demand at our Glasgow, U.K., Burlington, MA and Albuquerque, NM facilities, and incremental revenue from our acquisition of Gadea in July 2015.

 

Recurring royalty revenue

   

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 4,353     $ 4,322     $ 7,094     $ 11,007  

 

Our recurring royalties include revenue received in conjunction with a Development and Supply Agreement with Allergan. In 2015, we also received royalties on worldwide sales of Allegra/Telfast and Sanofi over-the-counter product and authorized generics, which ended in the second quarter of 2015. During the third quarter of 2015, we began earning royalties under an agreement with a customer of Gadea, as a result of the acquisition. Recurring royalties slightly increased during the three months ended June 30, 2016 as compared to 2015 due to Gadea. Recurring royalties decreased during the six months ended June 30, 2016 as compared to 2015 as a result of patent expirations associated with Allegra/Telfast during the second quarter of 2015. These amounts were partially offset by an increase in the other royalties during the period. We currently expect full year 2016 recurring royalties to continue to decline as compared to 2015 due to the expiration of the patents underlying the Allegra/Telfast royalties in the second quarter of 2015. 

 

The recurring royalties on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. All patents covered by these license agreements expired during the second quarter of 2015, and we will not receive any additional royalties on the sales of Allegra/Telfast in future periods. 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.

 

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Costs and Expenses

 

Cost of contract revenue

 

Cost of contract revenue consists of compensation and associated fringe benefits for employees within that segment, chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS, API and DPM segments were as follows:

  

Segment   Three Months Ended June 30,     Six Months Ended June 30,  
(in thousands)   2016     2015     2016     2015  
                         
DDS   $ 18,363     $ 16,003     $ 35,533     $ 29,708  
API     46,279       28,434       87,200       57,017  
DPM     17,572       20,231       38,844       36,082  
Total   $ 82,214     $ 64,668     $ 161,577     $ 122,807  
                                 
DDS Gross Margin     28.9 %     25.2 %     27.5 %     24.4 %
API Gross Margin     29.3 %     28.9 %     27.4 %     26.8 %
DPM Gross Margin     30.2 %     15.1 %     22.5 %     16.6 %
Total Gross Margin     29.4 %     24.1 %     26.3 %     23.4 %

 

DDS contract revenue gross margin percentage increased for the three and six months ended June 30, 2016 compared to the same periods in 2015. This increase is due to higher margin revenues as a result of our Whitehouse acquisition and cost savings initiatives throughout DDS. We currently expect DDS contract margin for full year 2016 to improve over amounts recognized in full year 2015 due to the acquisition of Whitehouse and full year benefits from SSCI, as well as continued cost containment and facility optimizations across the DDS sites.

 

API contract revenue gross margin percentages increased for the three and six months ended June 30, 2016 compared to the same periods in 2015 primarily due to our acquisition of Gadea in July of 2015. We currently expect improvement in API contract margins for full year 2016 over amounts recognized in 2015 driven by an increase in capacity utilization as well as a full year of Gadea operations.

 

DPM contract revenue gross margin percentage increased for the three and six months ended June 30, 2016 compared to the same periods in 2015 primarily due to higher capacity utilization at our commercial manufacturing facilities and due to contract termination revenue of $2.5 million related to the early termination of one of the Company’s collaboration arrangements recognized in the second quarter of 2016. We currently expect contract margins for full year 2016 to remain higher as compared to 2015.

 

Technology incentive award

 

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra/Telfast are the main driver of the awards. These royalties from Allegra/Telfast ceased during the second quarter of 2015 due to the expiration of underlying patents. The incentive awards were as follows:

 

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ -     $ 179     $ -     $ 560  

 

Technology incentive award expense decreased for the three and six months ended June 30, 2016 as compared to the same periods in the prior year due to the decrease in Allegra/Telfast recurring royalty revenue as discussed above.

 

Research and development

 

Research and development (“R&D”) expense consists of compensation and benefits, costs of chemicals, materials, outsourced activities and other out of pocket costs and overhead costs related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes. Our R&D activities are primarily accounted for in our API and DPM segments.

 

Research and development expenses were as follows:

 

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 3,479     $ 384     $ 6,647     $ 875  

 

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R&D expense for the three and six months ended June 30, 2016 increased compared to the same periods in 2015 primarily as a result of development efforts towards new niche generic products. We currently expect full year 2016 R&D expense to be higher than 2015 in line with our strategy and due to our acquisition of Gadea and increased investments in collaboration agreements.

 

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 June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 27,924     $ 16,518     $ 52,525     $ 33,992  

 

SG&A expenses for the three and six months ended June 30, 2016 increased compared to the same periods in 2015 primarily due to costs associated with investments made to grow the business, merger and acquisition activities, ERP implementation costs as well as incremental SG&A costs from the acquisition of Gadea and Whitehouse. We currently expect SG&A expenses for full year 2016 to increase due to a full year of operations at Gadea and Whitehouse, and incremental costs to grow the business, but to remain relatively consistent as a percentage of revenue when compared to 2015.

 

Restructuring and other charges

 

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 526     $ 1,632     $ 3,126     $ 3,119  

 

In the first quarter of 2015, we announced a restructuring plan to close our U.K. facility in Holywell, Wales, within the API segment, by the fourth quarter of 2015. Additionally, we made resource changes at the DDS Singapore site to optimize the cost profile of the facility. These actions were consistent with our ongoing efforts to consolidate our facility resources to more effectively utilize our resource pool and to further reduce our facility cost structure.

 

Restructuring charges for the three and six months ended June 30, 2016 consisted primarily of U.K. termination charges, employee termination costs and transitioning activities at our Singapore facility and costs associated with the transfer of continuing products from the Holywell, U.K. facility to our other manufacturing locations.

 

Restructuring charges for the three and six months ended June 30, 2015 consisted primarily of personnel realignment costs at the U.K. facility, and also included costs associated with the closure of the Syracuse, NY and Bothell, WA sites, which ceased operations in 2014 and 2012, respectively. 

 

Impairment charges

   

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 201     $ -     $ 201     $ 2,615  

 

In the second quarter of 2016, we wrote off a patent asset from proprietary drug discovery programs due to our licensing partner terminating the license agreement. During the six months ended June 30, 2015, we recorded property and equipment impairment charges of $2.6 million in our API segment associated with the Company’s decision to cease operations at our U.K. facility in Holywell, Wales.

 

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Interest expense, net

   

    Three Months Ended June 30,     Six Months Ended June 30,  
(in thousands)   2016     2015     2016     2015  
                         
Interest expense   $ (7,067 )   $ (3,185 )   $ (14,205 )   $ (6,226 )
Interest income     3       6       5       12  
Interest expense, net   $ (7,064 )   $ (3,179 )   $ (14,200 )   $ (6,214 )

 

Net interest expense increased for the three and six months ended June 30, 2016 from the same periods in 2015 primarily due to increased levels of outstanding debt used to finance our 2015 acquisitions, as well as an increase in amortization of deferred financing costs related to our credit facility.

 

Other (expense) income, net

   

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
$ (5,661 )   $ 634     $ (6,657 )   $ 1,103  

 

Other (expense) income, net changed to expense in the three and six months ended June 30, 2016 from income in the same periods in 2015 primarily due to the unrealized loss on the forward contract the Company entered in the second quarter of 2016 to hedge the foreign currency exposure related to the purchase price of the Euticals Acquisition. Additionally, the change was related to remeasurement gains and losses of foreign currency transactions at international business locations.

 

Income tax expense

 

Three Months Ended June 30,     Six Months Ended June 30,  
2016     2015     2016     2015  
(in thousands)  
                             
$ 15,008     $ 1,315     $ 12,791     $ 2,202  

 

Income tax expense for the three and six months ended June 30, 2016 increased as compared to the same periods in 2015 as a result of the Company establishing a full valuation allowance against its U.S. deferred tax assets during the three months ended June 30, 2016 in the amount of $8.5 million as a result of cumulative losses in the U.S. in recent years.  

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. As of June 30, 2016, we had $31.4 million in cash, cash equivalents, and restricted cash and $411.8 million in bank and other related debt (at face value).

 

During the first six months of 2016, we generated cash of $15.2 million from operating activities, compared to cash provided by operations of $20.0 million during the same period in 2015. The decrease was primarily driven by changes in working capital. Working capital, defined as current assets less current liabilities, was $153.9 million at June 30, 2016 as compared to $181.1 million as of December 31, 2015. Working capital was $146.1 million at June 30, 2015 as compared to $142.3 million as of December 31, 2014. During the six months ended June 30, 2016, cash used in investing activities was $25.5 million, resulting primarily from the use of $25.0 million in cash for the acquisition of property and equipment. For the same period in 2015, cash used in investing activities was $67.2 million, resulting primarily from the use of $36.0 million to acquire SSCI, $23.6 million to acquire the facility in Glasgow, U.K., and $7.5 million used for the acquisition of property and equipment. Additionally, during the six months ended June 30, 2016, cash used in financing activities was $8.1 million, relating primarily to $10.8 million in principal payments on long-term debt, offset by a $2.3 million release of restricted cash. During the same period in 2015, we generated cash of $42.9 million from financing activities, relating primarily to borrowings on our revolving credit facility and proceeds from stock issuances resulting from exercises of stock options and employee stock purchase plan purchases.

 

Convertible Senior Notes

 

On December 4, 2013, we completed a private offering of 2.25% Cash Convertible Senior Notes (the “Notes”), in the aggregate principal amount of $150 million.  The Notes mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date, and interest is 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.

 

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The Notes are not convertible into our 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 our 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 our 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 our 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 our 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, we have 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.

 

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

 

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, 2015. For the three months ended June 30, 2016, there have been no material changes in our contractual obligations, other than in the ordinary course of business. As of June 30, 2016, 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. In connection with the Euticals Acquisition, on July 7, 2016, the Company amended the Company’s Second Amended and Restated Credit Agreement and entered into the Third Amended and Restated Credit Agreement with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto. See Note 16 to the condensed consolidated financial statements for more details.

 

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 business combinations, inventories, goodwill and intangibles, other 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, 2015. There have been no material changes or modifications to the policies since December 31, 2015.

 

Recently Issued Accounting Pronouncements              

 

Refer to Note 1 to the condensed consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes during the three months ended June 30, 2016 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 year ended December 31, 2015.

 

30

 

 

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

 

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.

 

31

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Please refer to Part 1 – Note 12 to the condensed consolidated financial statements for information 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, 2015. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2015, other than as set forth below.

 

Our business is subject to risks relating to operating internationally.

 

A significant part of our contract revenue is derived from operations outside the U.S. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented approximately 36%, 32% and 40% of our total contract revenue in 2015, 2014, and 2013, respectively. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks associated with our international business including:

 

· foreign currencies we receive for sales and in which we record expenses outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue and cash flow (and increase the amount of expenses) that we recognize and cause fluctuations in reported financial results;
· certain contracts are denominated in currencies other than the currency in which we incur expenses related to those contracts and where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations;
· general economic and political conditions in the markets in which we operate;
· potential international conflicts, including terrorist acts;
· potential trade restrictions, exchange controls, adverse tax consequences, and legal restrictions on the repatriation of funds into the U.S.;
· difficulties and costs associated with staffing and managing foreign operations, including risks of work stoppages and/or strikes, as well as violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
· unexpected changes in regulatory requirements;
· the difficulties of compliance with a wide variety of foreign laws and regulations;
· unfavorable labor regulations in foreign jurisdictions;
· potentially negative consequences from changes in or interpretations of US and foreign tax laws and particularly any changes in tax laws affecting any repatriation of profits;
· exposure to business disruption or property damage due to geographically unique natural disasters;
· longer accounts receivable cycles in certain foreign countries; and
· import and export licensing requirements.

 

These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. For example, as mentioned above, we are subject to compliance with the United States Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.

 

In addition, on June 23, 2016, the U.K. held a non-binding referendum, in which a majority of voters approved an exit from the European Union (referred to as “Brexit”). The Brexit referendum may impact our relationship with foreign customers and the operations of our European facilities, and expose us to fluctuations in foreign currency rates and heightened volatility in our stock price due to reactions in global markets. The Brexit referendum constituted an advisory, non-binding vote, and its full impact is subject to the results of following the two-year negotiation period from the date of on which the British government commences formal withdrawal proceedings.

 

32

 

 

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

 

The following table represents share repurchases during the three months ended June 30, 2016:

 

Issuer Purchases of Equity Securities

 

Period  

(a)

Total Number
of Shares
Purchased (1)

   

(b)

Average
Price
Paid Per
Share

   

(c)

Total
Number

of Shares
Purchased
as
Part of
Publicly

Announced
Plans or
Programs

 

(d)

Maximum
Dollar
Value of
Shares that
May Yet Be
Purchased
Under the
Plan or
Program

April 1, 2016 – April 30, 2016         $     N/A   N/A
May 1, 2016 – May 31, 2016     4,474     $ 11.01     N/A   N/A
June 1, 2016 – June 30, 2016     529     $ 14.02     N/A   N/A
Total     5,003     $ 11.33     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.

 

33

 

 

Item 6.    Exhibits

 

Exhibit    
Number   Description
     
2.1   Share Purchase Agreement by and between Albany Molecular Research, Inc. and Lauro Cinquantasette S.p.A., dated as of May 5, 2016 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2016, File No. 001-35622).*
     
4.1   Registration Rights and Lock-Up Agreement by and between Albany Molecular Research, Inc. and Lauro Cinquantasette S.p.A., dated as of May 5, 2016 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2016, File No. 001-35622).
     
10.1   Subscription Agreement by and between Albany Molecular Research, Inc. and Lauro Cinquantasette S.p.A., dated as of May 5, 2016 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2016, File No. 001-35622) .
     
10.2   Senior Executive Cash Incentive Bonus Plan**
     
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 June 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial statements.**

 

* Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.

 

** Filed herewith.

 

*** 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.

 

34

 

 

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: August 5, 2016 By: /s/ Felicia I. Ladin  
    Felicia I. Ladin
    On behalf of the Registrant as Senior Vice President, Chief Financial Officer and Treasurer
(and also as Principal Financial Officer)

 

35

 

 

Exhibit 10.2

 

ALBANY MOLECULAR RESEARCH, INC.
SENIOR EXECUTIVE CASH INCENTIVE BONUS PLAN

 

SECTION 1.    PURPOSE

 

This Senior Executive Cash Incentive Bonus Plan (the “ Incentive Plan ”) is intended to provide an incentive for superior work and to motivate eligible executives of Albany Molecular Research, Inc. (the “ Company ”) and its subsidiaries toward even higher achievement and business results, to tie their goals and interests to those of the Company and its stockholders and to enable the Company to attract and retain highly qualified executives. The Incentive Plan is for the benefit of Covered Executives (as defined below). Bonus payments under the Incentive Plan are intended to be “performance-based” compensation within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (the “Code”) if paid to a Covered Executive who is a “covered employee” within the meaning of Section 162(m) of the Code.

 

SECTION 2.    COVERED EXECUTIVES

 

From time to time, the Compensation Committee of the Board of Directors of the Company (the “ Compensation Committee ”) may select certain key executives and other key employees (the “ Covered Executives ”) to participate in the Incentive Plan. Participation in this Incentive Plan does not change the “at will” nature of a Covered Executive’s employment with the Company and participation in the Incentive Plan in one performance period does not guarantee participation in subsequent performance periods.

 

SECTION 3.    ADMINISTRATION

 

The Compensation Committee shall have the sole discretion and authority to administer and interpret the Incentive Plan. Each member of the Compensation Committee shall be an “outside director” within the meaning of Section 162(m) of the Code.

 

SECTION 4.    BONUS DETERMINATIONS

 

(a) Performance Goals .  A Covered Executive may receive a bonus payment under the Incentive Plan based upon the attainment of one or more performance objectives that are established by the Compensation Committee and relate to financial and operational metrics with respect to the Company or any of its subsidiaries, units, divisions or groups (the “ Performance Goals ”), including, but not limited to, the following: earnings before interest, taxes, depreciation and amortization, net income (loss) (either before or after interest, taxes, depreciation and/or amortization), changes in the market price of the Company’s common stock, economic value-added, funds from operations or similar measure, sales or revenue, acquisitions or strategic transactions, operating income (loss), cash flow (including, but not limited to, operating cash flow and free cash flow), return on capital assets, equity or investment, stockholder returns, return on sales, gross or net profit levels, productivity, expense, margins, operating efficiency, customer satisfaction, working capital, earnings (loss) per share of common stock of the Company, sales or market shares and number of customers, customer satisfaction, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group and any of which may be measured either in accordance with GAAP or in accordance with pro forma measures as established by the Company and communicated to the shareholders of the Company. Within the first 90 days of each performance period (or, if shorter, within one-quarter of the performance period if the period is shorter than one year), the Compensation Committee shall select the Performance Goals applicable for each Covered Executive for the performance period. The Performance Goals may differ from Covered Executive to Covered Executive.

 

(b) Calculation of Performance Goals .  At the beginning of each applicable performance period, the Compensation Committee will determine whether any significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Covered Executive, including a change in accounting standards or an acquisition or disposition during the fiscal year in question. In all other respects, Performance Goals will be calculated in accordance with the Company’s financial statements, generally accepted accounting principles, or under a methodology established by the Compensation Committee at the beginning of the performance period and which is consistently applied with respect to a Performance Goal in the relevant performance period.

 

 

 

 

(c) Target; Threshold; Superior .  Each Performance Goal shall have a “target” (100 percent attainment of the Performance Goal) and may also have a “threshold” hurdle and/or a “superior” payment amount. In the event that the actual corporate performance shall fall between any of the levels set forth for achievement, linear interpolation shall be used to determine the actual payout under each Performance Goal.

 

(d) Bonus Requirements .   (i) Any bonuses paid to “covered employees” who are also Covered Executives under the Incentive Plan shall be based upon objectively determinable bonus formulas that tie such bonuses to one or more performance targets relating to the Performance Goals, (ii) bonus formulas for Covered Executives shall be adopted in each performance period by the Compensation Committee and communicated to each Covered Executive at the beginning of each performance period and (iii) no bonuses shall be paid to Covered Executives unless and until the Compensation Committee certifies in writing whether, and to what extent, Performance Goals for the performance period have been achieved. Notwithstanding the foregoing, the Compensation Committee may apply negative discretion to reduce, but not increase, the amount of the bonuses payable to Covered Executives under the Incentive Plan.

 

(e) Individual Target Bonuses and Maximum Bonuses .  The Compensation Committee shall establish a target bonus opportunity for each Covered Executive for each performance period. The maximum amount of bonus for each Covered Executive in any performance period shall not exceed $5 million.

 

(f) Employment Requirement .  Subject to any additional terms contained in a written agreement between the Covered Executive and the Company, in the discretion of the Compensation Committee, the payment of a bonus to a Covered Executive with respect to a performance period may be conditioned upon the Covered Executive’s employment by the Company on the bonus payment date. If a Covered Executive was not employed for an entire performance period, the Compensation Committee may pro rate the bonus based on the number of days employed during such period.

 

SECTION 5.    TIMING OF PAYMENT

 

(a) With respect to Performance Goals established and measured on a basis more frequently than annually (e.g., quarterly or semi-annually), the Performance Goals will be measured at the end of each performance period after the Company’s financial reports with respect to such period(s) have been published. If the Performance Goals and/or individual goals for such period are met, payments will be made as soon as practicable following the end of such period, but not later 74 days after the end of the fiscal year in which such performance period ends.

 

(b) With respect to Performance Goals established and measured on an annual or multi-year basis, Performance Goals will be measured as of the end of each such performance period (e.g., the end of each fiscal year) after the Company’s financial reports with respect to such period(s) have been published. If the Performance Goals and/or individual goals for any such period are met, bonus payments will be made as soon as practicable, but not later than 74 days after the end of the relevant fiscal year.

 

(c) For the avoidance of doubt, bonuses earned at any time in a fiscal year must be paid no later than 74 days after the last day of such fiscal year.

 

SECTION 6.    WITHHOLDING

 

Distributions pursuant to this Incentive Plan an shall be subject to all applicable withholding and other taxes and all contributions or deductions required by law to be deducted or withheld in accordance with procedures established by the Company.

 

SECTION 7.    AMENDMENT AND TERMINATION

 

The Company reserves the right to amend or terminate the Incentive Plan at any time in its sole discretion; provided, however, that amendments shall be subject to stockholder approval to the extent required by Section 162(m) of the Code. In the case of any Covered Executive employed outside the United States, the Company may vary the provisions of this Incentive Plan as deemed appropriate to conform with, as required by, or made desirable by, local laws, practices and procedures.

 

 

 

 

SECTION 8.    GOVERNING LAW

 

This Incentive Plan shall be governed by the laws of the State of Delaware.

 

SECTION 9.    STOCKHOLDER APPROVAL

 
DATE APPROVED BY BOARD OF DIRECTORS:   February 5, 2016
DATE APPROVED BY STOCK HOLDERS:   June 1, 2016

 

 

 

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: August 5, 2016 /s/ William S. Marth  
  Name: William S. Marth  
  Title: President and Chief Executive Officer
  (Principal Executive Officer)

 

 

 

 

 

 

Exhibit 31.2

 

CERTIFICATION

 

I, Felicia I. Ladin 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: August 5, 2016 /s/ Felicia I. Ladin  
  Name: Felicia I. Ladin
  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: August 5, 2016  
  /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 her 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: August 5, 2016 /s/ Felicia I. Ladin  
  Name: Felicia I. Ladin
  Title: Senior Vice President, Chief Financial Officer and Treasurer