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 March 31, 2012
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from               to

 

Commission file number: 0-25323

 

ALBANY MOLECULAR RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE		14-1742717
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

21 Corporate Circle

PO Box 15098

Albany, New York 12212-5098

(Address of principal executive offices)

 

(518) 512-2000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   x

No   o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   x

No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o

 

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

 

Yes   o

No   x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at April 30, 2012
Common Stock, $.01 par value		30,769,003 excluding treasury shares of 5,411,372

 

 

ALBANY MOLECULAR RESEARCH, INC.

INDEX

 

Part I.		Financial Information				3
		Item 1.		Condensed Consolidated Financial Statements (Unaudited)		3
				Condensed Consolidated Statements of Operations		3
				Condensed Consolidated Statements of Comprehensive Income		4
				Condensed Consolidated Balance Sheets		5
				Condensed Consolidated Statements of Cash Flows		6
				Notes to Condensed Consolidated Financial Statements		7
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		24
		Item 4.		Controls and Procedures		24
Part II.		Other Information				25
		Item 1.		Legal Proceedings		25
		Item 1A.		Risk Factors		25
		Item 6.		Exhibits		25
Signatures						26
Exhibit Index

  

 

PART I — FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended
(Dollars in thousands, except for per share data)		March 31, 2012				March 31, 2011
Contract revenue		$	42,710			$	42,931
Recurring royalties			10,985				14,016
Total revenue			53,695				56,947
Cost of contract revenue			39,670				41,542
Technology incentive award			1,099				1,402
Research and development			373				2,604
Selling, general and administrative			9,846				11,412
Restructuring charges			688				951
Property and equipment impairment charges			3,967				—
Arbitration charge			—				127
Total operating expenses			55,643				58,038
Loss from operations			(1,948	)			(1,091	)
Interest expense, net			(142	)			(39	)
Other (loss) income, net			(792	)			39
Loss before income tax expense			(2,882	)			(1,091	)
Income tax expense			925				376
Net loss		$	(3,807	)		$	(1,467	)
Basic and diluted loss per share		$	(0.13	)		$	(0.05	)

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

 

		Three Months Ended March 31,
		2012				2011
Net loss		$	(3,807	)		$	(1,467	)
Unrealized (loss) gain on marketable securities, net of taxes			(1	)			1
Foreign currency translation gain			2,016				2,742
Net actuarial loss related to pension and postretirement benefits			136				72
Total comprehensive (loss) income		$	(1,656	)		$	1,348

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

 

Condensed Consolidated Balance Sheets

(unaudited)

 

(Dollars and shares in thousands, except for per share data)		March 31, 2012				December 31, 2011
Assets
Current assets:
Cash and cash equivalents — unrestricted		$	8,244			$	19,984
Restricted cash			4,505				—
Accounts receivable, net			33,430				30,437
Royalty income receivable			10,673				6,819
Income taxes receivable			3,387				3,407
Inventory			29,308				26,004
Prepaid expenses and other current assets			12,829				10,130
Deferred income taxes			3,570				3,779
Total current assets			105,946				100,560
Property and equipment, net			145,048				149,796
Intangible assets and patents, net			2,992				2,976
Equity investment in unconsolidated affiliates			956				956
Deferred income taxes			6,520				7,373
Other assets			1,907				1,406
Total assets		$	263,369			$	263,067
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	24,997			$	23,175
Arbitration reserve			3,741				4,082
Deferred revenue and licensing fees			7,332				6,464
Accrued pension benefits			1,523				1,416
Current installments of long-term debt			2,439				2,839
Total current liabilities			40,032				37,976
Long-term liabilities:
Long-term debt, excluding current installments			3,002				3,003
Deferred licensing fees			3,929				4,286
Deferred income taxes			749				733
Pension and postretirement benefits			8,765				9,047
Other long-term liabilities			1,544				1,588
Total liabilities			58,021				56,633
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 50,000 shares authorized, 36,183 shares issued as of  March 31, 2012, and 36,016 shares issued as of December 31, 2011			362				360
Additional paid-in capital			206,642				206,074
Retained earnings			75,147				78,954
Accumulated other comprehensive loss, net			(9,915	)			(12,066	)
			272,236				273,322
Less, treasury shares at cost, 5,411 shares as of March 31, 2012 and December 31, 2011			(66,888	)			(66,888	)
Total stockholders’ equity			205,348				206,434
Total liabilities and stockholders’ equity		$	263,369			$	263,067

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Three Months Ended
(Dollars in thousands)		March 31, 2012				March 31, 2011
Operating activities
Net loss		$	(3,807	)		$	(1,467	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,535				4,397
Deferred income tax benefit			784				1,918
Loss on disposal of property, plant and equipment			102				3
Property and equipment impairment			3,967				—
Stock-based compensation expense			537				353
Provision for bad debt			—				21
Write down for obsolete inventories			316				3
Changes in assets and liabilities:
Accounts receivable			(2,993	)			(557	)
Royalty income receivable			(3,854	)			(5,797	)
Inventory, prepaid expenses and other assets			(7,290	)			(102	)
Accounts payable and accrued expenses			1,481				(5,615	)
Income taxes receivable			41				(2,073	)
Deferred revenue and licensing fees			511				(1,305	)
Pension and postretirement benefits			34				40
Other long-term liabilities			(44	)			(40	)
Net cash used in operating activities			(5,680	)			(10,221	)
Investing activities
Purchases of investment securities			—				(820	)
Proceeds from sales and maturities of investment securities			213				2,716
Purchase of property, plant and equipment			(2,155	)			(2,784	)
Payments for patent applications and other costs			(131	)			(27	)
Proceeds from disposal of property, plant and equipment			50				—
Net cash used in investing activities			(2,023	)			(915	)
Financing activities
Principal payments on long-term debt			(401	)			20
Change in restricted cash			(4,505	)			(5,742	)
Proceeds from sale of common stock			233				294
Net cash used in financing activities			(4,673	)			(5,428	)
Effect of exchange rate changes on cash flows			636				329
Decrease in cash and cash equivalents			(11,740	)			(16,235	)
Cash and cash equivalents at beginning of period			19,984				25,747
Cash and cash equivalents at end of period		$	8,244			$	9,512

 

See notes to unaudited condensed consolidated financial statements.

 

 

(All amounts in thousands, except per share amounts, unless otherwise noted)

 

Note 1 — Summary of Operations and Significant Accounting Policies

 

Nature of Business and Operations

 

Albany Molecular Research, Inc. (the “Company”) provides scientific services, technologies and products focused on improving the quality of life. With locations in the U.S., Europe, and Asia, the Company provides customers with a range of services and cost models. The Company’s core business consists of a fee-for-service contract services platform encompassing drug discovery, development and manufacturing. The Company also owns a portfolio of proprietary technologies which have resulted from its internal programs, including drug discovery and niche generic products and manufacturing process efficiencies, some of which are licensed to third parties, and some of which benefit the Company’s operations.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Unrealized gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive loss in the accompanying unaudited condensed consolidated balance sheets.

 

Use of Management Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the collectibility of receivables, the valuation of inventory, the fair value of intangible assets and long-lived assets, and the amount and realizabilty 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, the estimation of restructuring charges, assumptions utilized in determining stock-based compensation, and assumptions associated with legal contingencies. Actual results can vary from these estimates.

 

Contract Revenue Recognition

 

The Company’s contract revenue consists primarily of fees earned under contracts with third-party customers and reimbursed expenses under such contracts. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Reimbursed expenses consist of chemicals and other project specific costs. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to one year’s prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the FASB’s Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate accounting is based on the fair value of the respective elements.

 

 

The Company generates contract revenue on the following basis:

 

Full-time Equivalent (“FTE”).  An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.

 

These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.

 

Time and Materials.  Under a time and materials contract the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

 

Fixed-Fee. Under a fixed-fee contract the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue recognition process is considered complete when project documents (batch records, Certificates of Analysis, etc.) have been delivered to the customer and amounts due have been collected.

 

Up-Front License Fees, Milestone, and Royalty Revenue. The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.

 

Recurring Royalties Revenue Recognition

 

Recurring royalties consist of royalties under a license agreement with Sanofi based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s authorized generics. The Company records royalty revenue in the period in which the sales of Allegra/Telfast occur, because it can reasonably estimate such royalties. Royalty payments from Sanofi are due within 45 days after each calendar quarter and are determined based on sales of Allegra/Telfast and Teva Pharmaceuticals’ sales of generic D-12 in that quarter.

 

Investment securities

 

Investment securities’ fair values are based on quoted market prices of comparable instruments. When necessary, the Company utilizes matrix pricing from a third party pricing vendor to determine fair value pricing. Matrix prices are based on quoted prices for securities with similar coupons, ratings, and maturities, rather than on specific bids and offers for the designated security.

 

Long-Lived Assets

 

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that their 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 is being used;

 

·

a significant change in the business climate that could affect the value of a long-lived asset; and

 

·

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 recorded to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amount of the long-lived assets.

 

Note 2 — Earnings Per Share

 

Both basic and diluted weighted average shares outstanding were 30,140 for the three months ended March 31, 2012 and 29,835 for the three months ended March 31, 2011.

 

The Company has excluded all outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three months ended March 31, 2012 and 2011 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive. The weighted average number of anti-dilutive options and restricted shares outstanding (before the effects of the treasury stock method) was 3,133 and 1,615 for the three months ended March 31, 2012 and 2011, respectively.

 

Note 3 — Inventory

 

Inventory consisted of the following at March 31, 2012 and December 31, 2011:

 

		March 31, 2012				December 31, 2011
Raw materials		$	7,348			$	6,030
Work in process			3,172				3,050
Finished goods			18,788				16,924
Total		$	29,308			$	26,004

  

Note 4 –Debt and restricted cash

 

Debt

 

As of September 30, 2011, the Company was not in compliance with one of the financial covenant requirements of its credit agreement. As a result, the Company received a waiver from the lenders and additionally amended the above credit agreement effective November 29, 2011 which among other things, increased the effective interest rate, limited any further borrowings, required that the Company diligently seek refinancing of this debt agreement with a commitment for such to be obtained by March 31, 2012 and required the further repayment of $3,000 in December 2011 with the remaining outstanding balance to be repaid by June 2012, upon its maturity date. In addition, certain of the restrictive covenants were revised and as of such date the Company is only required to comply with certain cash maintenance requirements and to limit its capital expenditures. Covenants related to maintaining earnings levels were removed in the December 2011 amendment. As of March 31, 2012, the Company had $1,404 of outstanding letters of credit secured by this line of credit. These letters of credit will not be extended or renewed upon their expiration. The balance outstanding on the term loan was $2,150, bearing interest at a rate of 5.3% at March 31, 2012. The Company was in compliance with the existing financial covenant requirements as of March 31, 2012.

 

In April 2012, the Company entered into a $20,000 credit facility consisting of a 4-year, $5,000 term loan and a $15,000 revolving line of credit. The Company used a portion of the initial proceeds to repay all amounts due under its prior credit agreement, as amended. As of the closing date of the April 2012 agreement, the Company had $9,483 of outstanding letters of credit secured by the new line of credit.

 

Borrowings under this new April 2012 agreement will bear interest at a fluctuating rate equal to (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%.

 

The credit facility entered into in April 2012 contains financial covenants, including certain net cash flow requirements for 2012, a minimum fixed charge coverage ratio commencing in 2013 and extending for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum domestic unrestricted cash and maximum average monthly cash reserves held at international locations.

 

The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current interest rate of 0.64% at March 31, 2012. The amount outstanding as of March 31, 2012 was $3,275.

 

 

The following table summarizes long-term debt:

 

		March 31, 2012				December 31, 2011
Term loan		$	2,150			$	2,550
Industrial development authority bonds			3,275				3,275
Miscellaneous loan			16				17
			5,441				5,842
Less current portion			(2,439	)			(2,839	)
Total long-term debt		$	3,002			$	3,003

 

The aggregate maturities of long-term debt at March 31, 2012 are as follows:

 

2012 (remainder)		$	2,439
2013			298
2014			310
2015			314
2016			320
Thereafter			1,760
Total		$	5,441

 

Restricted cash

 

In March 2012, the Company pledged $4,505 of cash to collateralize a letter of credit issued by Wells Fargo Bank prior to closing the Company’s new credit facility in April 2012. Upon entering into a new credit agreement in April 2012, the Company was required to maintain a $5,000 restricted cash balance to partially collateralize the line of credit issued under the new credit agreement. The letter of credit issued in March 2012 by Wells Fargo Bank was secured by the line of credit granted in the April 2012 credit agreement, and the $4,505 of cash collateral was used to partially satisfy the cash collateral requirements included in the terms of the new credit agreement as disclosed above.

 

Note 5 — Restructuring and Impairment

 

In March 2012, the Company approved a restructuring plan that ceased all operations at its Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring plan is to advance the Company’s continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. In connection with this closure, the Company recorded a restructuring charge of $672 in its DDS operating segment.  This amount included $487 for termination benefits and $185 for preparing the facility for closure and other administrative costs.  Restructuring charges for the three months ended March 31, 2012 did not include costs associated with terminating the Budapest facility lease.  The Company is currently preparing the Budapest facility for closure and is negotiating the termination of the lease agreement.  The Company currently anticipates completing these lease termination activities in the second half of 2012, at which point additional restructuring charges will be recognized.  The Company currently estimates that lease termination charges associated with its Budapest facility will range between $1,000 and $2,000.

 

In conjunction with the decision to cease operations at the Company’s Budapest, Hungary facility as discussed above, the Company also recorded property and equipment impairment charges of $3,967 in our DDS segment. These charges are included under the caption “Property and equipment impairment charges” on the consolidated statement of operations for the three months ended March 31, 2012.

 

In March 2011, the Company reduced its workforce to right-size its U.S. operations, primarily focused on discovery chemistry services due to the shift in demand for these types of services to the Company’s lower cost operations in Asia. In connection with this reduction, the Company recorded a restructuring charge of $951 for termination benefits. These restructuring activities were recorded within the Company’s DDS operating segment.

 

 

In December 2011, the Company initiated a restructuring plan at one of its U.S. locations which included actions to further reduce the Company's workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve the Company's overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with the Company’s elimination of internal R&D activities.  As a result of the workforce reduction, the Company will be terminating the lease of one of its U.S. facilities which will result in a reduction in annual operating expenses related to this facility.  As a result of this restructuring, the Company recorded restructuring charges in the DDS operating segment of $16 in the three months ended March 31, 2012 and $320 in the fourth quarter of 2011.

 

The following table displays the restructuring activity and liability balances for the three months ended March 31, 2012:

 

		Balance at December 31, 2011				Charges/ (reversals)				Paid Amounts				Foreign Currency Translation Adjustments				Balance at March 31, 2012
Termination benefits and personnel realignment		$	456				470				(397	)			10			$	539
Lease termination charges			1,128				(24	)			(121	)			─				983
Other			354				242				(509	)			8				95
Total		$	1,938				688				(1,027	)			18			$	1,617

 

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

 

Restructuring charges are included under the caption “Restructuring charges” in the consolidated statement of operations for the three months ended March 31, 2012 and 2011 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the consolidated balance sheet at March 31, 2012 and December 31, 2011.

 

Anticipated cash outflow related to the restructurings for the remainder of 2012 is approximately $1,287, plus any cash consideration of the Hungary lease term settlement.

 

Note 6 —Intangible Assets

 

The components of intangible assets are as follows:

 

		Cost				Accumulated Amortization				Net				Amortization Period
March 31, 2012
Patents and Licensing Rights		$	3,914			$	(1,445	)		$	2,469				2-16 years
Customer Relationships			815				(292	)			523				5 years
		$	4,729			$	(1,737	)		$	2,992
December 31, 2011
Patents and Licensing Rights		$	3,756			$	(1,343	)		$	2,413				2-16 years
Customer Relationships			815				(252	)			563				5 years
Total		$	4,571			$	(1,595	)		$	2,976

 

Amortization expense related to intangible assets was $117 and $119 for the three months ended March 31, 2012 and 2011, respectively.

 

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

 

Year  ending December 31,
2012 (remaining)		$	347
2013			394
2014			394
2015			265
2016			216
Thereafter			1,376
Total		$	2,992

 

 

Note 7 — Share-Based Compensation

 

During the three months ended March 31, 2012, the Company recognized total share based compensation cost of $537 as compared to total share based compensation cost for the three months ended March 31, 2011 of $359.

 

The Company grants share-based compensation, including restricted shares, under its 2008 Stock Option and Incentive Plan, as well as its 1998 Employee Stock Purchase Plan.

 

Restricted Stock

 

A summary of unvested restricted stock activity as of March 31, 2012 and changes during the three months then ended is presented below:

 

		Number of Shares				Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2012			561			$	7.14
Granted			85			$	2.93
Vested			(100	)		$	8.96
Forfeited			(11	)		$	6.14
Outstanding, March 31, 2012			535			$	6.84

 

The weighted average fair value of restricted shares per share granted during the three months ended March 31, 2012 and 2011 was $2.93 and $5.24, respectively. As of March 31, 2012, there was $2,608 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.6 years.

 

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 three Months Ended
		March 31, 2012				March 31, 2011
Expected life in years			5				5
Risk free interest rate			0.90	%			2.12	%
Volatility			57	%			56	%
Dividend yield			—				—

 

A summary of stock option activity under the Company’s Stock Option and Incentive Plans as of March 31, 2012 and changes during the three month period then ended is presented below:

 

		Number of Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2012			2,762			$	7.58
Granted			270				2.92
Exercised			—				—
Forfeited			(35	)			6.85
Expired			(109	)			25.59
Outstanding, March 31, 2012			2,887			$	6.47				7.5			$	482
Options exercisable, March 31, 2012			1,013			$	12.41				3.7			$	—

 

The weighted average fair value of stock options granted for the three months ended March 31, 2012 and 2011 was $1.43 and $2.50, respectively. As of March 31, 2012, there was $2,535 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 2.6 years.

 

Employee Stock Purchase Plan

 

During the three months ended March 31, 2012 and 2011, 93 and 67 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan.

 

During the three months ended March 31, 2012 and 2011, cash received from stock option exercises and employee stock purchases was $233 and $294, respectively. The actual tax benefit realized for the tax deductions from share based compensation was $0 for both the three months ended March 31, 2012 and 2011.

 

 

Note 8 — Operating Segment Data

 

The Company has organized its sales, marketing and production activities into the DDS and LSM segments based on the criteria set forth in ASC 280, “Disclosures about Segments of an Enterprise and Related Information”. The Company’s management relies on an internal management accounting system to report results of the segments. The system includes revenue and cost information by segment. The Company’s management makes financial decisions and allocates resources based on the information it receives from this internal system.

 

DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. LSM includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates and high potency and controlled substance manufacturing. Corporate activities include business development and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

 

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

 

		Contract Revenue				Milestone & Recurring Royalty Revenue				Income  (Loss)   from Operations				Depreciation and Amortization
For the three months ended March 31, 2012
DDS		$	19,460			$	10,985			$	5,481			$	2,594
LSM			23,250				—				2,417				1,941
Corporate			—				—				(9,846	)			—
Total		$	42,710			$	10,985			$	(1,948	)		$	4,535
For the three months ended March 31, 2011
DDS		$	21,115			$	14,016			$	10,699			$	2,464
LSM			21,816				—				(378	)			1,933
Corporate			—				—				(11,412	)			—
Total		$	42,931			$	14,016			$	(1,091	)		$	4,397

 

The following table summarizes other information by segment as of and for the three month period ended March 31, 2012:

 

		DDS				LSM				Total
Total assets		$	142,991			$	120,378			$	263,369
Investments in unconsolidated affiliates			956				—				956
Capital expenditures			625				1,459				2,084

 

The following table summarizes other information by segment as of and for the year ended December 31, 2011:

 

		DDS				LSM				Total
Total assets		$	146,017			$	117,050			$	263,067
Investments in unconsolidated affiliates			956				—				956
Capital expenditures			6,578				4,198				10,776

 

Note 9 — Financial Information by Customer Concentration and Geographic Area

 

Total contract revenue from DDS’s three largest customers represented approximately 10%, 6% and 5% of DDS’s total contract revenue for the three months ended March 31, 2012, and 12%, 9% and 7% of DDS’s total contract revenue for the three months ended March 31, 2011. Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 28% and 37% of LSM’s total contract revenue for the three months ended March 31, 2012 and 2011, respectively. GE accounted for approximately 15% and 19% of the Company’s total contract revenue for the three months ended March 31, 2012 and 2011, respectively.

  

 

The Company’s total contract revenue for the three months ended March 31, 2012 and 2011 was recognized from customers in the following geographic regions:

 

		Three Months Ended March 31,
		2012				2011
United States			61	%			63	%
Europe			22				25
Asia			12				10
Other			5				2
Total			100	%			100	%

 

Long-lived assets by geographic region are as follows:

 

		March 31,  2012				December  31, 2011
United States		$	121,385			$	123,245
Europe			7,258				10,512
Asia			19,397				19,015
Total long-lived assets		$	148,040			$	152,772

 

Note 10 — Legal Proceedings

 

The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business. Except as noted below, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

Allegra

 

The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, has been involved in legal proceedings with several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company will receive royalties from Sanofi on U.S. Patent No. 5,578,610 until its expiration in 2013 and royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid. Similarly, the Company is entitled to receive royalties from Sanofi on certain foreign patents through 2015, unless those patents are earlier determined to be invalid. The Company is also entitled to receive certain royalties from Sanofi in certain foreign countries through mid 2015, unless certain patents are earlier determined to be invalid.

 

United States Litigations

 

Beginning in 2001, Barr Laboratories, Inc., Impax Laboratories, Inc., Mylan Pharmaceuticals, Inc., Teva Pharmaceuticals USA, Dr. Reddy’s Laboratories, Ltd./Dr. Reddy’s Laboratories, Inc., Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc., Sandoz Inc., Sun Pharma Global, Inc., Wockhardt and Actavis Mid Atlantic LLC, and Aurolife Pharma LLC and Aurobindo Pharma Ltd. filed Abbreviated New Drug Applications (“ANDAs”) with the Food and Drug Administration (“FDA”) to produce and market generic versions of Allegra products.

 

In response to the filings described above, beginning in 2001, Aventis Pharmaceuticals (now Sanofi) filed patent infringement lawsuits against each of the above referenced companies.  Each of the lawsuits was filed in the U.S. District Court in New Jersey and alleges infringement of one or more patents owned by Aventis Pharmaceuticals. In addition, beginning on November 14, 2006, Sanofi filed two patent infringement suits against Teva Pharmaceuticals USA, Barr Laboratories, Inc. and Barr Pharmaceuticals, Inc. in the Eastern District of Texas based on patents owned by Aventis.  Those lawsuits were transferred to the U.S. District Court in New Jersey.

 

Further, beginning on March 5, 2004, the Company, along with Aventis Pharmaceuticals, filed suit in the U.S. District Court in New Jersey against a number of defendants asserting infringement of U.S. Patent Nos. 5,581,011 and 5,750,703, which are exclusively licensed to Aventis Pharmaceuticals and relate to Allegra and Allegra-D products.  On September 9, 2009, the Company filed patent infringement lawsuits in the U.S. District Court in New Jersey against Dr. Reddy’s Laboratories, Ltd, Dr. Reddy’s Laboratories, Inc., and Sandoz, Inc. asserting infringement of U.S. Patent No. 7,390,906. That patent is licensed to Sanofi U.S. LLC and Sanofi U.S. LLC joined that lawsuit as a co-plaintiff with the Company.

 

 

On November 18, 2008, the Company, Aventis Pharmaceuticals, Sanofi, Teva Pharmaceuticals, and Barr Laboratories reached a settlement regarding the above-described patent infringement litigations relating to Teva Pharmaceuticals and Barr Laboratories (the “Teva Settlement”).  As part of the Teva Settlement, the Company entered into an amendment to its licensing agreement with Sanofi to allow Sanofi to sublicense patents related to ALLEGRA^® and ALLEGRA^®D-12 to Teva Pharmaceuticals and Barr Laboratories in the United States.  Subsequently, Teva Pharmaceuticals acquired Barr Laboratories.  The Company received an upfront sublicense fee from Sanofi of $10 million, and Sanofi will pay royalties to the Company on the sale of products in the United States containing fexofenadine hydrochloride (the generic name for the active ingredient in ALLEGRA^®) and products containing fexofenadine hydrochloride and pseudoephedrine hydrochloride (generic ALLEGRA^®D-12) by Teva Pharmaceuticals through 2015, along with additional consideration.   The Company received quarterly royalties through July 2010 for the branded Allegra D-12 equal to the royalties paid for the quarter ended June 30, 2009.  Thereafter, the royalty rate has reverted to the rate in effect prior to the signing of the sub-license amendment and the Company will also receive a royalty on Teva’s sales of the generic Allegra D-12.  The Company and Aventis Pharmaceuticals have also dismissed their claims against Ranbaxy Laboratories Ltd./Ranbaxy Pharmaceuticals Inc. and Sandoz, Inc. without prejudice. 

 

On March 19, 2010, the Company and Sanofi filed a motion for a preliminary injunction in the U.S. District Court in New Jersey seeking to enjoin Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a Allegra D-24 product based in that product infringing U.S. Patent No. 7,390,906.   On June 14, 2010, the Company and Sanofi were granted a preliminary injunction restraining Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. from commercial distribution of a D-24 product.  On January 13, 2011, the same court issued a decision interpreting the scope of the claims of U.S. Patent No. 7,390,906.  Based on the court’s January 13, 2011 interpretation of the scope of a claim term in U.S. Patent No. 7,390,906, the Company does not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc.   As a result, the Company, along with Sanofi, Dr. Reddy’s Laboratories, Ltd., and Dr. Reddy’s Laboratories, Inc., agreed to the court’s entry of an order on January 28, 2011, finding that there was no infringement of U.S. Patent No. 7,390,906 based on the Court’s January 13, 2011 claim interpretation. The court’s January 28, 2011 order also dissolved the preliminary injunction that was entered on June 14, 2010.  The Company and Sanofi U.S. LLC have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January 13, 2011 decision.

 

The January 13, 2011, decision also included an interpretation of the scope of the claims of U.S. Patent No. 5,750,703, and based on that interpretation, the Company does not presently have evidence sufficient to obtain a favorable outcome on its infringement claim against Dr. Reddy’s Laboratories, Ltd., Dr. Reddy’s Laboratories, Inc., Amino Chemicals Ltd., Dipharma S.P.A., and Dipharma Francis Sr.l As a result, the Company, along with Sanofi, Dr. Reddy’s Laboratories, Ltd., Dr. Reddy’s Laboratories, Inc. Amino Chemicals Ltd., Dipharma S.P.A., and Dipharma Francis Sr.l agreed to the court’s entry of an order on March 28, 2011, finding that there was no infringement of U.S. Patent No. 5,750,703 based on the Court’s January 13, 2011 claim interpretation. The Company and Sanofi U.S. LLC have proceeded directly to the U.S. Court of Appeals for the Federal Circuit to appeal the January 13, 2011 decision.

 

In June 2011, the Company, Sanofi and Impax Laboratories, Inc. reached a settlement agreement for the above patent infringement litigation relating to Impax (“Impax Settlement”). In conjunction with the Impax Settlement, the Company and Sanofi agreed to amend their license agreement to allow Sanofi to sublicense patents related to ALLEGRA^® and ALLEGRA^®D-12 to Impax Laboratories, Inc. in the United States.  Additionally, the Company, Sanofi, Mylan Pharmaceuticals, Inc., and Alphapharm reached a settlement agreement of the above patent infringement litigation relating to Mylan and the below noted litigation in Australia against Mylan affiliate Alphapharm (“Mylan Settlement”). In conjunction with the Mylan Settlement, the Company and Sanofi agreed to amend their license agreement to allow Sanofi to sublicense patents related to ALLEGRA^® and ALLEGRA^®D-12 to Mylan Pharmaceuticals, Inc. in the United States.  

 

International Litigations

 

In 2007, the Company filed patent infringement lawsuits in Australia against Alphapharm Pty Ltd., Arrow Pharmaceuticals Pty Ltd, Chemists’ Own Pty Ltd, and Sigma Pharmaceuticals Limited based on Australian Patent No. 699,799.  These matters were heard in a consolidated trial in November and December 2010. On February 17, 2011, the Court ruled that the defendants are not liable for infringement because the asserted claims of the Australian Patent No. 699,799 are invalid for lack of novelty and false suggestion. An appeal has been filed with regard to the ruling in the case against Arrow. The action against Alphapharm was settled as part of the Mylan Settlement, with Alphapharm receiving a sublicense to sell its products in Australia and New Zealand. Notwithstanding the court’s ruling of non-infringement, the Company continues to receive royalties on sales of the Allegra products in Australia, based on its rights under other patents.

   

 

At Risk Launches

 

Under applicable federal law, marketing of an FDA-approved generic version of Allegra may not commence until the earlier of a decision favorable to the generic challenger in the patent litigation or 30 months after the date the patent infringement lawsuit was filed. In general, the first generic filer is entitled to a 180-day marketing exclusivity period upon FDA approval.  The launch of a generic product is considered an “at-risk” launch if the launch occurs while there is still on-going litigation.  Of the remaining defendants in the pending United States litigation, Dr. Reddy’s Laboratories has engaged in an at-risk launch of a generic fexofenadine single-entity product.

 

Note 11 – Fair Value

 

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 its fair value of financial instruments using the following methods and assumptions:

 

Cash and cash equivalents, 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.

 

Debt:    The carrying value of long-term debt was approximately equal to fair value at March 31, 2012 and December 31, 2011 due to the resetting dates of the variable interest rates.

 

 

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

 

Forward-Looking Statements

 

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words and include, but are not limited to, statements concerning pension and postretirement benefit costs, the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”), future acquisitions, earnings, contract revenues, costs and margins, royalty revenues, patent protection and the ongoing Allegra® patent infringement litigation, Allegra® royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, long-lived asset impairment, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on March 15, 2012, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

 

Strategy and Overview

 

We are a global contract research and manufacturing organization that provides customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies that support the discovery and development of pharmaceutical products and the manufacturing of active pharmaceutical ingredients (“API”) and drug product for existing and experimental new drugs. With locations in the United States, Europe, and Asia, we maintain geographic proximity and flexible cost models. We have also historically leveraged our drug-discovery expertise to execute on several internal drug discovery programs, which have progressed to the development candidate stage and in some cases into Phase I clinical development. We have successfully partnered certain programs and are actively seeking to out-license our remaining programs to strategic partners for further development.

 

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

 

Additionally, with the acquisition of our Burlington, MA facility, we offer our customers a fully integrated manufacturing process for sterile injectable drugs. This includes the development and manufacture of the API, the design of the criteria to formulate the API into an injectable drug product, and the manufacture of the final drug product. We continue to make investments to build and recover our formulation business, as we believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated/manufactured on an aseptic basis.

 

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

 

 

In 2011, we made a decision to cease activities related to our internal proprietary compound discovery R&D programs. Although we halted our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these compounds or programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if any compound based on our intellectual property is successfully developed into new drugs and reach the market.

 

In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring plan was to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences.

 

Our total revenue for the quarter ended March 31, 2012 was $53.7 million, as compared to $56.9 million for the quarter ended March 31, 2011.

 

Contract services revenue for the first quarter of 2012 was $42.7 million, compared to $42.9 million for the same quarter in 2011. Recurring royalty revenues, which are based on the worldwide sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s over-the-counter product, authorized generics and estimates of sales of Teva’s authorized generics, decreased $3.0 million in the first quarter of 2012 from the first quarter of 2011. Consolidated gross margin was 7.1% for the quarter ended March 31, 2012 as compared to 3.2% for the quarter ended March 31, 2011.

 

During the three months ended March 31, 2012, cash used by operations was $5.7 million compared to cash used by operations of $10.2 million for the same period of 2011. This change from the three months ended March 31, 2011 resulted primarily from a payment of $4.8 million in the first quarter of 2011 associated with the Company’s arbitration settlement with a supplier. During the three months ended March 31, 2012, we spent $2.2 million in capital expenditures, primarily related to domestic modernization of our lab and production equipment. As of March 31, 2012, we had $8.2 million in unrestricted cash and cash equivalents and $5.4 million in bank and other related debt.

 

Results of Operations – Three Months ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

Revenues

 

Total contract revenue

 

Contract revenue consists primarily of fees earned under contracts with our third party customers. Our contract revenues for each of our Discovery/Development/Small Scale Manufacturing (“DDS”) and Large-Scale Manufacturing (“LSM”) segments were as follows:

 

		Three Months Ended March 31,
(in thousands)		2012				2011
DDS		$	19,460			$	21,115
LSM			23,250				21,816
Total		$	42,710			$	42,931

 

DDS contract revenues for the three months ended March 31, 2012 decreased from the same period in 2011. This decrease was partially due to lower contract revenue for our discovery services of $0.9 million primarily caused by lower demand for our U.S. biology services. Additionally, contract revenue for our development and small-scale manufacturing services decreased $0.7 million as a result of lower demand for our U.S. chemistry development services.

 

We currently expect DDS contract revenue for full year 2012 to approximate amounts recognized in 2011.

 

LSM revenue increased for the three months ended March 31, 2012 from the same period in 2011 primarily due to an increase in clinical supply manufacturing services at our Rensselaer, NY facility of $1.1 million, as well as continued improvement of clinical manufacturing services revenue at our Burlington, MA facility. These increases were offset, in part, by a decrease in contract revenue from our intermediate manufacturing in our Aurangabad, India facility as compared to the same period in 2011.

 

We currently expect LSM contract revenue for full year 2012 to increase from amounts recognized in 2011 driven by robust U.S. commercial API demand, and increase in our Phase III portfolio and improved revenues from our Burlington, MA facility.

 

 

Recurring royalty revenue

 

We earn royalties under our licensing agreement with Sanofi for the active ingredient in Allegra. Royalties were as follows:

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	10,985			$	14,016

 

Recurring royalties are based on the worldwide sales of Allegra®/Telfast, as well as on sales of Sanofi over-the-counter (“OTC”) product and authorized generics. Recurring royalties decreased during the quarter ended March 31, 2012 from the same period in 2011 primarily due to a decrease in royalties recognized from the sales of prescription Allegra® in Japan as a result of a less severe allergy season.

 

We currently expect full year 2012 recurring royalties to remain flat with amounts recognized in 2011. We are anticipating recurring royalties in the first half of 2012 to decrease from amounts recognized in the same period of 2011 due to the timing of the OTC product launch in the U.S. in 2011. We are anticipating recurring royalties to increase in the second half of 2012 from amounts recognized in the same period of 2011 as amounts in 2011 were impacted by prescription inventory reductions and marketing incentives associated with the OTC launch.

 

The recurring royalties we receive on the sales of Allegra®/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra®/Telfast royalties.

 

Costs and Expenses

 

Cost of contract revenue

 

Cost of contract revenue consists primarily of compensation and associated fringe benefits for employees, as well as chemicals, depreciation and other indirect project related costs. Cost of contract revenue for our DDS and LSM segments were as follows:

 

		Three Months Ended March 31,
Segment		2012				2011
(in thousands)
DDS		$	18,840			$	19,735
LSM			20,830				21,807
Total		$	39,670			$	41,542
DDS Gross Margin			3.2	%			6.4	%
LSM Gross Margin			10.4	%			0.0	%
Total Gross Margin			7.1	%			3.2	%

 

DDS contract revenue gross margin percentage decreased for the three months ended March 31, 2012 compared to contract gross margin percentage for the same period in 2011. The decrease in gross margin percentages for the three months ended March 31, 2012 from the three months ended March 31, 2011 resulted from lower demand for our U.S. biology and development services in relation to our fixed costs, partially offset by cost savings initiatives taken in our U.S. chemistry operations in 2011.

 

We currently expect DDS contract margins for 2012 to improve over amounts recognized in 2011 due to cost reduction actions implemented in the U.S. in 2011 along with the impact of the closure of our Hungarian operations.

 

LSM’s contract revenue gross margin percentages improved for the three months ended March 31, 2012 compared to the same period in 2011 primarily due to an increase in margins for our U.S. clinical manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

 

 

We currently expect LSM contract margins for 2012 to improve from amounts recognized in 2011 driven by improved capacity utilization, along with shift in revenues to higher margin commercial products.

 

Technology incentive award

 

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra® are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D’Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows:

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	1,099			$	1,402

 

The decrease in technology incentive award expense for the three months ended March 31, 2012 as compared to the same period in 2011 is associated with the decrease in Allegra recurring royalty revenue as discussed above.

 

We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods.

 

Research and development

 

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

 

During the fourth quarter of 2011, the Company’s Board of Directors made a decision to cease activities related to its internal discovery research and development programs, excluding its generic program. Although we ceased our proprietary R&D activities, we continue to believe there are additional opportunities to partner our proprietary compounds in return for a combination of up-front license fees, milestone payments and recurring royalty payments if these compounds are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility 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.

 

Research and development expenses were as follows:

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	373			$	2,604

 

R&D expense for the three months ended March 31, 2012 decreased from the same period in 2011 as a result of our strategic decision during the fourth quarter of 2011 to cease R&D operations related to our internal discovery research and development programs, excluding our generics program. R&D expenditures incurred in the first quarter of 2012 related primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants.

 

We currently expect full year 2012 R&D expense to reduce to approximately $1.0 million, with costs primarily related to developing new niche generic products and improving process efficiencies in our manufacturing plants.

 

Selling, general and administrative

 

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for selling, 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 March 31,
2012				2011
(in thousands)
$	9,846			$	11,412

 

The decrease in SG&A expenses for the three months ended March 31, 2012 from the comparable prior year period is primarily attributable to cost savings actions implemented in the U.S. in 2011. Additionally in the first quarter of 2011 we incurred charges attributable to AMRI Burlington’s remediation efforts.

 

We currently expect SG&A expenses for 2012 to decrease due to the closure of our Hungarian operations, as well as other cost saving actions implemented in the U.S. in 2011.

 

Restructuring

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	688			$	951

  

In March 2012, we approved a restructuring plan that ceased all operations at our Budapest, Hungary facility effective March 30, 2012. The goal of the restructuring plan is to advance our continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. In connection with this closure, the Company recorded a restructuring charge of $0.7 million in its DDS operating segment.  This amount included $0.5 million for termination benefits and $0.2 million for preparing the facility for closure and other administrative costs.  Restructuring charges for the three months ended March 31, 2012 did not include costs associated with terminating the Budapest facility lease.  The Company is currently preparing the Budapest facility for closure and is negotiating the termination of the lease agreement.  The Company currently anticipates completing these lease termination activities in the second half of 2012, at which point additional restructuring charges will be recognized.  The Company currently estimates that lease termination charges associated with its Budapest facility will range between $1.0 million and $2.0 million.

 

In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to further reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities.  As a result of the workforce reduction, we will be terminating the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility.  As a result of this restructuring, we recorded a restructuring charge of $0.3 million in the DDS operating segment.

 

Anticipated cash outflow related to the restructurings for the remainder of 2012 is approximately $1.3 million, plus any cash consideration of the Hungary lease term settlement.

 

Property and Equipment Impairment

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	3,967			$	—

 

In the first quarter of 2012, we recorded property and equipment impairment charges of $4.0 million in our DDS segment associated with the Company’s decision to cease operations at our Budapest, Hungary facility, as discussed above.

 

  

Interest expense, net

 

		Three Months Ended March 31,
(in thousands)		2012				2011
Interest expense		$	(146	)		$	(91	)
Interest income			4				52
Interest expense, net		$	(142	)		$	(39	)

 

Net interest expense increased for the three months ended March 31, 2012 from the same period in 2011 due to increased interest rates on our interest bearing liabilities and a decrease in balances of interest bearing assets.

 

Other (expense) income, net

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	(792	)		$	39

 

Other expense for the three months ended March 31, 2012 was primarily due to deferred financing amortization expense related to our prior credit agreement that was amended in June 2011 with a one year term, as well as expense related to the fluctuation in exchange rates associated with foreign currency transactions. Other income for the three months ended March 31, 2011 includes income from purchase accounting adjustments of $0.3 million related to the 2010 AMRI UK and AMRI Burlington acquisitions, offset in part by foreign currency transaction expense related to the fluctuations in exchange rates.

 

Income tax expense

 

Three Months Ended March 31,
2012				2011
(in thousands)
$	925			$	376

 

Income tax expense increased for the three months ended March 31, 2012 due primarily to the composition of pre-tax losses in relation to the applicable tax rates at our various locations worldwide.

 

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first three months of 2012, we used cash of $5.7 million in operating activities. The use of cash from operating activities was primarily due to a rise in both accounts receivable and inventory reflecting customer demand. The Company currently expects to collect the amounts related to the increase in accounts receivable in the second quarter of 2012 and to collect the accounts receivable associated with the sale of the inventory during the second half of 2012. The use of cash from operating activities also includes the temporary issuance of $1.5 million in security deposits at certain of the Company’s leased facilities to replace letters of credit that expired in conjunction with the transition of the Company’s credit facility to its new lender. Upon entering into a new credit agreement in April 2012, new letters of credit were issued under that credit agreement and these temporary cash security deposits will be returned to the Company in the second quarter of 2012.

 

During the first three months of 2012, cash used in investing activities was $2.0 million, resulting primarily from the acquisition of property and equipment. During the first three months of 2012, we used $4.7 million in financing activities, relating primarily to pledging $4.5 million of cash to collateralize a letter of credit issued by Wells Fargo Bank prior to closing the new credit facility in April 2012, along with payments made on our credit facilities.

 

Working capital was $65.9 million at March 31, 2012 as compared to $62.6 million as of December 31, 2011.

 

In June 2011, the Company finalized the renegotiation of its credit agreement, which included repayment of $2.7 million of the then outstanding line of credit. The remaining $7.0 million of the outstanding line of credit was converted into a term loan with a maturity date of June 2012 and quarterly repayments of $0.4 million.

 

In April 2012, we entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. We used a portion of the initial proceeds to repay all amounts due under our above mentioned June 2011 credit agreement. As of the closing date of the April 2012 agreement, the Company had $9.5 million of outstanding letters of credit secured by the new line of credit.

 

Borrowings under this new April 2012 agreement will bear interest at a fluctuating rate equal to (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%.

 

The credit facility entered into in April 2012 contains financial covenants, including certain net cash flow requirements for 2012, a minimum fixed charge coverage ratio commencing in 2013 and extending for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum domestic unrestricted cash and maximum average monthly cash reserves held at international locations.

 

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, 2011. There have been no material changes to our contractual obligations since December 31, 2011, except for long term debt repayments and the April 2012 credit facility as discussed above and in Note 4 to the condensed consolidated financial statements. As of March 31, 2012, 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 continue to pursue the expansion of our operations through internal growth and strategic acquisitions. We expect that additional expansion activities will be funded from existing cash and cash equivalents, cash flow from operations and/or the issuance of debt or equity securities and borrowings. Future acquisitions, if any, could be funded with cash on hand, cash from operations, 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. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. 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.

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, goodwill, long-lived assets, pension and postretirement benefit plans, income taxes and contingencies. 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, 2011. There have been no material changes or modifications to the policies since December 31, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Please refer to Part 1 – Note 10 to the condensed consolidated financial statements for further details and history on these litigations.

 

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, 2011, which could materially affect our business, financial condition or future results.

 

Item 6. Exhibits

 

Exhibit
Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101		XBRL (eXtensible Business Reporting Language).  The following materials from Albany Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial statements.**

  

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

 

** XBRL (Extensible Business Reporting Language) information is furnished and not deemed filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

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: May 10, 2012	By:	/s/ Mark T. Frost
		Mark T. Frost
		Senior Vice President, Administration, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)