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, 2014
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission file number: 001-3356220

 

ALBANY MOLECULAR RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

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

 

26 Corporate Circle

Albany, New York 12212

(Address of principal executive offices)

 

(518) 512-2000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Yes   x

No   ¨

 

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

 

Yes   x

No   ¨

 

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

 

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

 

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

 

Yes   ¨

No   x

 

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

 

Class		Outstanding at July 31, 2014
Common Stock, $.01 par value		32,478,117 excluding treasury shares of 5,458,062

 

 

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		21
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		29
		Item 4.		Controls and Procedures		29
Part II.		Other Information				30
		Item 1.		Legal Proceedings		30
		Item 1A.		Risk Factors		30
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		31
		Item 6.		Exhibits		32
Signatures						33
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								Six Months Ended
(Dollars in thousands, except for per share data)		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Contract revenue		$	61,474			$	50,764			$	112,512			$	97,257
Recurring royalties			6,705				8,528				14,988				21,441
Total revenue			68,179				59,292				127,500				118,698
Cost of contract revenue			45,038				42,450				86,648				80,272
Technology incentive award			424				569				1,017				1,683
Research and development			128				171				207				276
Selling, general and administrative			12,747				12,454				23,376				22,003
Postretirement benefit plan settlement gain							–				(1,285	)			–
Restructuring charges			1,042				4,953				1,272				5,832
Property and equipment impairment charges			3,718				906				3,718				1,440
Total operating expenses			63,097				61,503				114,953				111,506
Income (loss) from operations			5,082				(2,211	)			12,547				7,192
Interest expense, net			(3,065	)			(137	)			(5,681	)			(384	)
Other income (expense), net			(192	)			377				(232	)			994
Income (loss) before income taxes			1,825				(1,971	)			6,634				7,802
Income tax (benefit) expense			(1,899	)			504				(590	)			4,000
Net income (loss)		$	3,724			$	(2,475	)		$	7,224			$	3,802
Basic income (loss) per share		$	0.12			$	(0.08	)		$	0.23			$	0.12
Diluted income (loss) per share		$	0.11			$	(0.08	)		$	0.22			$	0.12

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net income (loss)		$	3,724			$	(2,475	)		$	7,224			$	3,802
Foreign currency translation gain (loss)			364				(1,982	)			1,008				(2,665	)
Net actuarial gain of pension and postretirement benefits			101				142				186				267
Total comprehensive income (loss)		$	4,189			$	(4,315	)		$	8,418			$	1,404

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

 

		June 30, 2014				December 31, 2013
Assets
Current assets:
Cash and cash equivalents		$	130,417			$	175,928
Restricted cash			6,467				714
Accounts receivable, net			58,480				52,216
Royalty income receivable			6,541				7,523
Inventory			44,277				31,991
Prepaid expenses and other current assets			10,325				7,061
Deferred income taxes			4,311				3,586
Total current assets			260,818				279,019
Property and equipment, net			131,619				127,775
Notes hedges			87,964				22,654
Goodwill			16,866				–
Restricted cash			–				3,810
Intangible assets and patents, net			15,348				3,042
Deferred income taxes			1,876				2,047
Other assets			5,659				6,921
Total assets		$	520,150			$	445,268
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	32,685			$	30,174
Deferred revenue and licensing fees			9,038				6,588
Arbitration reserve			669				1,351
Income taxes payable			6,651				8,901
Accrued pension benefits			681				811
Current installments of long-term debt			406				1,024
Total current liabilities			50,130				48,849
Long-term liabilities:
Long-term debt, excluding current installments			122,154				123,135
Notes conversion derivative			87,964				22,654
Deferred licensing fees			975				1,926
Pension and postretirement benefits			4,474				6,059
Deferred income taxes			71				631
Other long-term liabilities			1,071				1,257
Total liabilities			266,839				204,511
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000 shares authorized, none issued or outstanding			—				—
Common stock, $0.01 par value, 50,000 shares authorized, 37,877 shares issued as of June 30, 2014 and 37,023 shares issued as of December 31, 2013			379				370
Additional paid-in capital			240,355				235,806
Retained earnings			90,134				82,910
Accumulated other comprehensive loss, net			(10,083	)			(11,277	)
			320,785				307,809
Less, treasury shares at cost, 5,458 shares as of June 30, 2014 and 5,425 shares as of December 31, 2013			(67,474	)			(67,052	)
Total stockholders’ equity			253,311				240,757
Total liabilities and stockholders’ equity		$	520,150			$	445,268

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		Six Months Ended
(Dollars in thousands)		June 30, 2014				June 30, 2013
Operating activities
Net income		$	7,224			$	3,802
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangible amortization			8,025				8,133
Deferred financing amortization			1,033				-
Accretion of discount on long-term debt			2,823				–
Deferred income tax benefit			(2,492	)			1,720
Loss on disposal of property, plant and equipment			126				331
Property and equipment impairment			3,718				1,440
Stock-based compensation expense			1,957				1,178
Gain on settlement of post-retirement liability			(1,285	)			–
Excess tax benefit of stock option exercises			(1,080	)			(628	)
Provision for bad debt			33				52
Changes in assets and liabilities that provide (use) cash, net of acquisition:
Accounts receivable			(5,460	)			3,982
Royalty income receivable			982				(350	)
Inventory			(8,823	)			(7,081	)
Prepaid expenses and other assets			(2,263	)			(170	)
Accounts payable and accrued expenses			(1,105	)			6,440
Income taxes			47				(372	)
Deferred revenue and licensing fees			1,010				1,759
Pension and postretirement benefits			(118	)			149
Other long-term liabilities			13				(887	)
Net cash provided by operating activities			4,365				19,498
Investing activities
Purchase of business, net of cash acquired			(38,704	)			–
Purchase of property, plant and equipment			(6,446	)			(4,862	)
Payments for patent applications and other costs			(198	)			(285	)
Proceeds from disposal of property, plant and equipment			-				169
Net cash used in investing activities			(45,348	)			(4,978	)
Financing activities
Principal payments on long-term debt			(4,988	)			(416	)
Deferred financing costs			(222	)			–
Change in restricted cash			(1,943	)			345
Proceeds from sale of common stock			1,519				862
Purchases of treasury stock			(422	)			(91	)
Excess tax benefit of stock option exercises			1,080				628
Net cash (used in) provided by financing activities			(4,976	)			1,328
Effect of exchange rate changes on cash			448				(1,175	)
(Decrease) increase in cash and cash equivalents			(45,511	)			14,673
Cash and cash equivalents at beginning of period			175,928				23,293
Cash and cash equivalents at end of period		$	130,417			$	37,966

 

 

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 and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as of June 30, 2014. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Unrealized gains or losses resulting from translating non-U.S. currency financial statements are recorded in accumulated other comprehensive loss in the accompanying unaudited condensed consolidated balance sheets. When necessary, prior years’ unaudited condensed consolidated financial statements have been reclassified to conform to the current year presentation.

 

Use of Management Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the accompanying consolidated financial statements include assumptions regarding the valuation of inventory, intangible assets, and long-lived assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension plan, the amount and realizabilty of deferred tax assets, assumptions utilized in determining stock-based compensation, assumptions utilized in determining the value of both the notes hedges and the notes conversion derivative and assumptions related to the collectability of receivables. Actual results can vary from these estimates.

 

Contract Revenue Recognition

 

The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the FASB’s Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated pro rata across the components of the arrangement. If separate selling prices are not available, the Company will use the best estimate of selling price, consistent with the overall pricing strategy and after consideration of relevant market factors.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Recurring Royalties Revenue. Recurring royalties include royalties under a license agreement with Sanofi based on the worldwide net sales of fexofenadine HCl, marketed as Allegra in the Americas and Telfast elsewhere, as well as on sales of Sanofi’s authorized or licensed generics and sales by certain authorized sub-licensees. The Company records royalty revenue in the period in which the net sales of Allegra/Telfast occur, because it can reasonably estimate such royalties. Royalty payments from Sanofi are due within 45 days after each calendar quarter and are determined based on net sales of Allegra/Telfast and Teva Pharmaceuticals’ net sales of generic D-12 in that quarter. The Company receives additional royalties in conjunction with a Development and Supply Agreement with Actavis, Inc. (“Actavis”). These royalties, which the Company began receiving in the third quarter of 2012, are earned on Actavis’ net sales of a generic product. The Company records royalty revenue in the period in which the net sales of this product occur. Royalty payments from Actavis are due within 60 days after each calendar quarter and are determined based on sales of the qualifying product in that quarter.

 

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

 

The Company has discovered and conducted the early development of several new drug candidates, with a view to out- licensing these candidates to partners for further development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.

 

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

 

 

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

 

Under the terms of the Agreements, the Company received upfront licensing fees and research funding to further develop the licensed compounds. In addition, the Company is eligible to receive development and regulatory milestones for each licensed compound, as well as royalties on sales of commercialized compounds if any.

 

Under the terms of the Agreements, the Company may receive milestone payments for each compound advanced by BMS and Genentech upon achievement of certain clinical and regulatory milestones as follows:

 

·

Up to $14,000 in clinical development milestones; and

 

·

Up to $30,000 in regulatory milestones, due upon acceptance and/or approval of new drug application filings with regulatory agencies in various jurisdictions.

 

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

 

·

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

 

·

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

 

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

 

Cash, Cash Equivalents and Restricted Cash

 

Cash equivalents consist of money market accounts and overnight deposits. Some of our cash is deposited with financial institutions located throughout the U.S. and at banks in foreign countries where we operate subsidiary offices and at times may exceed insured limits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

Upon entering into a new credit agreement in April 2012, the Company was required to maintain a $5,000 restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement was directly reduced by the amount of principal payments made on the term loan which began in May 2013. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating the term loan liability. In June 2014 the Company terminated the credit agreement while still maintaining the letters of credit, thus requiring the Company to continue to maintain a restricted cash balance to collateralize these letters of credit. Restricted cash as of June 30, 2014 was $6,467.

 

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

 

Note 2 — Earnings Per Share

 

The shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Weighted average common shares outstanding - basic			31,490				30,872				31,385				30,760
Dilutive effect of share-based compensation			1,128				–				1,091				808
Weighted average common shares outstanding - diluted			32,618				30,872				32,476				31,568

 

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, 2014 and the six months ended June 30, 2013 because of anti-dilutive effects. The Company has excluded all outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three months ended June 30, 2013 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive. The weighted average number of anti-dilutive common equivalents outstanding (before the effects of the treasury stock method) was 9,637 and 267 for the three months ended June 30, 2014 and 2013, respectively, and 9,886 and 737 for the six months ended June 30, 2014 and 2013, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

Note 3 - Business Acquisition

 

On April 4, 2014, the Company completed the purchase of all of the outstanding shares of Cedarburg Pharmaceuticals, Inc. (Cedarburg), a contract developer and manufacturer of technically complex active pharmaceutical ingredients (“API’s”) for both generic and branded customers, located in Grafton, WI and Denver, CO. The aggregate purchase price was $38,951.

 

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

 

		April 4, 2014
Assets Acquired
Cash		$	247
Accounts receivable			837
Inventory			3,463
Prepaid expenses and other current assets			549
Property and equipment			8,307
Goodwill			16,866
Intangible assets			12,500
Total assets acquired		$	42,769
Liabilities Assumed
Accounts payable and accrued expenses		$	1,601
Deferred revenue			489
Capital lease obligations			566
Restructuring liabilities			1,134
Deferred tax liabilities			28
Total liabilities assumed			3,818
Net assets acquired		$	38,951

 

 

The aggregate purchase price of $38,951 is provisional pending determination of the final adjustment to the transaction consideration based on the working capital position of Cedarburg at the date of closing. The fair values of the acquired property and equipment, goodwill, and identifiable intangible assets of $8,307, $16,866, and $12,500, respectively, are provisional pending receipt of the final valuations for those assets.

 

Revenue and net income from Cedarburg for the period April 4, 2014 to June 30, 2014 was $5,515 and $721, respectively. The following table shows the unaudited combined condensed pro forma statements of income for the three and six months ended June 30, 2014 and 2013, respectively, as if the Cedarburg acquisition had occurred on January 1, 2013. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

 

		Unaudited
		Three Months Ended June 30,
		2014				2013
Total revenues		$	68,181			$	64,135
Net income (loss)			4,124				(2,339	)
Earnings (loss) per share:
Basic		$	0.13			$	(0.08	)
Diluted		$	0.13			$	(0.08	)

 

		Unaudited
		Six Months Ended June 30,
		2014				2013
Total revenues		$	129,289			$	127,676
Net income			6,612				3,215
Earnings per share:
Basic		$	0.21			$	0.10
Diluted		$	0.20			$	0.10

 

For the three and six months ended June 30, 2014 pre-tax net income was adjusted by reducing expenses by $2,124 and $2,694, respectively, for acquisition related costs. For the six months ended June 30, 2013 pre-tax net income was adjusted by increasing expenses by $824 for acquisition related costs.

 

For the six months ended June 30, 2014 pre-tax net income was adjusted by increasing expenses by $275 for purchase accounting related depreciation and amortization. For the three and six months ended June 30, 2013 pre-tax net income was adjusted by increasing expenses by $275 and $550, respectively, for purchase accounting related depreciation and amortization.

 

For the three and six months ended June 30, 2014 pre-tax net income was adjusted by decreasing interest expense by $21 and $43, respectively, to reflect certain debt paid off at the closing. For the three and six months ended June 30, 2013 pre-tax net income was adjusted by decreasing interest expense by $24 and $51, respectively, to reflect certain debt paid off at the closing.

 

The Company funded the acquisition of Cedarburg in April 2014 utilizing a portion of the proceeds from a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”) that was completed in December 2013. The Company did not have sufficient cash on hand to complete the acquisition of Cedarburg as of January 1, 2013. For the purposes of presenting the pro forma combined condensed statement of operations for the three and six months ended June 30, 2013, the Company has included the assumption of bridge financing as of January 1, 2013 to fund the acquisition of Cedarburg as of that date. The pro forma combined condensed statement of operations for the three and six months ended June 30, 2013 reflects the recognition of interest expense on the assumed bridge financing for the period January 1, 2013 to December 4, 2013 using the rate of interest that the Company paid on its term loan facility, at which point it is further assumed that a portion of the Notes financing would have been utilized to satisfy the bridge financing. For the three and six months ended June 30, 2013, pre-tax net income was adjusted by $321 and $642 of pro forma interest expense on the bridge financing.

 

 

Note 4 –Debt

 

The following table summarizes long-term debt:

 

		June 30, 2014				December 31, 2013
Convertible senior notes, net of unamortized debt discount		$	119,755			$	116,931
Term loan			–				4,524
Industrial development authority bond			2,390				2,695
Capital leases - equipment			409				-
Miscellaneous loan			6				9
			122,560				124,159
Less current portion			(406	)			(1,024	)
Total long-term debt		$	122,154			$	123,135

 

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $30,245 at June 30, 2014, are as follows:

 

2014 (remaining)		$	75
2015			448
2016			448
2017			397
2018			150,348
Thereafter			1,089
Total		$	152,805

 

Convertible Senior Notes

 

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

 

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

 

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

 

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

 

 

The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC Topic 815, Derivatives and Hedging, and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the three and six months ended June 30, 2014, the Company recorded $1,430 and $2,823, 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, 2014				December 31, 2013
Principal amount		$	150,000			$	150,000
Unamortized debt discount			30,245				33,069
Net carrying amount of Notes		$	119,755			$	116,931

 

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

 

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

 

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, 2014, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal, therefore there was no change in fair market value that was recognized in the accompanying condensed consolidated statement of operations.

 

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

 

		Location on Balance Sheet		June 30,  2014				December 31, 2013
Notes Hedges		Long-term assets		$	87,964			$	22,654
Notes Conversion Derivative		Long-term liabilities		$	(87,964	)		$	(22,654	)

 

 

Term Loan and Revolving Credit Facility

 

In April 2012, the Company entered into a $20,000 credit facility consisting of a 4-year, $5,000 term loan and a $15,000 revolving line of credit. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating the term loan liability. In June 2014 the Company terminated the credit agreement while still maintaining the letters of credit, thus requiring the Company to continue to maintain restricted cash to collateralize these letters of credit.

 

The balance required to be maintained as restricted cash must be at least 110% of the maximum potential amount of the outstanding letters of credit.  As of June 30, 2014, the Company had $5,141 of outstanding letters of credit secured by restricted cash.

 

IDA Bonds

 

The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current interest rate of 0.15% at June 30, 2014. The amount outstanding as of June 30, 2014 was $2,390.

 

Note 5 - Inventory

 

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

 

		June 30, 2014				December 31, 2013
Raw materials		$	14,934			$	13,294
Work in process			7,411				3,314
Finished goods			21,932				15,383
Total inventories, at cost		$	44,277			$	31,991

 

Note 6 — Restructuring and Impairment

 

In April 2014, the Company announced a restructuring plan transitioning Discovery and Development Services (DDS) activities at its Syracuse, N.Y. site to other sites within AMRI and ceased operations in Syracuse at the end of June 2014.

The actions taken are consistent with AMRI’s ongoing efforts to consolidate its facility resources to more effectively utilize its discovery and development resource pool and to further reduce its facility cost structure.

 

In the first six months of 2014, the Company recorded $1,272 of restructuring charges, including $1,110 during the three months ended June 30, 2014 relating to the closure of the Syracuse, NY location as described above, and administrative costs associated with finalizing the closure of its Hungarian legal entity.

 

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

 

		Balance at January 1, 2014				Charges/ (reversals)				Amounts Paid				Foreign Currency Translation & Other Adjustments (1)				Balance at  June 30,  2014
Termination benefits and personnel realignment		$	323			$	1,103			$	(452	)			(2	)		$	972
Lease termination and relocation charges			3,582				236				(1,898	)			–				1,920
Other			471				(67	)			(52	)			1				353
Total		$	4,376			$	1,272			$	(2,402	)		$	(1	)		$	3,245

 

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

 

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

 

Anticipated cash outflow related to the restructuring reserves as of June 30, 2014 for the remainder of 2014 is approximately $2,038.

 

 

In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $3,718 in the first half of 2014 and $1,440 in the first half of 2013 in the DDS segment. These charges are included under the caption “Property and equipment impairment charges” on the condensed consolidated statement of operations for the three months and six months ended June 30, 2014 and 2013.

 

Note 7 — Goodwill and Intangible Assets

 

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

 

		Amortization Period		December 31, 2013				Acquisitions				Additions				Amortization				June 30, 2014
Patents and Licensing Rights		2-16 years		$	2,804			$	-			$	198			$	(140	)		$	2,862
Trademarks		5 years			-				400				-				(20	)			380
Customer Relationships		5-20 years			238				12,100				-				(232	)			12,106
Goodwill		-			-				16,866				-								16,866
Total				$	3,042			$	29,366			$	198			$	(392	)		$	32,214

 

Amortization expense related to intangible assets was $281 and $113 for the three months ended June 30, 2014 and 2013, respectively, and $392 and $216 for the six months ended June 30, 2014 and 2013, respectively. The weighted average amortization period is 17.5 years.

 

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

 

Year  ending December 31,
2014 (remaining)		$	561
2015			1,034
2016			959
2017			959
2018			955
Thereafter			10,880
Total		$	15,348

 

Note 8 — Share-Based Compensation

 

During the three and six months ended June 30, 2014, the Company recognized total share based compensation cost of $1,024 and $1,957, respectively, as compared to total share based compensation cost for the three and six months ended June 30, 2013 of $675 and $1,178, respectively.

 

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

 

Restricted Stock

 

A summary of unvested restricted stock activity during the six months ended June 30, 2014 is presented below:

 

		Number of Shares				Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2014			509			$	6.28
Granted			562			$	11.25
Vested			(183	)		$	4.74
Forfeited			(26	)		$	6.92
Outstanding, June 30, 2014			862			$	9.84

 

As of June 30, 2014, there was $6,866 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 3.3 years. Of the 862 restricted shares outstanding, the Company currently expects 851 shares to vest.

 

 

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, 2014				June 30, 2013
Expected life in years			5				5
Risk free interest rate			1.52	%			0.82	%
Volatility			53	%			56	%
Dividend yield			—				—

 

A summary of stock option activity under the Company’s Stock Option and Incentive Plans during the six month period ended June 30, 2014 is presented below:

 

		Number of Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2014			2,046			$	5.62
Granted			326				10.37
Exercised			(282	)			4.31
Forfeited			(80	)			6.95
Expired			(92	)			15.78
Outstanding, June 30, 2014			1,918			$	6.08				7.5			$	26,933
Options exercisable, June 30, 2014			920			$	5.79				6.5			$	13,184

 

The weighted average fair value of stock options granted for the six months ended June 30, 2014 and 2013 was $4.85 and $2.86, respectively. As of June 30, 2014, there was $2,408 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.6 years. Of the 1,918 stock options outstanding, the Company currently expects 1,887 options to vest.

 

Employee Stock Purchase Plan

 

During the six months ended June 30, 2014 and 2013, 36 and 100 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan (“ESPP”).

 

During the six months ended June 30, 2014 and 2013, cash received from stock option exercises and employee stock purchases was $1,519 and $862, respectively. The excess tax benefit realized for the tax deductions from share based compensation was $1,080 and $628 for the six months ended June 30, 2014 and 2013, respectively.

 

Note 9 — Operating Segment Data

 

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

 

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

 

 

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 Intangible Amortization
For the three months ended June 30, 2014
DDS		$	19,512			$	4,239			$	2,703			$	1,933
LSM			41,962				2,466				15,126				2,331
Corporate			—				—				(12,747	)			—
Total		$	61,474			$	6,705			$	5,082			$	4,264
For the three months ended June 30, 2013
DDS		$	19,513			$	5,697			$	2,065			$	1,993
LSM			31,251				2,831				8,178				2,023
Corporate			—				—				(12,454	)			—
Total		$	50,764			$	8,528			$	(2,211	)		$	4,016

 

		Contract Revenue				Milestone & Recurring Royalty Revenue				Income  (Loss)   from Operations				Depreciation and Intangible Amortization
For the six months ended June 30, 2014
DDS		$	39,013			$	10,214			$	11,015			$	3,685
LSM			73,499				4,774				24,908				4,340
Corporate			—				—				(23,376	)			—
Total		$	112,512			$	14,988			$	12,547			$	8,025
For the six months ended June 30, 2013
DDS		$	39,609			$	16,838			$	13,918			$	4,138
LSM			57,648				4,603				15,277				3,995
Corporate			—				—				(22,003	)			—
Total		$	97,257			$	21,441			$	7,192			$	8,133

 

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

 

		DDS				LSM				Total
Total assets		$	265,810			$	254,340			$	520,150
Goodwill included in total assets			—				16,866				16,866
Investments in unconsolidated affiliates			956				—				956
Capital expenditures			1,823				4,623				6,446

 

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

 

		DDS				LSM				Total
Total assets		$	108,977			$	163,891			$	272,868
Investments in unconsolidated affiliates			956				—				956
Capital expenditures			1,356				3,506				4,862

 

Note 10 — Financial Information by Customer Concentration and Geographic Area

 

Total contract revenue from DDS’s three largest customers each represented approximately 10%, 9% and 8% for the three months ended June 30, 2014, and 8%, individually, of DDS’s total contract revenue for the three months ended June 30, 2013. Total contract revenue from DDS’s three largest customers represented approximately 8%, individually, of DDS’s total contract revenue for the six months ended June 30, 2014, and 8%, individually, of DDS’s total contract revenue for the six months ended June 30, 2013. Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 13% and 20% of LSM’s total contract revenue for the three months ended June 30, 2014 and 2013, respectively. GE accounted for approximately 21% and 26% of LSM’s total contract revenue for the six months ended June 30, 2014 and 2013, respectively. GE accounted for approximately 14% and 15% of the Company’s total contract revenue for the six months ended June 30, 2014 and 2013, respectively. LSM’s second largest customer represented 11% and 25% of LSM’s total contract revenue for the three months ended June 30, 2014 and 2013, respectively and 13% and 21% of LSM’s total contract revenue for the six months ended June 30, 2014 and 2013, respectively. Additionally, this customer represented 8% and 13% of the Company’s total contract revenue for the six months ended June 30, 2014 and 2013, respectively.

 

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
United States			71	%			71	%			67	%			67	%
Europe			15				18				20				19
Asia			8				8				8				11
Other			6				3				5				3
Total			100	%			100	%			100	%			100	%

 

Long-lived assets by geographic region are as follows:

 

		June 30, 2014				December  31, 2013
United States		$	139,722			$	107,403
Asia			6,424				17,449
Europe			17,687				5,965
Total long-lived assets		$	163,833			$	130,817

 

Note 11 — Legal Proceedings

 

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

 

Allegra:

 

The Company has settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and Allegra-D products. All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties. The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and will receive royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid. The Company is also entitled to receive certain royalties from Sanofi and certain approved sub-licensees through mid-2015, unless the relevant patent(s) are earlier determined to be invalid.

 

Note 12 – Fair Value

 

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

 

Cash and cash equivalents, restricted cash, receivables, and accounts payable: The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.

 

Convertible senior notes, derivatives and hedging instruments: The fair values of the Company’s Notes, which differ from their carrying values, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs. The estimated fair value of the Notes at June 30, 2014 was $216,188. The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.

 

 

Long-term debt, other than convertible senior notes: The carrying value of long-term debt approximated fair value at June 30, 2014 and December 31, 2013 due to the resetting dates of the variable interest rates.

 

The Company uses a framework for measuring fair value in generally accepted accounting principles and making disclosures about fair value measurements.  A three-tiered fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.  

 

These tiers include:  

Level 1 – defined as quoted prices in active markets for identical instruments;

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

Note 13 – Accumulated Other Comprehensive Income (Loss)

 

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

 

		Pension and postretirement benefit plans				Foreign currency adjustments				Total  Accumulated Other Comprehensive Loss
Balance at December 31, 2013, net of tax		$	(4,140	)		$	(7,137	)		$	(11,277	)
Net current period change, net of tax			186				1,008				1,194
Balance at June 30, 2014, net of tax		$	(3,954	)		$	(6,129	)		$	(10,083	)

 

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

 

		Three Months Ended								Six Months Ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Amortization of pension and other postretirement benefits (a)
Actuarial losses		$	156			$	219			$	312			$	411
Total before tax effect			156				219				312				411
Tax benefit on amounts reclassified into earnings			(55	)			(77	)			(110	)			(144	)
		$	101			$	142			$	202			$	267

 

(a)        Amounts represent amortization of net actuarial loss from shareholders’ equity into postretirement benefit plan cost. This amount was primarily recognized as cost of contract revenue in the consolidated statement of operations.

 

Note 14 – Employee Benefit Plans

 

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

 

Note 15 – Subsequent Events

 

In July 2014, the Company announced the completion of the acquisition of Oso Biopharmaceuticals Manufacturing, LLC, a contract manufacturer of highly complex injectable drug products. Total consideration paid, pending the completion of purchase accounting adjustments, was $110,000. AMRI financed the transaction with cash on hand.

 

 

Note 16 - Revision of Prior Period Financial Statements

 

During the second quarter of fiscal year 2014, we identified an error in our accounting for income tax expense recorded in fiscal years 2006 to 2013. We assessed the materiality of the error on prior periods’ financial statements and concluded that the error was not material to any of our prior period annual or interim financial statements. We elected to revise previously issued consolidated financial statements the next time they are filed. As each subsequent filing is made in the future, the previous period consolidated financial statements affected by the error will be revised. We have revised the condensed consolidated balance sheet as of December 31, 2013 included herein to reflect the correct balances by increasing income taxes payable and decreasing retained earnings each by $4,947. We have also revised the condensed consolidated statements of operations for the three and six months ended June 30, 2013 by increasing income tax expense by $228 and $456, respectively, resulting in a decrease in net income for the same periods by $228 and $456, respectively. For the three months ended June 30, 2013 loss per basic and diluted share increased by $0.01. For the six months ended June 30, 2014 income per basic and diluted share decreased by $0.02.

 

 

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

 

Forward-Looking Statements

 

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”) and Genentech, expected benefits from the acquisition of Cedarburg Pharmaceuticals, Inc., the acquisition of Oso Biopharmaceuticals Manufacturing, LLC, future acquisitions or divestitures, earnings, contract revenues, costs and margins, patent protection, Allegra® and Actavis royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, long-lived asset impairment, pension costs, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 17, 2014, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

 

Strategy and Overview

 

We are a global contract research and manufacturing organization uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers. Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large-scale manufacturing projects throughout our global network of research and manufacturing facilities. We believe we have a unique portfolio of service offerings ranging from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia. We believe this product and geographic mix will continue to allow us to increase multi-year strategic relationships and enhance our revenue growth with a variety of customers. In 2014 and beyond, we are targeting growth and increased profitability across the discovery and early development, active pharmaceutical ingredients (“API”) manufacturing and formulation manufacturing service offerings.

 

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

 

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

 

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

 

 

We have made investments to grow our formulation and injectable drug product business at our Burlington, MA facility. 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 and manufactured on an aseptic basis.

 

The cost base of our manufacturing and research facilities is largely fixed in nature. However, we continue to seek opportunities to minimize these fixed costs, with a focus on gaining flexibility and improving efficiency, cost structure and margin.

 

During 2012, we transitioned certain services from Hungary to India, and in 2013, ceased all activities in Hungary. During 2013, we further transitioned certain biology services from Bothell, WA to Singapore and Albany, NY.  These actions were taken to better align the business to customer demand and current and expected market conditions due to shifting preferences related to the preferred co-localization of integrated drug discovery activities.

 

In April 2014, we announced the transitioning of our DDS activities at our Syracuse, NY site to other sites within the Company and ceased operations in Syracuse at the end of June 2014. These actions are consistent with our ongoing efforts to consolidate our facility resources to more effectively utilize its discovery and development resource pool and to further reduce our facility cost structure.

 

Although we suspended substantial investments and halted proprietary compound R&D activities in 2011, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing. Our goal is to partner these programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market. One compound was successfully partnered in early 2013. We are continuing to focus on partnering other programs.

 

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

 

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

 

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

 

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

 

Our backlog of open manufacturing orders and accepted service contracts was $116.8 million at June 30, 2014 as compared to $114.8 million at June 30, 2013. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

 

We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, contracts vary in duration, and as such the timing and amount of revenues recognized from backlog can vary from period to period. Second, the Company’s manufacturing and services contracts are of a nature that a customer may, at its option, cancel or delay the timing of delivery, which would change our projections concerning the timing and extent to which revenue may be recognized. In addition, the value of the Company’s services contracts that are conducted on a time and materials or full-time equivalent basis are based on estimates, from which actual revenue generated could vary. Finally, there is no assurance that projects included in backlog will not be terminated or delayed at any time by customers or regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.

 

 

Our total revenue for the quarter ended June 30, 2014 was $68.2 million, which included $61.5 million from our contract service business and $6.7 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis. Consolidated gross margin was 26.7% for the quarter ended June 30, 2014 as compared to 16.4% for the quarter ended June 30, 2013.

 

During the six months ended June 30, 2014, cash provided by operations was $4.4 million compared to cash provided by operations of $19.5 million for the same period of 2013. The change from the six months ended June 30, 2013 was primarily driven by an increase in customer receivables due to growth in contract revenues and the timing of invoicing and cash collections, as well as timing of the payment of accounts payable and other accrued liabilities. During the six months ended June 30, 2014, we spent $6.4 million on capital expenditures, primarily related to growth and maintenance of our existing facilities. During the six months ended June 30, 2014, we spent $38.7 million to acquire Cedarburg Pharmaceuticals. As of June 30, 2014, we had $136.9 million in cash, cash equivalents, and restricted cash and $122.6 million in bank and other related debt, the largest portion of both the cash and the debt are a result of an offering of senior convertible notes sold by us in fourth quarter of 2013. In July 2014, we subsequently used $109.3 million of cash to acquire the Oso Bio business.

 

Results of Operations – Three and Six Months ended June 30, 2014 Compared to Three and Six Months Ended June 30, 2013

 

Revenues

 

Total contract revenue

 

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2014				2013				2014				2013
DDS		$	19,512			$	19,513			$	39,013			$	39,609
LSM			41,962				31,251				73,499				57,648
Total		$	61,474			$	50,764			$	112,512			$	97,257

 

DDS contract revenues for the three months and six months ended June 30, 2014 are consistent with the same periods in 2013, as decreases in U.S. chemistry and biology services were offset by an increase in U.S. development and small-scale services.

 

We currently expect DDS contract revenue for full year 2014 to increase from amounts recognized in 2013 driven by improved facility utilization at all of our sites.

 

LSM revenue increased for the three months ended June 30, 2014 from the same period in 2013 due to incremental revenues from the acquisition of Cedarburg Pharmaceuticals in the second quarter of 2014, as well as increased demand at our Burlington, MA and UK manufacturing facilities. LSM revenue increased for the six months ended June 30, 2014 from the same period in 2013 due to incremental revenues from the acquisition of Cedarburg Pharmaceuticals in the second quarter of 2014 and increased demand for our existing commercial manufacturing services and clinical supply manufacturing services worldwide.

 

We currently expect continued growth in LSM contract revenue for full year 2014 due to on-going demand for our existing commercial manufacturing services and clinical supply manufacturing services worldwide, as well as incremental revenues expected as a result of the acquisitions of Cedarburg Pharmaceuticals and Oso Biopharmaceuticals.

 

Recurring royalty revenue

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	6,705			$	8,528			$	14,988			$	21,441

 

 

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

 

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

 

We currently expect full year 2014 recurring royalties to decrease from amounts recognized in 2013, as previously announced, primarily due to patent expirations of Allegra that began in 2013 along with the introduction of generic fexofenadine in Japan during the first quarter of 2013. These decreases will be partially offset by a slight increase in Actavis royalties.

 

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These U.S. patents began to expire in November 2013. The international patents began to expire in June 2014 and most of these patents are covered by our license agreements with Sanofi. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

 

Costs and Expenses

 

Cost of contract revenue

 

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

 

Segment		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2014				2013				2014				2013
DDS		$	15,789			$	16,951			$	32,076			$	33,723
LSM			29,249				25,499				54,572				46,549
Total			45,038			$	42,450			$	86,648			$	80,272
DDS Gross Margin			19.1	%			13.1	%			17.8	%			14.9	%
LSM Gross Margin			30.3	%			18.4	%			25.8	%			19.2	%
Total Gross Margin			26.7	%			16.4	%			23.0	%			17.5	%

 

DDS contract revenue gross margin percentage increased for the three and six months ended June 30, 2014 compared to contract revenue gross margin percentage for the same periods in 2013. These increases are primarily due to previously announced cost savings initiatives as well as an increase in facility utilization.

 

We currently expect DDS contract margin percentage for 2014 to improve over amounts recognized in 2013 due to improved facility utilization.

 

LSM’s contract revenue gross margin percentages increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 due to the accretive benefit of gross margin percentages from the Cedarburg Pharmaceuticals acquisition and increased capacity utilization at our large-scale manufacturing facilities worldwide.

 

We currently expect improvement in LSM contract margins for full year 2014 as compared to full year 2013 driven by an increase in capacity utilization at all of our large-scale facilities worldwide, including the expected accretive benefit of gross margin percentages from the Cedarburg Pharmaceuticals and Oso Biopharmaceuticals acquisitions.

 

 

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. The incentive awards were as follows:

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	424			$	569			$	1,017			$	1,683

 

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

 

Research and development

 

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

 

The Company’s internal discovery research and development expenses focus on various generic programs.

 

Research and development expenses were as follows:

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	128			$	171			$	207			$	276

 

R&D expense for the three and six months ended June 30, 2014 decreased from the same periods in 2013 as a result of our continued strategic decision to limit our R&D activities.

 

We currently expect 2014 R&D expense to increase slightly from amounts recognized in 2013 relating primarily 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 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,
2014				2013				2014				2013
(in thousands)
$	12,747			$	12,454			$	23,376			$	22,003

 

SG&A increased for the three and six months ended June 30, 2014 as compared to the same periods in the prior year, primarily due to costs associated with the acquisitions of Cedarburg Pharmaceuticals and Oso Biopharmaceuticals and incremental SG&A costs from the acquisition of Cedarburg Pharmaceuticals in the second quarter of 2014. SG&A for the three and six months ended June 30, 2013 includes a one-time charge of $1.92 million for the settlement of a U.S. litigation matter.

 

We currently expect SG&A expenses for full year 2014 to increase from amounts recognized in 2013 due to investments made to grow the business, including incremental SG&A costs associated with the acquisitions of Cedarburg Pharmaceuticals and Oso Biopharmaceuticals.

 

 

Postretirement benefit plan settlement gain

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	-			$	-			$	(1,285	)		$	-

 

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

 

Restructuring

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	1,042			$	4,953			$	1,272			$	5,832

 

In April 2014, the Company announced a restructuring plan transitioning Discovery and Development Services (DDS) activities at its Syracuse, N.Y. site to other sites within AMRI and ceased operations in Syracuse at the end of June 2014.

The actions taken are consistent with AMRI’s ongoing efforts to consolidate its facility resources to more effectively utilize its discovery and development resource pool and to further reduce its facility cost structure. Restructuring charges for the three and six months ended June 30, 2014 consist primarily of termination benefits and personnel realignment costs associated with the closure of the Syracuse site.

 

During the first half of 2013, we recorded $5.8 million of restructuring charges primarily related to the closure of our Bothell, WA and Budapest, Hungary facilities.

 

Property and Equipment Impairment

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	3,718			$	906			$	3,718			$	1,440

 

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

 

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

 

Interest expense, net

 

		Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)		2014				2013				2014				2013
Interest expense		$	(3,065	)		$	(140	)		$	(5,684	)		$	(391	)
Interest income			-				3				3				7
Interest expense, net		$	(3,065	)		$	(137	)		$	(5,681	)		$	(384	)

 

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

 

 

Other income (expense), net

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	(192	)		$	377			$	(232	)		$	994

 

Other expense for the three and six months ended June 30, 2014 was primarily due to the write-off of a litigation settlement receivable balance.

 

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

 

Income tax (benefit) expense

 

Three Months Ended June 30,								Six Months Ended June 30,
2014				2013				2014				2013
(in thousands)
$	(1,899	)		$	504			$	(590	)		$	4,000

 

The Company recognized a net income tax benefit for the three and six months ended June 30, 2014 due to the reversal of a valuation allowance on a net operating loss deferred tax asset for the Company’s U.K. operations of $2.8 million due to a change in estimate regarding the recoverability of those assets resulting from improved profitability. Excluding the impact of reversing the valuation allowance, income tax expense increased for the three months ended June 30, 2014 as compared to the same period in 2013 due primarily to increased pre-tax income at the Company’s U.S. locations. Excluding the impact of reversing the valuation allowance, income tax expense decreased for the six months ended June 30, 2014 as compared to the same period in the prior year due primarily to a decrease in pre-tax income at the Company’s U.S. locations, as well as an increase in pre-tax income at the Company’s U.K. operations.

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first half of 2014, we generated cash from operating activities of $4.4 million. The decrease in cash generated from operating activities from the first half of 2013 is primarily due to an increase in customer receivables due to growth in contract revenues and the timing of invoicing and cash collections, as well as timing of the payment of accounts payable and other accrued liabilities.

 

During the first half of 2014, cash used in investing activities was $45.3 million, resulting primarily from the use of $38.7 million in cash to acquire Cedarburg Pharmaceuticals in April 2014 and $6.4 million for the acquisition of property and equipment. Additionally, during the first half of 2014, we used $5.0 million in cash in financing activities, relating primarily to payments made on our credit facilities.

 

Working capital, defined as current assets less current liabilities, was $210.7 million at June 30, 2014 as compared to $230.2 million as of December 31, 2013. This decrease primarily relates to the use of cash to acquire the Cedarburg Pharmaceuticals business in 2014.

 

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

 

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. Under the terms of the April 2012 credit agreement, the Company was required to maintain a $5.0 million restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement was directly reduced by the amount of principal payments made on the term loan which began in May 2013. In April 2014, the Company utilized the balance of restricted cash to pay off the balance of the term loan, thereby eliminating both the term loan liability and releasing the restricted cash.

 

 

In June 2014, the Company terminated its credit facility. In conjunction with the termination of the credit facility, the Company was required to maintain a $6.5 million restricted cash balance to collateralize outstanding letters of credit that were previously secured by the revolving line of credit. The Company is in negotiations with other banking institutions to enter into a new revolving line of credit agreement, which will serve in part to secure the outstanding letters of credit and which will allow for the release of the restricted cash balances.

 

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

 

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

 

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control Over Financial Reporting

 

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 details and history on outstanding litigation.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. The following risk factor has been revised or updated since the filing of our annual report on Form 10-K for the year ended December 31, 2013:

 

If we are not successful in selecting and integrating the businesses we acquire, or in managing our current and future divestitures, our business may suffer.

 

In recent years, we have engaged in a number of acquisitions and strategic investments. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions.

 

Even if completed, acquisitions and alliances involve numerous risks which may include:

 

•           difficulties and expenses incurred in assimilating and integrating operations, services, products or technologies;

•           challenges with developing and operating new businesses;

•           diversion of management's attention from other business concerns;

•           potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller;

•           acquisitions could be dilutive to earnings,;

•           loss of key employees;

•           risks that disagreements or disputes with prior owners of an acquired business may result in litigation expenses and diversion of our management's attention;

•           challenges with integration and support of preexisting supplier, distribution and customer relationships;

•           the presence or absence of adequate internal controls and/or significant fraud in the financial systems of acquired companies;

•           difficulties in achieving business and financial success; and

•           new technologies and products may be developed which cause businesses or assets we acquire to become less valuable.

 

In the event that an acquired business or technology or an alliance does not meet our expectations, our results of operations may be adversely affected.

 

We continually evaluate the performance and strategic fit of our businesses. Divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding acceptable exit strategies.

 

 

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

 

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

 

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 Program

April 1, 2014 – April 30, 2014

–

$

–

N/A

N/A

May 1, 2014 – May 31, 2014

517

$

16.22

N/A

N/A

June 1, 2014 – June 30, 2014

5,983

$

16.57

N/A

N/A

Total

6,500

$

16.54

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.

 

 

Item 6. Exhibits

 

Exhibit
Number		Description
2.1		Membership Interest Purchase Agreement By and Among Oso Biopharm Holdings, LLC, Oso Biopharmaceuticals Manufacturing, LLC, ALO Acquisition LLC, and Albany Molecular Research, Inc. dated as of June 1, 2014 (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 June 2, 2014, File No. 001-35622)
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, 2014, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed  Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

 

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

 

 

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 11, 2014	By:	/s/ Michael M. Nolan
		Michael M. Nolan
		Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)