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EX-31.1 - EXHIBIT 31.1 - ALBANY MOLECULAR RESEARCH INCv465967_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - ALBANY MOLECULAR RESEARCH INCv465967_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ALBANY MOLECULAR RESEARCH INCv465967_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ALBANY MOLECULAR RESEARCH INCv465967_ex31-2.htm
EX-10.7 - EXHIBIT 10.7 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-7.htm
EX-10.6 - EXHIBIT 10.6 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-6.htm
EX-10.5 - EXHIBIT 10.5 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-5.htm
EX-10.4 - EXHIBIT 10.4 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-4.htm
EX-10.3 - EXHIBIT 10.3 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-3.htm
EX-10.2 - EXHIBIT 10.2 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - ALBANY MOLECULAR RESEARCH INCv465967_ex10-1.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2017

 

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

 

For the transition period from               to

 

Commission file number: 001-35622

 

ALBANY MOLECULAR RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

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

 

26 Corporate Circle

Albany, New York 12203

(Address of principal executive offices)

 

(518) 512-2000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Yes    x   No    ¨

 

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

 

Yes    x   No    ¨

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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 April 30, 2017  
Common Stock, $.01 par value  

42,931,772 excluding treasury shares of 5,677,839

 

 

 

 

 

ALBANY MOLECULAR RESEARCH, INC.

INDEX

 

Part I. Financial Information 3
       
  Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
       
    Condensed Consolidated Statements of Operations 3
    Condensed Consolidated Statements of Comprehensive Loss 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 23
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
       
  Item 4. Controls and Procedures 30
       
Part II. Other Information 31
       
  Item 1. Legal Proceedings 31
       
  Item 1A. Risk Factors 31
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
       
  Item 6. Exhibits 33
       
Signatures   34
       
Exhibit Index    

 

 2 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.       Condensed Consolidated Financial Statements (Unaudited)

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three Months Ended March 31, 
(Dollars in thousands, except for per share data)  2017   2016 
         
Contract revenue  $160,225   $102,838 
Recurring royalties   3,597    2,741 
Total revenue   163,822    105,579 
           
Cost of contract revenue   122,778    79,363 
Research and development   3,374    3,168 
Selling, general and administrative   33,430    24,600 
Restructuring and other charges   2,159    2,600 
Total operating expenses   161,741    109,731 
           
Income (loss) from operations   2,081    (4,152)
           
Interest expense, net   (12,830)   (7,136)
Other expense, net   (793)   (997)
           
Loss before income tax benefit   (11,542)   (12,285)
           
Income tax benefit   (850)   (2,218)
           
Net loss  $(10,692)  $(10,067)
           
Basic and diluted loss per share  $(0.25)  $(0.29)

 

See notes to unaudited Condensed Consolidated Financial Statements.

 

 3 

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

 

   Three Months Ended March 31, 
(Dollars in thousands)  2017   2016 
         
Net loss  $(10,692)  $(10,067)
Foreign currency translation gain   7,287    5,794 
Net actuarial gain on pension and postretirement benefits   118    115 
Total comprehensive loss  $(3,287)  $(4,158)

 

See notes to unaudited Condensed Consolidated Financial Statements.

 

 4 

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited) 

 

   March 31,   December 31, 
(Dollars in thousands, except for per share data)  2017   2016 
Assets          
Current assets:          
Cash and cash equivalents  $35,193   $52,000 
Restricted cash   243    236 
Accounts receivable, net   139,705    144,795 
Royalty income receivable   5,236    3,486 
Inventory   174,043    167,111 
Prepaid expenses and other current assets   26,626    22,109 
Income taxes receivable   2,943    2,026 
Property and equipment held for sale   1,161    1,148 
Total current assets   385,150    392,911 
           
Property and equipment, net   360,282    364,806 
Notes hedges   18,535    51,003 
Goodwill   230,886    231,256 
Intangible assets, exluding goodwill, net   164,162    165,174 
Deferred income taxes   523    504 
Other assets   3,991    3,994 
Total assets  $1,163,529   $1,209,648 
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable and accrued expenses  $108,894   $122,210 
Deferred revenue   19,516    13,370 
Income taxes payable   3,627    2,826 
Accrued pension benefits   769    680 
Short-term borrowings   20,844    22,515 
Current installments of long-term debt   13,362    13,917 
Total current liabilities   167,012    175,518 
Long-term liabilities:          
Long-term debt, excluding current installments, net   607,246    604,476 
Notes conversion derivative   18,535    51,003 
Income taxes payable   3,894    3,769 
Pension and postretirement benefits   17,993    18,615 
Deferred income taxes   36,505    40,058 
Other long-term liabilities   15,545    17,227 
Total liabilities   866,730    910,666 
           
Commitments and contingencies          
           
Stockholders' equity:          
Preferred stock, $0.01 par value, authorized 2,000 shares, none issued or oustanding   -    - 
Common stock, $0.01 par value, authorized 100,000 shares, 48,609 shares issued as of March 31, 2017 and 48,465 shares issued as of December 31, 2016   486    485 
Additional paid-in capital   403,482    400,496 
(Accumulated deficit) retained earnings   (3,532)   7,160 
Accumulated other comprehensive loss, net   (32,325)   (39,730)
    368,111    368,411 
Less, treasury shares at cost, 5,677 shares as of March 31, 2017 and 5,573 shares as of December 31, 2016   (71,312)   (69,429)
Total stockholders’ equity   296,799    298,982 
Total liabilities and stockholders’ equity  $1,163,529   $1,209,648 

 

See notes to unaudited Condensed Consolidated Financial Statements. 

 

 5 

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   Three Months Ended March 31, 
(Dollars in thousands)  2017   2016 
         
Operating activities          
Net loss  $(10,692)  $(10,067)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation and intangible asset amortization   16,857    8,524 
Deferred financing costs amortization   1,959    969 
Accretion of discount on long-term debt   3,104    1,814 
Deferred income taxes   290    2,258 
Loss (gain) on disposal of property and equipment   19    (3)
Allowance for bad debts   522    (11)
Share-based compensation expense   2,355    2,146 
Changes in operating assets and liabilities that provide (use) cash, net of impact of business combinations:          
Accounts receivable   5,892    15,484 
Royalty income receivable   (1,720)   708 
Inventory   (5,296)   (3,149)
Prepaid expenses and other assets   (4,164)   (5,825)
Accounts payable and accrued expenses   (16,511)   2,649 
Income taxes   (2,141)   (2,690)
Deferred revenue   6,000    (1,171)
Pension and postretirement benefits   (541)   (39)
Other long-term liabilities   (2,343)   101 
Net cash (used in) provided by operating activities   (6,410)   11,698 
           
Investing activities          
Purchases of property and equipment   (3,949)   (11,629)
Payments for patent applications and other costs   (113)   (103)
Proceeds from disposal of property and equipment   -    13 
Net cash used in investing activities   (4,062)   (11,719)
           
Financing activities          
Issuance of short-term borrowings   28,066    - 
Principal payments on short-term borrowings   (30,080)   - 
Principal payments on long-term debt   (3,965)   (5,805)
Change in restricted cash   (7)   (34)
Proceeds from exercise of options and Employee Stock Purchase Plan   632    620 
Purchases of treasury stock   (1,883)   (714)
Net cash used by financing activities   (7,237)   (5,933)
           
Effect of exchange rate changes on cash and cash equivalents   902    804 
           
Decrease in cash and cash equivalents   (16,807)   (5,150)
           
Cash and cash equivalents at beginning of period   52,000    49,343 
           
Cash and cash equivalents at end of period  $35,193   $44,193 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $7,288   $3,526 
Income taxes, net  $892   $226 

 

See notes to unaudited Condensed Consolidated Financial Statements. 

 

 6 

 

 

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

 

Note 1 — Summary of Operations and Significant Accounting Policies

 

Nature of Business and Operations

 

Albany Molecular Research, Inc. (the “Company”) is a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. The Company supplies a broad range of services and technologies supporting the discovery and development of pharmaceutical products (“DDS”), the manufacture of fine chemicals (“FC”) and Active Pharmaceutical Ingredients (“API”), the development and manufacture of drug product (“DP”) for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. In addition, the Company offers analytical and testing services to customers in the medical device and personal care industries. With locations in the United States, Europe, and Asia, the Company maintains geographic proximity to its customers and flexible cost models.

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited Condensed Consolidated Financial Statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for any other period or for the year ending December 31, 2017. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries as of and for the three months ended March 31, 2017. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in the unaudited Condensed Consolidated Statements of Comprehensive Loss and in ‘Accumulated other comprehensive loss, net’ in the accompanying unaudited Condensed Consolidated Balance Sheets. When necessary, balances of prior period 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 the assumptions regarding the Company’s accounting for business combinations, goodwill impairment assessment, valuation of inventory, intangible assets and long-lived assets, and the amount and realizability of deferred tax assets. Other significant estimates include assumptions utilized in determining actuarial obligations in conjunction with the Company’s pension and postretirement health plans, assumptions utilized in determining share-based compensation, environmental remediation liabilities, as well as those utilized in determining the value of both the notes hedges and the notes conversion derivative and the assumptions related to the collectability of trade 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 approved by the applicable regulatory agencies for commercial sale. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated based on relative fair value across the components of the arrangement. If separate selling prices are not available, the Company will use its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant market factors.

 

 7 

 

 

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

 

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

 

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

 

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

 

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

 

Recurring Royalty

 

The Company currently receives royalties in conjunction with a Development and Supply Agreement with Teva Pharmaceuticals (“Teva”). These royalties are earned on net sales of generic products sold by Teva. The Company records royalty revenue in the period in which the net sales of these generic products occur. Royalty payments from Teva are due within 60 days after each calendar quarter and are determined based on sales of the qualifying products in that quarter. The Company also receives royalties on certain other products, and royalty revenue is generally estimated and recognized when the sales of product occur.

 

Collaboration Arrangement Revenues:

 

The Company enters into collaboration arrangements with third parties for the development and manufacture of certain products and/or product candidates. These arrangements may include non-refundable, upfront payments, milestone payments and cost sharing arrangements during the development stage, payments for manufacturing based on a cost plus an agreed percentage, as well as profit sharing payments during the product’s commercial stage.

 

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

 

Cash, Cash Equivalents and Restricted Cash

 

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

 

 8 

 

 

Restricted cash balances at March 31, 2017 and December 31, 2016 are required pursuant to the Company’s Singapore lease agreements.

 

Long-Lived Assets

 

The Company assesses the impairment of a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, among others, the following:

 

·a significant change in the extent or manner in which a long-lived asset group is being used;

 

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

 

·a significant decrease in the market value of assets.

 

If the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of the long-lived assets.

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivatives in accordance with FASB ASC Topic 815, “Derivatives and Hedging,” which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value. Additionally, changes in a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met. The Company recognizes changes in fair value associated with non-qualified derivatives in ‘Other (expense) income, net’ in the Condensed Consolidated Statements of Operations. If required hedge accounting criteria are met, then changes in fair value are recorded in accumulative other comprehensive loss, net.

 

Recent Accounting Pronouncements:

 

Accounting Pronouncements Issued But Not Yet Adopted

 

In March 2017, the FASB issued Accounting Standard Update (“ASU”) 2017-07, "Compensation-Retirement Benefits", which requires the service cost component of net benefit costs be reported with other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented separately from the service cost component and outside of income from operations. This amendment also allows only the service cost component to be eligible for capitalization when applicable. The ASU is effective for interim and annual periods beginning after December 15, 2017. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

 

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard addresses the classification of certain transactions within the statement of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investments. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

 9 

 

 

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: (Topic 606)." This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of ASC Topic 360, "Property, Plant, and Equipment," and intangible assets within the scope of ASC Topic 350, "Intangibles-Goodwill and Other") are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for calendar years beginning after December 15, 2017. Early adoption is not permitted. The Company has begun to evaluate the impact of this new standard on its consolidated financial statements, information technology ("IT") systems, policies and business processes and controls. The Company has developed an implementation plan to adopt this new guidance including determining the method of adoption. As part of this plan, the Company is currently reviewing customer contract provisions for all of its revenue streams and assessing the potential impact this standard will have on the consolidated financial statements and related disclosures. Based on the Company’s assessment procedures performed to date, it is currently unable to estimate the impact this standard will have on the consolidated financial statements; however, the Company anticipates that the adoption of the new standard may require it to make changes to its business processes and controls.

 

Accounting Pronouncements Recently Adopted

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted for certain transactions. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on its consolidated financial statements.

 

Note 2 — Earnings Per Share

 

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

 

   Three Months Ended March 31, 
   2017   2016 
           
Weighted average common shares outstanding – basic and diluted   42,385    34,718 

 

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 months ended March 31, 2017 and 2016 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents outstanding (before the effects of the treasury stock method) was 11,579 and 11,703 for the three months ended March 31, 2017 and 2016, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

Note 3 — Business Acquisitions

 

On July 11, 2016, the Company purchased from Lauro Cinquantasette S.p.A. all of the capital stock of Prime European Therapeuticals S.p.A. (“Euticals”) (the “Euticals Acquisition”), a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and the manufacture of active pharmaceutical ingredients with a network of facilities located in Italy, Germany, the U.S. and France. The Euticals operations have been assigned to the API, DDS and FC segments based on the activities performed and markets served at each location.

 

 10 

 

 

The aggregate net purchase price was $277,067 (net of cash acquired of $20,784), which consisted of (i) the issuance of 7,051 unregistered shares of common stock subject to a six month lock-up provision, valued at $91,765 (net of lock-up provision discount of $9,633), (ii) the issuance of two unsecured promissory notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, or $60,783, that were valued at $44,342 (net of an original issue discount of $16,441) (the “Euticals Seller Notes”), and (iii) $140,960 in cash, net of a final working capital adjustment of $2,309.

 

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

 

   July 11, 
   2016 
Assets Acquired     
Accounts receivable  $30,977 
Prepaid expenses and other current assets   4,492 
Inventory   103,895 
Income taxes receivable   205 
Property and equipment   159,924 
Intangible assets   59,457 
Goodwill   65,036 
Other long term-assets   713 
Total assets acquired  $424,699 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $61,011 
Short-term borrowings   27,362 
Deferred revenue   3,399 
Deferred income taxes   29,422 
Pension benefits   13,201 
Environmental liabilities   11,716 
Other long-term liabilities   1,521 
Total liabilities assumed   147,632 
Net assets acquired  $277,067 

 

The purchase price allocation was adjusted in the first quarter of 2017 due to the recognition of income tax receivables of $16 and deferred tax assets of $2,312. These adjustments resulted in a net decrease of goodwill of $2,328. The Company does not expect any further significant adjustments to the purchase price allocation.

 

The Company has attributed the goodwill of $65,036 to an expanded global footprint and additional market opportunities that the Euticals’ business offers within the API and DDS segments. The goodwill is not deductible for tax purposes. Intangible assets acquired consist of customer relationships of $7,073, with an estimated life of 9 years, developed technology of $44,648, with an estimated life of 16 years, and manufacturing intellectual property and know-how of $7,736, with an estimated life of 18 years.

 

Pro forma Information (Unaudited)

 

The following table shows the unaudited pro forma statements of operations for the three months ended March 31, 2016, as if the Euticals Acquisition had occurred on January 1, 2015. 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.

 

   Three months ended 
   March 31, 2016 
     
Total revenue  $162,124 
Net loss  $(17,222)
Pro forma shares - basic and diluted   41,769 
Loss per share:     
Basic and diluted  $(0.41)

 

 11 

 

 

The following table shows the pro forma adjustments made to the weighted average shares outstanding for the three months ended March 31, 2016:

 

   Three months ended 
   March 31, 2016 
Weighted average common shares outstanding - basic and diluted   34,718 
Pro forma impact of acquisition consideration   7,051 
Pro forma weighted average shares - basic and diluted   41,769 

 

For the three-month period ended March 31, 2016, pre-tax net income was adjusted by reducing expenses by $1,363 for acquisition-related costs and increasing expenses by $2,796 for purchase accounting related depreciation and amortization.

 

The Company partially funded the Euticals Acquisition utilizing the proceeds from a $230,000 term loan that was provided for in conjunction with the Third Amended and Restated Credit Agreement, entered into with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto (the “Third Restated Credit Agreement”), which was completed on July 7, 2016, along with the issuance of the Euticals Seller Notes on July 11, 2016 (see Note 5). The Company did not have sufficient cash on hand to complete the acquisition as of January 1, 2015. For the purposes of presenting the pro forma statements of operations for the three months ended March 31, 2016, the Company has assumed that it entered into the Third Restated Credit Agreement and issued the Euticals Seller Notes on January 1, 2015 for an amount sufficient to fund the preliminary cash consideration to acquire Euticals as of that date. The pro forma statement of operations for the three months ended March 31, 2016 reflects the recognition of interest expense that would have been incurred had the Third Restated Credit Agreement and the Euticals Seller Notes been entered into and issued, respectively, on January 1, 2015. The Company has recorded $3,841 of pro forma interest expense on the Third Restated Credit Agreement and the Euticals Seller Notes for the purposes of presenting the pro forma statements of operations for the three months ended March 31, 2016.

 

A portion of Euticals’ debt was paid by the Company at the closing of the Euticals Acquisition. For the purposes of presenting the pro forma statement of operations for the three months ended March 31, 2016, the Company has reduced expenses by $1,623 assuming the debt and accrued interest were paid on January 1, 2015.

 

Note 4 — Inventory

 

Inventory consisted of the following as of March 31, 2017 and December 31, 2016:

 

   March 31,   December 31, 
   2017   2016(a) 
         
Raw materials  $59,100   $57,071 
Work-in-process   57,562    57,808 
Finished goods   57,381    52,232 
Total inventory  $174,043   $167,111 

 

(a)Certain adjustments have been made to December 31, 2016 inventory classifications to conform to current year presentation.

 

Note 5 — Debt

 

Short-Term Borrowings

 

In connection with the Euticals Acquisition, the Company assumed the short-term borrowing obligations of Euticals, consisting of multiple bank revolving lines of credit with a maximum borrowing capacity of €42,050, or $44,919, at March 31, 2017 (the “Euticals Revolving Credit Facilities”). The Euticals Revolving Credit Facilities support Euticals’ short-term working capital needs and are collateralized, in part, by certain Euticals’ trade receivables balances. The Euticals Revolving Credit Facilities are subject to variable interest rates and the average effective interest rate was 3.75% during the three months ended March 31, 2017.

 

As of March 31, 2017, the aggregate outstanding balance under the Euticals Revolving Credit Facilities was $20,844 and the related trade receivables collateral was $13,212.

 

Long-Term Debt

 

The following table summarizes long-term debt:

 

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   March 31,   December 31, 
   2017   2016 
         
Convertible senior notes, net of unamortized discount  $137,414   $135,652 
Term loan, net of unamortized discount   423,071    423,698 
Euticals Seller Notes, net of unamortized discount   45,514    43,947 
Various borrowings with institutions, Gadea loans   23,425    25,784 
Capital leases – equipment & other   1,176    1,263 
    630,600    630,344 
Less: deferred financing fees   (9,992)   (11,951)
Less: current portion   (13,362)   (13,917)
Total long-term debt, excluding current portion  $607,246   $604,476 

 

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $28,016 at March 31, 2017, are as follows:

 

2017 (remaining)  $10,082 
2018   580,491 
2019   25,469 
2020   21,705 
2021   20,196 
Thereafter   673 
Total  $658,616 

 

Term Loans

 

In connection with the Euticals Acquisition, on July 7, 2016, the Company entered into the Third Restated Credit Agreement, which (i) provided incremental senior secured first lien term loans in an aggregate principal amount of $230,000 (the “Incremental Term Loans”) which increased the aggregate principal amount of senior secured first lien term loans under the prior credit agreement to $428,500, and (ii) increased the first lien revolving credit facility commitments by $5,000 to $35,000. The Company used the proceeds of the Incremental Term Loans primarily to: (i) pay a portion of the cash consideration for the Euticals Acquisition; (ii) pay various fees and expenses incurred in connection with the Euticals Acquisition and related financing activities; and (iii) repay the $30,000 outstanding under the first lien revolving credit facility.

 

The Third Restated Credit Agreement requires that we make quarterly repayments of $600 toward the Incremental Term Loans principal beginning on September 30, 2016. All remaining unpaid principal amounts of the Incremental Term Loans will mature and become payable on July 16, 2021 and the revolving credit facility commitments under the Third Restated Credit Agreement terminate and all amounts then outstanding thereunder are payable on July 16, 2020, subject, in each case, to earlier acceleration, on (i) the date that is six months prior to the scheduled maturity date of our 2.25% Cash Convertible Senior Notes issued on December 4, 2013 (the “Notes”) if on such date, both (x) more than $25,000 of the Notes shall remain outstanding and (y) the ratio of the secured debt of the Company and its subsidiaries to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00, or (ii) April 7, 2019, April 7, 2020 or April 7, 2021, respectively, in each case to the extent that at any such date we have not (x) prepaid or otherwise satisfied the amortization or final maturity payment amounts to next come due under each Euticals Seller Note then outstanding or (y) refinanced such amortization or final maturity payment amount to next come due under each Euticals Seller Note then outstanding in a manner permitted by the Third Restated Credit Agreement.

 

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

 

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

 

The face value of the term loans reconciles to the net carrying amount as follows:

 

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   March 31,   December 31, 
   2017   2016 
         
Principal amount - term loan  $425,262   $426,341 
           
Unamortized debt discount   (2,191)   (2,643)
           
Net carrying amount of term loan  $423,071   $423,698 

 

For the three months ended March 31, 2017 and 2016, the Company recognized $452 and $171, respectively, of amortization of the debt discount as interest expense based upon the effective rate of approximately 6.2%.

 

Euticals Seller Notes

 

As indicated in Note 3, in connection with the Euticals Acquisition, on July 11, 2016, the Company issued two notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, that were valued at $44,342 (net of original issue discount of $16,441). The Euticals Seller Notes are unsecured promissory notes, guaranteed by the Company, and are subject to customary representations and warranties and events of default with repayment to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the Euticals Acquisition closing date. The repayment is subject to certain set off rights of the Company relating to the seller’s indemnification obligations. The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which is due and payable in cash on the first day of January, April, July and October during each calendar year. The Euticals Seller Notes were recognized net of an original issue discount of $16,441. For the three months ended March 31, 2017, the Company recorded $889 of amortization of the debt discount as interest expense based upon an effective rate of 8.32%.

 

The face value of the Euticals Seller Notes reconciles to the net carrying amount as follows:

 

   March 31,   December 31, 
   2017   2016 
         
Principal amount - Euticals Seller Notes  $58,753   $57,862 
           
Unamortized debt discount   (13,239)   (13,915)
           
Net carrying amount of Euticals Seller Notes  $45,514   $43,947 

 

Convertible Senior Notes

 

On December 4, 2013, the Company completed the private offering of $150,000 aggregate principal amount of the Notes. The Notes mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date, and interest is paid in arrears semiannually on each of 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 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 upon certain 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.

 

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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 815, “Derivatives and Hedging,” and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the three months ended March 31, 2017 and 2016, the Company recorded $1,762 and $1,644, respectively, of amortization of the debt discount as interest expense based upon an effective rate of 7.69%.

 

The fair value of the Notes reconciles to the net carrying amount as follows:

 

   March 31,   December 31, 
   2017   2016 
Principal amount  $150,000   $150,000 
           
Unamortized debt discount   (12,586)   (14,348)
           
Net carrying amount of Notes  $137,414   $135,652 

 

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

 

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

 

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

 

Neither the Notes Conversion Derivative nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized immediately in the statement of operations. During the three months ended March 31, 2017 and 2016, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal and offsetting; therefore the net impact recognized in the statement of operations was zero.

 

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

 

   March 31,   December 31, 
   2017   2016 
Notes hedges asset  $18,535   $51,003 
           
Notes conversion derivative liability  $(18,535)  $(51,003)

 

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The change in fair value from December 31, 2016 to March 31, 2017 is primarily the result of the decrease in the Company’s stock price at March 31, 2017 as compared to December 31, 2016.

 

Note 6 — Restructuring and Other Charges

 

In August 2016, the Company announced a restructuring plan in connection with the Euticals Acquisition. Under the restructuring plan, the Company initiated a reduction in workforce in the U.S. and Europe and ceased operations in one location in Italy.  During the three months ended March 31, 2017, the Company recorded approximately $1,502 in expense related to this initiative primarily for lease termination charges for one site in Italy and $298 for employee termination benefits. The Company also recorded approximately $149 in employee termination benefits and $180 of other costs associated with other previously announced restructuring initiatives.

 

The following table displays the restructuring activity and liability balances for the three month period ended and as of March 31, 2017:

 

               Foreign     
               Currency     
   Balance at           Translation &   Balance at 
   January 1,   Charges/   Amounts   Other   March 31, 
   2017   (reversals)   Paid   Adjustments   2017 
                     
Termination benefits and personnel realignment  $4,471   $447   $(2,610)  $(6)  $2,302 
Lease termination and relocation charges   143    1,550    (35)   219    1,877 
Other   -    162    (113)   (49)   - 
Total  $4,614   $2,159   $(2,758)  $164   $4,179 

 

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 and other charges’ in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 and the restructuring liabilities are included in ‘Accounts payable and accrued expenses’ and ‘Other long-term liabilities’ on the Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016.

 

Anticipated cash outflow for the remainder of 2017 related to the above restructuring liabilities as of March 31, 2017 is approximately $4,179.

 

As a result of a prior restructuring initiative to close the Holywell, U.K. site, the Company is currently marketing its Holywell, U.K. facility for sale. The facility is an asset of the API operating segment and is classified as held for sale with the long-lived assets segregated to a separate line on the Condensed Consolidated Balance Sheets until it is sold. Depreciation expense on the facility has ceased. The carrying value of the facility is $1,161 at March 31, 2017.

  

Note 7 — Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the three months ended March 31, 2017 were as follows:

 

   DDS   API   DP   Total 
Balance as of December 31, 2016  $52,045   $104,556   $74,655   $231,256 
Measurement period adjustment   19    (2,347)   -    (2,328)
Foreign exchange translation   91    1,445    422    1,958 
Balance as of March 31, 2017  $52,155   $103,654   $75,077   $230,886 

 

The components of intangible assets are as follows:

 

 16 

 

 

               Foreign        
           Accumulated   Exchange       Amortization
   Cost   Impairment   Amortization   Translation   Net   Period
March 31, 2017                            
Intellectual Property and Know-How  $28,570   $(2,709)  $(5,026)  $(1,028)  $19,807   2-18 years
Customer Relationships   93,847    -    (12,166)   (1,294)   80,387   5-20 years
Product Portfolio   44,649    -    (1,929)   (1,469)   41,251   16 years
In-Process Research and Development   18,000    -    -    (539)   17,461   indefinite
Tradename   4,100    -    -    (123)   3,977   indefinite
Trademarks   2,272    -    (993)   -    1,279   5 years
Order Backlog   200    -    (204)   4    -   n/a
Total  $191,638   $(2,709)  $(20,318)  $(4,449)  $164,162    

 

               Foreign        
           Accumulated   Exchange       Amortization
   Cost   Impairment   Amortization   Translation   Net   Period
December 31, 2016                            
Intellectual Property and Know-How  $28,457   $(2,709)  $(4,639)  $(1,295)  $19,814   2-18 years
Customer Relationships   93,847    -    (10,522)   (1,748)   81,577   5-20 years
Product Portfolio   44,649    -    (1,253)   (2,105)   41,291   16 years
In-Process Research and Development   18,000    -    -    (804)   17,196   indefinite
Tradename   4,100    -    -    (183)   3,917   indefinite
Trademarks   2,272    -    (893)   -    1,379   5 years
Order Backlog   200    -    (204)   4    -   n/a
Total  $191,525   $(2,709)  $(17,511)  $(6,131)  $165,174    

 

Amortization expense related to intangible assets was $2,823 and $1,942 for the three months ended March 31, 2017 and 2016, respectively. The weighted average amortization period is 12.71 years.

 

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

 

Year ending December 31,     
2017 (remaining)  $8,423 
2018   11,690 
2019   11,689 
2020   11,689 
2021   11,689 
Thereafter   87,544 
Total  $142,724 

 

Note 8 — Share-Based Compensation

 

During the three months ended March 31, 2017 and 2016, the Company recognized total share based compensation cost of $2,355 and $2,146, respectively.

 

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

 

Restricted Stock

 

A summary of unvested restricted stock activity during the three months ended March 31, 2017 is presented below:

 

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       Weighted 
       Average Grant Date 
   Number of   Fair Value Per 
   Shares   Share 
Outstanding, January 1, 2017    1,254   $ 14.01 
Granted   444   $19.31 
Vested   (349)  $11.89 
Forfeited   (22)  $16.75 
Outstanding, March 31, 2017   1,327   $16.33 

 

As of March 31, 2017, there was $18,561 of total unrecognized compensation cost related to unvested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.91 years. Of the 1,327 shares outstanding, 175 shares of restricted stock outstanding have market-based vesting provisions. The grant date fair value assumptions for these shares contain a vesting probability factor to reflect the Company’s expectation that not all shares will vest. Of the remaining 1,152 shares of restricted stock outstanding, the Company currently expects all shares to vest.

 

Stock Options

 

The per share weighted-average fair value of stock options granted is determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

   For the Three Months
Ended March 31,
 
   2017   2016 
Expected life in years   5    5 
Interest rate   1.81%   1.25%
Volatility   44%   42%
Dividend yield   -    - 

 

A summary of stock option activity during the three months ended March 31, 2017 is presented below:

 

       Weighted   Weighted Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual Term   Intrinsic 
   Shares   Price Per Share   (Years)   Value 
Outstanding, January 1, 2017   1,578   $9.93           
Granted   540   $18.41           
Exercised   (9)  $2.29           
Forfeited   -   $-           
Expired   -   $-           
Outstanding, March 31, 2017   2,109   $12.13    7.14   $7,614 
Options exercisable, March 31, 2017   1,183   $8.64    5.63   $6,999 

 

The weighted average fair value of stock options granted for the three months ended March 31, 2017 and 2016 was $7.49 and $5.98, respectively. As of March 31, 2017, there was $5,717 of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 3.28 years. Of the 2,109 stock options outstanding, we currently expect all options to vest.

 

Employee Stock Purchase Plan

 

During the three months ended March 31, 2017 and 2016, 53 and 37 shares, respectively, were issued under the Company’s ESPP.

 

During the three months ended March 31, 2017 and 2016, cash received from stock option exercises and employee stock purchases under the ESPP was $632 and $620, respectively. The excess tax benefit realized for the tax deductions from share-based compensation was $0 for both the three months ended March 31, 2017 and 2016, respectively.

 

 18 

 

 

Note 9 — Business Segments

 

The Company organizes its operations into the DDS, API, DP and FC segments. The API segment provides pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. The DP segment provides pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations. The DDS segment provides activities such as drug lead discovery, optimization, drug development and small and medium scale commercial manufacturing. The FC segment provides lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

 

The following table contains earnings data by operating segment, reconciled to totals included in the unaudited Condensed Consolidated Financial Statements:

 

           Income     
       Recurring   (Loss)   Depreciation 
   Contract   Royalty   from   and 
   Revenue   Revenue   Operations   Amortization 
For the three months ended March 31, 2017                    
API  $103,364   $2,765   $12,569   $11,589 
DDS   29,167    -    4,475    1,963 
DP   22,534    832    860    2,060 
FC   5,160    -    (5)   552 
Corporate   -    -    (15,818)   693 
Total  $160,225   $3,597   $2,081   $16,857 

 

           Income     
       Recurring   (Loss)   Depreciation 
   Contract   Royalty   from   and 
   Revenue (a)   Revenue   Operations (b)   Amortization (b) 
For the three months ended March 31, 2016                    
API  $54,369   $2,741   $8,479   $3,109 
DDS   23,536    -    1,455    3,180 
DP   24,933    -    329    1,821 
Corporate   -    -    (14,415)   414 
Total  $102,838   $2,741   $(4,152)  $8,524 

 

(a)A portion of the 2016 amounts were reclassified between API and DDS to better align business activities within the Company’s reporting segments and conform to current year presentation.
(b)A portion of the 2016 amounts were reclassified between Corporate, API, DDS and DP to better align business activities within the Company’s reporting segments and conform to current year presentation.

 

The following table summarizes other information by segment as of and for the three-month period ended March 31, 2017:

 

   API   DDS   DP   FC   Corporate   Total 
Long-lived assets  $419,816   $116,598   $166,086   $23,504   $29,326   $755,330 
Goodwill included in total assets  $103,654   $52,155   $75,077   $-   $-   $230,886 
Total assets  $704,846   $163,487   $207,966   $37,100   $50,130   $1,163,529 
Investments in unconsolidated affiliates  $-   $-   $-   $-   $956   $956 
Capital expenditures  $2,175   $655   $918   $5   $196   $3,949 

 

The following table summarizes other information by segment as of December 31, 2016 and capital expenditures for the three-month period ended March 31, 2016:

 

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   API   DDS   DP   FC   Corporate   Total 
Long-lived assets  $425,207   $117,174   $165,781   $23,958   $29,116   $761,236 
Goodwill included in total assets  $104,556   $52,045   $74,655   $-   $-   $231,256 
Total assets  $706,838   $172,408   $209,689   $38,444   $82,269   $1,209,648 
Investments in unconsolidated affiliates  $-   $-   $-   $-   $956   $956 
Capital expenditures (three months ended March 31, 2016)  $4,194   $4,278   $857   $-   $2,300   $11,629 

 

Note 10 — Financial Information by Customer Concentration and Geographic Area

 

Total percentages of contract revenues by each segment’s three largest customers for the three months ended March 31, 2017 and 2016 are indicated in the following table:

 

    For the Three Months Ended March 31,  
    2017   2016  
           
API   12%, 9%, 7%   18%, 10%, 8%  
DDS   6%, 5%, 4%   11%, 4%, 3%  
DP   9%, 7%, 7%   13%, 13%, 6%  
FC   39%, 11%, 10%   -  

 

Total contract revenue from GE Healthcare (“GE”), the Company’s largest customer, represented 8% and 9% of total contract revenue for the three months ended March 31, 2017 and 2016, respectively.

 

Contract revenue by geographic region, based on the location of the customer, and expressed as a percentage of total contract revenue follows:

 

   For the Three Months Ended March 31, 
   2017   2016 
         
United States   61%   62%
Europe   25    29 
Asia   10    5 
Other   4    4 
Total   100%   100%

 

Long-lived assets by geographic region are as follows:

 

   March 31,   December 31, 
   2017   2016 
United States  $355,206   $357,711 
Asia   14,699    14,195 
Europe   385,425    389,330 
Total long-lived assets  $755,330   $761,236 

 

Note 11 — Fair Value of Financial Instruments

 

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

 

These tiers include:  

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

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

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

 

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

 

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

 

Convertible senior notes, derivatives and hedging instruments: The fair value of the Company’s Notes, which differ from their carrying value, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs. The estimated fair value of the Notes at March 31, 2017 was $162.527. The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.

 

Interest rate swaps: At March 31, 2017, the Company remained contracted under a derivative financial instrument to reduce the impact of fluctuations in variable interest rates on a loan that a financial institution granted in February 2015, which is a level 2 input. The estimated fair value of the swap at March 31, 2017 was a liability of $35. The Company hedges the interest rate risk of the initial amount of the aforementioned bank loan through an interest rate swap. In this arrangement, the interest rates are exchanged so that the Company receives from the financial institution a variable rate of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal amount (0.3%). The variable interest rate received for the derivative offsets the interest payment on the hedged transaction, with the end result being a fixed interest payment on the hedged financing. At March 31, 2017, the derivative financial instrument had not been designated as a hedging instrument.

 

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

 

            Contract   Interest    
    Nominal Amount   Contract   Date   Rate   Interest Rate
Instrument   at March 31, 2017   Date   Expiration   Payable   Receivable
Interest rate swap   $ 4,419   February 19, 2015   February 19, 2020   3-month Euribor   Fixed rate of 0.30%

 

Long-term debt, other than convertible senior notes:  The carrying value of long-term debt approximated fair value at March 31, 2017 due to the resetting dates of the variable interest rates.

 

Nonrecurring Measurements:

The Company has assets, including intangible assets, property and equipment, and equity method investments which are not required to be carried at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.

 

The fair values of these assets are then determined by the application of a discounted cash flow model using Level 3 inputs. Cash flows are determined based on Company estimates of future operating results, and estimates of market participant weighted average costs of capital (“WACC”) are used as a basis for determining the discount rates to apply to the future expected cash flows, adjusted for the risks and uncertainty inherent in the Company’s internally developed forecasts. 

 

Although the fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges.

 

Note 12 — Accumulated Other Comprehensive Loss, Net

 

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

 

           Total 
           Accumulated 
   Pension and   Foreign   Other 
   postretirement   currency   Comprehensive 
   benefit plans   adjustments   Loss 
Balance at December 31, 2016, net of tax  $(5,062)  $(34,668)  $(39,730)
Net current period change, net of tax   118    7,287    7,405 
Balance as of March 31, 2017, net of tax  $(4,944)  $(27,381)  $(32,325)

 

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

 

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   Three Months Ended March 31, 
   2017   2016 
Actuarial losses before tax effect (a)  $182   $177 
Tax benefit on amounts reclassified into earnings   (64)   (62)
   $118   $115 

 

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

 

Note 13 — Collaboration Arrangements

 

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

 

The Company is obligated under these arrangements to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component of the arrangement commences during the development activities and continues through the commercial stage of each product, during which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the Company generally has the right to receive payment for all unpaid development costs incurred through the date of termination. Additionally, in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to a third party on a contract research and manufacturing basis provided that it does not use the technology developed during the collaboration arrangement. On December 8, 2016, the product Sodium Nitroprusside Injection was approved by the FDA. As a result, this product has reached commercial contract manufacturing and profit sharing stage. None of the product candidates being developed pursuant to the Company’s other collaboration arrangements have reached the contract manufacturing or commercial and profit sharing stages.

 

The Company recognizes costs as incurred during the performance of development activities and classifies these costs as ‘Research and development’ expense while any development activity revenues earned are recorded as contract revenues. Costs incurred by the Company during the performance of the contract manufacturing activities are classified as ‘Cost of contract revenue’ when the related revenue is recognized.

 

Amounts associated with these collaboration arrangements recognized during the three months ended March 31, 2017 and 2016 were as follows:

 

   For the Three Months Ended March 31, 
   2017   2016 
         
Contract revenue  $2,136   $1,269 
           
Recurring royalties revenue  $832   $- 
           
Cost of contract revenue  $464   $- 
           
R&D expense  $2,304   $2,438 

 

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

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “plans,” “intend,” “expect,” “anticipate,” “predicts,” “potential,” “believe,” and “continue” or similar words, although not all forward-looking statements contain these identifying words. Forward-looking statements include, but are not limited to, statements concerning our acquisition of Prime European Therapeuticals S.p.A and the financial impact and expected synergies of this acquisition and future acquisitions, and statements regarding the impact of government regulation, customer spending and business trends, competition, foreign operations, business growth and the expansion of the global market, management’s strategic plans, the potential for future revenue under our collaboration arrangements , research and development projects and expenses, other projected costs, long-lived asset and goodwill impairment, our ability to utilize deferred tax assets, pension and postretirement benefit costs, and tax rates.

 

Readers should not place undue reliance on these forward-looking statements. Our actual results may differ materially from such forward-looking statements as a result of numerous factors, some of which we may not be able to predict and may not be within our control. Factors that could cause such differences include, but are not limited to, changes in customers’ spending and demand and the trends in pharmaceutical and biotechnology companies’ outsourcing of manufacturing services and research and development; our ability to provide quality and timely services and to compete with other companies providing similar services; our ability to comply with strict regulatory requirements; our ability to successfully integrate past and future acquisitions and to realize the expected benefits of each; disruptions in our ability to source raw materials; a change in our relationships with our largest customers; our ability to service our indebtedness; our ability to protect our technology and proprietary information and the confidential information of our customers; our ability to develop products of commercial value under our collaboration arrangements; the risk of patent infringement and other litigation, as well as those risks discussed elsewhere in this report and in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2017. All forward-looking statements are made as of the date of this report and we do not undertake any obligation to update our forward-looking statements, except as required by applicable law

 

References to “AMRI,” the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole. The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the Notes thereto included within this report.

 

Overview

 

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

 

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

 

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

 

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

 

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

 

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

 

Backlog

 

Our backlog of open manufacturing orders and accepted service contracts was $307.8 million at March 31, 2017 as compared to $391.2 million and $201.1 million at December 31, 2016 and March 31, 2016, respectively which includes the addition of Euticals. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

 

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

 

Results of Operations – Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

 

Our total revenue for the three months ended March 31, 2017 was $163.8 million, which included $160.2 million from our contract service business and $3.6 million from royalties on sales of certain products. Our total revenue for the three months ended March 31, 2016 was $105.6 million, which included $102.8 million from our contract service business and $2.7 million from royalties on sales of certain products. Consolidated gross margin was 23.4% for the three months ended March 31, 2017 as compared to 22.8% for the three months ended March 31, 2016. Our net loss was $10.7 million during the three months ended March 31, 2017, compared to net loss of $10.1 million during the same period in 2016.

 

Operating Segment Data

 

We organize our operations into the following segments: Discovery, Development and Analytical Services (“DDS”), Active Pharmaceutical Ingredients (“API”), Drug Product (“DP”) and Fine Chemicals (“FC”). DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. DP includes pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations. FC includes lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments. We began operating our FC business following the acquisition of Euticals in July 2016, and therefore, there is no comparative information available for the first quarter of 2016.

 

Revenue

 

Total contract revenue

 

Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Contract revenue for each of our segments was as follows:

 

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   Three Months Ended March 31, 
   2017   2016 
   (in thousands) 
API (a)  $103,364   $54,369 
DDS (a)   29,167    23,536 
DP   22,534    24,933 
FC   5,160    - 
Total  $160,225   $102,838 

 

(a) A portion of the 2016 amounts were reclassified between API and DDS to better align business activities within our reporting segments and conform to current year presentation.

 

API contract revenue for the three months ended March 31, 2017 increased $49.0 million from the same period of 2016 primarily due to $43.4 million of incremental revenue from the acquisition of Euticals and $5.1 million due to strong performance at our Rensselaer facility.

 

DDS contract revenue for the three months ended March 31, 2017 increased $5.6 million from the same period in 2016, driven by growth in Discovery and, Development services. Our Albany site within Development generated incremental revenue of $2.3 million in addition to $1.4 million of revenue from the acquisition of Euticals. In Discovery, revenue increased by $1.5 million due to the Compound Library Consortium at our Hyderabad facility and $1.2 million following the launch of our Integrated Discovery Center in Buffalo, NY.

 

DP contract revenue for the three months ended March 31, 2017 decreased $2.4 million from the same period in 2016. Approximately $1.3 million of the decrease was due to planned extended maintenance activities at our Burlington, MA facility and approximately $3.0 million was due to timing of shipments in our Albuquerque NM facility, partially offset by an increase in revenue of $1.9 million from our collaboration agreements and contract manufacturing work in Spain.

  

FC contract revenue for the three months ended March 31, 2017 of $5.2 million is entirely attributable to incremental revenue from the acquisition of Euticals.

 

Recurring royalty revenue

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$3,597   $2,741 

 

We earn recurring royalty revenue pursuant to Development and Supply Agreements with Actavis and Teva and under an agreement with a customer in Spain. During the fourth quarter of 2016, we also began earning profit sharing revenue from our first commercialized collaboration arrangement product, Sodium Nitroprusside Injection, which was developed with our partner Namigen, LLC and launched by Sagent Pharmaceuticals, Inc.

 

Recurring royalties for the three months ended March 31, 2017 increased $0.9 million compared to the same period of 2016 primarily due to royalties received on sales of Sodium Nitroprusside Injection.

 

Costs and Expenses

 

Cost of contract revenue

 

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

 

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Segment  Three Months Ended March 31, 
   2017   2016 
   (in thousands) 
API (a)  $79,881   $40,666 
DDS (a)   20,974    17,261 
DP (a)   17,322    21,436 
FC   4,601    - 
Total  $122,778   $79,363 
           
API Gross Contract Margin   22.7%   25.2%
DDS Gross Contract Margin   28.1%   26.7%
DP Gross Contract Margin   23.1%   14.0%
FC Gross Contract Margin   10.8%   -%
Total Gross Contract Margin   23.4%   22.8%

 

(a)A portion of the 2016 amounts were reclassified between API, DDS, and DP to better align business activities within our reporting segments and to conform to current year presentation.

 

API Cost of Contract Revenue for the three months ended March 31, 2017 increased from the same period of 2016 by $39.2 million. The increase was primarily due to the acquisition of Euticals, which contributed $37.9 million. API Gross Contract Margin decreased by 2.5 points during the three month period ended March 31, 2017 as compared to the same period of 2016. This decrease reflects a 7.3 point decrease resulting from the lower margins of Euticals as compared to our legacy API business, partially offset by strong performance in Spain of 4.8 points.

 

DDS Cost of Contract Revenue for the three months ended March 31, 2017 increased from the same period of 2016 by $3.7 million. Approximately $2.1 million of the increase was attributable to Albany Chemical Development growth and approximately $1.2 million of the increase was attributable to the acquisition of Euticals. DDS Gross Contract Margin increased by 1.4 points during the three month period ended March 31, 2017 as compared to the same period of 2016. This increase was primarily driven by our execution on Compound Library Consortium of 2.2 points, partially offset by lower margins in Analytical Services of 0.8 points.

 

DP Cost of Contract Revenue for the three months ended March 31, 2017 decreased from the same period of 2016 by $4.1 million. Approximately $5.3 million of the decrease was attributable to lower volumes in our US facilities partially offset by strong operational execution in our Albuquerque, NM facility and higher production costs of $1.0 million associated with increased volume from our operations in Spain. DP Gross Contract Margin increased by 9.1 points during the three month period ended March 31, 2017 as compared to the same period of 2016. The increase was primarily driven by the strong operational performance at the Albuquerque, NM facility. Collaboration arrangement revenues, and fees earned under our contract manufacturing contracts also contributed to the increase in DP Gross Contract Margin.

 

FC Cost of Contract Revenue for the three months ended March 31, 2017 of $4.6 million is entirely attributable to the acquisition of Euticals.

 

Research and development

 

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

 

Our R&D activities are primarily in our API and DP segments and relate to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

 

Research and development expenses were as follows:

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$3,374   $3,168 

 

R&D expense for the three months ended March 31, 2017 increased compared to March 31, 2016 primarily due to development efforts on our collaboration arrangements in DP, partially offset by a decrease in our API spend year over year.

 

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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 March 31, 
2017   2016 
(in thousands) 
$33,430   $24,600 

 

SG&A expenses for the three months ended March 31, 2017 increased by $8.8 million compared to the same period in 2016 primarily due to incremental SG&A expenses related to Euticals and costs associated with additional investments made in key supporting functions such as corporate quality and compliance, procurement and finance, as well as in training and developing our people.

 

Restructuring and other charges

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$2,159   $2,600 

 

The total restructuring charges for the three months ended March 31, 2017 were $2.2 million, related to previously announced restructuring initiatives. Approximately, $1.5 million of the charges related to lease termination costs associated with on site located in Italy and $0.5 million related to employee termination benefits.

 

Restructuring charges for the three months ended March 31, 2016 consisted primarily of costs associated with previously determined restructuring activities commenced by management and costs associated with the transfer of continuing products from the Holywell, U.K. facility to our other manufacturing locations.

 

Interest expense, net

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$12,830   $7,136 

 

Net interest expense increased for the three months ended March 31, 2017 from the same period in 2016 primarily due to increased levels of outstanding debt used to finance our acquisition of Euticals, as well as an increase in amortization of deferred financing costs and original issue discounts related to our long-term debt. 

 

 

Other expense, net

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$793   $997 

 

Other expense, net consists primarily of gains and losses on foreign currency transactions. Other expense, net for the three months ended March 31, 2017 decreased from the same period in 2016 primarily due to the fluctuation in exchange rates associated with foreign currency transactions.

 

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Income tax benefit

 

Three Months Ended March 31, 
2017   2016 
(in thousands) 
$850   $2,218 

  

The income tax benefit for the three months ended March 31, 2017 decreased from the same period in 2016 primarily due to an increase in U.S. income tax expense as a result of recognizing the full valuation allowance on our U.S. deferred tax assets, recorded during the second quarter of 2016, and incremental income tax expense in Spain and the U.K., partially offset by tax benefits in other tax jurisdictions.

  

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. As of March 31, 2017, we had $35.2 million in cash and cash equivalents, and $679.5 in bank and other debt (at face value). Working capital, defined as current assets less current liabilities, was $218.1 million as of March 31, 2017 and relatively flat period over period as compared to $217.4 million as of December 31, 2016.

 

Cash Flows – Three Months Ended March 31, 2017

 

During the three months ended March 31, 2017, we used cash of $6.4 million in operating activities primarily due to the timing of payments attributable to severance, employee compensation and benefits and payments to vendors that were incurred and accrued as of December 31, 2016, as well as payments associated with increased inventory levels during the period. These outflows were partially offset by collections from customers during the period. We used cash of $4.1 million in investing activities primarily attributable to $3.9 million in capital expenditures. Capital expenditures were primarily related to the growth, maintenance and upgrading of our facilities, including Euticals. Cash flow used in financing activities was $7.2 million, primarily related to the principal payments of long-term debt of $4.0 million and net repayments on short-term borrowings of $2.0 million.

 

Net cash used in operating activities of $6.4 million for the three months ended March 31, 2017 reflected a net loss of $10.7 million, offset by noncash expenses of $25.1 million and cash used by changes in operating assets and liabilities of $20.8 million.

 

The noncash expenses of $25.1 million recorded in the net loss relate to depreciation and amortization of $16.9 million, accretion of debt discount on long-term debt of $3.1 million, deferred financing costs amortization of $2.0 million and share-based compensation expense of $2.4 million.

 

Cash used by changes in operating assets and liabilities of $20.8 million was driven from net cash disbursements related to accounts payable and accrued expenses for severance, employee compensation and benefits and payments to vendors of $16.5 million and a net increase in inventory of $5.3 million. Additionally, increases in prepaid expenses and other assets of $5.3 million and decreases in other long-term liabilities of $2.3 million contributed to the cash outflow from changes in operating assets and liabilities. These cash outflows were partially offset by net collections from customers related to accounts receivable of $5.9 million and customer advances classified as deferred revenue of $6.0 million.

 

Cash Flows - Three Months Ended March 31, 2016

 

During the three months ended March 31, 2016, we generated cash of $11.7 million from operating activities. We used cash of $11.7 million in investing activities primarily attributable to $11.6 million in capital expenditures. Capital expenditures were primarily related to the growth, maintenance and upgrading of our facilities. Additionally, we used cash of $5.9 million in financing activities, primarily related to $5.8 million of principal payments on long-term debt.

 

Net cash provided by operating activities of $11.7 million for the three months ended March 31, 2016 reflected a net loss of $10.1 million, offset by adjustments for noncash expenses of $15.7 million and cash provided by changes in operating assets and liabilities of $6.1 million.

 

The noncash expenses of $15.7 million recorded in the net loss primarily relate to depreciation and amortization of $8.5 million, accretion of debt discount on long-term debt of $1.8 million, deferred income tax expense of $1.8 million and share-based compensation expense of $2.2 million.

 

Cash provided by changes in operating assets and liabilities of $6.1 million was driven primarily from net cash collections from customers related to accounts receivable of $15.5 million.

 

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Long-Term Debt and Other Obligations

 

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, 2016.

 

As disclosed in Note 5 of the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2017 and as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, we have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, we may fail to meet our current credit facility’s financial covenants and we may incur additional indebtedness in the future, which could each adversely affect our business, financial condition and results of operations. Additionally, our cash convertible Senior Notes (the “Senior Notes”) comes due in 2018 and we may not have sufficient cash on hand to repay these notes. If we are unable to pay the principal on our Senior Notes, we may need to incur additional debt or issue additional securities to generate funds to cover these payments. In addition, in the event of a default under the Senior Notes, the holders and/or the trustee under the indenture governing the Senior Notes may accelerate the payment obligations thereunder, which could have a material adverse effect on our business, financial condition and results of operations. Moreover, amounts outstanding under our term loan and revolving credit facility could become due and payable on an accelerated basis under certain conditions and in certain circumstances.

 

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 Third Amended and Restated Credit Agreement 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.

 

As of March 31, 2017, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

Critical Accounting Policies and Estimates

 

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

 

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes or modifications to the policies since December 31, 2016.

 

Recently Issued Accounting Pronouncements

 

Refer to Note 1 to the unaudited Condensed Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes during the three months ended March 31, 2017 with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

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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.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material changes to the Legal Proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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, 2016. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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

 

The following table represents share repurchases during the three months ended March 31, 2017:

 

Issuer Purchases of Equity Securities

 

           (c)  (d)
           Total Number  Approximate
           of Shares  Dollar Value of
           Purchased as  Shares that
   (a)   (b)   Part of Publicly  May Yet Be
   Total Number   Average Price   Announced  Purchased
   of Shares   Paid Per   Plans or  Under the Plans or
Period  Purchased (1)   Share   Programs  Programs
January 1, 2017 - January 31, 2017   21   $18.48   N/A  N/A
February 1, 2017 - February 28, 2017   76    18.53   N/A  N/A
March 1, 2017 - March 31, 2017   7    14.44   N/A  N/A
Total   104   $18.25   N/A  N/A

 

(1) Consists of shares repurchased by the Company to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock held by employees.

 

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Item 6.    Exhibits

 

Exhibit    
Number   Description
     
10.1   Amended Employment Agreement by and among Albany Molecular Research, Inc. and Milton Boyer dated February 8, 2017.*
     
10.2   Amended Employment Agreement by and among Albany Molecular Research, Inc. and Christopher M. Conway dated February 8, 2017.*
     
10.3   Amended Employment Agreement by and among Albany Molecular Research, Inc. and Steven R. Hagen dated February 8, 2017.*
     
10.4   Amended Employment Agreement by and among Albany Molecular Research, Inc. and Lori M. Henderson dated February 8, 2017.*
     
10.5   Amended Employment Agreement by and among Albany Molecular Research, Inc. and Felicia Ladin dated February 8, 2017.*
     
10.6   Amended Employment Agreement by and among Albany Molecular Research, Inc. and William S. Marth dated February 8, 2017.*
     
10.7   Amended Employment Agreement by and among Albany Molecular Research, Inc. and George Svokos dated February 8, 2017.*
     
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 three months ended March 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial statements.*

 

* Filed herewith.

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ALBANY MOLECULAR RESEARCH, INC.
     
     
Date: May 9, 2017 By: /s/ Felicia I. Ladin
    Felicia I. Ladin
   

On behalf of the Registrant as Senior Vice President, Chief Financial Officer and Treasurer

(and also as Principal Financial Officer)

 

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