UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number 000-23019

KENDLE INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)

Ohio		31-1274091
(State or other jurisdiction		(IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 500, Cincinnati, Ohio		45202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (513) 381-5550

(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 and 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,968,923 shares of Common Stock, no par value, as of April 29, 2011.

 

 

KENDLE INTERNATIONAL INC.
Index

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets —March 31, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2011 and 2010			4
Condensed Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended March 31, 2011 and 2010			5
Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosure About Market Risk			28
Item 4. Controls and Procedures			28
Part II. Other Information
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults upon Senior Securities			29
Item 4. Removed and Reserved			29
Item 5. Other Information			29
Item 6. Exhibits			30
Signatures			31
Exhibit Index			32
Exhibit 10.20
Exhibit 10.21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

KENDLE INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		March 31,				December 31,
(in thousands, except share data)		2011				2010
ASSETS
Current assets:
Cash and cash equivalents		$	18,521			$	21,217
Restricted cash			901				881
Accounts receivable, net			116,895				105,586
Deferred tax assets — current			7,888				7,876
Other current assets			25,994				24,665
Total current assets			170,199				160,225
Property and equipment, net			54,810				56,898
Goodwill			237,337				236,189
Other finite-lived intangible assets, net			11,053				11,808
Long-term deferred tax assets			23,935				17,929
Other assets			6,630				6,862
Total assets		$	503,964			$	489,911
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of obligations under capital leases		$	24			$	34
Trade payables			13,224				18,187
Advance billings			69,632				57,525
Other accrued liabilities			44,989				42,265
Total current liabilities			127,869				118,011
Convertible notes, net			134,543				133,082
Deferred tax liabilities			3,135				2,872
Non-current income taxes payable			1,110				1,110
Other liabilities			3,746				3,989
Total liabilities		$	270,403			$	259,064
Commitments and contingencies
Shareholders’ equity:
Preferred stock — no par value; 100,000 shares authorized; none issued and outstanding
Common stock — no par value; 45,000,000 shares authorized; 14,988,073 and 14,955,259 shares issued and 14,965,021 and 14,932,207 outstanding at March 31, 2011 and December 31, 2010, respectively		$	75			$	75
Additional paid in capital			181,357				181,308
Accumulated earnings			26,292				29,177
Accumulated other comprehensive income:
Foreign currency translation adjustment			26,329				20,779
Less: Cost of common stock held in treasury, 23,052 shares at March 31, 2011 and December 31, 2010, respectively			(492	)			(492	)
Total shareholders’ equity			233,561				230,847
Total liabilities and shareholders’ equity		$	503,964			$	489,911

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENDLE INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

		For the Three Months Ended
		March 31,
(in thousands, except per share data)		2011				2010
Net service revenues		$	81,527			$	88,519
Reimbursable out-of-pocket revenues			19,546				26,229
Total revenues			101,073				114,748
Costs and expenses:
Direct costs			43,166				46,447
Reimbursable out-of-pocket costs			19,546				26,229
Selling, general and administrative expenses			33,080				33,961
Depreciation and amortization			4,438				3,685
Total costs and expenses			100,230				110,322
Income from operations			843				4,426
Other income (expense):
Interest income			11				22
Interest expense			(2,963	)			(3,228	)
Other			(3,131	)			1,717
Total other expense			(6,083	)			(1,489	)
Income (loss) before income taxes			(5,240	)			2,937
Income tax provision (benefit)			(4,050	)			1,609
Income (loss) from Continuing Operations, net of tax		$	(1,190	)		$	1,328
Income (loss) from Discontinued Operations, net of tax		$	(1,695	)		$	(117	)
Net income (loss)		$	(2,885	)		$	1,211
Income (loss) per share data:
Basic income (loss) per share:
Income (loss) from continuing operations		$	(0.08	)		$	0.09
Income (loss) from discontinued operations			(0.11	)			(0.01	)
Basic income (loss)		$	(0.19	)		$	0.08
Diluted income (loss) per share:
Income (loss) from continuing operations		$	(0.08	)		$	0.09
Income (loss) from discontinued operations			(0.11	)			(0.01	)
Diluted income (loss)		$	(0.19	)		$	0.08
Weighted average shares outstanding
Basic			14,953				14,893
Diluted			14,953				15,036

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENDLE INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

		For the Three Months Ended
		March 31,
(in thousands)		2011				2010
Net income (loss)		$	(2,885	)		$	1,211
Other comprehensive income (loss):
Foreign currency translation adjustment			5,550				(626	)
Comprehensive income		$	2,665			$	585

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENDLE INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		For the Three Months Ended
		March 31,
(in thousands)		2011				2010
Cash flows from operating activities:
Net income (loss)		$	(2,885	)		$	1,211
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization			5,321				3,785
Deferred income taxes			(5,640	)			(1,623	)
Income tax benefit from stock option exercises			—				(5	)
Compensation expense on stock grants			185				526
Debt issue cost amortization			1,688				2,318
Foreign currency exchange loss (gain)			2,746				(874	)
Other			(93	)			379
Changes in operating assets and liabilities, net of effects from acquisitions:
Restricted cash			34				439
Accounts receivable			(8,581	)			12,359
Other current assets			1,774				(1,250	)
Other assets			109				(145	)
Trade payables			(5,412	)			203
Advance billings			10,430				726
Accrued liabilities and other			(3,963	)			(11,538	)
Net cash provided by (used in) operating activities			(4,287	)			6,511
Cash flows from investing activities:
Acquisitions of property and equipment and internally developed software			(1,873	)			(5,773	)
Acquisitions of businesses, less cash acquired			—				(2,400	)
Other			6				10
Net cash used in investing activities			(1,867	)			(8,163	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			13,500				—
Payments of long-term debt			(13,500	)			—
Debt issue costs			—				(307	)
Payments on capital lease obligations			(10	)			(22	)
Repurchase of note hedges and warrants			—				2
Amounts payable — book overdraft			2,739				147
Proceeds from issuance of common stock			2				31
Income tax benefit from stock option exercises			—				5
Net cash provided by (used in) financing activities			2,731				(144	)
Effects of exchange rates on cash and cash equivalents			727				(27	)
Net decrease in cash and cash equivalents			(2,696	)			(1,823	)
Cash and cash equivalents:
Beginning of period			21,217				52,103
End of period		$	18,521			$	50,280

The accompanying notes are an integral part of these condensed consolidated financial statements.

KENDLE INTERNATIONAL INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2010 filed by Kendle International Inc. (“the Company”) with the Securities and Exchange Commission.

The Condensed Consolidated Balance Sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements.

Goodwill and Intangible Assets

The Company modified its internal management reporting effective January 1, 2011, resulting in the identification of two operating segments; Early Stage and Late Stage. Such changes do not result in changes to the Company’s two reportable segments which continue to consist of Early Stage and Late Stage segments. The Company’s components that exist within each operating segment will be aggregated for purposes of testing goodwill for impairment, based upon the fact that those units maintain similar operating and economic characteristics.

Net Income Per Share Data

Net income (loss) per basic share is computed using the weighted average common shares outstanding. Net income (loss) per diluted share is computed using the weighted average common shares and potential common shares outstanding, unless antidilutive.

The following table sets forth the computation for basic and diluted earnings (loss) per share (in thousands, except per share information):

		Three Months Ended
		March 31,
		2011				2010
Basic earnings per share calculation:
Income (loss) from continuing operations		$	(1,190	)		$	1,328
Income (loss) from discontinued operations			(1,695	)			(117	)
Net income (loss)		$	(2,885	)		$	1,211
Weighted average shares outstanding for basic EPS computation			14,953				14,893
Earnings per share — income (loss) from continuing operations			(0.08	)			0.09
Earnings per share — income (loss) from discontinued operations			(0.11	)			(0.01	)
Earnings per share — basic		$	(0.19	)		$	0.08
Diluted earnings per share calculation:
Income (loss) from continuing operations		$	(1,190	)		$	1,328
Income (loss) from discontinued operations			(1,695	)			(117	)
Net income (loss)		$	(2,885	)		$	1,211
Weighted average shares outstanding			14,953				14,893
Dilutive effect of stock options and restricted stock			—				143
Weighted average shares outstanding for diluted EPS computation			14,953				15,036
Earnings per share — income (loss) from continuing operations			(0.08	)			0.09
Earnings per share — income (loss) from discontinued operations			(0.11	)			(0.01	)
Earnings per share — assuming dilution		$	(0.19	)		$	0.08

For the three months ended March 31, 2011, approximately 197,000 of outstanding options were anti-dilutive compared to approximately 128,000 for the same period of 2010.

Under accounting guidance related to contingently convertible instruments on diluted earnings per share, due to the Company’s obligation to settle the par value of its Convertible Notes (defined in Note 4) in cash, the Company is not required to include any shares underlying the Convertible Notes in its weighted average shares outstanding used in calculating diluted earnings per share until the average price per share for the quarter exceeds the $47.71 conversion price and only to the extent of the additional shares that the Company may be required to issue in the event that the Company’s conversion obligation exceeds the principal amount of the Convertible Notes converted. These conditions have not been met as of the three months ended March 31, 2011 or for the year ended December 31, 2010. At any such time in the future that these conditions are met, only the number of shares that would be issuable (under the “treasury” method of accounting for the share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price. The following table provides examples of how changes in the Company’s stock price will require the inclusion of additional shares in the denominator of the weighted average shares outstanding — assuming dilution calculation. The table also reflects the impact on the number of shares that the Company would expect to issue upon concurrent settlement of the Convertible Notes and the bond hedges and warrants mentioned below:

														Shares Due to the				Incremental Shares Issued
		Convertible Notes				Warrant				Total Treasury Method				Company under Note				by the Company Upon
Share Price		Shares				Shares				Incremental Shares (1)				Hedges				Conversion (2)
$40.00			—				—				—				—				—
$45.00			—				—				—				—				—
$50.00			136,592				—				136,592				(136,592	)			—
$55.00			395,683				—				395,683				(395,683	)			—
$60.00			611,592				—				611,592				(611,592	)			—
$65.00			794,284				173,820				968,104				(794,284	)			173,820
$70.00			950,877				374,732				1,325,609				(950,877	)			374,732

(1)		Represents the number of incremental shares that must be included in the calculation of fully diluted shares.
(2)		Represents the number of incremental shares to be issued by the Company upon conversion of the Convertible Notes, assuming concurrent settlement of the bond hedges and warrants.

Accounting for Uncertainty in Income Taxes

At March 31, 2011, the total amount of unrecognized tax benefits was approximately $1.0 million all of which would impact the effective tax rate, if recognized.

Interest and penalties associated with uncertain tax positions are recognized as components of the income tax expense in the Company’s Condensed Consolidated Statements of Operations. Tax-related interest and penalties and the related recorded liability were not material at March 31, 2011.

The Company does not have a material amount of unrecognized tax benefits for which the statute of limitations is expected to expire within the next 12 months. The remaining unrecognized tax benefits primarily include potential transfer pricing exposures from allocation of income between tax jurisdictions and potential deemed foreign dividends.

The tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below:

Jurisdiction		Open Years
United States			2007 - 2010
Germany			2006 - 2010
United Kingdom			2009 - 2010
Netherlands			2008 - 2010

The Company operates in various state and local jurisdictions. Open tax years for state and local jurisdictions approximate the open years reflected above for the United States.

Subsequent Events

Accounting guidance related to subsequent events requires entities to evaluate events or transactions occurring after the balance sheet date through the date of issuance of the condensed consolidated financial statements to determine whether events require recognition or nonrecognition and disclosure. Recognition is required for the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events may require disclosure. The Company has evaluated subsequent events through the issuance date of its Condensed Consolidated Financial Statements.

New Accounting Pronouncements

Revenue recognition under the Company’s customer contracts generally involve multiple service deliverables, where bundled service deliverables are accounted for in accordance with Accounting Standards Codification (“ASC”) 605-25, “Multiple-Element Arrangements.” For certain unit-based contracts the Company recognizes net service revenue based on output units, a unit could include such things as completion of a monitoring visit, monthly site management units or case report form pages entered. The Company tracks the units completed for each unit category included in the contract. Each of the Company’s service deliverables has standalone value.

In the first quarter of 2011, the Company adopted Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements” for new or materially modified contracts entered into after that date, which did not have a material impact on the Company’s financial statements. ASU 2009-13 requires the allocation of contract (arrangement) value based on the relative selling price of the various separate units of accounting in the arrangement. The guidance in ASU 2009-13 requires a hierarchy of evidence be followed when determining if evidence of the selling price of an item exists such that the best evidence of selling price of a unit of accounting is vendor-specific objective evidence (VSOE), or the price charged when a deliverable is sold separately. When VSOE is not available to determine selling price, relevant third-party evidence (TPE) of selling price should be used, if available. Lastly, when neither VSOE nor TPE of selling price for similar deliverables exists, management must use its best estimate of selling price considering all relevant information that is available without undue cost and effort.

Generally, the Company is not able to establish VSOE as its deliverables are seldom sold separately. Consistent with its policies prior to the adoption of ASU 2009-13, the Company has established TPE of selling price for each arrangement deliverable based on the price it charges for equivalent services when sold to other similar customers as well as the Company’s knowledge of market-pricing from the competitive bidding process for customer contracts offering similar services to comparably situated customers. The Company allocates arrangement consideration at the inception of the arrangement using the relative selling prices of the deliverables within the contract based on TPE. Consistent with its accounting prior to the adoption of ASU 2009-13, the Company recognizes revenues for the separate elements of its contracts upon performance of actual units of output and when all other revenue recognition criteria are met.

2. Discontinued Operations

As has been previously disclosed, the Company made a decision to close the Early Stage operations of its facility located in Utrecht, The Netherlands (“Utrecht”), as a result of overall adverse operating results due to volatility in the Early Stage drug development market as well as a changing and challenging regulatory environment in the Netherlands leading to cancellations in the Company’s backlog. The Company’s plan for closure was deemed official upon receiving the approval of the Dutch Works Council, which became effective on March 1, 2011.

The following results of the Utrecht Early Stage closure have been presented as discontinued operations within the Company’s condensed consolidated statements of operations and have been excluded from segment operating results for all periods presented.

		Three Months Ended March 31,
		2011				2010
		(in thousands)
Net service revenues		$	468			$	1,708
Loss from discontinued operations			(2,275	)			(157	)
Income tax benefit			(580	)			(40	)
Net loss from discontinued operations		$	(1,695	)		$	(117	)

The net loss from discontinued operations for the three months ended March 31, 2011 was primarily the result of costs incurred related to the closure of the Company’s Utrecht facility (see Note 8). As of March 31, 2011, there were no material assets remaining at Utrecht related to the discontinued operations.

The closure is not expected to have any significant effect on the Company’s remaining Early Stage operations, or the Late Stage operations that continue to be conducted at Utrecht.

3. Goodwill and Other Intangible Assets:

Goodwill at March 31, 2011 and December 31, 2010 consisted of the following:

										Goodwill
(In thousands)		Early Stage				Late Stage				Total
Balance at December 31, 2010		$	11,730			$	224,459			$	236,189
Foreign currency fluctuations			339				809				1,148
Balance at March 31, 2011		$	12,069			$	225,268			$	237,337

Amortizable intangible assets consisted of the following:

		As of March 31,				As of December 31,
(in thousands)		2011				2010
Amortizable intangible assets:
Carrying amount:
Customer relationships		$	22,549			$	22,407
Completed technology			2,600				2,600
Backlog			6,200				6,200
Internally developed software (a)			18,269				18,212
Total carrying amount		$	49,618			$	49,419
Accumulated Amortization:
Customer relationships		$	(11,825	)		$	(11,018	)
Completed technology			(2,369	)			(2,292	)
Backlog			(6,102	)			(6,089	)
Internally developed software (a)			(16,849	)			(16,711	)
Total accumulated amortization		$	(37,145	)		$	(36,110	)
Net amortizable intangible assets		$	12,473			$	13,309

(a)		Internally developed software is included in Other Assets in the Company’s Condensed Consolidated Balance Sheets.

4. Debt:

The Company is party to a credit agreement (the “Facility”) which is comprised of a $35 million revolving loan commitment, with up to $10 million of such commitment available for issuance of letters of credit and up to $5 million of such commitment available for same-day swing line loans. At the Company’s request and with the consent of the current lender or additional lenders, the total commitment may be increased by, or incremental term loans may be obtained for, up to an additional $15 million. At the Company’s election, loans under the Facility are available either at (i) an adjusted base rate plus an applicable margin; or (ii) an adjusted LIBOR plus an applicable margin. The applicable margin for each interest rate is calculated in accordance with the terms of the Facility.

The Facility, as amended on April 27, 2010, matures on March 31, 2015. The Facility was amended on January 21, 2011 (Amendment No. 2) to increase the “Total Leverage Ratio” for certain periods and also contemplates certain additional add-backs to “Consolidated EBITDA” for certain cash and non-cash charges. The Facility was further amended (Amendment No. 3, dated as of April 28, 2011) to increase the “Total Leverage Ratio” for certain periods and also amends in certain respects the definition of “Letter of Credit”; and (Amendment No. 4, dated as of May 3, 2011) to facilitate the Company entering into a definitive merger agreement (see Note 9 for further details).

Borrowings under the Facility are collateralized by substantially all of the Company’s assets pursuant to the terms of a Pledge and Security Agreement. The Facility contains various affirmative and negative covenants including those regarding limitations on the Company’s ability to incur certain indebtedness, limitations on certain investments, limitations on capital expenditures and limitations on certain acquisitions and asset sales outside the ordinary course of business, as well as financial covenants regarding limitations on the Company’s total leverage ratio, senior secured leverage ratio and interest coverage ratio. The Company is in compliance with all covenants as of March 31, 2011.

The Company also maintains an existing $5.0 million Multicurrency Facility that is renewable annually and is used in connection with the Company’s European operations.

As of March 31, 2011 and December 31, 2010, there were no amounts outstanding under the revolving credit loan portion of the Facility or the Multicurrency Facility.

In July 2007, the Company entered into a Purchase Agreement with UBS Securities LLC (the Underwriter) for the issuance and sale by the Company of $200 million, including a $25 million over-allotment of the Company’s Convertible Notes (Convertible Notes). The Convertible Notes have a maturity date of July 15, 2012 and were sold to the Underwriters at a price of $1,000 per Convertible Note, less an underwriting discount of 3% per Convertible Note. Throughout 2010 and 2009, the Company has repurchased in the open market $67.5 million of par value of its outstanding Convertible Notes. The carrying amounts of the equity and debt components were as follows:

		As of March 31,				As of December 31,
		2011				2010
		(in thousands)
Equity component, carrying amount		$	35,860			$	35,860
Principal component, at par		$	142,500			$	142,500
Unamortized discount			(7,957	)			(9,418	)
Principal component, carrying amount		$	134,543			$	133,082

The net carrying amounts of the Convertible Notes are classified as long-term in the accompanying Condensed Consolidated Balance Sheets. The debt discount and adjusted debt issuance costs are being amortized, using the effective interest rate method, over the term of the Convertible Notes which mature on July 15, 2012. Interest expense on the Convertible Notes has been recorded at an effective rate of 8.02%.

Interest expense recognized related to the Convertible Notes was as follows:

		For the three months ended March 31,
		2011				2010
		(In thousands)
Interest cost at coupon rate		$	1,202			$	1,303
Discount amortization			1,461				1,450
Total interest expense recognized		$	2,663			$	2,753

5. Stock Based Compensation:

In the first three months of 2011, the Company issued 21,635 shares of time vested restricted share units (RSUs) under the 2007 Stock Incentive Plan. Of this award, 11,613 shares vest in their entirety after 18 months and the remaining 10,022 shares vest in their entirety after 1.5 months. Of the 21,635 shares awarded, 10,022 RSUs were issued to retirement eligible associates and resulted in immediate vesting. The Company has therefore recorded one-third of the expense for the retirement eligible associates in the first quarter of 2011 and will record the remaining expense in the second quarter of 2011. The expense for the remaining RSUs will be recorded on a straight-line basis over the vesting period.

In the first three months of 2011, the Company issued 51,723 shares of performance-based restricted stock units. The vesting of these shares is dependent upon a performance condition, the Company meeting a certain EPS target for 2011, and a service condition, as 33% vest in March 2012, 33% vest in January 2013, and 33% vest in January 2014. If the performance condition is not met at least at the 74% of target level, the award does not vest. If the performance condition is met at greater than 74% of target level but below 100% of target level, the number of shares is adjusted to between 50% and 98% of the original award based upon the target tier level achieved. Expense is being recorded over the vesting period (33 months) assuming achievement of the performance condition.

The following is a summary of stock based compensation expense recorded by the Company for the following periods:

		Three Months Ended March 31,
(in thousands)		2011				2010
Stock options		$	36			$	41
Non-vested restricted common stock			117				454
Total stock based compensation		$	153			$	495

As of March 31, 2011, there was approximately $1,278,000 of total unrecognized compensation cost, approximately $361,000 of which relates to options and $917,000 of which relates to non-vested common stock. The cost is expected to be recognized over a weighted-average period of 2 years for options and 1.6 years for non-vested common stock.

Stock Options:

The following table summarizes information regarding stock option activity in the first three months of 2011:

										Weighted				Aggregate
						Weighted				Average				Intrinsic
						Average				Remaining				Value
		Shares				Exercise Price				Contractual Life				($ in thousands)
Options outstanding at December 31, 2010			397,150			$	15.60
Granted			3,000				9.00
Canceled			(5,256	)			14.43
Exercised			(300	)			8.30
Options outstanding at March 31, 2011			394,594				15.57				4.93			$	526
Exercisable at March 31, 2011			328,494				15.98				4.14			$	448

Substantially all of the outstanding options are expected to vest.

Under the provisions of accounting guidance pertaining to Stock Compensation, the Company is required to estimate on the date of grant the fair value of each option using an option-pricing model. Accordingly, the Black-Scholes pricing model is used with the following weighted-average assumptions:

		Three Months Ended March 31,
		2011
Dividend yield			0	%
Expected volatility			66.8	%
Risk-free interest rate			2.1	%
Expected term			3.2

The expected volatility is based on the Company’s stock price over a historical period which approximates the expected term of the option as well as a comparison to volatility for other companies in the Company’s industry and expectations of future volatility. The risk free interest rate is based on the implied yield in U.S Treasury issues with a remaining term approximating the expected term of the option. The expected option term is calculated as the historic weighted average life of similar awards.

The total intrinsic value of stock options exercised was approximately $1,000 in the three months ended March 31, 2011 compared to approximately $53,000 in the three months ended March 31, 2010.

Non-Vested Common Stock:

A summary of non-vested common stock activity during the first three months of 2011 is as follows:

Non-Vested Stock

		Shares
Shares outstanding at December 31, 2010			80,109
Granted			73,358
Vested			(30,482	)
Canceled			(10,352	)
Shares outstanding at March 31, 2011			112,633

The weighted-average per share fair value of non-vested shares that were granted in the first three months of 2011 was $9.48 per share.

The weighted-average per share fair value (as of grant date) of non-vested shares that vested during the first three months of 2011 was $12.84 per share.

6. Fair Value of Financial Instruments:

Accounting guidance related to fair value measurements enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. This guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

		Level 1: Quoted market prices in active markets for identical assets or liabilities.
		Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
		Level 3: Unobservable inputs that are not corroborated by market data.

The Company generally applies fair value techniques on a non-recurring basis associated with valuing potential impairment loss related to goodwill and other long-lived assets.

The following table summarizes the carrying amounts and fair values of certain financial assets and liabilities at March 31, 2011:

Quoted Prices in

Active Markets for

Significant Other

Significant

Carrying

Identical Assets

Observable Inputs

Unobservable Inputs

Amount

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Money Market Accounts

$

72

$

72

$

—

$

—

The following table summarizes the carrying amounts and fair values of certain financial assets and liabilities at December 31, 2010:

Quoted Prices in

Active Markets for

Significant Other

Significant

Carrying

Identical Assets

Observable Inputs

Unobservable Inputs

Amount

(Level 1)

(Level 2)

(Level 3)

(In thousands)

Money Market Accounts

$

6,509

$

6,509

$

—

$

—

The Company elected not to apply the fair value option to any eligible financial instruments. The carrying amounts of cash, accounts receivable, accounts payable and accruals approximate fair value. The fair value of the Company’s Convertible Notes was approximately 95% and 94% of the par value at March 31, 2011 and December 31, 2010, respectively. The bond hedges and warrants associated with the Convertible Notes currently have no value.

7. Segment Information:

The Company operates its business in two reportable segments, Early Stage and Late Stage. The Early Stage business currently focuses on the Company’s Phase I operations, while Late Stage is comprised of contract services related to Phase II through IV clinical trials, regulatory affairs and biometrics offerings. Support and Other consists of unallocated corporate expenses, primarily information technology, marketing and communications, human resources, finance and legal.

Segment information, excluding discontinued operations (see Note 2) for the three months ended March 31, 2011 and 2010 is as follows:

		Early				Late				Support
(in thousands)		Stage				Stage				& Other				Total
Three months ended March 31, 2011
Net service revenues		$	5,117			$	75,645			$	765			$	81,527
Reimbursable out-of-pocket revenues			767				18,779				—				19,546
Total revenues		$	5,884			$	94,424			$	765			$	101,073
Operating income (loss)		$	(399	)		$	16,174			$	(14,932	)		$	843
Three months ended March 31, 2010
Net service revenues		$	5,663			$	82,104			$	752			$	88,519
Reimbursable out-of-pocket revenues			633				25,596				—				26,229
Total revenues		$	6,296			$	107,700			$	752			$	114,748
Operating income (loss)		$	218			$	16,988			$	(12,780	)		$	4,426

Identifiable assets by segment as of March 31, 2011 and December 31, 2010 are as follows:

(in thousands)		March 31, 2011				December 31, 2010
Identifiable assets:
Early Stage		$	28,538			$	32,528
Late Stage		$	404,771			$	390,608
Support & Other (a)		$	70,655			$	66,775
Total assets		$	503,964			$	489,911

(a)		Primarily comprised of cash and tax-related assets.

8. Restructuring Expenses:

At December 31, 2010, the Company accrued approximately $3.0 million for anticipated severance costs related to the closure of the Early Stage portion of operations at its Utrecht location. In the three months ended March 31, 2011, the Company officially closed its Utrecht location and terminated most employees. During the three months ended March 31, 2011, the Company paid severance costs of $1.8 million and recorded additions to the accrual of $0.9 million, primarily related to management’s estimate of the expected costs of terminating the Company’s lease obligation. The remaining accrual at March 31, 2011 is approximately $2.1 million; these amounts are anticipated to be paid during 2011.

Additional expenses related to accelerated amortization of leasehold improvements and equipment totaling $0.8 million were incurred in the three months ended March 31, 2011 and are reported within the loss from discontinued operations (see Note 2).

9. Subsequent Event:

On May 4, 2011 the Company entered into a definitive merger agreement with INC Research, LLC, under which INC will acquire all of the outstanding shares of the Company. The Company’s Board of Directors unanimously approved the transaction which is expected to close in the third quarter of 2011, subject to approval by the Company’s shareholders, satisfaction of customary closing conditions, and regulatory approvals.

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

The information discussed below is derived from the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2011 and should be read in conjunction therewith. The Company’s results of operations for a particular quarter may not be indicative of results expected during subsequent quarters or for the entire year.

The results of operations herein have been adjusted for the presentation of discontinued operations for all periods presented.

Company Overview

Kendle International Inc. (the Company or Kendle) is a global clinical research organization (CRO) that delivers integrated clinical development services, including clinical trial management, clinical data management, statistical analysis, medical writing, regulatory consulting and organizational meeting management and publications services, among other services, on a contract basis to the biopharmaceutical industry. The Company operates in North America, Europe, Asia/Pacific, Latin America and Africa. The Company operates its business in two reportable operating segments, Early Stage and Late Stage. The Early Stage business currently focuses on the Company’s Phase I operations while Late Stage is comprised of clinical development services related to Phase II through IV clinical trials, regulatory affairs and biometrics and statistics offerings. The Company has aggregated its Clinical and Data Monitoring operating unit, Regulatory, Site and Medical affairs operating unit, Biostatistics and Statistical Programming operating unit and its Project Management and Late Phase operating unit into the Late Stage segment under the aggregation criteria in accounting guidance related to disclosures about segments of an enterprise and related information. The aggregation criteria met include a similar nature of services provided, a similar type of customer, similar methods used to distribute services, similar economic characteristics and a similar regulatory environment. In addition, the Company reports support functions primarily composed of unallocated corporate expenses for information technology, marketing and communications, human resources, finance and legal under the Support and Other category for purposes of segment reporting. A portion of the costs incurred by the support units are allocated to the Early and Late Stage reportable operating segments.

The Company primarily earns net service revenues through performance under Late Stage segment “full-service” contracts. The Company also recognizes revenues through limited or functional service contracts, consulting contracts, and Early Stage segment contracts. For a detailed discussion regarding the Company’s Late Stage segment contracts, Early Stage segment contracts, revenue recognition process and other Critical Accounting Policies and Estimates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the year ended December 31, 2010.

The CRO industry in general continues to be dependent on the research and development efforts of the principal pharmaceutical and biotechnology companies as major customers, and the Company believes this dependence will continue. The loss of business from any of its major customers could have a material adverse effect on the Company.

Early Stage Developments

As has been previously disclosed, the Company made a decision to close the Early Stage operations of its facility located in Utrecht, The Netherlands (“Utrecht”), as a result of overall adverse operating results due to volatility in the Early Stage drug development market as well as a changing and challenging regulatory environment in the Netherlands leading to cancellations in the Company’s backlog. The Company’s plan for closure was deemed official upon receiving the approval of the Dutch Works Council, which became effective on March 1, 2011.

The results of the Utrecht Early Stage closure have been presented as discontinued operations within the Company’s condensed consolidated statements of operations and have been excluded from segment operating results for all periods presented.

The closure is not expected to have any significant effect on the Company’s remaining Early Stage operations, or the Late Stage operations that continue to be conducted at Utrecht.

New Business Awards and Backlog

Backlog consists of anticipated net service revenue from contracts, letters of intent and other forms of commitments (collectively defined as backlog) that either have not started but are anticipated to begin in the near future, or are in process and have not been completed. Amounts included in backlog represent anticipated future net service revenue and exclude net service revenue that has been recognized previously in the Consolidated Statements of Operations. Once contracted work begins, net service revenue is recognized in the Consolidated Statements of Operations. Awards can vary significantly from quarter to quarter and contracts generally have terms ranging from several months to several years. The Company’s new business awards for the three months ended March 31, 2011 and 2010 were approximately $164 million and $89 million, respectively.

The majority of the Company’s backlog is from large established biopharmaceutical firms with annual revenues greater than $1 billion. Backlog arising from contracts with small biotech firms with no revenues or large biopharmaceutical partner are not material to the Company. The Company continues to experience high levels of cancellations and delays between proposals and awards due to budget reductions and pipeline reprioritizations at large pharmaceutical companies, drug failures due to efficacy and safety, and regulatory actions related to drugs in development among other things. The average duration of the contracts in backlog fluctuates from quarter to quarter based on the contracts constituting backlog at any given time. The Company generally experiences a longer period of time between contract award and revenue recognition with respect to large contracts covering global services. Additionally, as a result of biopharmaceutical companies starting to award trials earlier in the cycle than they have historically, we are seeing the time duration between award and revenue recognition elongate as study designs continue to be reviewed and revised.

As the Company competes for and enters into large contracts that are global in nature, the Company expects the average duration of the contracts in backlog to increase and may be affected by changes in foreign exchange rates. Fluctuations in foreign exchange rates caused backlog to increase by approximately $3.9 million as of March 31, 2011, primarily as a result of the strengthening of the Euro throughout the three months ended March 31, 2011. Based on its 2010 experience, quarterly revenue as a percentage of the beginning of the quarter backlog averaged approximately 10%.

Results of Continuing Operations

Revenues

		Three Months Ended March 31,
										% Increase
		2011				2010				(Decrease)
		(in thousands)
Net service revenues
Late stage		$	75,645			$	82,104				-7.9	%
Early stage			5,117				5,663				-9.6	%
Support & other			765				752				1.7	%
Total net service revenues			81,527				88,519				-7.9	%
Reimbursable out-of-pocket revenues*			19,546				26,229				-25.5	%
Total revenues		$	101,073			$	114,748				-11.9	%

*		Reimbursable out-of-pocket revenues and expenses fluctuate from period to period, primarily due to the level of investigator activity in a particular period.

Net service revenues declined approximately $7.0 million for the three months ended March 31, 2011.

Net service revenues in the Late Stage segment for the three month period in 2011 decreased from the prior year by approximately $6.5 million, primarily as result of reduced volume. The Company’s backlog has increased from December 31, 2010, however the lengthening of the timeframe from awarded status to signature status inhibits the Company from commencing projects and revenue generating activities. These delays are in large part attributable to pharmaceutical companies awarding work earlier in the process and taking longer to finalize significant study related terms.

Net service revenues from the Early Stage segment decreased from the same periods of the prior year by approximately $0.5 million as a result of lower sales volumes and continued project delays similar to those discussed in the Late Stage segment.

Net service revenues from the Company’s top five customers accounted for approximately 30% and 26% of net service revenues for the periods ended March 31, 2011 and 2010, respectively. No customer accounted for more than 10% of total net service revenues for 2011 or 2010.

The Company’s results of operations are subject to volatility due to a variety of factors. The cancellation or delay of contracts and cost overruns could have adverse effects on the Condensed Consolidated Financial Statements. Fluctuations in the Company’s sales cycle and the ability to maintain large customer contracts or to enter into new contracts could negatively affect the Company’s long-term growth. For a more detailed discussion regarding the risk factors associated with the Company’s results of operations, among other things, see Item 1A — Risk Factors, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Operating Expenses

		Three Months Ended March 31,
										% Increase
		2011				2010				(Decrease)
		(in thousands)
Direct costs		$	43,166			$	46,447				-7.1	%
Reimbursable out-of-pocket costs*			19,546				26,229				-25.5	%
SG&A expenses			33,080				33,961				-2.6	%
Depreciation and amortization			4,438				3,685				20.4	%
Total operating expenses		$	100,230			$	110,322				-9.1	%

*		Reimbursable out-of-pocket revenues and expenses fluctuate from period to period, primarily due to the level of investigator activity in a particular period.

Direct costs decreased from the same period last year by approximately $3.3 million or 7.1% which is line with the decrease in overall net service revenues. Direct costs as a percentage of net service revenues have remained steady at approximately 52.9% and 52.5% for the three months ended March 31, 2011 and 2010, respectively as a result of management’s effort to align resources with revenues.

Selling, general and administrative expenses (SG&A) decreased approximately $0.9 million for the three months ended March 31, 2011. The decrease in selling, general and administrative expenses relates primarily to the Company’s ongoing cost reduction and workforce optimization initiatives to reduce operating expenses. These benefits were partially offset by the Company’s continued investment in its new business development and global sales organization. SG&A expenses expressed as a percentage of net service revenues were 40.6% and 38.4% for the three months ended March 31, 2011 and 2010, respectively. The increase indicates that a significant portion of these costs are more fixed in nature and do not fluctuate in proportion to net service revenues.

Depreciation and amortization expense increased approximately $0.8 million or 20.4% primarily as a result of the Company’s implementation of its new ERP system and the resultant amortization related to these systems.

Income from Continuing Operations

		Three Months Ended March 31,
										% Increase
		2011				2010				(Decrease)
		(in thousands)
Operating income (loss)
Late stage		$	16,174			$	16,988				-4.8	%
Early stage			(399	)			218				-283.0	%
Support & other			(14,932	)			(12,780	)			16.8	%
Total operating income		$	843			$	4,426				-81.0	%

Income from operations declined for the three months ended March 31, 2011 as a result of the overall decline in net service revenues and the relatively fixed nature of SG&A. Total operating margins for the three month period ended March 31, 2011 and 2010 were approximately 1.0% and 5.0%, respectively.

Late Stage segment income from operations decreased by $0.8 million for the three months ended March 31, 2011 compared to the same period of the prior year. The decrease is attributable to the segment’s decline in net service revenues, partially offset by the Company’s cost reduction initiatives. Operating margin for the three months ended March 31, 2011 and 2010 for the Late Stage segment were approximately 21.4% and 20.7%, respectively.

Early Stage operating results declined for the three months ended March 31, 2011 from the same period in 2010. Early Stage operations generally have higher fixed costs than the Late Stage segment, making a decline in revenues more difficult to absorb. The Early Stage segment incurred operating losses of $0.4 million for the three months ended March 31, 2011 as compared to operating income of $0.2 million for same period of the prior year.

Support and other costs increased approximately $2.2 million from the same period in the prior year as a result of the implementation of the Company’s ERP system which was placed into service in the second half of 2010. For the three months ended March 31, 2011, the Company is now recognizing amortization expense on this software asset. Additionally the Company continues to incur implementation-related expenses; however they are no longer being capitalized as they were in the development stage of the project, which was ongoing in the same period of the prior year.

Other Income (Expense)

		Three Months Ended March 31,
										Increase
		2011				2010				(Decrease)
		(in thousands)
Other income (expense)
Interest income		$	11			$	22			$	(11	)
Interest expense			(2,963	)			(3,228	)			(265	)
Foreign currency gains / (losses)			(3,131	)			1,870				(5,001	)
Other expenses			0				(153	)			(153	)
Total other income (expense)		$	(6,083	)		$	(1,489	)		$	(4,594	)

Interest Expense

The primary component of interest expense is interest on the Company’s 3.375% Convertible Notes issued in 2007. Interest expense on the Convertible Notes was recorded at an effective rate of 8.02%. The decline is primarily the result of the Company’s repurchase of $12 million of its par value Convertible Notes subsequent to the three months ended March 31, 2010. An additional decrease from the prior year resulted from the write-off of unamortized debt issuance costs when the Company terminated its former credit facility in March of 2010. These decreases were partially offset by interest paid on the Company’s short-term borrowings under the revolving credit loan portion of its Facility during the three months ended March 31, 2011. The remainder of interest expense relates to interest on capital lease obligations and amortization of debt issuance costs, net of capitalized interest.

Foreign Currency

The Company incurs foreign currency exchange gains and losses as part of the normal course of business as it has subsidiaries in many countries outside the U.S. The exchange rate transaction gains and losses typically occur when the Company holds assets in a currency other than the functional currency of the reporting location or as a result of regional cash pooling arrangements.

In the three month period ended March 31, 2011 these foreign exchange transactions resulted in a net loss of $3.1 million as compared to a net gain of $1.9 million for the same period of 2010. The foreign exchange result for the three months ended March 31, 2011 is primarily due to the weakening of the U.S. dollar against the Euro, the British Pound and the Mexican peso. The 2010 result for this same period was due to the strengthening of the U.S. dollar against both the British Pound and the Euro and to a lesser extent the strengthening of the British Pound against the Euro.

Income Taxes

The effective income tax rate was 77.3% for the three months ended March 31, 2011, compared to 54.8% for the three months ended March 31, 2010. The effective tax rate for the first quarter of 2011 reflects the Company’s expectation that taxable income will exceed book income in 2011 because of the impact of estimated 2011 foreign deemed dividends.

Tax expense for the quarter ended March 31, 2010 included approximately $350,000 resulting from the December 31, 2009 expiration of certain tax legislation in the U.S. related to the U.S. tax treatment of certain foreign earnings. The Company continues to maintain full valuation allowances against the net operating losses incurred in some of its subsidiaries. The Company also maintains valuation allowances for portions of its foreign tax credits that are not expected to be realizable. Because Kendle operates on a global basis, the effective tax rate varies from quarter to quarter based on the relative mix of pretax earnings or losses at the various locations.

Discontinued Operations

As has been previously disclosed, the Company made a decision to close the Early Stage operations of its facility located in Utrecht, The Netherlands (“Utrecht”), as a result of overall adverse operating results due to volatility in the Early Stage drug development market as well as a changing and challenging regulatory environment in the Netherlands leading to cancellations in the Company’s backlog. The Company’s plan for closure was deemed official upon receiving the approval of the Dutch Works Council, which became effective on March 1, 2011. For the three months ended March 31, 2011, discontinued operations accounted for a pre-tax loss of $2.3 million and a corresponding tax benefit of $0.6 million. For the three months ended March 31, 2010, the pre-tax loss from discontinued operations was $157 thousand and a tax benefit of $40 thousand.

The net loss from discontinued operations for the three months ended March 31, 2011 was primarily the result of costs incurred related to the closure of the Company’s Utrecht facility. As of March 31, 2011 there were no material assets remaining at Utrecht related to the discontinued operations.

The closure is not expected to have any significant effect on the Company’s remaining Early Stage operations, or the Late Stage operations that continue to be conducted at Utrecht.

Net Income (Loss)

Net loss for the three months ended March 31, 2011 was approximately $2.9 million, or $0.19 per both basic and diluted share. Net income for the three months ended March 31, 2010 was approximately $1.2 million, or $0.08 per both basic and diluted share.

Liquidity and Capital Resources

Cash Flows

Cash and cash equivalents decreased by $2.7 million at March 31, 2011 when compared with December 31, 2010, which was the net result of cash used by operating activities of $4.3 million, and investing activities of $1.9 million, partially offset by $2.7 million of cash provided from financing activities. Foreign exchange rates had a positive impact on cash and cash equivalents of $0.7 million for the three months ended March 31, 2011. At March 31, 2011 cash and cash equivalents were $18.5 million. In addition, the Company has approximately $0.9 million in restricted cash which represents cash received from customers that is segregated in separate Company bank accounts and available for use only for specific project expenses.

Net cash used by operating activities for the three months ended March 31, 2011 consisted primarily of the Company’s net loss of $2.9 million, adjusted for noncash expenses of $4.2 million primarily related to depreciation and amortization, debt issuance cost amortization, and unrealized losses in foreign exchange, partially offset by the noncash changes in deferred income taxes. Additional uses of operating cash resulted from increases in accounts receivable and decreases in accounts payable and accrued liabilities, which were offset by cash provided by the increases in advance billings. Fluctuations in accounts receivable and advance billings occur on a regular basis as services are performed, milestones or other billing criteria are achieved, invoices are sent to customers, and payments for outstanding accounts receivable are collected from customers. Such activity varies by individual customer and contract. The Company has been and continues to be vigilant in monitoring and collecting its accounts receivable.

Investing activities for the three months ended March 31, 2011 consisted primarily of $1.9 million used for capital expenditures, the majority of which relates to the implementation of the Company’s ERP software.

Financing activities for the three months ended March 31, 2011 consisted primarily of $2.7 million of proceeds from the Company’s accounts payable overdrafts. Additionally, proceeds of $13.5 million were received by accessing the revolving line of credit and were all promptly repaid.

Capital Resources

The Company is party to a credit agreement (the “Facility”) which is comprised of a $35 million revolving loan commitment, with up to $10 million of such commitment available for issuance of letters of credit and up to $5 million of such commitment available for same-day swing line loans. At the Company’s request and with the consent of the current lender or additional lenders, the total commitment may be increased by, or incremental term loans may be obtained for, up to an additional $15 million. At the Company’s election, loans under the Facility are available either at (i) an adjusted base rate plus an applicable margin; or (ii) an adjusted LIBOR plus an applicable margin. The applicable margin for each interest rate is calculated in accordance with the terms of the Facility.

The Facility, as amended on April 27, 2010, matures on March 31, 2015. The Facility was amended on January 21, 2011 (Amendment No. 2) to increase the “Total Leverage Ratio” for certain periods and also contemplates certain additional add-backs to “Consolidated EBITDA” for certain cash and non-cash charges. The Facility was further amended (Amendment No. 3, dated as of April 28, 2011) to increase the “Total Leverage Ratio” for certain periods and also amends in certain respects the definition of “Letter of Credit”; and (Amendment No. 4, dated as of May 3, 2011) in order to facilitate the Company entering into a definitive merger agreement (see Note 9 to the Condensed Consolidated Financial Statements for further details).

Borrowings under the Facility are collateralized by substantially all of the Company’s assets pursuant to the terms of a Pledge and Security Agreement. The Facility contains various affirmative and negative covenants including those regarding limitations on the Company’s ability to incur certain indebtedness, limitations on certain investments, limitations on capital expenditures and limitations on certain acquisitions and asset sales outside the ordinary course of business, as well as financial covenants regarding limitations on the Company’s total leverage ratio, senior secured leverage ratio and interest coverage ratio. The Company is in compliance with all covenants as of March 31, 2011.

The Company also maintains an existing $5.0 million Multicurrency Facility that is renewable annually and is used in connection with the Company’s European operations.

As of March 31, 2011 and December 31, 2010, there were no amounts outstanding under the revolving credit loan portion of the Facility or the Multicurrency Facility. The Company did draw on the Facility for short periods of time during the three months ended March 31, 2011 to cover temporary operational cash flow needs, promptly repaying each advance. The maximum amount outstanding at any point was $3.5 million and the average daily amount outstanding for the period was approximately $794,000. The weighted average interest rate paid on these advances was 6.00%.

In July 2007, the Company entered into a Purchase Agreement with UBS Securities LLC (the Underwriter) for the issuance and sale by the Company of $200 million, including a $25 million over-allotment of the Company’s Convertible Notes (Convertible Notes). The Convertible Notes have a maturity date of July 15, 2012 and were sold to the Underwriters at a price of $1,000 per Convertible Note, less an underwriting discount of 3% per Convertible Note. Throughout 2010 and 2009, the Company has repurchased in the open market $67.5 million of par value of its outstanding Convertible Notes. At March 31, 2011 the par value of the outstanding Convertible Notes was $142.5 million.

The net carrying amounts of the Convertible Notes are classified as long-term in the accompanying Condensed Consolidated Balance Sheets. The debt discount and adjusted debt issuance costs are being amortized, using the effective interest rate method, over the term of the Convertible Notes which mature on July 15, 2012. Interest expense on the Convertible Notes has been recorded at an effective rate of 8.02%.

The Company’s primary cash needs on both a short-term and long-term basis are for the payment of salaries and fringe benefits, business development costs, capital expenditures, hiring and recruiting expenses, acquisitions and facility-related expenses. The Company believes that its existing cash balances, together with cash flows from operations and borrowing capacity under the Facility and the Multicurrency Facility, will be sufficient to meet its foreseeable cash needs for the short term.

Longer term the Company will need to retire its Convertible Notes upon maturity on July 15, 2012. The Company believes it could obtain sufficient resources to meet this obligation. There can be no such reassurance that future financings will be available on terms as economically favorable as the Company’s existing terms.

The Company has not historically experienced regular liquidity or collections issues with the large majority of its customers. However, the Company does have contracts with biotechnology and small pharmaceutical companies, some of which are dependent upon external financing to fund their contractual commitments. The Company is continuing to monitor the financial status of its customers.

As more of the Company’s revenues are generated in locations other than the U.S., repatriation of those cash flows in a tax efficient manner is increasingly challenging. The Company is in the process of revising its internal transfer pricing methodologies to align with its current operational model.

Market Risk and Derivative Instruments

Interest Rates

The Company is exposed to changes in interest rates on any amounts outstanding under the Facility and Multicurrency Facility. No amounts were outstanding under either the Facility or the Multicurrency Facility as of March 31, 2011.

Foreign Currency

The Company operates on a global basis and is therefore exposed to various types of currency risks. There are specific transaction risks which arise from the nature of the contracts the Company executes with its customers. From time to time contracts are denominated in a currency different than the particular local currency. This contract currency denomination issue is applicable only to a portion of the contracts executed by the Company.

The first risk occurs as revenue recognized for services rendered is denominated in a currency different from the currency in which the subsidiary’s expenses are incurred. As a result, the subsidiary’s net service revenues and resultant net income or loss can be affected by fluctuations in exchange rates.

The second risk results from the passage of time between the invoicing of customers under these contracts and the ultimate collection of customer payments against such invoices. Because the contract is denominated in a currency other than the subsidiary’s local currency, the Company recognizes a receivable at the time of invoicing at the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared until the payment from the customer is received will result in the Company receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. This difference is recognized by the Company as a foreign currency transaction gain or loss, as applicable, and is reported in Other Income (Expense) in the Condensed Consolidated Statements of Operations.

A third type of transaction risk arises from transactions denominated in multiple currencies between any two of the Company’s various subsidiary locations. For each subsidiary, the Company maintains an intercompany receivable and payable, which is denominated in multiple currencies. Changes in exchange rates from the time the intercompany receivable/payable balance arises until the balance is settled or measured for reporting purposes, results in exchange rate gains and losses. This intercompany receivable/payable arises when work is performed by a Kendle location in one country on behalf of a Kendle location in a different country under contract with the customer. Additionally, there are occasions when funds are transferred between subsidiaries for working capital purposes. The foreign currency transaction gain or loss is reported in Other Income (Expense) in the Condensed Consolidated Statements of Operations.

The Company does not currently have hedges in place to mitigate exposure due to foreign exchange rate fluctuations. Due to uncertainties regarding the timing of and currencies involved in the majority of the Company’s foreign exchange rate transactions; it is impracticable to implement hedging instruments to match the Company’s foreign currency inflows and outflows. The Company has implemented procedures intended to mitigate the impact of foreign currency exchange rate fluctuations including an intercompany procedure to allow for regular settlement of intercompany balances where practical. The Company will continue to evaluate ways to mitigate the risk of this impact in the future.

The Company’s Condensed Consolidated Financial Statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting Condensed Consolidated Financial Statements. The Company’s foreign subsidiaries translate their financial results from local currency into U.S. dollars as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the shareholders’ equity account referred to as the foreign currency translation adjustment account. This account exists only in the foreign subsidiaries’ U.S. dollar balance sheet and is necessary to keep the foreign subsidiaries’ balance sheet stated in U.S. dollars in balance. Foreign currency translation adjustments, which are reported as a separate component of Shareholders’ Equity, were approximately $26.3 million at March 31, 2011 and $20.8 million at December 31, 2010.

Use of Non-GAAP Financial Measures

The Results of Operations section of this Quarterly Report on Form 10-Q may, from time to time, contain adjustments to amounts calculated in accordance with generally accepted accounting principles (“GAAP”) in the United States. The Company’s management believes that investors’ understanding of the Company’s performance is enhanced by disclosing these non-GAAP financial measures as a reasonable basis for comparison of ongoing results of operations. Non-GAAP measures should not be considered a substitute for GAAP-based measures and results. The Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

Cautionary Statement for Forward-Looking Information

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially from those expressed or implied. Any forward-looking statement speaks only as of the date made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

Statements concerning expected financial performance, on-going business strategies and possible future action which the Company intends to pursue to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors.

Factors that could cause actual performance to differ materially from these forward-looking statements include those risk factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which risk factors may be updated from time to time by the Company’s Quarterly Reports on Form 10-Q.

Item 3.		Quantitative and Qualitative Disclosure About Market Risk

See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective and designed to ensure that material information relating to the Company and the Company’s consolidated subsidiaries are made known to them by others within those entities.

Changes in Internal Control

In addition, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, has determined that there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting during the period covered by this report.

The Company is in the process of implementing a new enterprise resource planning (ERP) system. The Company expects the transition from its legacy systems to the new ERP system to continue throughout 2011. The Company is evaluating, and will continue to evaluate, the impact of the implementation on its internal controls related to financial reporting. At this juncture, the Company does not anticipate any adverse impact.

Part II. Other Information

Item 1.		Legal Proceedings

The Company is party to lawsuits and administrative proceedings incidental to the normal course of business. The Company currently is not a party to any pending material proceedings under Item 103 of Regulation S-K.

Item 1A.		Risk Factors

There have been no material changes from the information previously reported under Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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

None

Item 3.		Defaults upon Senior Securities

Not applicable

Item 4.		Removed and Reserved

Item 5.		Other Information

None

Item 6.		Exhibits

Exhibit						Filing
Number				Description of Exhibit		Status
	2.3			Agreement and Plan of Merger, dated as of May 4, 2011, by and among INC Research, LLC, Triangle Two Acquisition Corp. and Kendle International Inc.		A
	4.1	(a)		Amendment No. 1 to Stockholder Rights Agreement, dated as of May 4, 2011, between Kendle International Inc. and American Stock Transfer & Trust Company, LLC		B
	10.20			Amendment No. 3 to Credit Agreement with various lenders and JPMorgan Chase Bank N.A., as Administrative Agent dated as of April 28, 2011		C
	10.21			Amendment No. 4 to Credit Agreement with various lenders and JPMorgan Chase Bank N.A., as Administrative Agent dated as of May 3, 2011		C
	31.1			Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		C
	31.2			Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		C
	32.1			Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		C
	32.2			Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		C

Filing
Status		Description of Filing Status
A		Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the Commission on May 5, 2011.
B		Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-A (Amendment No. 1) filed with the Commission on May 5, 2011.
C		Filed herewith

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.

KENDLE INTERNATIONAL INC.

Exhibit Index

Exhibits				Description
	2.3			Agreement and Plan of Merger, dated as of May 4, 2011, by and among INC Research, LLC, Triangle Two Acquisition Corp. and Kendle International Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the Commission on May 5, 2011).
	4.1	(a)		Amendment No. 1 to Stockholder Rights Agreement, dated as of May 4, 2011, between Kendle International Inc. and American Stock Transfer & Trust Company, LLC (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-A (Amendment No. 1) filed with the Commission on May 5, 2011).
	10.20			Amendment No. 3 to Credit Agreement with various lenders and JPMorgan Chase Bank N.A., as Administrative Agent dated as of April 28, 2011
	10.21			Amendment No. 4 to Credit Agreement with various lenders and JPMorgan Chase Bank, N.A., as Administrative Agent dated as of May 4, 2011
	31.1			Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
	31.2			Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002
	32.1			Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
	32.2			Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002