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, 2013
¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission file number: 0-25323

 

ALBANY MOLECULAR RESEARCH, INC.

(Exact name of registrant as specified in its charter)

 

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

 

26 Corporate Circle

Albany, New York 12212

(Address of principal executive offices)

 

(518) 512-2000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Yes   x

No   ¨

 

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

 

Yes   x

No   ¨

 

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

 

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

 

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

 

Yes   ¨

No   x

 

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

 

Class		Outstanding at April 30, 2013
Common Stock, $.01 par value		31,418,106 excluding treasury shares of 5,411,372

 

 

ALBANY MOLECULAR RESEARCH, INC.

 INDEX

 

Part I.		Financial Information				3
		Item 1.		Condensed Consolidated Financial Statements (Unaudited)		3
				Condensed Consolidated Statements of Operations		3
				Condensed Consolidated Statements of Comprehensive Income (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		16
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		23
		Item 4.		Controls and Procedures		23
Part II.		Other Information				24
		Item 1.		Legal Proceedings		24
		Item 1A.		Risk Factors		24
		Item 6.		Exhibits		24
Signatures						25
Exhibit Index

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.      Condensed Consolidated Financial Statements (Unaudited)

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended
(Dollars in thousands, except for per share data)		March 31, 2013				March 31, 2012
Contract revenue		$	46,493			$	42,710
Recurring royalties			12,913				10,985
Total revenue			59,406				53,695
Cost of contract revenue			37,822				39,670
Technology incentive award			1,114				1,099
Research and development			105				373
Selling, general and administrative			9,549				9,846
Restructuring charges			879				688
Property and equipment impairment charges			534				3,967
Total operating expenses			50,003				55,643
Income (loss) from operations			9,403				(1,948	)
Interest expense, net			(82	)			(142	)
Other income (loss), net			452				(792	)
Income (loss) before income tax expense			9,773				(2,882	)
Income tax expense			3,268				925
Net income (loss)		$	6,505			$	(3,807	)
Basic and diluted income (loss) per share		$	0.21			$	(0.13	)

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

(unaudited)

		Three Months Ended March 31,
		2013				2012
Net income (loss)		$	6,505			$	(3,807	)
Unrealized loss on marketable securities, net of taxes			-				(1	)
Foreign currency translation (loss) gain			(683	)			2,016
Net actuarial gain related to pension and postretirement benefits			125				136
Total comprehensive income (loss)		$	5,947			$	(1,656	)

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Dollars and shares in thousands, except for per share data)		March 31, 2013				December 31, 2012
Assets
Current assets:
Cash and cash equivalents		$	28,535			$	23,293
Restricted cash			1,032				702
Accounts receivable, net			36,345				42,496
Royalty income receivable			12,978				8,180
Inventory			32,763				28,216
Prepaid expenses and other current assets			10,179				7,337
Deferred income taxes			2,748				3,200
Total current assets			124,580				113,424
Property and equipment, net			132,875				135,519
Restricted cash			4,345				4,524
Intangible assets and patents, net			3,075				3,065
Equity investment in unconsolidated affiliates			956				956
Deferred income taxes			2,406				3,520
Other assets			1,760				1,854
Total assets		$	269,997			$	262,862
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses		$	22,102			$	23,566
Income taxes payable			2,337				1,148
Arbitration reserve			2,376				2,717
Deferred revenue and licensing fees			8,245				7,365
Accrued pension benefits			543				414
Current installments of long-term debt			954				776
Total current liabilities			36,557				35,986
Long-term liabilities:
Long-term debt, excluding current installments			7,048				7,227
Deferred licensing fees			2,500				2,857
Deferred income taxes			781				753
Pension and postretirement benefits			8,495				8,691
Other long-term liabilities			1,040				1,207
Total liabilities			56,421				56,721
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 50,000 shares authorized, 36,830 shares issued as of  March 31, 2013, and 36,326 shares issued as of December 31, 2012			368				363
Additional paid-in capital			209,267				207,784
Retained earnings			81,682				75,177
Accumulated other comprehensive loss, net			(10,853	)			(10,295	)
			280,464				273,029
Less, treasury shares at cost, 5,411 shares as of March 31, 2013 and December 31, 2012			(66,888	)			(66,888	)
Total stockholders’ equity			213,576				206,141
Total liabilities and stockholders’ equity		$	269,997			$	262,862

 

See notes to unaudited condensed consolidated financial statements.

 

 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

 (unaudited)

 

		Three Months Ended
(Dollars in thousands)		March 31, 2013				March 31, 2012
Operating activities
Net income (loss)		$	6,505			$	(3,807	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			4,117				4,535
Deferred income tax benefit			1,534				784
Loss on disposal of property, plant and equipment			67				102
Property and equipment impairment			534				3,967
Stock-based compensation expense			506				537
Excess tax benefit of stock option exercises			(352	)			─
Provision for bad debt			52				─
Write down for obsolete inventories			─				316
Changes in assets and liabilities that provide (use) cash:
Accounts receivable			6,099				(2,993	)
Royalty income receivable			(4,798	)			(3,854	)
Inventory, prepaid expenses and other assets			(7,349	)			(7,290	)
Accounts payable and accrued expenses			(1,931	)			1,481
Income taxes			1,541				41
Deferred revenue and licensing fees			523				511
Pension and postretirement benefits			125				34
Other long-term liabilities			(41	)			(44	)
Net cash provided by (used in) operating activities			7,132				(5,680	)
Investing activities
Proceeds from sales and maturities of investment securities			—				213
Purchase of property, plant and equipment			(2,446	)			(2,155	)
Payments for patent applications and other costs			(116	)			(131	)
Proceeds from disposal of property, plant and equipment			—				50
Net cash used in investing activities			(2,562	)			(2,023	)
Financing activities
Principal payments on long-term debt			(1	)			(401	)
Change in restricted cash			(151	)			(4,505	)
Proceeds from sale of common stock			629				233
Excess tax benefit of stock option exercises			352				─
Net cash provided by (used in) financing activities			829				(4,673	)
Effect of exchange rate changes on cash			(157	)			636
Increase (decrease) in cash and cash equivalents			5,242				(11,740	)
Cash and cash equivalents at beginning of period			23,293				19,984
Cash and cash equivalents at end of period		$	28,535			$	8,244

 

See notes to unaudited condensed consolidated financial statements.

 

 

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

 

Note 1 — Summary of Operations and Significant Accounting Policies

 

Nature of Business and Operations

 

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

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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

 

Use of Management Estimates

 

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

 

Contract Revenue Recognition

 

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

 

 

The Company generates contract revenue on the following basis:

 

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

 

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

 

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

 

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

 

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

 

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

 

The Company has entered into such agreements with Bristol-Myers Squibb (“BMS”) and Genentech, Inc. (“Genentech”). Under the terms of these Agreements, the Company received upfront licensing fees and research funding to further develop the licensed compounds. In addition, the Company is eligible to receive development and regulatory milestones for each licensed compound, as well as royalties on sales of commercialized compounds, if any.

 

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

 

·

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

 

·

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

 

For both the three months ended March 31, 2013 and 2012, no milestone revenue was recognized by the Company.

 

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

 

 

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

 

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.

 

Upon entering into a new credit agreement in April 2012, the Company is required to maintain a $5,000 restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement will be directly reduced by the amount of principal payments made on the term loan beginning in May 2013. The balance of restricted cash at March 31, 2013 primarily consists of the above mentioned $5,000.

 

Long-Lived Assets

 

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

 

·

a significant change in the extent or manner in which a long-lived asset 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.

 

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,
		2013				2012
Weighted average common shares outstanding - basic			30,650				30,140
Dilutive effect of share-based compensation			713				-
Weighted average common shares outstanding - diluted			31,363				30,140

 

The Company has excluded certain outstanding stock options from the calculation of diluted earnings per share for the three months ended March 31, 2013 because the exercise price was greater than the average market price of the Company’s common shares during that period, and as such, these options would be anti-dilutive. The Company has excluded all outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the three months ended March 31, 2012 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive. The weighted average number of anti-dilutive options and restricted shares outstanding (before the effects of the treasury stock method) was 1,020 and 3,133 for the three months ended March 31, 2013 and 2012, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

 

 

Note 3 — Inventory

 

Inventory consisted of the following at March 31, 2013 and December 31, 2012:

 

		March 31, 2013				December 31, 2012
Raw materials		$	9,104			$	8,575
Work in process			3,955				2,949
Finished goods			19,704				16,692
Total		$	32,763			$	28,216

 

Note 4 –Debt

 

In April 2012, the Company entered into a $20,000 credit facility consisting of a 4-year, $5,000 term loan and a $15,000 revolving line of credit. The Company used a portion of the initial proceeds borrowed under the term loan to repay all amounts due under its prior credit agreement. As of March 31, 2013, the Company had no amounts outstanding on the revolving line of credit and $8,177 of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at March 31, 2013 is $6,823.

 

Borrowings under this agreement will bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of March 31, 2013, the interest rate on the term loan was 3.625%.

 

The credit facility contains financial covenants, including a minimum fixed charge coverage ratio which commenced in 2013 and extends for the remaining term of the agreement, maximum quarterly year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations. As of March 31, 2013 the Company was in compliance with its current financial covenants.

 

The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021. Interest payments are due monthly with a current interest rate of 0.24% at March 31, 2013. The amount outstanding as of March 31, 2013 was $2,990.

 

The following table summarizes long-term debt:

 

		March 31,  2013				December 31, 2012
Term loan		$	5,000			$	5,000
Industrial development authority bonds			2,990				2,990
Miscellaneous loan			12				13
			8,002				8,003
Less current portion			(954	)			(776	)
Total long-term debt		$	7,048			$	7,227

 

The aggregate maturities of long-term debt at March 31, 2013 are as follows:

 

2013 (remaining)		$	774
2014			1,024
2015			1,029
2016			1,034
2017			2,711
Thereafter			1,430
Total		$	8,002

 

Note 5 — Restructuring and Impairment

 

During 2012, the Company announced its decisions to cease operations at its Budapest, Hungary, and Bothell, Washington facilities. The goal of these restructuring activities is to advance the Company’s continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing its location footprint. In connection with these activities, the Company recorded restructuring charges in its Discovery, Drug Development and Small Scale Manufacturing (“DDS”) operating segment of $879 in the first quarter of 2013 and $4,355 during 2012.  These amounts included $1,636 for termination benefits and $3,153 for preparing the facilities for closure and other administrative costs, including estimated costs associated with terminating the Budapest lease, and $445 for repayment of government incentive programs. The Company exited the Hungary facility in the third quarter of 2012 and is in the process of resolving the termination of the lease. 

 

 

In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $534 in the DDS segment in the first quarter of 2013. These charges are included under the caption “Property and equipment impairment” on the Consolidated Statement of Operations for the three months ended March 31, 2013.

 

The following table displays the restructuring activity and liability balances for the year ended and as of March 31, 2013:

 

		Balance at January 1, 2013				Charges/ (reversals)				Amounts Paid				Foreign Currency Translation Adjustments				Balance at  March 31, 2013
Termination benefits and personnel realignment		$	386			$	464			$	(226	)			(8	)		$	616
Lease termination and relocation charges			1,405				415				(666	)			(76	)			1,078
Other			470				-				-				(2	)			468
Total		$	2,261			$	879			$	(892	)			(86	)		$	2,162

 

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

 

Restructuring charges are included under the caption “Restructuring charges” in the consolidated statements of operations for the three months ended March 31, 2013 and 2012 and the restructuring liabilities are included in “Accounts payable and accrued expenses” and “other long-term liabilities” on the consolidated balance sheets at March 31, 2013 and December 31, 2012.

 

Anticipated cash outflow related to the restructurings for the remainder of 2013 is approximately $2,153, which includes the estimated settlement of the Hungary lease.

 

Note 6 —Intangible Assets

 

The components of intangible assets are as follows:

 

		Cost				Accumulated Amortization				Net				Amortization Period
March 31, 2013
Patents and Licensing Rights		$	4,409			$	(1,694	)		$	2,715			2-16 years
Customer Relationships			815				(455	)			360			5 years
Total		$	5,224			$	(2,149	)		$	3,075
December 31, 2012
Patents and Licensing Rights		$	4,333			$	(1,669	)		$	2,664			2-16 years
Customer Relationships			815				(414	)			401			5 years
Total		$	5,148			$	(2,083	)		$	3,065

 

Amortization expense related to intangible assets was $103 and $117 for the three months ended March 31, 2013 and 2012, respectively.

 

 

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

 

Year  ending December 31,
2013 (remaining)		$	315
2014			425
2015			330
2016			246
2017			246
Thereafter			1,513
Total		$	3,075

 

Note 7 — Share-Based Compensation

 

The Company recognized total share-based compensation cost of $506 and $537 during the three months ended March 31, 2013 and 2012.

 

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

 

Restricted Stock

 

A summary of unvested restricted stock activity as of March 31, 2013 and changes during the three months then ended is presented below:

 

		Number of Shares				Weighted Average Grant Date Fair Value Per Share
Outstanding, January 1, 2013			468			$	5.85
Granted			235			$	6.67
Vested			(106	)		$	8.05
Forfeited			(7	)		$	6.52
Outstanding, March 31, 2013			590			$	5.77

 

The weighted average fair value of restricted shares per share granted during the three months ended March 31, 2013 and 2012 was $6.67 and $2.93, respectively. As of March 31, 2013, there was $3,053 of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.6 years. Of the 590 restricted shares outstanding, we currently expect 567 shares to vest.

 

Stock Options

 

The fair value of each stock option award is estimated at the date of grant using the Black-Scholes valuation model based on the following assumptions:

 

		For the three Months Ended
		March 31, 2013				March 31, 2012
Expected life in years			5				5
Risk free interest rate			0.82	%			0.90	%
Volatility			56	%			57	%
Dividend yield			—				—

 

A summary of stock option activity under the Company’s Stock Option and Incentive Plans as of March 31, 2013 and changes during the three month period then ended is presented below:

 

		Number of Shares				Weighted Average Exercise Price Per Share				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding, January 1, 2013			2,389			$	5.90
Granted			314				5.99
Exercised			(176	)			2.31
Forfeited			(31	)			5.85
Expired			(180	)			15.33
Outstanding, March 31, 2013			2,316			$	5.45				7.8			$	12,750
Options exercisable, March 31, 2013			826			$	8.30				5.8			$	2,790

 

 

The weighted average fair value of stock options granted for the three months ended March 31, 2013 and 2012 was $2.86 and $1.43, respectively. As of March 31, 2013, there was $2,387 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years.

 

Employee Stock Purchase Plan

 

During the three months ended March 31, 2013 and 2012, 100 and 93 shares, respectively, were issued under the Company’s 1998 Employee Stock Purchase Plan.

 

During the three months ended March 31, 2013 and 2012, cash received from stock option exercises and employee stock purchases was $629 and $233, respectively. The excess tax benefit realized for the tax deductions from share based compensation was $352 and $0 for the three months ended March 31, 2013 and 2012, respectively.

 

Note 8 — Operating Segment Data

 

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

 

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

 

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

 

		Contract Revenue				Milestone & Recurring Royalty Revenue				Income (Loss)  from Operations				Depreciation and Amortization
For the three months ended March 31, 2013
DDS		$	20,096			$	11,141			$	11,853			$	2,145
LSM			26,397				1,772				7,099				1,971
Corporate			—				—				(9,549	)			—
Total		$	46,493			$	12,913			$	9,403			$	4,117
For the three months ended March 31, 2012
DDS		$	19,460			$	10,985			$	5,481			$	2,594
LSM			23,250				—				2,417				1,941
Corporate			—				—				(9,846	)			—
Total		$	42,710			$	10,985			$	(1,948	)		$	4,535

 

The following table summarizes other information by segment as of and for the three month period ended March 31, 2013:

 

		DDS				LSM				Total
Total assets		$	118,912			$	151,085			$	269,997
Investments in unconsolidated affiliates			956				—				956
Capital expenditures			459				1,987				2,446

  

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

 

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

 

 

Note 9 — Financial Information by Customer Concentration and Geographic Area

 

Total contract revenue from DDS’s three largest customers each represented approximately 8%, individually, of DDS’s total contract revenue for the three months ended March 31, 2013, and 10%, 6% and 5% of DDS’s total contract revenue for the three months ended March 31, 2012. Total contract revenue from LSM’s largest customer, GE Healthcare (“GE”), represented 32% and 28% of LSM’s total contract revenue for the three months ended March 31, 2013 and 2012, respectively. GE accounted for approximately 18% and 15% of the Company’s total contract revenue for the three months ended March 31, 2013 and 2012, respectively. LSM’s second largest customer represented 16% of LSM’s total contract revenue for both the three months ended March 31, 2013 and 2012.

 

The Company’s total contract revenue for the three months ended March 31, 2013 and 2012 was recognized from customers in the following geographic regions:

 

		Three Months Ended March 31,
		2013				2012
United States			63	%			61	%
Europe			21				22
Asia			13				12
Other			3				5
Total			100	%			100	%

 

Long-lived assets by geographic region are as follows:

 

		March 31, 2013				December  31, 2012
United States		$	109,968			$	112,268
Asia			19,268				19,076
Europe			6,714				7,240
Total long-lived assets		$	135,950			$	138,584

 

Note 10 — Legal Proceedings

 

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

 

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

 

Note 11 – Fair Value

 

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

 

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

 

 

Long-term debt: The carrying value of long-term debt approximated fair value at March 31, 2013 and December 31, 2012 due to the resetting dates of the variable interest rates.

 

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

 

These tiers include:

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

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

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

 

Note 12 – Accumulated Other Comprehensive Income (Loss)

 

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

 

		Pension and postretirement benefit plans				Foreign currency adjustments				Total Accumulated Other Comprehensive Loss
Balance at December 31, 2012, net of tax		$	(5,687	)		$	(4,608	)		$	(10,295	)
Net current period change, net of tax			125				(683	)			(558	)
Balance at March 31, 2013, net of tax		$	(5,562	)		$	(5,291	)		$	(10,853	)

 

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

 

		Three Months Ended March 31, 2013
Amortization of pension and other postretirement benefits (a)
Actuarial losses			192
Total before tax effect			192
Tax benefit on amounts reclassified into earnings			(67	)
			125

 

(a)

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

 

 

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

 

Forward-Looking Statements

 

The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and the Notes thereto included within this report. This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning pension and postretirement benefit costs, the Company’s relationship with its largest customers, the Company’s collaboration with Bristol-Myers Squibb (“BMS”), future acquisitions, earnings, contract revenues, costs and margins, patent protection, Allegra® and Actavis royalty revenue, government regulation, retention and recruitment of employees, customer spending and business trends, foreign operations, including increasing options and solutions for customers, business growth and the expansion of the Company’s global market, clinical supply manufacturing, management’s strategic plans, drug discovery, product commercialization, license arrangements, research and development projects and expenses, revenue and expense expectations for future periods, goodwill and long-lived asset impairment, competition and tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on March 18, 2013, as updated by Part II Item 1A, “Risk Factors,” in subsequent Forms 10-Q. All forward-looking statements are made as of the date of this report, and we do not undertake to update any such forward-looking statements in the future, except as required by law. References to “AMRI”, the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole.

 

Strategy and Overview

 

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

 

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

 

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

 

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

 

 

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. AMRI SMARTSOURCING™ is a cross functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI’s people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both 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.

 

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

 

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

 

Our backlog of open manufacturing orders and accepted service contracts was $124.5 million at March 31, 2013, as compared to $104.3 million at March 31, 2012. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

 

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

 

Our total revenue for the quarter ended March 31, 2013 was $59.5 million, which included $46.5 million from our contract service business and $12.9 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc. (“Actavis”). Consolidated gross margin was 18.6% for the quarter ended March 31, 2013 as compared to 7.1% for the quarter ended March 31, 2012.

 

During the three months ended March 31, 2013, cash provided by operations was $7.1 million compared to cash used by operations of $5.7 million for the same period of 2012. This change from the three months ended March 31, 2012 resulted primarily from improvement in the Company’s financial position. During the three months ended March 31, 2013, we spent $2.4 million in capital expenditures, primarily related to growth and maintenance of our existing facilities. As of March 31, 2013, we had $33.9 million in cash, cash equivalents and restricted cash and $8.0 million in bank and other related debt.

 

Results of Operations – Three Months ended March 31, 2013 Compared to Three Months Ended March 31, 2012

 

Revenues

 

Total contract revenue

 

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

 

		Three Months Ended March 31,
(in thousands)		2013				2012
DDS		$	20,096			$	19,460
LSM			26,397				23,250
Total		$	46,493			$	42,710

 

 

DDS contract revenues for the three months ended March 31, 2013 increased from the same period in 2012. This increase was primarily due to an increase in demand for U.S. chemistry services.

 

We currently expect DDS contract revenue for full year 2013 to increase from amounts recognized in 2012 primarily due to continued growth in demand for our U.S. chemistry services.

 

LSM revenue increased for the three months ended March 31, 2013 from the same period in 2012 primarily due to an increase in commercial manufacturing services at our Rensselaer, NY facility, as well as at our international large-scale manufacturing facilities.

 

We currently expect continued growth in LSM contract revenue for full year 2013 due to strong demand for our commercial manufacturing services.

 

Recurring royalty revenue

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	12,913			$	10,985

 

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

 

Recurring royalties increased during the quarter ended March 31, 2013 from the same period in 2012 primarily due to the receipt of Actavis royalties of $1.8 million.

 

We currently expect full year 2013 recurring royalties to slightly increase over amounts recognized in 2012 primarily due to incremental royalties from Actavis, partially offset by lower Allegra royalties.

 

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

 

Costs and Expenses

 

Cost of contract revenue

 

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

 

		Three Months Ended March 31,
Segment		2013				2012
(in thousands)
DDS		$	16,772			$	18,840
LSM			21,050				20,830
Total		$	37,822			$	39,670
DDS Gross Margin			16.5	%			3.2	%
LSM Gross Margin			20.3	%			10.4	%
Total Gross Margin			18.6	%			7.1	%

 

 

DDS contract revenue gross margin percentage increased for the three months ended March 31, 2013 compared to contract gross margin percentage for the same period in 2012. These increases are primarily due to previously announced cost savings initiatives as well as an increase in facility utilization.

 

We currently expect DDS contract margins for 2013 to improve over amounts recognized in 2012 due to the impact of full year cost savings initiatives in our global discovery services platform along with increased facility utilization.

 

LSM’s contract revenue gross margin percentages improved for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

 

We currently expect continued improvement in LSM contract margins for 2013 driven by an increase in capacity utilization.

 

Technology incentive award

 

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

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	1,114			$	1,099

 

Technology incentive award expense for the three months ended March 31, 2013 remained consistent with expense for the same period in 2012.

 

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

 

Research and development

 

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

 

During the fourth quarter of 2011, the Company made a decision to cease activities related to its internal discovery research and development programs, excluding generic programs. Although we ceased our proprietary new compound R&D activities, we continue to believe there are additional opportunities to partner these programs in return for appropriate consideration if our technology results in compounds that are successfully developed into new drugs and reach the market. In addition, R&D activities continue at our large-scale manufacturing facility related to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

 

Research and development expenses were as follows:

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	105			$	373

 

R&D expense for the three months ended March 31, 2013 decreased from the same period in 2012 as a result of our continued efforts to support our strategic decision to cease R&D operations related to our internal discovery research and development programs, excluding our generics program.

 

 

Based on our strategic decision to cease R&D operations, we currently expect 2013 R&D expense to decrease slightly from amounts recognized in 2012.

 

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,
2013				2012
(in thousands)
$	9,549			$	9,846

 

The decrease in SG&A expenses for the three months ended March 31, 2013 from the comparable prior year period is primarily attributable to cost savings actions.

 

We currently expect SG&A expenses for 2013 to decrease from amounts recognized in 2012 due to on-going cost savings actions.

 

Restructuring

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	879			$	688

 

During 2012, we approved restructuring plans to cease all operations at our Budapest, Hungary, and Bothell, WA facilities. The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and to remain diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. Additionally, we intend to expand and better integrate our in vitro biology services with the total drug discovery service platform and to further optimize the Company’s location footprint. In connection with these actions, we recorded restructuring charges of $0.9 million in the first quarter of 2013 and $4.6 million in 2012.

 

We exited the Budapest, Hungary facility in the third quarter of 2012 and are in the process of resolving the termination of the lease.

 

Anticipated cash outflow related to the restructurings for the remainder of 2013 is approximately $2.2 million, which includes the settlement of the Hungary lease.

 

Property and Equipment Impairment

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	534			$	3,967

 

In the first quarter of 2013, we recorded property and equipment impairment charges of $0.5 million in our DDS segment associated with the Company’s decision to cease operations at our Bothell, Washington facility.

 

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

 

 

Interest expense, net

 

		Three Months Ended March 31,
(in thousands)		2013				2012
Interest expense		$	(83	)		$	(146	)
Interest income			1				4
Interest expense, net		$	(82	)		$	(142	)

 

Net interest expense decreased for the three months ended March 31, 2013 from the same period in 2012 primarily due to decreased interest rates on our interest bearing liabilities.

 

Other income (expense), net

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	452			$	(792	)

 

Other income for the three months ended March 31, 2013 was primarily related to an insurance demutualization gain of $0.4 million.

 

Other expense for the three months ended March 31, 2012 was primarily due to deferred financing amortization expense related to our prior credit agreement that was amended in June 2011 with a one year term, as well as expense related to the fluctuation in exchange rates associated with foreign currency transactions.

 

Income tax expense

 

Three Months Ended March 31,
2013				2012
(in thousands)
$	3,268			$	925

 

Income tax expense increased for the three months ended March 31, 2013 as compared to the same period in prior year due primarily to improved pre-tax income at the Company’s U.S. locations.

 

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first three months of 2013, we generated cash of $7.1 million in operating activities which was primarily due to increased levels of profitability.

 

During the first three months of 2013, cash used in investing activities was $2.6 million, resulting primarily from the acquisition of property and equipment. During the first three months of 2013, we generated $0.5 million in financing activities, relating primarily to cash received in relation to option exercises and ESPP purchases, offset in part by payments made on our credit facilities.

 

Working capital was $88.0 million at March 31, 2013 as compared to $77.4 million as of December 31, 2012. This increase primarily relates to an increase in royalties receivable, as well as cash generated from operations.

 

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. The Company used a portion of the initial proceeds from borrowings against the term loan to repay all amounts due under its prior credit agreement. As of March 31, 2013, the Company had no amounts outstanding under the line of credit and $8.2 million of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at March 31, 2013 was $6.8 million.

 

Upon entering into the credit agreement in April 2012, the Company is required to maintain a $5.0 million restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement will be directly reduced by the amount of principal payments made on the term loan beginning in May 2013.

 

Borrowings under this agreement bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of March 31, 2013, the interest rate on the outstanding term loan was 3.625%.

 

The credit facility contains financial covenants, including a minimum fixed charge coverage ratio commencing in 2013 and extending for the remaining term of the agreement, maximum quarterly and year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations. As of March 31, 2013, the Company was in compliance with its current financial covenants.

 

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, 2012. There have been no material changes to our contractual obligations since December 31, 2012. As of March 31, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

 

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

 

Critical Accounting Policies and Estimates

 

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

 

 

We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. There have been no material changes or modifications to the policies since December 31, 2012.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part II, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results.

 

Item 6. Exhibits

 

Exhibit
Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101		XBRL (eXtensible Business Reporting Language).  The following materials from Albany Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) notes to consolidated financial statements.**

 

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

 

** XBRL (Extensible Business Reporting Language) information is furnished and not deemed filed or a part of a registration

statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the

Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

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

 

	ALBANY MOLECULAR RESEARCH, INC.
Date: May 9, 2013	By:	/s/ Michael M. Nolan
		Michael M. Nolan
		Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)