PART I
ITEM 1. BUSINESS.
Overview
Albany Molecular Research, Inc. i
s a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”) and the manufacturing of drug product for existing and experimental new drugs, as well as research, development and manufacturing for the agrochemical and other industries.
With locations in the United States, Europe, and Asia, AMRI maintains geographic proximity to our customers and flexible cost models. AMRI has also historically leveraged its drug-discovery expertise to execute on several internal drug discovery programs, certain of which have been successfully partnered.
AMRI is actively seeking to out-license the remaining programs to strategic partners for further development and commercialization.
Industry Overview and Trends
We believe that market trends in the pharmaceutical and biotech industries demonstrate an increasing emphasis towards outsourcing, as companies seek to maintain reduced internal resources in favor of variable models that offer high quality and higher accountability alternatives to meet their drug discovery, development and manufacturing needs.
We believe that ongoing announcements from many large pharmaceutical companies regarding their reorganization plans and strategy changes point to outsourcing as an increasingly important and strategic part of future R&D efforts.
We also believe that announcements from several pharmaceutical companies regarding regulatory scrutiny of their manufacturing facilities, and in some instances, closure or divestiture of these facilities, point to opportunities for AMRI to benefit from increased outsourcing of API and drug product manufacturing services.
Business Strategy
AMRI is uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers.
Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large-scale manufacturing projects throughout our global network of research and manufacturing facilities.
We believe we have a unique portfolio of service offerings ranging from early stage discovery through manufacturing and formulation across the U.S., Europe and Asia.
We believe this product and geographic mix will continue to allow us to increase multi-year strategic relationships and enhance our revenue growth with a variety of customers.
In the fourth quarter of 2013, we successfully managed the operations of the Company to be profitable independent of royalties from the sales of Allegra and we continue to manage the operations with the goal of being profitable independent of all royalties.
In 2014 and beyond, we are targeting growth and increased profitability across the discovery and early development, API manufacturing and formulation manufacturing service offerings.
Our strategy to accomplish this includes the following:
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Organizational Leadership
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In 2013, we announced the retirement of our Company founder from his role as President and CEO after 22 years, to Chairman of the Board, effective January 1, 2014.
Simultaneously, the Chairman of the Board assumed the role of President and CEO, and stepped down as Chairman of the Board.
Also in late 2013, our new Senior Vice President, Drug Discovery joined the Company and in January 2014, our Senior Vice President, Sales and General Manager, API joined the Company.
The appointment of other highly experienced, key personnel, underscore AMRI’s dedication to client service, operational excellence, and growth.
We have enhanced and unified our sales and marketing organization under this new global leadership to optimize selling opportunities and management of key accounts across our business segments.
We believe our strengthened organizational structure, combined with more focused sales and marketing efforts, should enable us to drive long term growth across diversified segments and increased, sustainable profitability.
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Enhance revenue growth and mix
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Market trends continue to point to outsourcing as an increasingly important part of business strategies for our customers across the discovery, development and API and formulation manufacturing areas, including both generic and branded products.
We believe our ability to offer a full service model, which also allows customers to use a combination of our U.S., Europe and Asia based facilities, will result in an increase in demand for our services globally.
We also offer our customers the option of insourcing, a strategic relationship that embeds AMRI scientists into the customer’s facility, allowing them to cost-effectively leverage their unused laboratory space.
AMRI’s SMARTSOURCING initiative, offering a full range of value-added opportunities, provides customers informed decision-making, enhanced efficiency and more successful outcomes at all stages of the pipeline. This approach maximizes the strengths of both insourcing and outsourcing by leveraging AMRI’s expertise, global facilities and project management to provide strategic relationships and flexible business models for customers.
We are also continuing to focus our efforts on other important customer segments: small and large biotech companies, non-profit/government entities and related industries such as the agricultural, nutraceutical and food industries.
We believe maintaining a balance within our customer portfolio between large pharmaceutical, non-profit/government, biotech and other companies will help ensure sustained sales and reduce risk.
We have made investments to grow our formulation and injectable drug product business at our Burlington, MA facility and in 2013 successfully cleared an FDA warning letter.
We believe this type of business has significant potential in the drug product world driven by the growth in biologically based compounds which are formulated and manufactured on an aseptic basis.
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Streamline operations to improve margins
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The cost base of our manufacturing and research facilities is largely fixed in nature.
However, we continue to seek opportunities to minimize these fixed costs, with a focus on gaining flexibility and improving efficiency, cost structure and margin.
During 2012, we transitioned certain services from Hungary to India, and in 2013, ceased all activities in Hungary.
During 2013, we further transitioned certain biology services from Bothell, WA to Singapore and Albany, NY. These actions were taken to better align the business to customer demand and current and expected market conditions due to shifting preferences related to the preferred co-localization of integrated drug discovery activities.
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Maximize licensing/partnering of proprietary compounds to enhance future cash flow
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Although we suspended substantial investments and halted proprietary compound R&D activities in 2011, we continue to believe there are additional opportunities to partner our proprietary compounds or programs to create value, as we have seen a renewed commitment by pharmaceutical companies for innovation both internally and through licensing.
Our goal is to partner these programs in return for a combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.
One compound was successfully partnered in early 2013.
We are continuing to focus on partnering other programs.
We may consider acquisitions that enhance or complement our existing service offerings.
In addition to growing the Company organically, any acquisitions would generally be expected to contribute to AMRI’s growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle.
Our Capabilities
The problem-solving abilities of our scientists can provide added value throughout the drug discovery, development and manufacturing process. We also offer certain, limited formulation services, including early phase solid dosage capabilities at our Rensselaer, NY facility and aseptic fill finish for both clinical and commercial products at our Burlington, MA location.
Our comprehensive suite of services allows our customers to contract with a single partner, eliminating the time and cost of transitioning projects among multiple vendors.
We perform services including drug discovery, pharmaceutical development, and manufacturing of active ingredients and pharmaceutical intermediates, and drug product manufacturing for many of the world’s leading healthcare companies.
Business Segments
We have organized our activities into two distinct segments: Large Scale Manufacturing (“LSM”) and Discovery, Drug Development and Small-Scale Manufacturing (“DDS”).
Our LSM activities include pilot- to commercial-scale production of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing.
Our remaining activities, including drug lead discovery, in vitro biology and DMPK, lead optimization, drug development, and small-scale commercial manufacturing, represent our DDS business segment.
See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to the Consolidated Financial Statements for financial information on the Company’s business segments.
Service Offerings
Drug Discovery Services
The competitive drug discovery industry continues to face many challenges, including a weakening product pipeline, increasing costs, more complex disease targets and regulatory hurdles. These challenges have compelled many companies/research organizations to look outside their own R&D function for contract partners to support research and development from the earliest stages of the drug discovery process.
AMRI performs integrated drug discovery programs, harnessing the capabilities and expertise of specialist teams of scientists from individual disciplines under the coordination of experienced project leaders and key employees with decades of experience. All of the capabilities described below are also offered individually to support customers who have their own capacity in certain areas.
Our Drug Discovery Services include:
Assay Development and Design
We offer custom assay design and development services to clients in the pharmaceutical, biopharmaceutical and agrochemical industries who are starting from a unique target or who are supporting ongoing lead discovery programs.
This service can be delivered independently to a client, or integrated with our full range of drug discovery services.
Screening
Our diverse offering of screening capabilities, coupled with access to our range of sample collections, give customers the essential tools to efficiently identify and optimize lead compounds.
Screening Libraries
We have created a series of unique, high purity, cost effective, small molecule synthetic compound libraries and a complementary collection of natural product extracts from marine, plant and microbial sources designed for screening and hit-to-lead programs.
We are uniquely positioned to fully support active hits from any of these libraries with lead optimization services, analytical services, custom synthesis and/or small or large-scale manufacturing.
Natural Product Services
We have a longstanding, well established ability to deliver on natural products discovery programs. Our natural product library and screening capabilities are supported by a team of experts with decades of experience in the field.
We have substantial expertise in natural product isolation, structural identification, fermentation development and biotransformations giving us the ability to rapidly advance a natural product from hit to lead to qualified drug candidate.
Custom Synthesis and Library Synthesis
In the Hit-Lead phase of drug discovery it is common to require custom designed libraries of compounds relating to specific structural classes of interest.
Our synthetic libraries group is equipped to design and execute the preparation of libraries typically containing hundreds of compounds. AMRI applies the same capabilities to create larger libraries, typically thousands of compounds, for use in the screening phase of drug discovery. AMRI’s custom synthesis capabilities support all stages of drug discovery.
Medicinal Chemistry
Lead optimization is the complex, iterative process of altering the chemical structure of a confirmed hit to identify an improved drug lead with the goal of progressing to a preclinical candidate.
Well-trained, intuitive and knowledgeable, our medicinal chemists have years of experience working with drug-like compounds.
Our medicinal chemistry capability is fully integrated with our other drug discovery services, allowing for a “one stop shop” approach towards outsourcing lead discovery and optimization efforts, if so desired.
Computer-Aided Drug Discovery (“CADD”)
Our CADD services use sophisticated computational software and techniques to help identify novel hits or leads against selected therapeutic targets, as well as to support medicinal chemistry lead optimization programs. CADD methods can increase the odds of identifying compounds with desirable characteristics, speed up the hit-to-lead process and improve the chances of getting a compound over the many hurdles of preclinical testing.
In vitro ADMET
We conduct
in vitro
ADMET assays to evaluate and improve metabolism, bioavailability, pharmacology and toxicology of compounds.
Bioanalytical Services
We develop and execute rapid, sensitive, and robust bioanalytical methods for extraction and quantitation of drug and metabolites in biological fluids and tissues to support preclinical and clinical studies.
This service is provided stand-alone or can be coupled directly with services provided by our network of
in vivo
testing providers.
Network of pharmacology service providers
We have worked in close collaboration with multiple
in vivo
pharmacology and preclinical safety assessment providers.
The strong relationships we have developed with several of these providers allow AMRI to effectively coordinate these external services with our own internal capabilities to deliver a fully integrated drug discovery program.
Chemical Development
Chemical development involves the scale-up synthesis of a lead compound and intermediates. Processes developed for small-scale production of a compound may not be suitable for larger scale production because they may be too expensive, environmentally unacceptable or present safety concerns. With chemical development locations around the globe, we have become a top choice for an increasing number of pharmaceutical and biotechnology companies seeking a partner for the rapid advancement of their drug candidates. Customers throughout the world rely on our proven technical expertise, commitment to the highest quality and regulatory standards, flexibility, and strong customer focus to advance their lead compounds through the drug development process, from bench scale to commercial production.
Current Good Manufacturing Practices (“cGMP”) API
Manufacturing
Our manufacturing facilities are strategically situated in various locations in the United States, Europe and Asia.
These locations are globally positioned to provide tailored customer solutions and enable the efficient and cost-effective transfer of pre-clinical, clinical and commercial APIs from small-scale to large-scale production.
Additionally, these locations easily integrate with our discovery and pharmaceutical development services.
We provide chemical synthesis and manufacturing services for our customers in accordance with cGMP regulations. All facilities and manufacturing techniques used for prescribed steps in the manufacture of products for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines and regulations as established by the FDA. Our Albany, New York location has production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances sufficient for conducting clinical trials from Phase I through Phase II, and later stages, including commercial API, for selected products, based on volume and other parameters. Our large-scale manufacturing facility in Rensselaer, New York is equipped to provide a wide range of custom chemical development and manufacturing capabilities. We conduct commercial cGMP manufacturing of APIs and advanced intermediates. Our large-scale cGMP manufacturing facilities provide synergies with our small-scale development laboratories, offering our customers services at every scale, from bench to production.
We have special capabilities in high value-added areas of pharmaceutical development and manufacturing, including high potency manufacturing.
Cytotoxic and other highly potent compounds present a number of potential challenges in their production and handling.
We have extensive experience in the cGMP production of these types of compounds, from grams to hundreds of kilograms per year.
Our Rensselaer, NY facility is licensed by the U.S. Drug Enforcement Administration to produce Schedule I, II, III, IV and V controlled substances.
For over 50 years, the facility has produced controlled substances such as analgesics, amphetamines, barbiturates, and anabolic steroids.
Our large-scale manufacturing facility in Aurangabad, India was issued a Good Manufacturing Practice (“GMP”) certificate from the Australian Government Therapeutic Goods Administration (“TGA”) following an inspection in February 2011.
The certificate covers general GMP manufacturing operations, and laboratory controls designed for the production and release of APIs and intermediates.
The successful audit confirms AMRI’s compliance with GMP regulations and further demonstrates the Company’s commitment to operational quality.
Our Aurangabad facility is an approved facility by Indian FDA and World Health Organization (“WHO”) GMP certified with production facilities and quarantine and restricted access storage necessary to manufacture quantities of drug substances under cGMP regulations sufficient for conducting clinical trials and commercial API, for selected products, based on volume and other parameters.
In addition our site was approved by various leading global pharmaceutical companies from Europe and Asia as their API vendor for their generics and drug development requirements.
Formulation Development & cGMP Formulation Manufacturing
We have added selected focused formulation capabilities to our portfolio.
Our Burlington, MA facility provides contract manufacturing services in sterile syringe and vial filling using specialized technologies including lyophilization.
AMRI Burlington provides these services for both small molecule drug products and biologicals, from clinical phase to commercial scale.
Working in close collaboration with our already established chemical synthesis, analytical development and preformulation groups, we also offer formulation development services for solid dosage, solution, suspension, topicals and injectables, cGMP early clinical phase capsules filling using Xcelodose® technology and cGMP early clinical Powder in Bottle for solution and suspension.
Analytical Chemistry Services
We provide broad analytical chemistry services for drug discovery, pharmaceutical development and manufacturing. With years of industry experience, state-of-the-art technologies and instrumentation, along with close collaboration with synthesis chemists, our analytical services are designed to ensure that the right tools are used to solve even the most difficult problem.
Proprietary Research and Development
Leveraging our wide array of drug discovery capabilities, we established several internal drug discovery programs with the goal to discover and develop promising drug candidates and license these candidates in return for upfront fees, milestones and downstream royalty payments for commercialized drug products. We identified lead series candidates and optimized these lead series to development candidate status, in some cases pursuing these into early clinical studies.
Our proprietary research and development efforts to date have contributed to the discovery and development of one product that has reached the market. We discovered a new process to prepare a metabolite known as terfenadine carboxylic acid, or TAM, in a purer form. The purer form of TAM is the active ingredient in the non-sedating antihistamine known as fexofenadine HCl, which is sold by Sanofi under the name Allegra in the Americas and as Telfast elsewhere. We have been issued several United States and foreign patents relating to TAM and the process chemistry by which TAM is produced. Our issued patents relating to TAM began expiring in 2013, with the last to expire in 2015.
More recent drug discovery and development projects have been focused on treatments for irritable bowel disease, central nervous system diseases and obesity.
Our R&D efforts benefited from access to a broad array of our scientific services including capabilities in microbial fermentation, molecular biology, cell culture, gene expression and cloning, scale up synthesis of human metabolites, preformulation, chemical development and cGMP synthesis. Additionally, a portion of our R&D efforts focused on improving the manufacturing process for our generic API products.
In late 2011, we announced that we would cease to invest in most of these internal drug discovery efforts but continue to seek partnership or investment for the advanced programs with the goal of returning value to AMRI.
We continue to place R&D focus on improving our manufacturing processes and development of certain generic products or synthetic routes.
We spent $0.4 million, $0.9 million and $7.9 million on research and development activities in 2013, 2012 and 2011, respectively.
Licensing Agreements
AMRI Rensselaer, Inc., a wholly-owned subsidiary of AMRI, and Actavis, Inc. (“Actavis”) are parties to a long term Development and Supply Agreement (the “Supply Agreement”). Under the Supply Agreement, the Company supplies four amphetamine salts (“API”) to Actavis.
In addition to compensation for the supply of API, the Company will receive royalties on Actavis’ sales of any finished drug product that incorporates the API, for a period of five years from the date of the first commercial sale of the last product approved for sale by the Federal Drug Administration.
Actavis received FDA approval of its abbreviated new drug application (“ANDA”) for generic Adderall XR® on June 25, 2012. Actavis received FDA approval of its ANDA for extended release formulations of dextroamphetamine sulfate on November 30, 2012. Under the Agreement, the Company will receive royalty payments on sales of both finished drug products, which royalties are expected to continue through at least 2017.
In January 2011, we entered into a research and licensing agreement with Genentech.
Under the terms of the agreement, Genentech received an
exclusive license to develop and commercialize multiple potential products from our proprietary antibacterial program. Additionally, we have collaborated with Genentech in a research program with the objective of identifying novel antibacterial agents. In addition to an upfront license fee and research funding of $1.5 million, we will be eligible to receive development and regulatory milestones of up to $40.0 million for each compound to achieve these events and will receive royalties from Genentech on worldwide sales of any resulting commercialized compounds.
In October 2005, we licensed the worldwide rights to develop and commercialize potential products from our amine neurotransmitter reuptake inhibitor technology and patents identified in one of our proprietary research programs to Bristol-Myers Squibb Company (“BMS”). In conjunction with the licensing agreement, we received a non-refundable, non-creditable up-front payment of $8.6 million, which included the cancellation of outstanding warrants, and a total of $10.8 million for research and development services in the first three years of the agreement. The agreement also set forth milestone events that, if achieved by these products, would entitle the Company to non-refundable, non-creditable milestone payments.
In 2013, BMS announced the cessation of its commercialization activities regarding the assets under the license.
We are engaged in ongoing discussions with BMS as to the disposition of these assets, which may or may not result in future payments to AMRI.
If such potential products are developed by BMS, the Company is entitled to milestone payments of up to $43.5 million for each of the first and second compounds to achieve these events, and up to $22.0 million for each subsequent product to achieve these events.
These milestone events include candidate nomination, IND or equivalent regulatory filings, commencement of middle- and late-stage clinical trials, and regulatory approval of compounds for commercial sale.
The agreement also provides for the Company to receive royalty payments on worldwide sales of any such product that is commercialized.
From the entry into this agreement through December 31, 2013, we have recorded $15.5 million from achieving certain milestones with BMS.
In March 1995, we entered into a license agreement with Sanofi. Under the terms of the license agreement, we granted Sanofi an exclusive, worldwide license to any patents issued to us related to our original TAM patent applications.
From the beginning of the agreement through December 31, 2013, we have had revenues of $7.4 million in milestone payments and approximately $551.8 million in royalties under this license agreement. Sanofi is obligated under the license agreement to pay ongoing royalties to us based upon its net sales of Allegra/Telfast and generic fexofenadine.
Additionally during the fourth quarter of 2008, we entered into an amendment to our licensing agreement with Sanofi to allow Sanofi to sublicense patents related to Allegra and Allegra D-12® to Teva Pharmaceuticals and Barr Laboratories in the United States.
Subsequently, Teva Pharmaceuticals acquired Barr Laboratories.
As a result of this amendment, we received an upfront sublicense fee from Sanofi of $10.0 million and additionally we will receive royalties from Sanofi on the net sale of products in the United States containing fexofenadine hydrochloride and products containing fexofenadine hydrochloride (generic Allegra) and pseudoephedrine hydrochloride (generic Allegra D-12) by Teva Pharmaceuticals through 2015, along with additional consideration. We are not entitled, however, to receive any additional milestone payments under the license agreement.
See “Item 3Legal Proceedings” for discussion of legal proceedings related to Allegra/Telfast.
Customers
Our customers include pharmaceutical companies and biotechnology companies, as well as government research entities and non-profit organizations, which are a growing segment of our customer base.
We also sell, to a more limited extent, to companies who are in the businesses of agriculture, fine chemicals, contract chemical manufacturing, medical devices, and flavoring and cosmetics.
For the year ended December 31, 2013, contract revenue from our three largest customers represented 15%, 9% and 5%, respectively, of our contract revenue.
For the year ended December 31, 2012, contract revenue from our three largest customers represented 15%, 12% and 7%, respectively, of our contract revenue.
For the year ended December 31, 2011, contract revenue from our three largest customers represented 16%, 9% and 8%, respectively, of our contract revenue.
In each of these years, the Company’s largest customer was GE Healthcare.
See Note 13 to the Consolidated Financial Statements for information on geographic and other customer concentrations.
Our backlog of open manufacturing orders and accepted service contracts was $114.3 million at December 31, 2013, as compared to $115.3 million at December 31, 2012.
Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time, which may be as long as several years.
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.
Sales and Marketing
Our services are sold primarily by our dedicated sales and business development personnel and senior management. Because our customer contacts are often highly skilled scientists, we believe our use of technical experts in the sales effort has allowed us to establish strong customer relationships. In addition to our internal sales efforts, we also rely on the sales efforts of consultants, both in the United States and abroad. We market our services directly to customers through targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.
Employees
As of January 31, 2014, we had 1,282 employees. Of these employees, 490 are at our international facilities. Our U.S. large-scale manufacturing hourly work force has 92 employees who are subject to a collective bargaining agreement with the International Chemical Workers Union.
A 3-year collective bargaining agreement was signed in January 2014 with the union and expires in January 2017.
Additionally, we have 51 union employees at our large-scale manufacturing facility at AMRI India that are covered by two collective bargaining agreements.
One agreement expires in April 2015 and the other expires in March 2016.
None of our other employees are subject to any collective bargaining agreement. We consider our relations with our employees and the unions to be good.
Competition
While a small number of larger outsourcing service providers have emerged as leaders within the industry, the outsourcing market for pharmaceutical and biotechnology contract chemistry and biology services remains fragmented.
We face competition based on a number of factors, including size, relative expertise and sophistication, quality and costs of identifying and optimizing potential lead compounds and speed and costs of optimizing chemical processes. In many areas of our business we also face foreign competition from companies in regions with lower cost structures.
We compete with contract research companies, contract drug manufacturing companies, research and academic institutions and with the internal research departments of biotechnology companies.
We have also historically competed with internal research departments of large pharmaceutical companies; recently, however, competition in this area continued to be reduced, however, as these companies have downsized their internal organizations.
We rely on many internal factors that allow us to stay competitive and differentiate us in the marketplace, including:
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Our globalization of both research and manufacturing facilities, which allows us to increase our access to key global markets
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Our ability to offer a flexible combination of high quality, cost-effective services
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Our comprehensive service offerings, which allow us to provide our customers 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.
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Patents and Proprietary Rights
Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms can be uncertain and involve complex legal and factual questions. We seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is justifiable.
We cannot be assured that any AMRI patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or will not be circumvented by others. In the event a third party has also filed one or more patent applications for inventions which conflict with one of ours, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in the loss of any opportunity to secure patent protection for the inventions and the loss of any right to use the inventions. Even if the eventual outcome is favorable to us, these proceedings could result in substantial cost to us. The filing and prosecution of patent applications, litigation to establish the validity and scope of patents, assertion of patent infringement claims against others and the defense of patent infringement claims by others can be expensive and time consuming. We cannot be certain that in the event that any claims with respect to any of our patents, if issued, are challenged by one or more third parties, a court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity afforded by the disputed rights. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the technologies covered by such rights, could be subject to significant liability to the third party, and could be required to license technologies from the third party. Furthermore, even if our patents are determined to be valid, enforceable, and broad in scope, we cannot be certain that competitors will not be able to design around such patents and compete with us and our licensees using the resulting alternative technology.
We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes. These United States patents began 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, described herein. Additionally, our United States patents related to substituted biaryl purines as potent anticancer agents and a series of aryl and heteroaryl tetrahydroisoquinolines related to central nervous system indications begin to expire in 2020.
Many of our current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.
We also rely upon trade secrets and proprietary know-how for certain unpatented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. We cannot provide assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, we cannot provide assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, we cannot be certain that third parties will not independently develop substantially equivalent or better technology.
Government Regulation
The manufacture, transportation and storage of our products are subject to certain international, Federal, state and local laws and regulations. Our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by us or our customers. The nature and the extent to which such regulation may apply to us or our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by us or our customers will require regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.
Generally, in order to gain U.S. FDA or foreign regulatory approval of a drug product, several years of studies and regulatory filings and review must occur, including laboratory studies, IND filing, several years of clinical trials, NDA filings, and FDA and foreign regulatory authority marketing approval.
Even if FDA regulatory clearances are obtained, a marketed product is subject to continual review. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. For marketing outside the United States, we will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.
All facilities and manufacturing techniques used for prescribed steps in the manufacture of API for clinical use or for sale in the United States must be operated in conformity with cGMP guidelines as established by the FDA and International Conference on Harmonization (“ICH”). Our facilities are subject to unscheduled periodic regulatory inspections to ensure compliance with cGMP regulations. Failure on our part to comply with applicable requirements could result in the termination of ongoing research or the disqualification of data for submission to regulatory authorities. A finding that we had materially violated cGMP requirements could result in additional regulatory sanctions and, in severe cases, could result in a mandated closing of our facilities or significant fines, which would materially and adversely affect our business, financial condition and results of operations.
During 2013 an FDA inspection of our large-scale cGMP manufacturing facility in Rensselaer was completed, resulting in the issuance of a Form FDA 483, with one minor observation being cited.
AMRI submitted responses to the observation consistent with the requirements and timeframe of the FDA, resulting in clearance of the Form 483.
Additionally, during 2012, the Rensselaer facility was audited by the DEA to assess conformance with the controlled drug legislation for which the facility holds Schedule I, II, III, IV and V licenses.
The audit was successful and no non-conformances were noted.
We acquired the AMRI Burlington facility on June 14, 2010.
On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations. The warning letter did not restrict production or shipment of products from the facility; however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations. Although we resumed cGMP operations in May 2011, the warning letter, subsequent remediation efforts and suspension of production have had a material adverse effect on our business operations and cash flow.
In November 2013, the warning letter was lifted after investment and remedial efforts by AMRI Burlington.
The Company continues the manufacturing operations currently in place at the Burlington site, including GMP operations.
During 2012 the U.S. Government passed new legislation termed the Generic Drug User Fee Amendments (“GDUFA”) which was effective beginning October 2012.
AMRI has taken required actions, specifically, the self-identification of impacted facilities and the budgeting of required fees.
Our manufacturing and research and development processes involve the controlled use of hazardous or potentially hazardous materials and substances. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials, including radioactive compounds and certain waste products. Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges.
Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be eliminated.
Our facilities which are subject to FDA and DEA inspection are currently in full compliance.
Concentration of Business and Geographic Information
For a description of revenue and long lived assets by geographic region, please see Note 13 to the Consolidated Financial Statements.
Internet Website
We maintain an internet website at
www.amriglobal.com
. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available on our website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available at the SEC’s website at
www.sec.gov
.
ITEM 1A. RISK FACTORS
The following factors should be considered carefully in addition to the other information in this Form 10-K. Except as mentioned under “Item 7A - Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion contained in this Form 10-K contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10-K.
Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein.
Failure to manage the business to consistent profitability without Allegra and other royalties will have a significant impact on operations and stock value.
The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenue, earnings and operating cash flows.
Recently, we have begun to receive royalties on the sales of other products.
We continue to develop our business and manage our operating costs in order to be in a position to maintain a business that can operate profitably as these royalties decrease significantly in 2014 then further in 2015.
Recurring royalties have a significantly higher gross and operating margin than do our other business activities, resulting in the need to replace a significant amount of margin in order to achieve such profitability.
The Company has taken certain cost cutting steps in order to right size the business operations to support the profitability that is achievable from our core contract research and manufacturing businesses.
In the future, we may need to take additional cost cutting measures if our revenues do not increase or are not profitable enough to support our operations.
In addition, if we are not able to increase operating revenue and decrease operating costs in order to replace Allegra and other royalty income, there will be a material and adverse impact on our business, including negative impacts on our operating cash flow, access to capital and ability to implement required capital improvements to our facilities.
If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.
All facilities and manufacturing techniques used to manufacture drugs in the United States must conform to standards that are established by the FDA. The FDA conducts unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards.
If the FDA finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or, if the FDA determines that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA or other applicable regulatory bodies could have a material adverse effect on our operations.
Our Burlington, MA facility was subject to an FDA warning letter which has resulted in a significant disruption in our business operations at this facility and has had and may continue to have a material adverse effect on our business operations and cash flow.
On August 18, 2010, we received a warning letter from the FDA which pertained to its inspection of AMRI Burlington in March 2010 and which identified three significant observations. A copy of the warning letter is available on the FDA website at www.fda.gov. The warning letter did not restrict production or shipment of products from the facility; however we voluntarily suspended cGMP production for a period of time while we undertook remediation steps to address the FDA’s observations. Although we resumed cGMP operations in May 2011, the suspension of production has had a material adverse effect on our business operations and cash flow.
The warning letter was lifted by the FDA in November 2013 and the facility is now subject to regular FDA and other regulatory inspections, which are expected to be completed yearly.
In the event that further issues are discovered by the FDA in later inspections, any adverse action by the FDA may have a material and adverse effect on our business operations and cash flow.
We may experience disruptions in or the inability to source raw materials to support our production processes or to deliver goods to our customers.
We rely on independent suppliers for key raw materials, consisting primarily of various chemicals. We generally use raw materials available from more than one source and do not enter into long-term contracts for such materials.
We could experience inventory shortages if we were required to use an alternative manufacturer on short notice, which could lead to raw materials being purchased on less favorable terms than we have with our regular supplier.
Additionally, we rely on various third-party delivery services to transport both goods from our vendors and finished products to our customers.
A disruption in our ability to source or transport materials could delay or halt production and delivery of certain of our products thereby adversely impacting our ability to market and sell such products and our ability to compete.
Our sales forecast and/or revenue projections may not be accurate.
We use a backlog system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales backlog. While this process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties.
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.
Any variation in the conversion of the backlog into revenue or the backlog itself could cause us to improperly plan or budget and thereby adversely affect our business, results of operations and financial condition.
We derive a significant percentage of our revenue from a small group of customers.
We may lose one or more of our major customers.
During the year ended December 31, 2013, revenues from our largest customer represented approximately 15% of our contract revenue, or 13% of our total revenue.
During the year ended December 31, 2012, revenues from our largest customer represented approximately 15% of our contract revenue, or 13% of our total revenue.
Our existing agreement with this customer extends through 2016.
In addition, during the year ended December 31, 2013 sales to another customer represented approximately 9% of our contract revenue, or 8% of our total revenue.
In addition, during the year ended December 31, 2013, we provided services to three other major customers, who combined, represent approximately 14% of our contract revenues or 12% of our total revenue. In total, our five largest customers in 2013 represented approximately 38% of our contract revenue and 33% of our total revenue.
These customers, along with most of our other customers, typically may cancel their contracts with 30 days’ to two-years’ prior notice, depending on the size of the contract, for a variety of reasons, some of which are beyond our control.
If any one of our major customers cancels its contract with us, our contract revenues may materially decrease.
We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, we may fail to meet our current credit facility’s financial covenants and we may incur additional indebtedness in the future, which could each adversely affect our business, financial condition and results of operations.
We have a significant amount of indebtedness, including $150.0 million in aggregate principal with additional accrued interest under our Convertible Senior Notes due 2018.
Our ability to make payments on, and to refinance, our indebtedness, including these notes, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future.
To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control.
If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of outstanding convertible notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the convertible notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the convertible notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions.
In addition, in the event of a default under the convertible notes, the holders and/or the trustee under the indentures governing the convertible notes may accelerate the payment obligations under the convertible notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.
We currently have 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.
As of December 31, 2013, the Company had $6.2 million of outstanding letters of credit secured by this line of credit.
The credit facility contains financial covenants, including a minimum fixed charge coverage ratio, maximum quarterly year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations.
As of December 31, 2013, the Company was in compliance with its current financial covenants.
In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
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make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
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limit our flexibility in planning for, or reacting to, changes in our business and our industry;
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place us at a disadvantage compared to our competitors who have less debt; and
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limit our ability to borrow additional amounts for working capital, capital expenditures, research and development efforts, acquisitions, debt service requirements, execution of our business strategy or other purposes.
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Any of these factors could materially and adversely affect our business, financial condition and results of operations. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
In addition, under our Convertible Senior Notes due 2018, we are required to offer to repurchase the convertible notes upon the occurrence of a fundamental change, which could include, among other things, any acquisition of us for consideration other than publicly traded securities. The repurchase price must be paid in cash, and this obligation may have the effect of discouraging, delaying or preventing an acquisition of the Company that would otherwise be beneficial to our security holders.
Pharmaceutical and biotechnology companies may discontinue or decrease their usage of our services.
We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services, as a result of negative economic trends generally and more specifically in the pharmaceutical industry.
We may be adversely affected in future periods as a result of general economic and/or pharmaceutical industry downturns which may result in a diminished availability of liquidity in the marketplace.
If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the overall global economy, our revenues and earnings could be lower than we currently expect and our revenues may decrease or not grow at historical rates.
We face increased competition.
We compete directly with the in-house research departments of pharmaceutical companies and biotechnology companies, as well as contract research companies, and research and academic institutions. We also experience significant competition from foreign companies operating under lower cost structures, primarily those in China and other Asian countries.
While we operate in certain lower relative cost jurisdictions, such as India and Singapore, we do not have operations in China. Many of our competitors have greater financial and other resources than we have. As new companies enter the market and as more advanced technologies become available, we currently expect to face increased competition. In the future, any one of our competitors may develop technological advances that render the services that we provide obsolete. While we plan to develop technologies, which will give us competitive advantages, our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future, and our competitors may be able to develop such technologies before we do or provide those services at a lower cost. Consequently, we may not be able to successfully compete in the future.
We may be required to record additional long-lived asset impairment charges.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable based on the existence of certain triggering events.
Factors we consider important which could result in long-lived asset impairment include the following:
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a significant change in the extent or manner in which a long-lived asset group is being used;
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a significant change in the business climate that could affect the value of a long-lived asset group; and
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a significant decrease in the market value of assets.
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In 2013, we recorded long-lived asset impairment charges of $1.9 million in the DDS segment primarily related to the Company’s decision to cease operations at our Bothell, WA and Budapest, HU facilities.
If long-lived assets are determined to be impaired in the future, we would be required to record a charge to our results of operations.
Agreements we have with our employees, customers, consultants and other third parties may not afford adequate protection for our valuable intellectual property, confidential information and other proprietary information.
Some of our most valuable assets include patents.
In addition to patent protection, we also rely on trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our customer’s information, such as trade secrets, proprietary information and other customer confidential information, as well as our own, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques causing some technologies that we develop to be patented by other companies. Our failure to protect our proprietary information and techniques may inhibit our ability to compete effectively and our investment in those technologies may not yield the benefits we expected. In addition, we may be subject to claims that we are infringing on the intellectual property of others. We could incur significant costs defending such claims and if we are unsuccessful in defending these claims, we may be subject to liability for infringement.
To the extent that we are unable to protect confidential customer information, we may encounter material harm to our reputation and to our business.
We may not be able to effectively manage our international operations.
There are significant risks associated with the establishment of foreign operations, including, but not limited to: geopolitical risks, foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates, compliance with local laws and regulations, the protection of our intellectual property and that of our customers, the ability to integrate our corporate culture with local customs and cultures, and the ability to effectively and efficiently supply our international facilities with the required equipment and materials. If we are unable to effectively manage these risks, these locations may not produce the revenues, earnings, or strategic benefits that we anticipate, or we may be subject to fines or other regulatory actions if we do not comply with local laws and regulations, which could have a material adverse effect on our business.
Delays in, or failure of, the approval of our customers’ regulatory submissions could impact our revenue and earnings.
The successful transition of clinical and preclinical candidates into long term commercial supply agreements is a key component of the LSM business strategy.
If our customers do not receive approval of their FDA regulatory submissions, this could have a significant negative impact on our revenue and earnings.
In addition, the manufacture of controlled substances requires timely approval by the DEA of sufficient controlled substance quota.
If we do not receive sufficient DEA quota to meet our customers’ demands, and/or if our customers do not receive sufficient quota to take delivery of and/or formulate the product at their facilities, this could have a significant negative impact on our revenue and earnings.
We may not be able to recruit and retain the highly skilled employees we need.
Our future growth and profitability depends upon the research and efforts of our highly skilled employees, such as our scientists, and their ability to keep pace with changes in drug discovery and development technologies. We compete vigorously with pharmaceutical firms, biotechnology firms, contract research firms, and academic and research institutions to recruit scientists. If we cannot recruit and retain scientists and other highly skilled employees, we will not be able to continue our existing services and will not be able to expand the services we offer to our customers.
We may lose one or more of our key employees.
Our business is highly dependent on our senior management and scientific staff, including:
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William Marth, our Chief Executive Officer and President;
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Michael M. Nolan, our Vice President, Chief Financial Officer and Treasurer;
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Steven R. Hagen, Ph.D., our Senior Vice President, Manufacturing and Pharmaceuticals;
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Lori M. Henderson, our Vice President, General Counsel and Secretary
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Michael Luther, Ph.D., our Senior Vice President, Discovery;
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Brian D. Russell, our Vice President, Human Resources; and
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George Svokos, our Senior Vice President, Sales and General Manager, API
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The loss of any of our key employees, including our scientists, may have a material adverse effect on our business.
We may be held liable for harm caused by drugs that we develop and test.
We develop, test and manufacture drugs that are used by humans. If any of the drugs that we develop, test or manufacture harm people, we may be required to pay damages. Although we carry liability insurance, we may be required to pay damages in excess of the amounts of our insurance coverage. Damages awarded in a product liability action could be substantial and could have a material adverse effect on our financial condition.
We may be liable for contamination or other harm caused by hazardous materials that we use.
Our manufacturing and research and development processes involve the use of hazardous or potentially hazardous materials and substances. We are subject to Federal, state and local laws and regulation governing the use, manufacture, handling, storage and disposal of such materials, including but not limited to radioactive compounds and certain waste products.
Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges.
Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, we cannot completely eliminate the risk of contamination or injury resulting from these materials.
We may incur liability as a result of any contamination or injury.
In addition, we cannot predict the extent of regulations that might result from any future legislative or administrative actions, therefore we could be required to incur significant costs to comply with environmental laws and regulations and these actions could restrict our operations in the future.
Such expenses, liabilities or restrictions could have a material adverse effect on our operations and financial condition.
We completed an environmental remediation assessment associated with groundwater contamination at our Rensselaer, New York location.
This contamination is associated with past practices at the facility prior to 1990, and prior to our investment or ownership of the facility.
Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation.
Under the remediation plan, we are expected to pay for monitoring and reporting into 2014.
Under a 1999 agreement with the facility’s previous owner, our maximum liability under the remediation is $5.5 million.
If the State of New York Department of Environmental Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a material adverse effect on our operations.
Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our facilities.
We depend on our laboratories and equipment for the continued operation of our business. Our research and development, manufacturing and all administrative functions are primarily conducted at our facilities in Albany and Rensselaer, New York. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event at any of our facilities could have a significant negative impact on our operations.
Terrorist attacks or acts of war may seriously harm our business.
Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition.
The potential for terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.
Domestic governmental policy changes, including health care reform and budgetary policies could reduce the reimbursement rates pharmaceutical and biotechnology companies receive for drugs they sell, which incorporate some of our products, which in turn, could reduce the demand for or amounts that they have available to retain our services.
We depend on contracts with pharmaceutical and biotechnology companies for a majority of our revenues.
We therefore depend upon the ability of pharmaceutical and biotechnology companies to earn enough profit on the drugs they market to devote substantial resources to the research and development of new drugs.
Additionally, we rely on our collaborative partners to obtain acceptable prices or an adequate level of reimbursement for our current and potential future products.
Continued efforts of government and third-party payors to contain or reduce the cost of health care through various means, could affect our levels of revenues and earnings.
In certain foreign markets, pricing and/or profitability of pharmaceutical products are subject to governmental control.
Domestically, there have been and may continue to be proposals to implement similar governmental control.
Future legislation may limit the prices pharmaceutical and biotechnology companies can charge for the drugs they market and cost control initiatives could affect the amounts that third-party payors agree to reimburse for those drugs.
There is no assurance that our collaborative partners will be able to obtain acceptable prices for our products which would allow us to sell these products on a competitive and profitable basis.
As a result, such laws and initiatives may have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to the research and development of new drugs.
If pharmaceutical and biotechnology companies decrease the resources they devote to the research and development of new drugs, the amount of services that we perform, and therefore our revenues, could be reduced.
The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in every shareholder’s best interests.
There are provisions in our certificate of incorporation and bylaws which may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
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Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire.
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Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control.
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Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock.
We have renewed a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board’s ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of us is made in the future. Under the terms of the Shareholder Rights Plan, the Board can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our Common Stock. Once a shareholder acquires more than 15% of our outstanding Common Stock without Board approval (the “acquiring person”), all other shareholders will have the right to purchase securities from us at a price less than their then fair market value. These subsequent purchases by other shareholders substantially reduce the value and influence of the shares of Common Stock owned by the acquiring person.
Our officers and directors have significant control over us and their interests as shareholders may differ from our other shareholders.
As of February 28, 2014, our directors and officers beneficially owned or controlled approximately 11.0% of our outstanding common stock. Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.
Our stock price is volatile and could experience substantial change.
The market price of our common stock has historically experienced and may continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially.
Because we do not intend to pay dividends, our shareholders will benefit from an investment in our common stock only if it appreciates in value.
We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of our shareholders’ investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchased their shares.
We may experience significant increases in operational costs beyond our control.
Costs for certain items which are needed to run our business, such as energy and certain materials, have the potential to fluctuate.
As these cost increases are often dependent on market conditions, and although we do our best to manage these price increases, we may experience increases in our costs due to the volatility of prices and market conditions.
Increases in these costs could negatively impact our results of operations to the extent that we are unable to incorporate these increases into the pricing of our goods and services.
Our business may be adversely affected if we encounter complications in connection with our information technology systems and infrastructure.
We rely to a large extent upon sophisticated information technology systems and infrastructure, with respect to enterprise resource planning, manufacturing, and the storage of business, financial, intellectual property, and other information essential to the effective operation and management of our business.
While we have invested significantly in the operation and protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions, or identify breaches in our systems.
Prolonged interruptions or significant breaches could result in a material adverse effect on our operations.
We are subject to foreign currency risks.
Our global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors.
If we fail to effectively manage such risks, it could have a negative impact on our consolidated financial statements.
For a further discussion of our foreign currency risks, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.
A reduction or delay in government funding of research and development may adversely affect our business.
A portion of our overall revenue is derived either from governmental sources directly, such as the U.S. National Institutes of Health (“NIH”) , or indirectly, from customers whose funding is partially dependent on both the level and timing of funding from government sources.
A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results and there is no guarantee that government funding will be directed towards projects and studies that require use of our services.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The aggregate square footage of our operating facilities is approximately 987,000 square feet, of which 726,000 square feet are owned and 261,000 square feet are leased. Set forth below is information on our principal facilities:
Location
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Square Feet
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Primary Purpose
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Rensselaer, New York
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276,000
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Contract Manufacturing
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Albany, New York
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198,000
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Contract Manufacturing, Contract Research and Administration
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Aurangabad, India
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208,000
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Contract Manufacturing
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Holywell, United Kingdom
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68,000
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Contract Manufacturing & Contract Research
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East Greenbush, New York
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64,000
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Contract Research
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Hyderabad, India
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62,000
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Contract Research
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Burlington, Massachusetts
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46,000
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Contract Manufacturing
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Singapore
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37,000
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Contract Research
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Syracuse, New York
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28,000
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Contract Research
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Our Rensselaer, NY, Aurangabad, India, Holywell, United Kingdom and Burlington, MA facilities are used in our Large-Scale Manufacturing (“LSM”) segment as reported in the consolidated financial statements.
All other facilities are used in our Discovery, Drug Development and Small-Scale Manufacturing (“DDS”) segment, as reported in the consolidated financial statements.
We believe these facilities are generally in good condition and suitable for their purpose.
We believe that the capacity associated with these facilities is adequate to meet our anticipated needs through 2014.
ITEM 3. 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.
Early in the first quarter of 2014, the Company had settled all pending United States and foreign litigation surrounding the marketing of generic versions of Allegra and Allegra-D products.
All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties.
The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and will receive royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid.
The Company is also entitled to receive certain royalties from Sanofi and certain approved sub-licensees through mid-2015, unless the relevant patent(s) are earlier determined to be invalid.
In 2013, the Company settled litigation that was brought by a former vendor related to a contract cancellation, and the litigation was terminated. The Company recorded a charge of $1.9 million in 2013 representing the payment made upon finalizing the settlement agreement.
ITEM 4.
Mine Safety Disclosures
None.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
1
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Summary of Significant Accounting Policies
Nature of Business:
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 consolidated financial statements include the accounts of Albany Molecular Research, Inc. (“AMRI”) and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated during consolidation. When necessary, prior years’ consolidated financial statements have been reclassified to conform to the current year presentation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in the consolidated statements of comprehensive income (loss) and in accumulated other comprehensive loss in the accompanying 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 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, assumptions utilized in determining the value of both the notes hedges and the notes conversion derivative and assumptions related to the collectability of receivables. Actual results can vary from these estimates.
Contract Revenue Recognition:
The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Generally, the Company’s contracts may be terminated by the customer upon
30
days’ to two 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 separate selling prices determined for each component, and total contract consideration is then allocated pro rata across the components of the arrangement. If separate selling prices are not available, the Company will use the best estimate of selling price, consistent with the overall pricing strategy and after consideration of relevant market factors.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The Company generates contract revenue under the following types of contracts:
Fixed-Fee
. Under a fixed-fee contract, the Company charges a fixed agreed upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed, delivery is made and title transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons.
In these instances, the revenue recognition process is considered complete when project documents have been delivered to the customer
, as required under the arrangement, or other customer-specific contractual conditions
have been satisfied.
Full-time Equivalent (“FTE”).
An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.
These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts on a monthly basis as services are performed according to the terms of the contract.
Time and Materials.
Under a time and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and material contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.
Recurring Royalty and Milestone Revenues
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 a generic product sold by its customer.
The Company records royalty revenue in the period in which the net sales of this product occur.
Royalty payments from Actavis are due within 60 days after each calendar quarter and are determined based on sales of the qualifying product in that quarter.
Up-Front License Fees and Milestone Revenue
.
The Company recognizes revenue from up-front non-refundable licensing fees on a straight-line basis over the period of the underlying project. The Company will recognize revenue arising from a substantive milestone payment upon the successful achievement of the event, and the resolution of any uncertainties or contingencies regarding potential collection of the related payment, or if appropriate over the remaining term of the agreement.
The Company has discovered and conducted the early development of several new drug candidates, with a view to out- licensing these candidates to partners for further development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
On October 20, 2005, the Company entered into a License and Research Agreement with Bristol-Myers Squibb (“BMS”) for a program of compounds that encompass biogenic amine reuptake inhibitors in development for the treatment of depression and other central nervous system disorders.
As amended, the agreement is referred to herein as the “BMS Agreement”.
On December 20, 2010, the Company entered into a Research Collaboration and License Agreement with Genentech, Inc. (“Genentech”) (the “Genentech Agreement”, and collectively with the BMS Agreement, the “Agreements”) for a family of antibacterial compounds discovered from the Company’s proprietary research of its natural products sample collection.
Under the terms of the Agreements, the Company received upfront licensing fees and research funding to further develop the licensed compounds.
In addition, the Company is eligible to receive development and regulatory milestones for each licensed compound, as well as royalties on sales of commercialized compounds if any.
Under the terms of the Agreements, the Company may receive milestone payments for each compound advanced by BMS and Genentech upon achievement of certain clinical and regulatory milestones as follows:
|
·
|
Up to $
14,000
in clinical development milestones; and
|
|
·
|
Up to $
30,000
in regulatory milestones, due upon acceptance and/or approval of new drug application filings with regulatory agencies in various jurisdictions.
|
The Company has determined the milestones contained in these Agreements to be substantive milestones in accordance with ASC 605-28-25.
In evaluating the milestones included in the Agreements, the Company considered the following:
|
·
|
The Company considered each individual milestone to be commensurate with the enhanced value of the underlying licensed intellectual property as it is advanced from the development stage to a commercialized product, and considered them to be reasonable when evaluated in relation to the total agreement consideration, including other milestones.
|
|
·
|
The milestones are deemed to relate solely to past performance, as each milestone is payable to the Company only after the achievement of the related event defined in the agreement, and is not refundable if additional future success events do not occur.
|
No milestone revenue was recognized in the year ended December 31, 2013.
For the years ended December 31, 2012 and 2011, the Company recognized clinical development milestones of $
800
and $
3,000
, respectively, under the BMS Agreement, and no additional amounts for each such period under the Genentech Agreemen
t.
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.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Upon entering into a new credit agreement in April 2012, the Company was required to maintain a $
5,000
restricted cash balance to partially collateralize the revolving line of credit.
In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement is directly reduced by the amount of principal payments made on the term loan which began in May 2013.
The restricted cash balance at December 31, 2013 was $
4,524
.
Allowance for Doubtful Accounts:
The Company records an allowance for doubtful accounts for estimated receivable losses. Management reviews outstanding receivable balances on a regular basis in order to assess the collectability of these balances, and adjusts the allowance for doubtful accounts accordingly. The allowance and related accounts receivable are reduced when the account is deemed uncollectible.
Allowances for doubtful accounts were $
815
and $
487
as of December 31, 2013 and 2012, respectively.
Inventory:
Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in the Company’s large-scale manufacturing plants.
Large-scale manufacturing inventories are valued on a first-in, first-out (“FIFO”) basis.
Inventories are stated at the lower of cost or market.
The Company writes down inventories equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Any such write-down, which represents a new cost basis for the inventory, results in a charge to operations.
Property and Equipment:
Property and equipment are initially recorded at cost or, if acquired as part of a business combination, at fair value. Expenditures for maintenance and repairs are expensed when incurred. When assets are sold, retired, or otherwise disposed of, the applicable costs and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized.
Depreciation is determined using the straight-line method over the estimated useful lives of the individual assets. Accelerated methods of depreciation have been used for income tax purposes.
The Company provides for depreciation of property and equipment over the following estimated useful lives:
Laboratory equipment and fixtures
|
|
7-18 years
|
Office equipment
|
|
3-7 years
|
Computer equipment
|
|
3-5 years
|
Buildings
|
|
39 years
|
Leasehold improvements are amortized over the lesser of the useful life of the asset or the lease term.
Equity Investments:
The Company maintains an equity investment in a company that has operations in areas within the Company’s strategic focus.
This investment is in a leveraged start-up company and was recorded at historical cost.
The Company accounts for this investment using the cost method of accounting as the Company’s ownership interest in the investee is below
20
% and the Company does not have the ability to exercise significant influence over the investee.
The Company records an impairment charge when an investment has experienced a decline in value that is other-than-temporary.
Future adverse changes in market conditions or poor operating results of underlying investments could result in the Company’s inability to recover the carrying value of the investment thereby requiring an impairment charge in the future.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The carrying value of the equity investment at December 31, 2013 and 2012 was
$
956
and is included within “other assets” on the accompanying consolidated balance sheets.
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.
Patents, Patent Application Costs and Customer Relationships:
The costs of patents issued and acquired are being amortized on the straight-line basis over the estimated remaining lives of the issued patents.
Patent application and processing costs are capitalized and amortized over the estimated life once a patent is acquired or expensed in the period the patent application is denied or the related appeal process has been exhausted.
Customer relationships acquired are being amortized on a straight-line basis over the estimated period of benefit from these relationships.
Pension and Postretirement Benefits:
The Company maintains pension and postretirement benefit costs and liabilities that are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets, which are updated on an annual basis. The Company is required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in the related pension and postretirement benefit costs may occur in the future due to changes in the assumptions.
Loss Contingencies:
Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will be material.
Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analyses that often depend on judgments about potential actions by third parties such as regulators.
The Company enlists the technical expertise of its internal resources in evaluating current exposures and potential outcomes, and will utilize third party subject matter experts to supplement these assessments as circumstances dictate.
Research and Development:
Research and development costs are charged to operations when incurred and are included in operating expenses.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is provided for when it is determined that deferred tax assets are not recoverable based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax-planning strategies.
Additionally, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach.
Derivative Instruments and Hedging Activities:
The Company accounts for derivatives in accordance with FASB ASC Topic 815,
Derivative and Hedging
, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value.
Additionally, changes in the derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met.
Stock-Based Compensation:
The Company records compensation expense associated with stock options and other equity based compensation in accordance with ASC 718 “Compensation Stock Compensation”.
The Company establishes fair value as the measurement objective in accounting for share-based payment transactions with employees and recognizes expense on a straight-line basis over the applicable vesting period.
Earnings Per Share:
The Company computes net earnings (loss) per share in accordance with ASC 260-20 “Earnings per Share”.
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share would reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company (such as stock options).
The following table provides basic and diluted earnings per share calculations:
|
|
Year Ended December 31, 2013
|
|
Year Ended December 31, 2012
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Net
|
|
Average
|
|
Per Share
|
|
Net
|
|
Average
|
|
Per Share
|
|
Net
|
|
Average
|
|
Per Share
|
|
|
|
Income
|
|
Shares
|
|
Amount
|
|
Loss
|
|
Shares
|
|
Amount
|
|
Loss
|
|
Shares
|
|
Amount
|
|
Basic earnings (loss) per share
|
|
$
|
12,680
|
|
30,912
|
|
$
|
0.41
|
|
$
|
(3,777)
|
|
30,318
|
|
$
|
(0.12)
|
|
$
|
(32,296)
|
|
29,961
|
|
$
|
(1.08)
|
|
Dilutive effect of share-based
equity
|
|
|
|
|
936
|
|
|
(0.01)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
share
|
|
$
|
12,680
|
|
31,848
|
|
$
|
0.40
|
|
$
|
(3,777)
|
|
30,318
|
|
$
|
(0.12)
|
|
$
|
(32,296)
|
|
29,961
|
|
$
|
(1.08)
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The Company has excluded certain outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the year ended December 31, 2013 because of anti-dilutive effects. The Company has excluded all outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the years ended December 31, 2012 and 2011 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive.
The weighted average number of anti-dilutive common equivalents outstanding was
1,363
,
1,712
and
1,852
for the years ended December 31, 2013, 2012 and 2011, respectively, and were excluded from the calculation of diluted earnings (loss) per share.
Restructuring Charges:
The Company accounts for its restructuring costs as required by ASC 420-10, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred, except for one-time termination benefits that meet certain requirements.
Subsequent Events:
The Company evaluates subsequent events at the date of the balance sheet as well as conditions that arise after the balance sheet date but before the financial statements are issued. The effects of conditions that existed at the date of the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and conditions exist, if any, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. For purposes of preparing the accompanying consolidated financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued.
During 2012, the Company announced its decisions to cease operations at its Budapest, Hungary and Bothell, Washington facilities. The goal of these restructuring activities was 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 our 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 $
6,538
during 2013 and $
4,355
during 2012. These amounts primarily consist of $
1,728
for termination benefits, $
445
for repayment of government incentive programs and $
8,720
for lease termination settlements and fees and other administrative costs.
The Company exited the Hungary facility in 2012.
During 2013, the Company reached agreement with the landlord of that facility requiring AMRI Hungary to pay approximately $
1,890
to settle the litigation in Hungary that resulted from the termination of the lease following the cessation of operations in Budapest, Hungary.
Of this amount, $
1,100
was recorded in 2012 as the Company’s initial estimate of its liability under this lease.
The remaining $
822
is included in the restructuring charge taken during 2013.
T
his settlement amount was paid in the second half of 2013.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The following table displays the restructuring activity and liability balances for the year ended and as of December 31, 2013:
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
Translation &
|
|
|
|
|
|
Balance at
|
|
|
|
Amounts
|
|
Other
|
|
Balance at
|
|
|
|
January 1,
|
|
Charges/
|
|
Paid/
|
|
Adjustments
|
|
December 31,
|
|
|
|
2013
|
|
(reversals)
|
|
Adjustments
|
|
(1)
|
|
2013
|
|
Termination benefits and personnel realignment
|
|
$
|
386
|
|
$
|
1,047
|
|
$
|
(1,114)
|
|
$
|
4
|
|
$
|
323
|
|
Lease termination and relocation charges
|
|
|
1,405
|
|
|
5,997
|
|
|
(4,950)
|
|
|
1,130
|
|
|
3,582
|
|
Other
|
|
|
470
|
|
|
139
|
|
|
(139)
|
|
|
1
|
|
|
471
|
|
Total
|
|
$
|
2,261
|
|
|
7,183
|
|
$
|
(6,203)
|
|
$
|
1,135
|
|
$
|
4,376
|
|
|
(1)
|
Included in lease termination and relocation charges adjustments are reclassifications of unamortized deferred rent balances from accrued expenses into the restructuring reserve of $
1,148
.
|
The following table displays the restructuring activity and liability balances for the year ended and as of December 31, 2012:
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Currency
|
|
Balance at
|
|
|
|
January 1,
|
|
Charges/
|
|
Amounts
|
|
Translation
|
|
December 31,
|
|
|
|
2012
|
|
(reversals)
|
|
Paid
|
|
Adjustments
|
|
2012
|
|
Termination benefits and personnel realignment
|
|
$
|
456
|
|
$
|
1,076
|
|
$
|
(1,154)
|
|
$
|
8
|
|
$
|
386
|
|
Lease termination and relocation charges
|
|
|
1,128
|
|
|
2,713
|
|
|
(2,446)
|
|
|
10
|
|
|
1,405
|
|
Other
|
|
|
354
|
|
|
843
|
|
|
(727)
|
|
|
|
|
|
470
|
|
Total
|
|
$
|
1,938
|
|
$
|
4,632
|
|
$
|
(4,327)
|
|
$
|
18
|
|
$
|
2,261
|
|
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 years ended December 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 December 31, 2013 and 2012.
Anticipated cash outflow related to the restructuring reserves as of December 31, 2013 for 2014 is approximately $
3,152
.
In conjunction with the Company’s actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $
1,857
and $
8,334
during the years ended December 31, 2013 and 2012, respectively, in the DDS segment.
Included in the 2013 charges was $
1,323
of impairment charges related to the disposition of certain movable equipment located at the former Hungary facility.
These charges are included under the caption “Property and equipment impairment” on the Consolidated Statement of Operations for the years ended December 31, 2013 and 2012.
3.
I
nventory
Inventory consisted of the following at December 31, 2013 and 2012:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Raw materials
|
|
$
|
8,384
|
|
$
|
8,575
|
|
Work in process
|
|
|
3,314
|
|
|
2,949
|
|
Finished goods
|
|
|
20,293
|
|
|
16,692
|
|
Total inventories, at cost
|
|
$
|
31,991
|
|
$
|
28,216
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
|
4.
|
Property and Equipment
|
Property and equipment consists of the following:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Laboratory equipment and fixtures
|
|
$
|
147,747
|
|
$
|
149,448
|
|
Office equipment
|
|
|
33,604
|
|
|
32,985
|
|
Leasehold improvements
|
|
|
38,856
|
|
|
39,612
|
|
Buildings
|
|
|
61,802
|
|
|
62,146
|
|
Land
|
|
|
2,679
|
|
|
2,676
|
|
|
|
|
284,688
|
|
|
286,867
|
|
Less accumulated depreciation and amortization
|
|
|
(166,988)
|
|
|
(158,972)
|
|
|
|
|
117,700
|
|
|
127,895
|
|
Construction-in-progress
|
|
|
10,075
|
|
|
7,624
|
|
|
|
$
|
127,775
|
|
$
|
135,519
|
|
Depreciation and amortization expense of property and equipment was approximately $
15,151
, $
16,253
and $
16,754
for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company recorded long-lived asset impairment charges of $
1,857
, $
8,334
and $
4,674
for the years ended December 31, 2013, 2012 and 2011, respectively.
The components of intangible assets are as follows:
|
|
|
|
Accumulated
|
|
|
|
Amortization
|
|
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Period
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and Licensing Rights
|
|
$
|
4,318
|
|
$
|
(1,514)
|
|
$
|
2,804
|
|
|
2-16 years
|
|
Customer Relationships
|
|
|
815
|
|
|
(577)
|
|
|
238
|
|
|
5 years
|
|
Total
|
|
$
|
5,133
|
|
$
|
(2,091)
|
|
$
|
3,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the years ended December 31, 2013, 2012 and 2011 was $
429
, $
466
and $
529
, respectively.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The following chart represents estimated future annual amortization expense related to intangible assets:
Year ending December 31,
|
|
|
|
|
2014
|
|
$
|
426
|
|
2015
|
|
|
338
|
|
2016
|
|
|
263
|
|
2017
|
|
|
263
|
|
2018
|
|
|
259
|
|
Thereafter
|
|
|
1,493
|
|
Total
|
|
$
|
3,042
|
|
The following table summarizes long-term debt:
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Convertible senior notes, net of unamortized debt discount
|
|
$
|
116,931
|
|
$
|
|
|
Term loan
|
|
|
4,524
|
|
|
5,000
|
|
Industrial development authority bond
|
|
|
2,695
|
|
|
2,990
|
|
Miscellaneous loan
|
|
|
9
|
|
|
13
|
|
|
|
|
124,159
|
|
|
8,003
|
|
Less current portion
|
|
|
(1,024)
|
|
|
(776)
|
|
Total long-term debt
|
|
$
|
123,135
|
|
$
|
7,227
|
|
The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $33,069 at December 31, 2013 are as follows:
2014
|
|
$
|
1,024
|
|
2015
|
|
|
1,029
|
|
2016
|
|
|
1,034
|
|
2017
|
|
|
2,711
|
|
2018
|
|
|
150,340
|
|
Thereafter
|
|
|
1,090
|
|
Total
|
|
$
|
157,228
|
|
Convertible Senior Notes
On December 4, 2013,
the Company completed a private offering of $
150,000
aggregate principal amount of
2.25
% Cash Convertible Senior Notes (the “Notes”), dated as of December 4, 2013 between the Company and Wilmington Trust, National Association, as Trustee. The Notes will mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date and interest will be paid in arrears semiannually on each May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "
Securities Act
").
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The Notes are not convertible into the Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount in cash equal to the settlement amount, determined in the manner set forth in the indenture.
The initial conversion rate is
63.9844
shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately $
15.63
per share of common stock). The conversion rate is subject to adjustment in some events as described in the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in the indenture.
The Company may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.
The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC Topic 815,
Derivatives and Hedging
, and is accounted for as a derivative liability.
The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $
33,600
and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the year ended December 31, 2013, the Company recorded $
531
of amortization of the debt discount as interest expense based upon an effective rate of
7.69
%.
The components of the Notes were as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Principal amount
|
|
$
|
150,000
|
|
$
|
|
|
Unamortized debt discount
|
|
|
33,069
|
|
|
|
|
Net carrying amount of Notes
|
|
$
|
116,931
|
|
$
|
|
|
In connection with the pricing of the Notes, on November 19, 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating to a notional number of shares of the Company's common stock underlying the Notes to be issued by the Company with two counterparties (the "
Option Counterparties
").
The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that we are required to make upon conversion of the Notes in excess of the principal amount of converted notes if our common stock price exceeds the conversion price.
The Notes Hedges are accounted for as a derivative instrument in accordance with ASC Topic 815.
The aggregate cost of the note hedge transaction was $33,600
.
At the same time, the Company also entered into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to
9,598
shares of the Company's common stock underlying the note hedge transactions. The cash convertible note hedge transactions are intended to offset cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the warrants. The initial strike price of the warrants is $
18.9440
per share, which is
60
% above the last reported sale price of the Company's common stock of $
11.84
on November 19, 2013 and proceeds of $
23,100
were received from the Option Counterparties from the sale of the warrants.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Aside from the initial payment of a $
33,600
premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.
Neither the Notes Conversion Derivative nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized immediately in the statements of operations.
As of December 31, 2013, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal, therefore there was no change in fair market value that was recognized in the statements of operations.
The following table summarizes the fair value and the presentation in the consolidated balance sheet:
|
|
Location on Balance Sheet
|
|
December 31,
|
|
|
|
|
|
2013
|
|
2012
|
|
Notes Hedges
|
|
Other assets
|
|
$
|
22,654
|
|
$
|
|
|
Notes Conversion Derivative
|
|
Other liabilities
|
|
$
|
(22,654)
|
|
$
|
|
|
Term Loan and Revolving Credit Facility
In April 2012, the Company entered into a $
20,000
credit facility consisting of a
4
-year, $
5,000
term loan and a $
15,000
revolving line of credit.
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 December 31, 2013, the Company had no amounts outstanding on the revolving line of credit and $
6,158
of outstanding letters of credit secured by this line of credit.
The amount available to be borrowed under the revolving line of credit at December 31, 2013 is $
8,842
.
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 December 31, 2013, the interest rate on the term loan was
3.5
%.
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 December 31, 2013, the Company was in compliance with its current financial covenants.
IDA Bonds
The Company maintains variable interest rate industrial development authority (“IDA”) bonds due in increasing annual installments through 2021.
Interest payments are due monthly with a current interest rate of
0.16
% at December 31, 2013.
The amount outstanding as of December 31, 2013 was $
2,695
.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
7. Income Taxes
The components of income (loss) before taxes and income tax expense (benefit) are as follows:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
19,490
|
|
$
|
9,990
|
|
$
|
(19,498)
|
|
Foreign
|
|
|
213
|
|
|
(9,871)
|
|
|
(17,140)
|
|
|
|
$
|
19,703
|
|
$
|
119
|
|
$
|
(36,638)
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,155
|
|
$
|
188
|
|
$
|
(5,099)
|
|
State
|
|
|
|
|
|
|
|
|
157
|
|
Foreign
|
|
|
743
|
|
|
330
|
|
|
824
|
|
|
|
|
6,898
|
|
|
518
|
|
|
(4,118)
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
227
|
|
|
3,399
|
|
|
(839)
|
|
State
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(102)
|
|
|
(21)
|
|
|
615
|
|
|
|
|
125
|
|
|
3,378
|
|
|
(224)
|
|
|
|
$
|
7,023
|
|
$
|
3,896
|
|
$
|
(4,342)
|
|
The differences between income tax expense (benefit) and income taxes computed using a federal statutory rate of
35
% for the years ended December 31, 2013, 2012 and 2011, were as follows:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Pre-tax income (loss) at statutory rate
|
|
$
|
6,896
|
|
$
|
42
|
|
$
|
(12,807)
|
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income
|
|
|
|
|
|
|
|
|
(35)
|
|
State taxes, net of federal benefit and valued credits
|
|
|
|
|
|
|
|
|
102
|
|
Rate differential on foreign operations
|
|
|
(1,018)
|
|
|
1,666
|
|
|
324
|
|
Domestic production deduction
|
|
|
(602)
|
|
|
(79)
|
|
|
|
|
Change in valuation allowance
|
|
|
4,518
|
|
|
671
|
|
|
1,642
|
|
Research and development credits
|
|
|
(723)
|
|
|
10
|
|
|
(115)
|
|
Employee Stock Purchase Plan
|
|
|
85
|
|
|
56
|
|
|
96
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
4,594
|
|
Increase (reduction) in uncertain tax position reserves
|
|
|
|
|
|
|
|
|
326
|
|
Other, net
|
|
|
(2,133)
|
|
|
1,530
|
|
|
1,531
|
|
|
|
$
|
7,023
|
|
$
|
3,896
|
|
$
|
(4,342)
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The tax effects of temporary differences giving rise to significant portions of the deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Nondeductible accrued expenses
|
|
$
|
458
|
|
$
|
1,181
|
|
Library amortization and impairment charges
|
|
|
1,808
|
|
|
1,922
|
|
Inventories
|
|
|
1,799
|
|
|
1,676
|
|
State tax credit carry-forwards
|
|
|
5,178
|
|
|
5,071
|
|
Investment write-downs and losses
|
|
|
867
|
|
|
867
|
|
Deferred income
|
|
|
1,090
|
|
|
1,781
|
|
Share-based compensation
|
|
|
1,377
|
|
|
1,131
|
|
Goodwill and intangibles
|
|
|
5,938
|
|
|
6,743
|
|
Arbitration reserve
|
|
|
473
|
|
|
951
|
|
Restructuring
|
|
|
2,619
|
|
|
1,655
|
|
Pension
|
|
|
2,432
|
|
|
3,270
|
|
Net operating loss carry-forwards
|
|
|
14,954
|
|
|
10,048
|
|
Federal tax credit carry-forward
|
|
|
366
|
|
|
920
|
|
Other, net
|
|
|
933
|
|
|
892
|
|
|
|
|
40,292
|
|
|
38,108
|
|
Less valuation allowance
|
|
|
(21,403)
|
|
|
(16,885)
|
|
Deferred tax assets, net
|
|
|
18,889
|
|
|
21,223
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property and equipment depreciation differences
|
|
|
(13,638)
|
|
|
(15,027)
|
|
Prepaid real estate taxes
|
|
|
(249)
|
|
|
(229)
|
|
Other, net
|
|
|
-
|
|
|
-
|
|
Net deferred tax asset
|
|
$
|
5,002
|
|
$
|
5,967
|
|
The Company has tax-effected foreign net operating loss carry-forwards (“NOLs”) of $
4,781
, which begin to expire in various years beginning in 2014, and tax-effected foreign NOLs of $
6,266
, which do not expire. The Company has tax-effected U.S. state NOLs of $
3,907
that begin to expire in 2030.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and carry back opportunities in making this assessment. Based upon the level of projected future taxable income over the periods in which the deferred tax assets are deductible, a valuation allowance is included in deferred tax assets above as follows:
|
|
December 31,
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
U.S.
|
|
$
|
10,029
|
|
$
|
7,163
|
|
Foreign
|
|
|
11,374
|
|
|
9,722
|
|
Total valuation allowance
|
|
$
|
21,403
|
|
$
|
16,885
|
|
The Company has determined that the remaining net deferred tax assets are more likely than not to be realized, and therefore no additional valuation allowance is required.
This determination was based on the evaluation of the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences and forecasted operating earnings with focus on the Company’s U.S. operations.
The change in the valuation allowance during 2013 is related to increases in tax attributes in taxing jurisdictions where the Company does not project sufficient taxable income to utilize these attributes.
The amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income during the carry forward period are reduced.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
2013
|
|
2012
|
|
Balance at January 1
|
|
$
|
326
|
|
$
|
326
|
|
Increases related to prior year tax positions
|
|
|
|
|
|
|
|
Decreases related to prior year tax positions
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
326
|
|
$
|
326
|
|
The Company classifies interest expense and penalties related to unrecognized tax benefits as a component of income tax expense.
As of December 31, 2013 the Company has not accrued any penalties related to its uncertain tax position as it believes that it is more likely than not that there will not be any assessment of penalties.
Also as of December 31, 2013, the Company has not accrued any interest related to its uncertain tax positions as the amount is immaterial.
The Company files federal income tax returns, as well as multiple state and foreign jurisdiction tax returns. The Company currently has a tax holiday in Singapore through the end of
2015
, resulting in a zero tax rate on current income in Singapore.
The Company’s federal income tax returns have been examined by the Internal Revenue Service through the year ended December 31, 2007. All significant state matters have been concluded for years through 2007 and foreign matters have been concluded for years through 2005.
Tax examinations that commenced during 2010 and 2011 remain in process.
Management of the Company believes that the Company’s exposure associated with future tax examinations is not material.
The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiaries totaling $
16,700
because management considers such earnings to be reinvested indefinitely outside of the U.S. If the earnings are distributed in the future, the Company may be subject to both foreign withholding taxes and U.S. income taxes that may not be fully offset by foreign tax credits, however calculations of the potential tax liability is not necessary or practicable as of December 31, 2013.
|
8.
|
Share-based Compensation
|
During the years ended December 31, 2013, 2012 and 2011, the Company recognized total share-based compensation cost of $
2,620
, $
1,896
and $
1,639
, respectively, and received cash from stock option exercises and employee stock purchase plan purchases was $1,527, $531 and $671, respectively.
The following are the shares of common stock reserved for issuance at December 31, 2013:
|
|
Number of
|
|
|
|
Shares
|
|
Stock Option Plans
|
|
2,692
|
|
Employee Stock Purchase Plan
|
|
474
|
|
Shares reserved for issuance
|
|
3,166
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Employee Stock Purchase Plan
The Company’s 1998 Employee Stock Purchase Plan (the “Purchase Plan”) was adopted during August 1998 and amended in November 2010,
June 2011 and June 2013. Up to
1,400
shares of common stock may be issued under the Purchase Plan, which is administered by the Compensation Committee of the Board of Directors. The Purchase Plan establishes two stock offering periods per calendar year, the first beginning on January 1 and ending on June 30, and the second beginning on July 1 and ending December 31. All U.S. employees who work more than twenty hours per week are eligible for participation in the Purchase Plan. Employees who are deemed to own greater than
5
% of the combined voting power of all classes of stock of the Company are not eligible for participation in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase Plan by authorizing payroll deductions up to
10
% of their cash compensation during the offering period. The maximum number of shares to be issued to any single employee during an offering period is limited to two thousand shares.
At the end of the offering period, the accumulated payroll deductions will be used to purchase common stock on the last business day of the offering period at a price equal to
85
% of the closing price of the common stock on the first or last day of the offering period, whichever is lower.
The 15% discount and the look-back feature are considered compensatory items for which expense must be recognized.
The Company values Purchase Plan shares as a combination position consisting of
15
% of a share of nonvested stock and
85
% of a six-month stock option.
The value of the nonvested stock is estimated based on the fair market value of the Company’s common stock at the beginning of the offering period. The value of the stock option is calculated using the Black-Scholes valuation model using historical expected volatility percentages, a risk free interest rate equal to the six-month U.S. Treasury rate at the beginning of the offering period, and an expected life of six months. The resulting per-share value is multiplied by the shares estimated to be purchased during the offering period based on historical experience to arrive at a total estimated compensation cost for the offering period.
The estimated compensation cost is recognized on a straight-line basis over the offering period.
During the years ended December 31, 2013, 2012 and 2011,
163
,
182
and
137
shares, respectively, were issued under the Purchase Plan.
Stock Option Plan
The Company has a stock option plan, through which incentive stock options or non-qualified stock options, as well as other equity instruments such as restricted shares, may be issued.
In addition, certain stock options are outstanding which were issued under stock option plans that have subsequently expired.
Incentive stock options granted to employees may not be granted at prices less than
100
% of the fair market value of the Company’s common stock at the date of option grant.
Non-qualified stock options may be granted to employees, directors, advisors, consultants and other key persons of the Company at prices established at the date of grant, and may be less than the fair market value at the date of grant.
All stock options may be exercised at any time, after vesting, over a ten-year period subsequent to the date of grant.
The Company has a variety of vesting schedules for the stock options that have been granted to employees and non-employees directors. The Company has elected to record the compensation expense associated with these options on a straight-line basis over the vesting term.
Non-qualified stock option vesting terms are established at the date of grant, but have a duration of not more than ten years.
The per share weighted-average fair value of stock options granted is determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected life in years
|
|
5
|
|
|
5
|
|
|
5
|
|
Interest rate
|
|
0.90
|
%
|
|
0.83
|
%
|
|
1.20
|
%
|
Volatility
|
|
55
|
%
|
|
57
|
%
|
|
57
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Following is a summary of the status of stock option programs during 2013, 2012 and 2011:
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
Exercise
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
Price
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2011
|
|
1,557
|
|
$
|
17.43
|
|
|
|
|
|
|
Granted
|
|
1,615
|
|
|
3.03
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(213)
|
|
|
18.34
|
|
|
|
|
|
|
Expired
|
|
(197)
|
|
|
35.98
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
2,762
|
|
$
|
7.58
|
|
|
|
|
|
|
Granted
|
|
430
|
|
|
3.00
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(678)
|
|
|
7.34
|
|
|
|
|
|
|
Expired
|
|
(125)
|
|
|
24.92
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
2,389
|
|
$
|
5.90
|
|
|
|
|
|
|
Granted
|
|
354
|
|
|
6.78
|
|
|
|
|
|
|
Exercised
|
|
(310)
|
|
|
3.01
|
|
|
|
|
|
|
Forfeited
|
|
(211)
|
|
|
6.52
|
|
|
|
|
|
|
Expired
|
|
(176)
|
|
|
15.24
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
2,046
|
|
$
|
5.62
|
|
7.1
|
|
$
|
10,214
|
|
Options exercisable, December 31, 2013
|
|
1,072
|
|
$
|
6.56
|
|
6.0
|
|
$
|
4,740
|
|
The weighted average fair value per share of stock options granted during the years ended December 31, 2013, 2012 and 2011 was $
3.22
, $
1.46
and $
1.49
, respectively.
The total intrinsic value of stock options exercised during the years ended December 31, 2013, 2012 and 2011 was $
2,125
, $
0
and $
0
, respectively.
The actual tax benefit realized for the tax deductions from stock option exercises was $785 and $
0
during the years ended December 31, 2013 and 2012.
As of December 31, 2013, there was $
1,551
of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of
1.5
years. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was approximately $783, $
769
and $
527
, respectively. Of the
2,046
stock options outstanding, we currently expect
1,983
options to vest.
Restricted Stock
The Company also issues restricted shares of common stock of the Company under the 2008 Stock Option and Incentive Plan. The shares are issued as restricted stock and are held in the custody of the Company until all vesting restrictions are satisfied. If the vesting terms under which the award was granted are not satisfied, the shares are forfeited.
Restricted stock is valued based on the fair value of the shares on the grant date, and is amortized to expense on a straight-line basis over the applicable vesting period. The Company reduces the straight-line compensation expense by an estimated forfeiture rate to account for the estimated impact of shares of restricted stock that are expected to be forfeited before becoming fully vested. This estimate is based on the Company’s historical forfeiture experience.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Following is a summary of the restricted stock activity during 2013, 2012 and 2011:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
|
Shares
|
|
Fair Value
|
|
Outstanding, January 1, 2011
|
|
483
|
|
$
|
9.61
|
|
Granted
|
|
318
|
|
|
5.19
|
|
Vested
|
|
(116)
|
|
|
11.06
|
|
Forfeited
|
|
(124)
|
|
|
8.06
|
|
Outstanding, December 31, 2011
|
|
561
|
|
$
|
7.14
|
|
Granted
|
|
140
|
|
|
3.12
|
|
Vested
|
|
(177)
|
|
|
7.68
|
|
Forfeited
|
|
(56)
|
|
|
6.16
|
|
Outstanding, December 31, 2012
|
|
468
|
|
$
|
5.85
|
|
Granted
|
|
266
|
|
|
7.37
|
|
Vested
|
|
(175)
|
|
|
6.95
|
|
Forfeited
|
|
(50)
|
|
|
5.64
|
|
Outstanding, December 31, 2013
|
|
509
|
|
$
|
6.28
|
|
During the years ended December 31, 2013 and 2012, a total of
50
and
56
shares, respectively, with an unrecognized compensation expense of $
279
and $
447
, respectively, were forfeited.
The amount amortized to expense during years ended December 31, 2013, 2012 and 2011, net of the impact of forfeitures, was approximately $
1,070
, $
932
and $
861
, respectively.
As of December 31, 2013, there was $
2,259
of total unrecognized compensation cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of
2.0
years. Of the
509
restricted shares outstanding, we currently expect 488 shares to vest.
Shareholder Rights Plan
The Company has renewed a Shareholder Rights Plan, the purpose of which is, among other things, to enhance the Board of Directors’ ability to protect shareholder interests and to ensure that shareholders receive fair treatment in the event any coercive takeover attempt of the Company is made in the future. The Shareholder Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, the Company or a large block of the Company’s Common Stock. The following summary description of the Shareholder Rights Plan does not purport to be complete and is qualified in its entirety by reference to the Company’s Shareholder Rights Plan, which has been previously filed with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form 8-A.
In connection with the renewal of the Shareholder Rights Plan, the Board of Directors of the Company declared a dividend distribution of one preferred stock purchase right (a “Right”) for each outstanding share of Common Stock to stockholders of record as of the close of business on July 30, 2012. The Rights currently are not exercisable and are attached to and trade with the outstanding shares of Common Stock.
Under the Shareholder Rights Plan, the Rights become exercisable if a person becomes an “acquiring person” by acquiring 15% or more of the outstanding shares of Common Stock or if a person commences a tender offer that would result in that person owning 15% or more of the Common Stock. A stockholder owning 15% or more of the common stock of the Company as of July 27, 2012, is “grandfathered” under the Shareholder Rights Plan and will become an “acquiring person” upon acquiring an additional ½
% of the Common Stock. If a person becomes an “acquiring person,” each holder of a Right (other than the acquiring person) would be entitled to purchase, at the then-current exercise price, such number of shares of the Company’s preferred stock which are equivalent to shares of Common Stock having twice the exercise price of the Right. If the Company is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company’s common stock having a value of twice the exercise price of the Right.
The Shareholder Rights Plan was amended on March 23, 2011 in order to allow the Board of Directors to grant equity awards to the Company’s former CEO and current Chairman of the Board, without the granting, vesting or exercise of those awards resulting in an inadvertent triggering of the Shareholder Rights Plan.
The Shareholder Rights Plan was renewed on July 27, 2012.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
|
9.
|
Employee Benefit Plans
|
Defined Contribution Plans
The Company maintains a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering all eligible U.S. non-union employees. Employees must complete one calendar month of service and be over
20.5
years of age as of the plan’s entry dates. Participants may contribute up to
100
% of their compensation, subject to IRS limitations. The Company currently makes matching contributions equal to
50
% of the participants’ contributions, up to a limit of
10
% of the participants’ wages. In addition, the Company has reserved the right to make discretionary profit sharing contributions to employee accounts. The Company has made no discretionary profit sharing contributions. Employer matching contributions vest at a rate of
20
% per year beginning after two years of participation in the plan. Employer matching contributions were approximately $
1,784
, $
1,688
and $
1,765
for the years ended December 31, 2013, 2012 and 2011, respectively.
The Company also sponsors a savings and profit sharing plan under section 401(k) of the Internal Revenue Code covering union employees. Employees must complete one calendar month of service and there is no age requirement as of the plan’s entry dates. Participants may contribute up to
100
% of their regular wages, subject to IRS limitations, and the Company matches
50
% of each dollar contributed by the employee up to
10
% of their wages. In addition, the Company has reserved the right to make discretionary profit sharing contributions to employee accounts. The Company has made no discretionary profit sharing contributions. Employer matching contributions vest at a rate of
20
% per year beginning after two years of participation in the plan, however the employer match under this plan does not begin until the employee completes one year of service. Employer matching contributions were $
129
, $
129
and $
127
for the years ended December 31, 2013, 2012 and 2011, respectively.
Defined Benefit and Postretirement Welfare Plan
AMRI Rensselaer maintains a non-contributory defined benefit plan (salaried and hourly) and a non-contributory, unfunded post-retirement welfare plan, covering substantially all employees. Benefits for the salaried defined benefit plan are based on salary and years of service. Benefits for the hourly defined benefit plan (for union employees) are based on negotiated benefits and years of service. The hourly defined benefit plan is covered under a collective bargaining agreement with the International Chemical Workers Union which represents the hourly workforce at AMRI Rensselaer.
Effective June 5, 2003, the Company eliminated the accumulation of additional future benefits under the non-contributory, unfunded post-retirement welfare plan for salaried employees. Effective August 1, 2003, the Company curtailed the salaried defined benefit pension plan and effective March 1, 2004, the Company curtailed the hourly defined benefit pension plan.
In the first quarter of 2014, the union ratified an action to modify the post-retirement plan, significantly reducing the level of benefits available to the participants.
The Company recognizes the overfunded or underfunded status of its postretirement plans in its balance sheet and recognizes changes in that funded status in the year in which the changes occur. Additionally, the Company is required to measure the funded status of a plan as of the end of its fiscal year.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The following table provides a reconciliation of the changes in the plans’ benefit obligations and fair value of the plans’ assets during the years ended December 31, 2013 and 2012, and a reconciliation of the funded status to the net amount recognized in the consolidated balance sheets as of December 31 (the plans’ measurement dates) of both years:
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Benefits
|
|
Benefits
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
26,907
|
|
$
|
26,867
|
|
$
|
1,133
|
|
$
|
1,049
|
|
Service cost
|
|
|
|
|
|
|
|
|
63
|
|
|
61
|
|
Interest cost
|
|
|
916
|
|
|
1,008
|
|
|
48
|
|
|
48
|
|
Actuarial loss (gain)
|
|
|
(1,676)
|
|
|
597
|
|
|
103
|
|
|
(25)
|
|
Benefits paid
|
|
|
(1,566)
|
|
|
(1,565)
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
|
24,581
|
|
|
26,907
|
|
|
1,347
|
|
|
1,133
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
|
18,935
|
|
|
17,453
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
1,275
|
|
|
1,887
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
414
|
|
|
1,160
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(1,566)
|
|
|
(1,565)
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
|
19,058
|
|
|
18,935
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(5,523)
|
|
$
|
(7,972)
|
|
$
|
(1,347)
|
|
$
|
(1,133)
|
|
The Company included $
1,547
and $
531
in other comprehensive income for the years ended December 31, 2013 and 2012, respectively, which represent the respective fluctuations in the unrecognized actuarial gains and losses, net of related tax benefits.
At December 31, 2013 and 2012, the accumulated benefit obligation (the actuarial present value of benefits, vested and non-vested, earned by employees based on current and past compensation levels) for the Company’s pension plan totaled $
24,581
and $
26,907
, respectively.
The following table provides the components of net periodic benefit cost (income) for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Benefits
|
|
Benefits
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
63
|
|
$
|
61
|
|
$
|
63
|
|
Interest cost
|
|
|
916
|
|
|
1,008
|
|
|
1,179
|
|
|
48
|
|
|
48
|
|
|
55
|
|
Expected return on plan assets
|
|
|
(1,291)
|
|
|
(1,263)
|
|
|
(1,285)
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss
|
|
|
822
|
|
|
766
|
|
|
496
|
|
|
1
|
|
|
|
|
|
1
|
|
Net periodic benefit cost
|
|
$
|
447
|
|
$
|
511
|
|
$
|
390
|
|
$
|
112
|
|
$
|
109
|
|
$
|
119
|
|
Recognized in AOCI (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
2
|
|
$
|
2
|
|
$
|
3
|
|
Net actuarial loss (gain)
|
|
|
6,902
|
|
|
9,384
|
|
|
10,177
|
|
|
44
|
|
|
(58)
|
|
|
(33)
|
|
Total recognized in AOCI (pre-tax)
|
|
$
|
6,902
|
|
$
|
9,384
|
|
$
|
10,177
|
|
$
|
46
|
|
$
|
(56)
|
|
$
|
(30)
|
|
Total recognized in consolidated
statement of operations and AOCI
|
|
$
|
7,349
|
|
$
|
9,895
|
|
$
|
10,567
|
|
$
|
158
|
|
$
|
53
|
|
$
|
89
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
In 2014, the Company expects to amortize $
1
of prior service cost and $
626
of net actuarial loss from shareholders’ equity into postretirement benefit plan cost.
The following assumptions were used to determine the periodic pension cost for the defined benefit pension plans for the year ended December 31:
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Discount rate
|
|
3.50
|
%
|
|
4.00
|
%
|
|
5.10
|
%
|
Expected return on plan assets
|
|
7.70
|
%
|
|
8.00
|
%
|
|
8.00
|
%
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The discount rates utilized for determining the Company’s pension obligation and net periodic benefit cost were selected using high-quality long-term corporate bond indices as of the plan’s measurement date. The rate selected as a result of this process was substantiated by comparing it to the composite discount rate that produced a liability equal to the plan’s expected benefit payment stream discounted using the Citigroup Pension Discount Curve (“CPDC”). The CPDC was designed to provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. The CPDC is a yield curve of hypothetical double-A zero coupon bonds with maturities up to 30 years. This curve includes adjustments to eliminate the call features of corporate bonds.
As a result of this modeling process, the discount rate was
4.25
% at December 31, 2013 and
3.50
% at December 31, 2012.
The following assumptions were used to determine the periodic postretirement benefit cost for the postretirement welfare plan for the year ended December 31:
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Health care cost trend rate assumed for next year
|
|
7.25
|
%
|
|
7.25
|
%
|
|
10.0
|
%
|
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2022
|
|
|
2021
|
|
|
2017
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement welfare plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
1-Percentage-
|
|
1-Percentage-
|
|
|
|
Point Increase
|
|
Point Decrease
|
|
Effect on total of service and interest cost
|
|
$
|
31
|
|
$
|
(23)
|
|
Effect on accumulated postretirement benefit obligation
for the year ended December 31, 2013
|
|
$
|
288
|
|
$
|
(223)
|
|
The Company’s pension plan weighted-average asset allocations at December 31 by asset category are as follows:
|
|
2013
|
|
|
2012
|
|
|
|
Market Value
|
|
%
|
|
|
Market Value
|
|
%
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
8,539
|
|
45
|
%
|
|
$
|
8,284
|
|
44
|
%
|
Debt securities
|
|
|
8,406
|
|
44
|
|
|
|
8,427
|
|
45
|
|
Real estate
|
|
|
949
|
|
5
|
|
|
|
935
|
|
5
|
|
Commodities
|
|
|
734
|
|
4
|
|
|
|
743
|
|
4
|
|
Other
|
|
|
430
|
|
2
|
|
|
|
546
|
|
2
|
|
Total
|
|
$
|
19,058
|
|
100
|
%
|
|
$
|
18,935
|
|
100
|
%
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
Based on the three-tiered fair value hierarchy, all pension plan assets’ fair values can be determined by their quoted market price and therefore have been determined to be Level I as of December 31, 2013.
The overall objective of the Company’s defined benefit plans is to provide the means to pay benefits to participants and their beneficiaries in the amounts and at the times called for by the plan. This is expected to be achieved through the investment of the Company’s contributions and other assets and by utilizing investment policies designed to achieve adequate funding over a reasonable period of time.
Defined benefit plan assets are invested so as to achieve a competitive risk adjusted rate-of-return on portfolio assets, based on levels of liquidity and investment risk that is prudent and reasonable under circumstances which exist from time to time.
While the Company’s primary objective is the preservation of capital, it also adheres to the theory of capital market pricing which maintains that varying degrees of investment risk should be rewarded with compensating returns.
The asset allocation decision includes consideration of the non-investment aspects of the Company’s defined benefit plans, including future retirements, lump-sum elections, contributions, and cash flow. These actual characteristics of the plan place certain demands upon the level, risk, and required growth of trust assets. The Company regularly conducts analyses of the plan’s current and likely future financial status by forecasting assets, liabilities, benefits and contributions over time. In so doing, the impact of alternative investment policies upon the plan’s financial status is measured and an asset mix which balances asset returns and risk is selected.
The Company’s plan policies of preservation of capital, return expectations and investment diversification are all measured during these reviews to aid in the determination of asset class and risk allocation.
The Company’s decision with regard to asset mix is reviewed periodically. Asset mix guidelines include target allocations and permissible ranges for each asset category. Assets are monitored on an ongoing basis and rebalanced as required to maintain an asset mix within the permissible ranges. The guidelines will change from time to time, based on an ongoing evaluation of the plan’s tolerance of investment risk.
To determine the expected long-term rate of return on pension plan assets, the Company considers current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for the Company’s pension plan’s assets, the Company evaluates general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads across a number of potential scenarios.
The 2013 target allocation was as follows:
Equity securities
|
|
44
|
%
|
Debt securities
|
|
45
|
|
Real estate
|
|
5
|
|
Commodities
|
|
4
|
|
Other
|
|
2
|
|
Total
|
|
100
|
%
|
The market-related value of plan assets is used in developing the expected rate of return on plan assets. In developing the expected rate of return, the market-related value of plan assets phases in recognition of capital appreciation by recognizing investment gains and losses over a four-year period at
25
% per year.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The expected future benefit payments are as follows for the years ending December 31:
|
|
Pension
|
|
|
|
Benefits
|
|
2014
|
|
$
|
1,637
|
|
2015
|
|
|
1,659
|
|
2016
|
|
|
1,634
|
|
2017
|
|
|
1,628
|
|
2018
|
|
|
1,667
|
|
2019 - 2023
|
|
|
8,074
|
|
Based on current actuarial assumptions, the Company expects to contribute $
811
to its pension plan in 2013.
The Company leases both facilities and equipment used in its operations and classifies those leases as operating leases. The Company has long-term operating leases for a substantial portion of its research and development laboratory facilities. The expiration dates on the present leases range from November 2014 to November 2020.
The leases contain renewal options at the option of the Company.
The Company is responsible for paying the cost of utilities, operating costs, and increases in property taxes at its leased facilities.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2013 are as follows:
Year ending December 31,
|
|
|
|
2014
|
$
|
3,150
|
|
2015
|
|
2,143
|
|
2016
|
|
1,309
|
|
2017
|
|
1,214
|
|
2018
|
|
1,261
|
|
Thereafter
|
|
2,049
|
|
Rental expense amounted to approximately $
3,243
, $
4,498
and $
4,914
during the years ended December 31, 2013, 2012, and 2011, respectively.
|
11.
|
Related Party Transactions
|
(a) Technology Development Incentive Plan
In 1993, the Company adopted a Technology Development Incentive Plan to provide a method to stimulate and encourage novel innovative technology developments by its employees. To be eligible to participate, the employee must be the inventor, co-inventor or have made a significant intellectual contribution of novel technology that results in new revenues received by the Company.
Eligible participants will share in awards based on a percentage of the licensing, royalty or milestone revenue received by the Company, as defined by the Plan.
In 2013, 2012 and 2011, the Company awarded Technology Incentive Compensation (“TIC”) relating to the invention of the active ingredient in Allegra. The inventor is Thomas D’Ambra, the Company’s former President and Chief Executive Officer and current Chairman of the Board of Directors.
Additionally, in 2012 and 2011, the Company granted awards to employees in relation to milestone payments for its proprietary amine neurotransmitter reuptake inhibitors as a result of successful licensing of this technology to BMS. The amounts awarded and included in the consolidated statements of operations for all TIC awards for the years ended December 31, 2013, 2012 and 2011 are $
2,767
, $
3,143
and $
3,557
, respectively.
Included in accrued compensation in the accompanying consolidated balance sheets at both December 31, 2013 and 2012 are unpaid Technology Development Incentive Compensation awards of $
517
and $
683
, respectively.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
(b) Telecommunication Services
A member of the Company’s board of directors is the former Chief Executive Officer and current member of the Board of Directors of one of the providers of telephone and internet services to the Company. This telecommunications company was paid approximately $
187
, $
188
and $
190
for services rendered to the Company in 2013, 2012 and 2011, respectively.
(c) Contract Revenue
The Company’s current Chief Executive Officer was previously President and Chief Executive Officer of, a global pharmaceutical company to which the Company provided a variety of services in 2013 and 2012. The Company received $
1,446
and $
889
in contract revenue from this customer in 2013 and 2012, respectively.
The Company, from time to time, may be involved in various claims and legal proceedings arising in the ordinary course of business.
Except as noted below, the Company is not currently a party to any such claims or proceedings which, if decided adversely to the Company, would either individually or in the aggregate have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Allegra:
As of early in the first quarter of
2014, the Company settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and Allegra-D products.
All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties.
The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and will receive royalties on U.S. Patent No. 5,750,703 until its expiration in 2015, unless those patents are earlier determined to be invalid.
The Company is also entitled to receive certain royalties from Sanofi and certain approved sub-licensees through mid-2015, unless the relevant patent(s) are earlier determined to be invalid
.
Other:
In 2013, the Company settled litigation
that was brought by a former vendor related to a contract cancellation, and the litigation was terminated. The Company recorded a charge of $
1,920
in 2013 representing the payment made upon finalizing the settlement agreement.
Environmental liabilities:
The Company has completed an environmental remediation assessment associated with groundwater contamination at its Rensselaer, NY location. Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation. Under the remediation plan, the Company is expected to pay for monitoring and reporting into 2014. Under a 1999 agreement with the facility’s previous owner, the Company’s maximum liability under the remediation is $
5,500
. For the years ended December 31, 2013, 2012 and 2011, no costs have been paid by the Company.
At December 31, 2013 and 2012, $
46
and $
191
was recorded for future environmental liabilities in the consolidated balance sheets.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
|
13.
|
Concentration of Business and Geographic Information
|
For the year ended December 31, 2013 contract revenue from the Company’s three largest customers represented
15
%,
9
% and
5
%, respectively, of its contract revenue.
For the year ended December 31, 2012 contract revenue from the Company’s three largest customers represented
15
%,
12
% and
7
%, respectively, of its contract revenue.
For the year ended December 31, 2011 contract revenue from the Company’s three largest customers represented
16
%,
9
% and
8
%, respectively, of its contract revenue.
The Company’s largest customer, GE Healthcare, represented
24
% of LSM contract revenue and
15
% of total contract revenue for the year ended December 31, 2013.
The Company’s second largest customer, a large pharmaceutical company, represented approximately
14
% of LSM contract revenue and
9
% of the Company’s total contract revenue for the year ended December 31, 2013.
Contract revenue by geographic region, based on the location of the customer, and expressed as a percentage of total contract revenue follows:
|
|
Year Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
60
|
%
|
|
57
|
%
|
|
57
|
%
|
Europe
|
|
19
|
%
|
|
21
|
%
|
|
25
|
%
|
Asia
|
|
13
|
%
|
|
19
|
%
|
|
16
|
%
|
Other countries
|
|
8
|
%
|
|
3
|
%
|
|
2
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Long-lived assets by geographic region are as follows:
|
|
2013
|
|
2012
|
|
United States
|
|
$
|
107,403
|
|
$
|
112,268
|
|
Asia
|
|
|
17,449
|
|
|
19,076
|
|
Europe
|
|
|
5,965
|
|
|
7,240
|
|
Total long-lived assets
|
|
$
|
130,817
|
|
$
|
138,584
|
|
The Company has organized its sales, marketing and production activities into the DDS and LSM segments based on the criteria set forth in ASC Topic 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.
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The following table summarizes information by segment for the year ended December 31, 2013:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Contract revenue
|
|
$
|
77,418
|
|
$
|
132,583
|
|
$
|
210,001
|
|
Recurring royalties and milestones
|
|
|
27,612
|
|
|
8,962
|
|
|
36,574
|
|
Total revenue
|
|
$
|
105,030
|
|
$
|
141,545
|
|
$
|
246,575
|
|
Operating income before unallocated expenses
|
|
$
|
27,139
|
|
$
|
35,292
|
|
$
|
62,431
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
42,256
|
|
Total unallocated expenses
|
|
|
|
|
|
|
|
|
42,256
|
|
Operating income
|
|
|
|
|
|
|
|
|
20,175
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
(1,244)
|
|
Other income, net
|
|
|
|
|
|
|
|
|
772
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
19,703
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
$
|
7,597
|
|
$
|
7,983
|
|
$
|
15,580
|
|
Long-lived asset impairment
|
|
$
|
1,857
|
|
$
|
|
|
$
|
1,857
|
|
Restructuring charges
|
|
$
|
6,375
|
|
$
|
808
|
|
$
|
7,183
|
|
The following table summarizes other information by segment as of December 31, 2013:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Total assets
|
|
$
|
259,736
|
|
$
|
185,532
|
|
$
|
445,268
|
|
Investments in unconsolidated affiliates
|
|
|
956
|
|
|
|
|
|
956
|
|
Capital expenditures
|
|
|
2,900
|
|
|
8,235
|
|
|
11,135
|
|
The following table summarizes information by segment for the year ended December 31, 2012:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Contract revenue
|
|
$
|
73,458
|
|
$
|
116,400
|
|
$
|
189,858
|
|
Recurring royalties and milestones
|
|
|
32,039
|
|
|
4,789
|
|
|
36,828
|
|
Total revenue
|
|
$
|
105,497
|
|
$
|
121,189
|
|
$
|
226,686
|
|
Operating income before unallocated expenses
|
|
$
|
18,331
|
|
$
|
23,276
|
|
$
|
41,607
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
40,904
|
|
Total unallocated expenses
|
|
|
|
|
|
|
|
|
40,904
|
|
Operating income
|
|
|
|
|
|
|
|
|
703
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
(454)
|
|
Other income, net
|
|
|
|
|
|
|
|
|
(130)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
$
|
119
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
$
|
9,550
|
|
$
|
7,782
|
|
$
|
17,332
|
|
Long-lived asset impairment
|
|
$
|
8,334
|
|
$
|
|
|
$
|
8,334
|
|
Restructuring charges
|
|
$
|
4,632
|
|
$
|
|
|
$
|
4,632
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
The following table summarizes other information by segment as of December 31, 2012:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Total assets
|
|
$
|
122,169
|
|
$
|
140,693
|
|
$
|
262,862
|
|
Investments in unconsolidated affiliates
|
|
|
956
|
|
|
|
|
|
956
|
|
Capital expenditures
|
|
|
2,926
|
|
|
6,964
|
|
|
9,890
|
|
The following table summarizes information by segment for the year ended December 31, 2011:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Contract revenue
|
|
$
|
74,032
|
|
$
|
95,579
|
|
$
|
169,611
|
|
Recurring royalties and milestones
|
|
|
38,034
|
|
|
|
|
|
38,034
|
|
Total revenue
|
|
$
|
112,066
|
|
$
|
95,579
|
|
$
|
207,645
|
|
Operating income (loss) before unallocated expenses
|
|
$
|
5,851
|
|
$
|
(912)
|
|
$
|
4,939
|
|
Unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
41,071
|
|
Total unallocated expenses
|
|
|
|
|
|
|
|
|
41,071
|
|
Operating loss
|
|
|
|
|
|
|
|
|
(36,132)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
(583)
|
|
Other income, net
|
|
|
|
|
|
|
|
|
77
|
|
Loss before income tax benefit
|
|
|
|
|
|
|
|
$
|
(36,638)
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and intangible amortization
|
|
$
|
10,351
|
|
$
|
7,619
|
|
$
|
17,970
|
|
Goodwill impairment charge
|
|
$
|
15,812
|
|
$
|
|
|
$
|
15,812
|
|
Long-lived asset impairment
|
|
$
|
4,674
|
|
$
|
|
|
$
|
4,674
|
|
Patent impairment
|
|
$
|
856
|
|
$
|
|
|
$
|
856
|
|
Restructuring charges
|
|
$
|
1,271
|
|
$
|
|
|
$
|
1,271
|
|
The following table summarizes other information by segment as of December 31, 2011:
|
|
DDS
|
|
LSM
|
|
Total
|
|
Total assets
|
|
$
|
146,017
|
|
$
|
117,050
|
|
$
|
263,067
|
|
Investments in unconsolidated affiliates
|
|
|
956
|
|
|
|
|
|
956
|
|
Capital expenditures
|
|
|
6,578
|
|
|
4,198
|
|
|
10,776
|
|
ALBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
1
5.
Fair Value of Financial Instruments
The Company determines its fair value of financial instruments using the following methods and assumptions:
Cash and cash equivalents, restricted cash, receivables, and accounts payable:
The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.
Convertible senior notes, derivatives and hedging instruments:
The fair values of the Company’s Notes, which differ from their carrying values, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs.
The estimated fair value of the Notes at December 31, 2013 was $
138,563
.
The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs.
These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.
Long-term debt, other than convertible senior notes:
The carrying value of long-term debt approximated fair value at December 31, 2013 and 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.
Nonrecurring Measurements:
The Company has assets, including intangible assets, property and equipment, and equity method investments which are not required to be carried at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.
The fair values of these assets are then determined by the application of a discounted cash flow model using Level 3 inputs. Cash flows are determined based on Company estimates of future operating results, and estimates of market participant weighted average costs of capital (“WACC”) are used as a basis for determining the discount rates to apply the future expected cash flows, adjusted for the risks and uncertainty inherent in the Company’s internally developed forecasts.
Although the fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges.
In 2013 and 2012, the Company recorded long-lived asset impairment charges of $
1,857
and $
8,334
, respectively, in its DDS segment primarily associated with the Company’s decision to cease operations at its Budapest, Hungary and Bothell, Washington facilities.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
In the fourth quarter of 2011, the Company recorded long-lived asset impairment charges of $
4,674
in its DDS segment associated with the Company’s decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company's workforce, right size capacity, and reduce operating costs.
These long-lived asset impairment charges are included under the caption “Property and equipment impairment” in the consolidated statement of operations for the years ended December 31, 2013, 2012 and 2011.
16.
Accumulated Other Comprehensive Loss
The accumulated balances for each classification of other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Pension and
|
|
Unrealized
|
|
Foreign
|
|
Other
|
|
|
|
Postretirement
|
|
gains/(losses)
|
|
Currency
|
|
Comprehensive
|
|
|
|
benefit plans
|
|
on securities
|
|
adjustments
|
|
Loss
|
|
Balance at January 1, 2011, net of tax
|
|
$
|
(3,926)
|
|
$
|
20
|
|
$
|
(1,034)
|
|
$
|
(4,940)
|
|
Net current period change, net of tax
|
|
|
(2,292)
|
|
|
(21)
|
|
|
(4,813)
|
|
|
(7,126)
|
|
Balance at December 31, 2011, net of tax
|
|
|
(6,218)
|
|
|
(1)
|
|
|
(5,847)
|
|
|
(12,066)
|
|
Net current period change, net of tax
|
|
|
531
|
|
|
1
|
|
|
1,239
|
|
|
1,771
|
|
Balance at December 31, 2012, net of tax
|
|
|
(5,687)
|
|
|
|
|
|
(4,608)
|
|
|
(10,295)
|
|
Net current period change, net of tax
|
|
|
1,547
|
|
|
|
|
|
(2,529)
|
|
|
(982)
|
|
Balance at December 31, 2013, net of tax
|
|
$
|
(4,140)
|
|
$
|
|
|
$
|
(7,137)
|
|
$
|
(11,277)
|
|
Amounts recognized into net earnings from accumulated other comprehensive income (loss) related to the actuarial losses on pension and postretirement benefits were $
535
,
498
and
323
for the years ended December 31, 2013, 2012 and 2011, respectively.
A
LBANY
MOLECULAR RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
(In thousands, except per share amounts)
17.
Selected Quarterly Consolidated Financial Data (unaudited)
The following tables present unaudited consolidated financial data for each quarter of 2013 and 2012:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
46,493
|
|
$
|
50,764
|
|
$
|
53,029
|
|
$
|
59,715
|
|
Recurring royalties and milestones
|
|
|
12,913
|
|
|
8,528
|
|
|
7,726
|
|
|
7,407
|
|
Total revenue
|
|
|
59,406
|
|
|
59,292
|
|
|
60,755
|
|
|
67,122
|
|
Income (loss) from operations
|
|
|
9,403
|
|
|
(2,211)
|
|
|
6,017
|
|
|
6,966
|
|
Net income (loss)
|
|
|
6,505
|
|
|
(2,247)
|
|
|
3,930
|
|
|
4,492
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
$
|
(0.07)
|
|
$
|
0.13
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.21
|
|
$
|
(0.07)
|
|
$
|
0.12
|
|
$
|
0.14
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
42,710
|
|
$
|
42,390
|
|
$
|
45,627
|
|
$
|
59,131
|
|
Recurring royalties and milestones
|
|
|
10,985
|
|
|
7,619
|
|
|
10,143
|
|
|
8,081
|
|
Total revenue
|
|
|
53,695
|
|
|
50,009
|
|
|
55,770
|
|
|
67,212
|
|
(Loss) income from operations
|
|
|
(1,948)
|
|
|
1,494
|
|
|
(1,097)
|
|
|
2,254
|
|
Net (loss) income
|
|
|
(3,807)
|
|
|
257
|
|
|
(2,143)
|
|
|
1,916
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13)
|
|
$
|
0.01
|
|
$
|
(0.07)
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
(0.13)
|
|
$
|
0.01
|
|
$
|
(0.07)
|
|
$
|
0.07
|
|
During the fourth quarter of 2013, the Company recorded long-lived asset impairment charges of $
417
in the DDS segment
in order to
further optimize the Company’s location footprint and cease operations at our Budapest, Hungary and Bothell, Washington facilities.
During the fourth quarter of 2012, the Company recorded long-lived asset impairment charges of $
4,367
in the DDS segment primarily as a result of the Company’s decision to further optimize its location footprint by closing its Bothell, WA site.