Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting
company” in 12b-2 of the Exchange Act
The aggregate market
value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 30, 2016 was approximately
$355.4 million based upon the closing price per share of the Registrant’s Common Stock as reported on the Nasdaq Global
Market on June 30, 2016. Shares of Common Stock held by each officer and director and by each person who owns 10% or more
of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2017, there were 42,940,675
outstanding shares of the Registrant’s Common Stock, excluding treasury shares of 5,669,707.
The information required
pursuant to Part III of this report is incorporated by reference from the Company’s definitive proxy statement, relating
to the annual meeting of stockholders to be held on or around May 31, 2017, pursuant to Regulation 14A to be filed with the Securities
and Exchange Commission.
This Annual Report on Form 10-K contains
“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may be identified by forward-looking
words such as “may,” “could,” “should,” “would,” “will,” “plans,”
“intend,” “expect,” “anticipate,” “predicts,” “potential,” “believe,”
“continue” or similar words, although not all forward-looking statements contain these identifying words. Forward-looking
statements include, but are not limited to, statements concerning our recent acquisitions and the financial impact and expected
synergies of each, and statements regarding the impact of pending litigation matters, government regulation, customer spending
and business trends, competition, foreign operations, business growth and the expansion of the global market, management’s
strategic plans, the potential for future revenue under our collaboration arrangements , research and development projects and
expenses, other projected costs, long-lived asset and goodwill impairment, our ability to utilize deferred tax assets, pension
and postretirement benefit costs, and tax rates.
Readers should not place undue reliance
on these forward-looking statements. Our actual results may differ materially from such forward-looking statements as a result
of numerous factors, some of which we may not be able to predict and may not be within our control. Factors that could cause such
differences include, but are not limited to, changes in customers’ spending and demand and the trends in pharmaceutical
and biotechnology companies’ outsourcing of manufacturing services and research and development; our ability to provide
quality and timely services and to compete with other companies providing similar services; our ability to comply with strict
regulatory requirements; our ability to successfully integrate past and future acquisitions and to realize the expected benefits
of each; disruptions in our ability to source raw materials; a change in our relationships with our largest customers; our ability
to service our indebtedness; our ability to protect our technology and proprietary information and the confidential information
of our customers; our ability to develop products of commercial value under our collaboration arrangements; the risk of patent
infringement and other litigation, as well as those risks discussed elsewhere in this report, including under the heading “Risk
Factors.” All forward-looking statements are made as of the date of this report and we do not undertake any obligation to
update our forward-looking statements, except as required by applicable law
PART I
ITEM 1. BUSINESS.
References throughout
this Form 10-K to the “Company,” “AMRI,” “we,” “us,” and “our” refer
to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole, unless the context otherwise indicates.
Overview
We are a leading global contract research
and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. We
supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacture
of Active Pharmaceutical Ingredients (“API”) and fine chemicals, the development and manufacture of drug product (“DP”)
for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. In addition,
we offer analytical and testing services to the medical device and personal care industry. With locations in the United States,
Europe, and Asia, we maintain geographic proximity to our customers and flexible cost models.
Our Capabilities
We perform services and offer solutions
in drug discovery and the development, manufacture and testing of pharmaceutical intermediates, API and drug product for many
of the world’s leading healthcare companies. The problem-solving abilities of our scientists provide added value throughout
the discovery, development and manufacturing process. Our comprehensive suite of services and flexible business model allow our
customers to contract with a single provider, providing them with a more efficient transition of experimental compounds through
the research and development process, ultimately reducing the time and cost involved in bringing compounds from concept to market.
Compounds developed in our contract research facilities can then be more easily transitioned to production at our large-scale
manufacturing facilities for use in clinical trials and, ultimately, commercial sales if the product meets regulatory approval.
In addition to providing an integrated
services model for outsourcing, we offer our customers the option of insourcing. With our world class expertise in managing high
performing groups of scientists, this option allows us to embed our scientists into the customer’s facility allowing the
customer to cost-effectively leverage their unused laboratory space.
As our customers continue to seek innovative
new strategies for R&D efficiency and productivity, we are continually aligning our business and resources to address their
needs. We use a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging our people,
know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery, development
or manufacturing process. We have also aligned our sales and marketing organization to optimize selling opportunities within our
respective business segments, underscoring our dedication to client service. Our improved organizational structure, combined with
more focused marketing efforts, should enable us to continue to drive long-term growth and profitability.
Industry Overview and Trends
We believe that market trends in the pharmaceutical
and biotech industries demonstrate an increasing emphasis on outsourcing of pharmaceutical discovery, development and manufacturing
services, as companies seek to reduce internal resources and fixed overhead costs in favor of variable models that offer high
quality and higher accountability alternatives to meet their needs. We believe that ongoing reorganizations and strategy changes
by the pharmaceutical industry point to outsourcing as an increasingly important and strategic part of their R&D and manufacturing
efforts. We also believe that increased regulatory scrutiny of manufacturing facilities, and in some instances, closure or divestiture
of these facilities, provide opportunities for AMRI to benefit from increased outsourcing of discovery and API and drug product
manufacturing and testing 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 placing their discovery, development,
and small and large-scale manufacturing projects seamlessly across our global network of research and manufacturing facilities.
We have a comprehensive suite of service offerings ranging from early stage discovery through formulation and manufacturing across
the U.S., Europe and Asia. We believe our services, products and geographic mix will allow us to increase strategic relationships
and enhance our revenue growth with a large and diverse customer base. We have divided our business into four segments and have
taken many actions to provide for both revenue growth and increased profitability across our service offerings. Our strategy to
accomplish this includes the following:
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·
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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 drug discovery, development,
manufacturing and testing spectrum. We believe our ability to offer an integrated 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 focus our efforts on
important customer segments, including global generic and specialty pharmaceutical companies, small and large biotech companies,
medical device companies, non-profit/government entities and companies in related industries such as agricultural, nutraceutical
and food. We believe maintaining a balance within our customer portfolio between large pharmaceutical, non-profit/government,
biotech and other companies will help ensure sustained revenue and reduce concentration risk.
We have made investments to
grow our Discovery and Development Services (“DDS”), API and DP businesses in areas that have higher growth opportunities,
are differentiated and have high barriers to entry or that expand our global footprint. We have invested in additional discovery
and development capabilities, including discovery biology, analytical chemistry and drug product testing, further extending our
services for customers. Within our API business, we have expanded our portfolio of products, including products such as controlled
substances and steroids, which have high regulatory standards and/or a limited number of suppliers. In addition, we have expanded
our development and manufacturing expertise to include complex capabilities such as sterile API, fermentation and hydrogenation.
We also believe our injectable DP business has significant potential in the marketplace, driven by the growth in biologically-based
compounds which are formulated and manufactured on a sterile basis.
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·
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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.
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·
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Maximize
licensing/partnering of products and services to enhance future cash flow
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Since 2014, we have focused
on advancing our leadership in the development and manufacture of generic products by entering into multiple collaboration arrangements with pharmaceutical companies. These programs provide us the opportunity to capture revenue over the lifetime
of the generic product, through development, supply and, if commercialized by our partner, through profit sharing. Through 2016,
we had entered into 12 such programs, with the first product approved and launched in December 2016. These programs collectively
address over $3 billion in innovator market value and, if approved and launched, could generate significant revenue in future
years.
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Acquire
businesses to expand our services and capabilities
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Over the last few years, we
have acquired new businesses and may consider additional acquisitions that enhance or complement our existing service offerings
and capabilities. Any acquisitions would generally be expected to contribute to our growth by integrating with and expanding our
current services and capabilities within the drug discovery, development and manufacturing life cycle.
Business Development
Significant Business Developments
We have recently completed the following acquisitions that
impacted our results of operations and will continue to have an impact on our future operations.
Euticals
On July 11, 2016, we acquired all of the
outstanding shares of Prime European Therapeuticals S.p.A, (“Euticals”), a privately-held company headquartered in
Lodi, Italy (the “Euticals Acquisition"). The purchase price was $277.1 million (net of cash acquired of $20.8 million),
which consisted of $141 million in cash, net of a final working capital adjustment of $2.3 million, the issuance of 7.1 million
shares of AMRI common stock, valued at $91.8 million (net of lock-up provision discount of $9.6 million), and two promissory notes
with a combined face value of €55 million, that were valued at $44.3 million (net of an original issue discount of $16.4
million). Euticals specializes in custom synthesis and the manufacture of API, with a network of facilities located primarily
in Italy, Germany, the U.S. and France.
Whitehouse Laboratories
On December 15, 2015, we acquired all
the outstanding equity interests of Whitehouse Analytical Laboratories, LLC (“Whitehouse”). Total consideration
was $53.9 million in cash and $1.8 million in shares of AMRI common stock.
Whitehouse, based
in Lebanon, New Jersey, is a leading provider of testing services that includes chemical and material analysis, method development
and validation and quality control verification services to the pharmaceutical, medical device and personal care industries.
Gadea Pharmaceutical Group
On July 16, 2015, we acquired all the
outstanding shares of Gadea Pharmaceutical Group (“Gadea”), a privately-held company located in Valladolid,
Spain. The purchase price was $127.6 million (net of cash acquired of $10.9 million), which consisted of 2.2 million shares
of AMRI common stock, valued at $40.6 million, and $98.0 million in cash. Gadea, along with its Crystal Pharma division,
is widely recognized as an industry leader in the development and manufacture of technically complex API and finished drug product.
SSCI
On February 13, 2015, we completed the
purchase of assets and assumed certain liabilities of a solid state chemistry and analytical business, now called AMRI SSCI, LLC
(“SSCI”), for a purchase price of $35.9 million. SSCI has an industry-leading reputation for solving difficult drug
substance and formulated drug product challenges and is considered an expert in solid-state chemistry and analytical services.
SSCI brings extensive material science knowledge and technology and expands our capabilities in analytical testing to include
peptides, proteins and oligonucleotides.
Glasgow
On January 8, 2015 we acquired all of
the outstanding equity interests of a sterile injectable business located in Glasgow, UK, now called Albany Molecular Research
(Glasgow) Limited (“Glasgow”), for a total purchase price of $23.8 million. The Glasgow facility extends our capabilities
to include sterile injectable drug product formulation and clinical stage manufacturing.
Oso Biopharmaceuticals
On July 1, 2014, we acquired all of the
outstanding equity interests of Oso Biopharmaceuticals Manufacturing, LLC (“OsoBio”), a contract manufacturer of highly
complex injectable drug products for an aggregate purchase price of $109.2 million. The addition of OsoBio provides us with commercial-scale
manufacturing capabilities for highly complex injectable drug products. With the addition of OsoBio, we offer customers a single
source to address their sterile fill/finish needs, from discovery and development through to commercial supply.
Cedarburg Pharmaceuticals
On April 4, 2014, we acquired all of the
outstanding shares of Cedarburg Pharmaceuticals, Inc. (“Cedarburg”), a contract developer and manufacturer of technically
complex API for both generic and branded customers, for an aggregate purchase price of $39.0 million. The acquisition is consistent
with our strategy to be the preeminent supplier of custom and complex drug development services and product to both the branded
and generic pharmaceutical industry.
Business
Segments
We
have organized our business into four distinct segments: DDS, API, DP and Fine Chemicals (“FC”). Our DDS segment provides
comprehensive services from hit identification to investigational new drug (“IND”), including drug lead discovery,
library design and synthesis, synthetic and medicinal chemistry,
in vitro
biology and pharmacology, lead optimization,
chemical development, drug metabolism and pharmacokinetics, analytical testing services and small-scale commercial manufacturing.
Our API segment provides pilot to commercial scale manufacturing of API, including intermediates, high potency and controlled
substances, steroids and hormones and sterile API. Our DP segment provides formulation through commercial scale production of
complex liquid-filled and lyophilized injectable products and opthalmic formulations. Our FC segment provides
lab
to commercial scale synthesis of reagents and diverse compounds.
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 our business segments.
DDS
Segment
We have the capabilities and expertise
to provide services and solutions from standalone activities to fully integrated drug discovery program support. We do this by
leveraging our global team of scientists across multiple disciplines and providing our customers with experienced project management
from employees with decades of real world discovery and development experience.
Discovery
We offer a full portfolio of comprehensive
services from target and lead identification tools to IND enabling activities. These services and solutions consist of expertise
with diverse chemistry library design and synthesis, high throughput and high content screening (HTS), medicinal chemistry, biology
and pharmacology, including a full suite of drug metabolism and pharmacokinetics that includes biotransformation and biocatalysis
capabilities.
Our discovery
efforts are focused on our centers of excellence in Hyderabad, India and Albany and Buffalo, New York. In close cooperation with
New York State, we are the anchor partner in an integrated drug discovery center on the Buffalo Niagara Medical School campus
in Buffalo, NY. Working with other partners in academia and industry, we have created a North American center of excellence for
industry, government and academic collaborations that will provide unique services and solutions to the drug discovery community.
This center leverages our expertise in biology, HTS, medicinal chemistry and pharmacology, integrated within a single site in
the U.S. In cooperation with New York’s Empire State Development Corporation, we are managing the operations of this center.
Equipment and facilities have been purchased and are owned by New York State.
Chemical Development
We provide expertise in a full array of
chemical development technologies to promote the best overall solutions for route development from late lead optimization to commercial
manufacturing. Processes developed for small-scale production of a compound may not be scalable or efficient for larger scale
production. The benefits provided by our chemical development efforts include improved cost efficiency, new intellectual property,
improved process safety and sustainability. Comprehensive and collaborative consideration of these synthetic options allows these
benefits to be recognized early in the development and progression of both proprietary and generic APIs, and to accelerate development
timeframes.
With chemical development locations located
in close proximity to our manufacturing facilities around the globe, we have become a top choice for an increasing number of biopharmaceutical
companies seeking a partner for the rapid advancement of their drug candidates. Customers throughout the world rely on our proven
technical and analytical expertise, commitment to the highest quality and regulatory standards, flexibility, and strong customer
focus to advance their clinical candidate compounds through the drug development process, from bench to commercial production.
Analytical and Testing Services
We provide broad
analytical chemistry and testing 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
and testing services are designed to ensure that the right tools are used to solve even the most difficult problem.
We provide extensive capabilities in analytical
services, a critical support function for pharmaceutical development and API and drug product manufacturing. We are considered
experts in the field of solid-state chemistry and analytical services and have an industry-leading reputation for solving the
most difficult API and drug product issues. We also provide state-of-the-art spectroscopic and microscopy expertise and work with
a variety of compounds, including small molecules, peptides, proteins and oligonucleotides.
We also offer a comprehensive array of
testing solutions, from materials and excipients; container qualification and container closure integrity testing; extractable
and leechables; drug delivery systems and device qualification programs; packaging; distribution; and stability and storage programs.
These services augment our discovery, development and manufacturing services and meet the increasingly complex needs of customers
we serve.
API Segment
Our manufacturing facilities are strategically
situated in various locations in the United States, Europe and Asia. These locations are integrated with our pharmaceutical development
services and 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.
We provide chemical synthesis and manufacturing
services for our customers in accordance with Current Good Manufacturing Practice (“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 United States Food and Drug Administration
(“FDA”) as well as the European Medicines Agency (“EMA”). We have production facilities and quarantine
and restricted access storage necessary to manufacture quantities of API sufficient for conducting clinical trials from Phase
I through commercial scale, based on volume and other parameters. We have proven capabilities in high value-added areas of pharmaceutical
development and manufacturing, such as cytotoxic compounds, controlled substances, steroids and hormones. These types of products
present a number of potential challenges in their production and handling and we have extensive experience in the cGMP production
of these types of compounds, from grams to hundreds of kilograms per year. Additionally, several of our facilities are licensed
by the U.S. Drug Enforcement Administration to produce scheduled controlled substances. In addition, we have expertise in complex
manufacturing processes such as sterile API, fermentation and hydrogenation.
Leveraging our wide array of API development
and manufacturing capabilities, we have established a growing portfolio of APIs. Our portfolio can generally be classified into
two categories: (i) proprietary API for which we have a long-term development and/or supply relationship with a customer; and
(ii) generic or non-proprietary API which we develop and license and supply to customers in return for manufacturing revenue and,
for certain products, royalty payments or a percentage of the profits on sales of commercialized drug products using those API.
The addition of Euticals significantly expands the number of proprietary compounds we manufacture for customers, as well as our
non-proprietary API portfolio, positioning us as one of the leading sources of specialty and generic API.
As of December 31, 2016, our portfolio
consisted of over 240 intermediates and APIs. In addition, we had over 140 APIs in development for customers or for our own portfolio.
We will continue to expand our generic, non-proprietary API portfolio both through internal development and through in-licensing
or acquisitions.
DP Segment
We have become the preferred choice for
an ever-increasing number of pharmaceutical and biotechnology companies seeking a partner for the rapid advancement of their drug
candidates. We provide state-of-the-art facilities and capabilities to deliver integrated pharmaceutical drug development programs
and services, including process R&D, pre-formulation and formulation development, GLP bioanalytical and separation sciences.
Working in close collaboration with our established chemical synthesis, analytical development, preformulation and testing groups,
we offer formulation development services for dosage forms, including solid dosage, solution, suspension, topicals, injectables,
opthalmics, cGMP early clinical phase capsules filling and cGMP early clinical powder in bottle for solution and suspension.
We also provide cGMP contract manufacturing
services in sterile syringe, opthalmics and vial filling using specialized technologies including lyophilization. We provide these
services for both small molecule drug products and biologicals, from small batch manufacturing to commercial scale.
As of December 31, 2016, we had agreements
in place to manufacture and supply 19 commercial drug products for customers. Our drug product pipeline also includes approximately
93 products under development by customers or partners.
FC Segment
Following the Euticals Acquisition, we
operate a new reportable segment, Fine Chemical (“FC”).
Our FC segment provides lab
to commercial scale synthesis of reagents and diverse compounds to the pharmaceutical, agrochemical, detergent and cosmetics industries.
We currently do not allocate significant selling or marketing resources towards this segment.
Research
and Development
Leveraging our wide array of drug development
and manufacturing capabilities, we conduct research and development (“R&D”) activities at our large-scale manufacturing
facilities to develop APIs for our own portfolio. We also enter into collaboration arrangements with third parties for the development
and manufacture of certain products and/or product candidates in both our API and DP segments. Although each of these arrangements
is unique in nature, both parties are active participants in the activities of the collaboration and are exposed to significant
risks and rewards depending on the commercial success of the activities. These arrangements typically include research and development
and manufacturing. We are obligated under these arrangements to perform the development activities and contract manufacturing
of the product or product candidate. Generally, the contract manufacturing component of the arrangement commences during the development
activities and continues through the commercial stage of the product, during which time the collaboration partner is obligated
to purchase the product from us. The collaboration partners are generally responsible for obtaining regulatory approval and for
sale and distribution of the product. The original terms of these arrangements generally range from 7 to 10 years in duration.
These arrangements may include non-refundable, upfront payments, milestone payments and cost sharing provisions during the development
stage, payments for manufacturing based on cost plus an agreed percentage, as well as profit sharing payments during the product’s
commercial stage.
Licensing
Agreements
Teva Agreement
The Company currently receives royalties
in conjunction with a Development and Supply Agreement with Teva Pharmaceuticals (“Teva”). This agreement was previously
with Allergan, plc (“Allergan”) and was transferred to Teva, following Allergan’s sale of its generic business
to Teva in 2016. These royalties are earned on Teva’s net sales of qualifying generic products in the period in which the
sales occur.
Sanofi Agreement
In March 1995, we entered into a license
agreement with Sanofi, pursuant to which we granted Sanofi an exclusive, worldwide license to any patents issued to us related
to certain patent applications. The royalty payments under this license agreement ceased in May 2015 due to the expiration of
patents under the license agreement. The historic royalties were based on the worldwide net sales of fexofenadine HCl, marketed
as Allegra in the Americas and as Telfast elsewhere, as well as on sales of Sanofi’s authorized or licensed generics and
sales by certain authorized sub-licensees.
Collaboration
Arrangements
We have several agreements that span our API and DP segments to co-develop
and commercialize generic products in the United States or in other designated countries. In many cases, the development costs
are shared with a third-party pharmaceutical company. The products are in various development stages. If the products are approved
and commercialized, we will supply active pharmaceutical ingredient and/or drug product and the third party pharmaceutical company
will sell and distribute those products. We will receive a percentage of the profits on those product sales.
Sodium
Nitroprusside Agreement
On December 8, 2016, the product Sodium
Nitroprusside Injection was approved by the FDA. This product was developed with our partner Namigen and launched by Sagent pursuant
to a collaboration arrangement. We currently supply the finished drug product, which our partner sells and distributes. In addition
to receiving contract revenue on the manufacture of the product, we also receive a percentage of the profits on our partner’s
sales of the product.
Our customers include pharmaceutical 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, 2016, contract
revenue from our three largest customers represented 7%, 5% and 3%, respectively, of our contract revenue. For the year ended
December 31, 2015, contract revenue from our three largest customers represented 11%, 5% and 4%, respectively, of our total
contract revenue. For the year ended December 31, 2014, contract revenue from our three largest customers represented 13%, 10%
and 6%, respectively, of our contract revenue. In each of these years, our largest customer was GE Healthcare. See Note 14
to the Consolidated Financial Statements for information on geographic and other customer concentrations.
Our backlog of open manufacturing orders
and accepted service contracts was $391.2 million at December 31, 2016, including backlog acquired in the Euticals Acquisition,
as compared to $173.8 million at December 31, 2015. 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, our 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 our services
contracts that are conducted on a time and materials or full-time equivalent basis are based on estimates, from which actual revenue
generated could vary. Finally, there is no assurance that projects included in backlog will not be terminated or delayed at any
time by regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues
included in backlog or estimate the portion to be filled in the current year.
Sales
and Marketing
Our services are sold primarily by our
dedicated sales 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. We market our services
directly to customers through meetings with senior management of pharmaceutical and biotechnology companies, participation in
trade conferences and shows, maintenance of an extensive Internet web site and advertisements in scientific and trade journals
and other forums. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.
Employees
As of December 31, 2016, we had 3,085
employees. Of these employees, 1,693 are at our international facilities. Our U.S. large-scale manufacturing hourly work force
has 108 employees who are subject to a collective bargaining agreement with the International Chemical Workers Union. A 3-year
collective bargaining agreement was ratified in January 2017 with the union and expires in January 2020. Our Missouri location
is also covered by a collective bargaining agreement, with 28 members. This collective bargaining agreement expires in September
2017 and negotiations are anticipated in the second half of 2017. Additionally, we have 72 union employees at our large-scale
manufacturing facility at AMRI India that are covered by two collective bargaining agreements. One agreement expires in April
2018 and the other expires in 2019. 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
research, development and manufacturing remains fragmented. We face competition based on a number of factors, including size,
relative expertise and sophistication, quality, costs and speed. 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 and manufacturing departments of biotechnology and
pharmaceutical companies. We have also historically competed with internal research departments of large pharmaceutical companies;
recently, however, competition in this area has declined, as these companies have downsized their internal research 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, and
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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, development and manufacturing
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.
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 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 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 and drug product 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. 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
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.
Concentration of Business and Geographic
Information
For a description of revenue and long-lived
assets by geographic region, please see Note 14 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
Certain factors could have a material
adverse effect on our business, financial condition and results of operations. You should consider carefully the risks and uncertainties
described below, in addition to other information contained in this Annual Report on Form 10-K, including under the heading “Forward-Looking
Statements.” The risks and uncertainties described below are not the only ones we face. Additional risk and uncertainties
that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect
our business.
We are dependent on our customers’
spending on and demand for our manufacturing and development services. A decrease in their spending or demand could have a material
adverse effect on our business.
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, development and manufacturing 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.
In addition, the amount that customers
are able to spend on our services will depend upon, among other things, their access to capital and their need to develop new
products, which is influenced by underlying consumer demand for their products, competitors’ initiatives, market response
and reimbursement rates. Any reduction in customer spending as a result of these factors or from general economic and/or pharmaceutical
industry downturns could have a material adverse impact on our revenues, earnings and financial condition..
Our services and offerings are highly complex, and if we
are unable to provide quality and timely offerings to our customers, our business could suffer.
The services we offer are highly complex. Our operating results
depend on our ability to execute and, when necessary, improve our quality management strategy and systems, and our ability to
effectively train and maintain our employee base with respect to quality management. A failure of our quality control systems
could result in problems with facility operations or preparation or provision of products. In each case, such problems could arise
for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with
raw materials or environmental factors and damage to, or loss of, manufacturing operations. Such problems could affect production
of a particular batch or series of batches of products, requiring the destruction of such products or a halt of facility production
altogether.
In addition, our failure to meet required quality standards
may result in our failure to timely deliver products to our customers, which in turn could damage our reputation for quality and
service. Any such failure could, among other things, lead to increased costs, lost revenue, reimbursement to customers for lost
drug product, APIs or other raw materials, other customer claims, damage to and possibly termination of existing customer relationships,
time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products.
If problems in preparation or manufacture of a product or failures to meet required quality standards for that product are not
discovered before such product is released to the market, we may be subject to adverse regulatory actions, including product recalls,
injunctions to halt manufacture and distribution, restrictions on our operations, and monetary sanctions.
We operate in a highly regulated industry
and our failure to meet strict regulatory requirements could have a material adverse impact on our business.
All facilities and manufacturing techniques
used to manufacture APIs and drug product for clinical use or for commercial sale in the United States are subject to extensive
ongoing regulation, including cGMP and drug safety standards that are established by the FDA and similar standards established
by regulatory authorities in other countries, as well as for some facilities, regulations imposed by the DEA. The FDA and other
regulatory authorities conduct unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards.
Failure by us or by our customers to comply with the requirements of these regulatory authorities, including remediating any inspectional
observations to the satisfaction of these regulatory authorities, could result in warning letters, product recalls, monetary sanctions,
injunctions to halt manufacturing and distribution, restrictions on our operations, or withdrawal of existing or denial of pending
approvals, including those relating to products or facilities. In addition, such a failure could expose us to product liability
claims, contractual claims from our customers, as well as ongoing remediation and increased compliance costs, any or all of which
could be significant and adversely affect our results of operations. Any adverse action by the FDA or other applicable regulatory
bodies or any failure by us to maintain, renew or obtain necessary permits and licenses could have a material adverse effect on
our reputation, our prospects for future work and our operating results.
If we are not successful in selecting
and integrating the businesses and technologies we acquire, or in managing our divestitures, our business may suffer.
During the past few years, we have significantly
expanded our business through acquisitions, including the acquisition of Gadea in 2015 and Euticals in 2016. Our future success
depends in part on our ability to acquire additional businesses and technologies that complement, enhance or expand our current
business or offerings and we therefore plan to continue to acquire businesses and technologies, as strategic opportunities present
themselves. However, we may face competition from other companies in pursuing such acquisitions and businesses and technologies
may not be available on terms and conditions that we find acceptable. We risk spending time and money investigating and negotiating
with potential acquisition partners, but not completing transactions.
Even if completed, acquisitions involve
numerous risks which may include:
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difficulties,
resources and expenses incurred in assimilating and integrating operations, services, products or technologies, including supplier,
distribution, employee and customer relationships;
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challenges
with developing and operating new businesses, including those which may be materially different from our existing businesses
and which may require the development or acquisition of new internal capabilities and expertise;
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diversion
of management's attention from the Company’s existing core business, resulting in the loss of key customers or personnel;
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potential
losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain
from the seller;
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acquisitions
could be dilutive to earnings, or in the event of acquisitions made through the issuance of our common stock to the shareholders
of the acquired company, dilutive to the ownership of our existing shareholders;
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Loss of key employees
of the acquired business;
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risks of not being able to overcome differences in foreign
business practices, customs and importation regulations, language and other cultural barriers in connection with the acquisition
of foreign companies;
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risks
that disagreements or disputes with prior owners of an acquired business, technology, service or product may result in litigation
expenses and diversion of our management's attention;
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absence
of adequate internal controls or occurrence of fraud in the financial systems of acquired companies; and
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risk
that the initial objectives for the acquisition may not remain viable due to variety of factors, including regulatory changes.
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In the event that any of the above occur
or the acquired business or technology does not otherwise meet our expectations or perform in accordance with historical periods,
our results of operations may be adversely affected.
Some of the same risks exist when we decide
to exit or sell a business, site, or product line. In addition, divestitures could involve additional risks, including the following:
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difficulties
in the separation of operations, services, products and personnel, including obtaining any necessary consents from customers
or relevant regulatory agencies; and
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the
need to agree to retain or assume certain current or future liabilities in order to complete the divestiture.
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We continually evaluate the performance
and strategic fit of our businesses and operating facilities. Moreover, in connection with our business acquisitions, we have
undertaken, and may continue to undertake, restructuring plans relating to reductions in force and other transition activities.
Such restructurings and any other divestitures of non-strategic businesses or assets may result in significant write-offs, including
those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial
condition. In addition, we may encounter difficulty in finding buyers or alternative exit strategies at acceptable prices and
terms and in a timely manner. To the extent we are not successful in completing our planned divestitures or restructuring efforts,
we may have to expend significant cash, incur debt and continue to absorb under-performing divisions. If we are unable to manage
these or any other significant risks that we encounter in divesting a business, site or product line, we may not achieve some
or all of the expected benefits of the divestiture which could have a material adverse effect on our business.
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. While 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 delays and to raw materials being purchased on less favorable
terms than we have with our regular supplier. Under the terms of our contracts, we may not be able to pass additional expense
for raw materials along to our customers and therefore such increases may impact our results of operations. Additionally, we rely
on various third-party delivery services to transport both supplies 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 comply with the terms of our contracts, which could result in breach of contract claims,
financial penalties or customers terminating such contracts entirely.
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,
2016, revenues from GE Healthcare, our largest customer, represented approximately 7% of our contract and total revenue. Our existing
agreement with GE Healthcare extends through 2018. In total, our five largest customers in 2016 represented approximately 22%
of our contract and total revenue. This customer concentration increases credit risk and other risks associated with particular
customers and particular products, including risks related to market demand for such products and regulatory risks. In addition,
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. The loss
or a significant reduction in business from any of our major customers could materially decrease our contract revenues and have
a material adverse impact on our results of operations.
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.
As of December 31, 2016, we had approximately
$683.5 million of indebtedness outstanding. Our ability to make payments on, and to refinance, our indebtedness 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, or to fund our liquidity needs,
we may be forced to refinance all or a portion of our indebtedness, 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.
Our Convertible Senior Notes due 2018
(the “Convertible Senior Notes”) come due in the first half of 2018, and we may not have sufficient cash on hand to
repay these notes. If we are unable to pay the principal on our Convertible Senior Notes, we may need to incur additional debt
or issue additional securities to generate funds to cover these payments. In addition, in the event of a default under the Convertible
Senior Notes, the holders and/or the trustee under the indenture governing the Convertible Senior Notes may accelerate the payment
obligations thereunder, which could have a material adverse effect on our business, financial condition and results of operations.
Moreover, amounts outstanding under our term loan and revolving credit facility could become due and payable on an accelerated
basis under certain conditions and in certain circumstances. For a further discussion of our indebtedness, please see Note 7 to
our Consolidated Financial Statements included herein.
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.
Moreover, actions by credit rating agencies, such as downgrades or negative changes to ratings outlooks or recovery ratings, can
affect the availability of financing options for the Company, increase our cost of capital and hurt our competitive position.
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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expose
us to the risk of increased interest rates because certain of our borrowings are at variable
rates of interest;
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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. Also, under our Convertible
Senior Notes, 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 our Company 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 our Company that would otherwise be beneficial to our shareholders
.
Restrictions under our credit agreement may prevent us from
obtaining additional sources of funding that we may require to advance certain of our business objectives.
During 2016, in connection with the Euticals Acquisition, we
entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with Barclays Bank PLC. The Credit
Agreement contains customary restrictions on our activities, including covenants that may restrict us from:
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incurring
additional indebtedness;
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paying
dividends on or repurchasing our capital stock;
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making
investments or acquisitions;
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guaranteeing
indebtedness;
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engaging
in transactions with affiliates;
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consolidating,
merging or transferring all or substantially all of our assets.
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Our ability to comply with these restrictive covenants will
depend on our future performance, which may be affected by events beyond our control. If we violate any of these covenants and
are unable to obtain waivers, we would be in default under our Credit Agreement and payment of the indebtedness could be accelerated.
In addition, complying with these covenants may preclude us from obtaining additional sources of financing in the short-term and
may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject
to such restrictions.
We face increased competition.
We compete with other contract development
manufacturing organizations, clinical research organizations, large pharmaceutical companies offering third-party manufacturing
services to fill their excess capacity, laboratories and research and academic institutions. We compete on a variety of factors,
including: quality, regulatory compliance, expertise, scope and breadth of services, reliability, price, value and manufacturing
flexibility.
We also experience significant competition
from foreign companies operating under lower cost structures, primarily those in China, India and other Asian countries. While
we operate in certain lower relative cost jurisdictions, such as India , we do not have operations in China. Many of our competitors
have greater financial, technical, marketing 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. Moreover, pharmaceutical companies may elect
to provide their development and manufacturing services internally rather than outsource those functions to us or any of our competitors.
In the future, any one of our competitors
may develop technological advances that render the services that we provide less desirable or obsolete. In order to compete, we
must properly anticipate our customers’ needs and enhance, innovate and develop new, more cost-efficient services. We may
not be able to develop the services we need to successfully compete in the future, and our competitors may be able to develop
such services before we do or provide those services at a lower cost. Consequently, we may lose existing customers and fail to
attract new customers, which would materially harm our financial condition and prospects.
Along with significant property and
equipment balances, we have a significant and increasing amount of intangible assets, including goodwill, recorded on our balance
sheet, mainly related to our acquisitions, which may lead to potentially significant impairment charges.
We review long-lived assets, including
goodwill, 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. Goodwill and indefinite-lived intangible assets are also subject to an impairment
assessment at least annually. The amount of goodwill and identifiable intangible assets in our consolidated balance sheet has
increased significantly as a result of acquisitions. At December 31, 2016, the total goodwill related to DDS, API and DP was $52.0
million, $104.6 million and $74.7 million, respectively, and total intangible assets and patents recorded on our consolidated
balance sheet was $165.2 million.
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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If long-lived assets are determined to
be impaired in the future, we would be required to record a charge to our results of earnings, which would have a material, adverse
effect on our business and financial condition.
If we are unable to protect our technology
and proprietary information, our business could be materially harmed.
Some of the most valuable assets of the
Company include patents. 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 our patent applications will result in the issuance of patents or, if any patent are issued, they will provide
significant proprietary protection or commercial advantage. In addition to patent protection, we also rely on trade secrets, know-how,
continuing technological innovation and licensing opportunities. There can be no assurance that these protections will prove meaningful
against competitive offerings or otherwise be commercially valuable or that we will be successful in enforcing our intellectual
property rights against unauthorized users. In an effort to maintain the confidentiality and ownership of our information, such
as trade secrets, proprietary information and other confidential information, 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.
In
addition, 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 connection
with our collaboration activities, we or our partner may seek approval to market a generic product before the expiration of patents
for that product, based upon our belief that such patents are invalid, unenforceable or would not be infringed by our products.
In these cases and others, we could 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 and could be required, among other things, to discontinue the use of the infringing technology, expend significant
resources to develop non-infringing technology, license such technology from the third party claiming infringement and/or cease
the manufacture, use or sale of the infringing processes or offerings. Even if the eventual outcome is favorable to us, these
proceedings could result in substantial cost. 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.
If we are unable to protect the confidentiality
of our customers’ proprietary information, we may be subject to claims.
Many of the formulations and processes
used by us in manufacturing or developing products to customer specifications are subject to trade secret protection, patents
or other protections owned or licensed by the relevant customer. We take significant efforts to protect our customers’ proprietary
and confidential information, including requiring our employees to enter into agreements protecting such information. If, however,
any of our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary
information has been disclosed, this could damage our reputation, subject us to legal proceedings and significant expense and
have a material adverse effect on our business.
Failure to manage our business to
consistent profitability without Allegra and/or other royalties will have a significant impact on our operations, financial
condition and stock value.
The recurring royalties we received on
the sales of Allegra/Telfast historically provided a material portion of our revenue, earnings and operating cash flows. These
royalties ceased in May 2015. Recurring royalties have significantly higher margins than do our other business activities, resulting
in the need to replace a significant amount of margin in order to achieve the same level of profitability. While recently we have
begun to receive royalties on the sales of other products in connection with our collaboration arrangement activities, we must continue
to develop our business and manage our operating costs in order to operate profitably. In recent years, we have acquired revenue-generating
businesses, including Euticals and Gadea, that are expected to produce consistent and growing revenue and profit over time and
have effected certain cost saving measures in order 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 continue
to increase or are not profitable enough to support our operations. If we are unable to do so, there will be a material and adverse
impact on our business, including negative impact on our operating cash flow, access to capital and ability to implement required
capital improvements to our facilities.
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, certain
of our 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. Moreover, the
volume of product under each contract is subject to change, sometimes, significantly, based on the expected forecast volume required
by our customers. In addition, the value of our 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.
Delays in, or failure
to obtain, the approval of our customers’ regulatory submissions could impact our
revenue and earnings.
The successful transition of preclinical
and clinical candidates into long term commercial supply agreements is a key component of the Drug Product and API business strategy.
If our customers do not receive approval for their products from the applicable regulatory authorities, 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 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.
These foreign market risks were further heightened following our recent acquisitions of Euticals, with operations in Italy, Germany
and France and Gadea, with operations in Spain. While we have derivative financial instruments in place as appropriate to mitigate
certain of our foreign exchange risk, these hedges may not be successful and they do not fully cover the foreign currency exposure
that results from the operation of the entire business. 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”.
Our business is subject to risks relating to operating internationally.
We have significant international operations,
particularly following the acquisitions of Gadea and Euticals. As a result, a significant part of our contract revenue is derived
from operations outside the U.S. Our international revenues, which include revenues from our non-U.S. subsidiaries, have represented
approximately 47%, 36% and 32% of our total contract revenue in 2016, 2015, and 2014, respectively. We expect that international
revenues will continue to account for a significant percentage of our revenues for the foreseeable future. We currently have operations
in eight countries. There are a number of risks associated with our international business including:
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fluctuations
in currency exchange rates;
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general
economic and political conditions in the markets in which we operate;
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potential
international conflicts, including terrorist acts;
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potential
trade restrictions, exchange controls, adverse tax consequences, and legal restrictions on the repatriation of funds into
the U.S.;
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difficulties
and costs associated with staffing and managing foreign operations, including risks of work stoppages and/or strikes, as well
as violations of local laws or anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and the
OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions;
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unexpected
changes in regulatory requirements;
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the
difficulties of compliance with a wide variety of foreign laws and regulations;
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unfavorable
labor regulations in foreign jurisdictions;
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potentially
negative consequences from changes in or interpretations of US and foreign tax laws and particularly any changes in tax laws
affecting any repatriation of profits;
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exposure to business disruption
or property damage due to geographically unique natural disasters;
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longer accounts receivable
cycles in certain foreign countries; and
|
|
·
|
import and export licensing
requirements.
|
These risks, individually or in the aggregate,
could have an adverse effect on our results of operations and financial condition. For example, as mentioned above, we are subject
to compliance with the United States Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies
and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining
business. While our employees and agents are required to comply with these laws, we cannot be sure that our internal policies
and procedures will always protect us from violations of these laws despite our commitment to legal compliance and corporate ethics.
The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial
condition, and results of operations.
In addition, on June 23, 2016, the U.K.
held a non-binding referendum, in which a majority of voters approved an exit from the European Union (referred to as “Brexit”).
The Brexit referendum may impact our relationship with foreign customers and the operations of our European facilities, and expose
us to fluctuations in foreign currency rates and heightened volatility in our stock price due to reactions in global markets.
The Brexit referendum constituted an advisory, non-binding vote, and its full impact is subject to the results of following the
two-year negotiation period from the date of on which the British government commences formal withdrawal proceedings.
In December 2016, the Italian Prime Minister,
Matteo Renzi, resigned his position. If the new government calls for a referendum on Italy’s membership in the European
Union and such an exit is approved, this could have a significant adverse impact on our API operations in Italy. Such an exit
could increase regulatory costs and the abandonment of the euro could adversely affect pricing and profitability, which would
provide competitive advantages to API manufacturers outside of Italy. Following the Euticals Acquisition, we have significant
API operations in Italy and our business could therefore be materially adversely impacted by such a withdrawal.
Our future success depends on our ability to retain our
senior management and to attract, retain and motivate qualified personnel.
Our
business is highly dependent on our senior management, including William Marth, our Chief Executive Officer and President, and
George Svokos, our Senior Vice President and Chief Operating Officer. Although we have formal employment agreements with our executive
officers, these agreements do not prevent them from terminating their employment with us at any time. We do not maintain “key
person” insurance for any of our executives or other employees.
Our future growth and profitability also
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 with pharmaceutical firms, biotechnology firms, contract
research firms, and academic and research institutions to recruit scientists. These employees may voluntarily terminate their
employment with us at any time. If we cannot retain such scientists and other highly skilled employees, or attract additional
qualified 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.
Furthermore, retaining and motivating
key personnel from our recent acquisitions who will be instrumental in integrating our businesses will be important to our ability
to successfully achieve our business objectives.
We are subject to labor and employment laws and regulations,
which could increase our costs and restrict our operations in the future.
We employ approximately 3,100 employees
worldwide. Some of our employees are represented by labor organizations and national works councils. Our management believes that
our employee relations are satisfactory. However, further organizing activities or collective bargaining may increase our employment-related
costs and we may be subject to work stoppages and other labor disruptions. Moreover, if we are subject to employment-related claims,
such as individual and class actions relating to alleged employment discrimination, wage-hour and labor standards issues, and
such actions are successful in whole or in part, this may affect our ability to compete or have a material adverse effect on our
business, financial condition and results of operations.
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 named as a defendant
in a product liability lawsuit, which could be costly to defend and could result in significant liability and divert management’s
time, attention and resources. Even claims without merit could subject us to adverse publicity and require us to incur significant
legal fees. Although we have generally sought to mitigate this risk through liability insurance and contractual indemnities and
liability limitations in our agreements with customers and vendors, we may nevertheless be required to pay damages and such amounts
may be in excess of the amounts of our insurance coverage or excluded from coverage entirely. Product liability claims and lawsuits,
regardless of their ultimate outcome, could have a material adverse effect on our operations, financial condition, reputation
and on our ability to attract and retain customers.
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, chemicals 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, and therefore we could be required to incur significant costs to comply with environmental laws and regulations which
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 have been required to conduct remediation
activities, including ongoing monitoring and reporting, at certain of our facilities. It is the Company’s policy to record
appropriate liabilities for environmental matters where remedial efforts are probable and the costs can be reasonably estimated.
Such liabilities are based on the Company’s best estimate of the future costs required to complete the remedial work. Environmental
matters often span several years and frequently involve regulatory oversight or adjudication. Additionally, many remediation efforts
are fluid and are likely to be affected by future technology, site and regulatory developments. Each of these matters is subject
to various uncertainties, and it is possible that some of these liabilities will be materially higher than the Company has estimated.
In addition, our operations have grown through acquisitions, and it is possible that facilities that we have acquired may expose
us to environmental liabilities associated with historical site conditions that have not yet been discovered. If such remediation
costs or claims were to arise, they may be material and may not be recoverable under any contractual indemnity or otherwise from
prior owners or operators or any insurance policy.
Our operations may be interrupted by
the occurrence of a natural disaster or other catastrophic event at our facilities.
We depend on our laboratories, manufacturing
facilities and equipment for the continued operation of our business. Our research and development, manufacturing and administrative
functions are primarily conducted at our facilities in Albany and Rensselaer, New York, Albuquerque, New Mexico, Valladolid, Spain,
Milan, Italy, Grafton, Wisconsin, and Burlington, Massachusetts. Although we have contingency plans in effect for natural disasters
or other catastrophic events, these events could still disrupt our operations. For example, in 2014, our facility in Albuquerque,
New Mexico experienced a power failure which resulted in certain business interruption losses. 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 increasing potential for terrorist attacks over the past several years, 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.
Our systems and networks may be subject to cyber security
breaches and other disruptions that could compromise our information, interrupt our operations and harm our business.
In the ordinary course of our business,
we rely heavily upon our technology systems and networks to input, maintain and communicate the confidential and proprietary data
we receive on behalf of our customers, to facilitate the manufacture of inventory, to receive and process orders of product, to
manage the billing and collections from our customers and to generally operate our global network of manufacturing and development
facilities. Our security measures could be compromised and, as a result, our data, customers’ data, information technology
or infrastructure could be accessed improperly, made unavailable or improperly modified, or our servers could be attacked or corrupted
by computer hackers, nefarious actors, computer viruses or other malicious software programs or breached due to employee error
or malfeasance, all of which could create system disruptions and cause shutdowns or denials of service. In addition, subcontractors,
partners or other third party vendors that receive or utilize confidential information on our behalf may become subject to a security
breach, which may result in unauthorized access to such third party’s information systems and/or our or our customers’
protected information. The occurrence of any of these events could cause our infrastructure to be perceived as vulnerable, cause
our customers to lose confidence in our services and to terminate or not renew their agreements with us, damage our reputation
and negatively affect our ability to attract new customers, all of which could reduce our revenue, increase our expenses and expose
us to legal claims and regulatory actions. Similarly, if our internal networks are compromised, we could be adversely affected
by the loss of proprietary, trade secret or confidential technical and financial data. Because techniques used to obtain unauthorized
access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may
be unable to anticipate these techniques or to implement adequate preventive measures. We could be forced to expend significant
resources in response to a cybersecurity breach, including repairing system damage, increasing cyber security protection costs
by deploying additional personnel and protection technologies, paying regulatory fines and and resolving legal claims and regulatory
actions, all of which could increase our expenses, divert the attention of our management and key personnel away from our business
operations and adversely affect our results of operations.
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 in turn, could reduce the demand for 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 drive continued demand for our services and to devote substantial
resources to the research and development of new drugs. Additionally, under our long-term collaboration agreements, we rely on
our partners to obtain acceptable prices or an adequate level of reimbursement for current and potential future products developed
under those agreements. If they are unable to do so, we may not be able to sell those products on a competitive and profitable
basis. 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. 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.
Our business may be adversely affected
if we encounter complications in connection with the upgrade and implementation of our global enterprise resource planning (“ERP”)
system, our information technology systems and infrastructure. Upgrading and integrating our business systems could result in
implementation issues and business disruptions.
During the fiscal year ended December
31, 2016, we implemented a new ERP system at all of our global locations, except our Gadea and Euticals locations. We may implement
or upgrade ERP systems at our recently acquired businesses during 2017. The implementation or upgrade of ERP systems affects the
processes that constitute our internal control over financial reporting and will require testing for effectiveness. In general,
the process of planning and preparing for these types of implementations is extremely complex and we are required to address a
number of challenges including data conversion, system cutover and user training. Problems in any of these areas could cause operational
problems during implementation including delayed shipments, missed sales, billing and accounting errors and other operational
issues. There have been numerous, well-publicized instances of companies experiencing difficulties with the implementation of
ERP systems which resulted in negative business consequences. 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.
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, delay or prevent 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. Among other things, these provisions:
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·
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Establish
a classified board of directors such that not all members of the board are elected at
one time;
|
|
·
|
Limit
the manner in which stockholders can remove directors from the board;
|
|
·
|
Establish
advance notice requirements for stockholder proposals that can be acted on at stockholder
meetings and nominations to our board of directors;
|
|
·
|
Require
that stockholder actions must be effected at a duly-called stockholder meeting and prohibit
actions by our stockholders by written consent;
|
|
·
|
Limit
who may call stockholder meetings; and
|
Authorize our board of directors to issue
preferred stock without stockholder approval, which could discourage or delay a tender offer or change in control.
Moreover, because we are incorporated
in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a
person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three
years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless
the merger or combination is approved in a prescribed manner.
Our officers and directors have significant
control over us and their interests as shareholders may differ from our other shareholders.
As of March 2, 2017, our directors and
officers beneficially owned or controlled approximately 14.8% 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.These cost increases are often dependent
on market conditions. 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.
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 future government funding will be directed towards projects and studies that require use
of our services.
Any claims beyond our insurance coverage
limits, or that are otherwise not covered by our insurance, may result in substantial costs and a reduction in our available capital
resources.
We maintain property insurance, employer’s
liability insurance, product liability insurance, general liability insurance, business interruption insurance, and directors
and officers liability insurance, among others. Although we maintain what we believe to be adequate insurance coverage, potential
claims may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could cause an adverse
effect on our business, financial condition and results of operations. In addition, in the future we may not be able to obtain
adequate insurance coverage or we may be required to pay higher premiums and accept higher deductibles and additional risk to
our business and financial condition.
Tax legislation initiatives or challenges
to our tax positions could have a material adverse effect on our results of operations and financial condition.
We are a multinational business with global
operations. As such, we are subject to the tax laws and regulations of Italy, France, Germany, Spain, the United Kingdom, the
United States and several other international jurisdictions. From time to time, various legislative initiatives may be proposed
that could have a material adverse effect on our effective tax rate or tax payments. In addition, tax laws and regulations are
extremely complex and subject to varying interpretations. If our tax positions are challenged by relevant tax authorities, we
may not be successful in defending such a challenge and this could have a material adverse effect on our results of operations
and financial condition.
Tax assessments by various tax authorities
could be materially different than the amounts we have provided for in our consolidated financial statements. We are regularly
audited by various tax authorities. From time to time, these audits could result in proposed assessments. While we believe that
we have adequately provided for any such assessments, future settlements could be materially different than we have provided for
and thereby have a material adverse effect on our earnings and cash flows. We operate in various tax jurisdictions, and although
we believe that we have provided for income and other taxes in accordance with the relevant regulations, if the applicable regulations
were ultimately interpreted differently by a taxing authority, we could be exposed to additional tax liabilities. While we believe
our tax positions, including, among others, intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions
in which we conduct our business, it is possible that these positions may be challenged by jurisdictional tax authorities, which
could have a significant impact on our tax position.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The aggregate square footage of our operating
facilities is approximately 3,007,000 square feet, of which 2,539,000 square feet are owned and 468,000 square feet are leased.
Set forth below is information on our principal facilities:
Location
|
|
Square Feet
|
|
Segment
|
|
Primary Purpose
|
Rensselaer, New York
|
|
331,000*
|
|
API, DDS
|
|
Contract Manufacturing
& Contract Research
|
Origgio, Italy
|
|
323,000
|
|
API
|
|
Contract Manufacturing
|
Valladolid, Spain
|
|
268,000
|
|
API
|
|
Contract Manufacturing
|
Zamora, Spain
|
|
259,000
|
|
API
|
|
Contract Manufacturing
|
Lodi, Italy
|
|
245,000
|
|
API
|
|
Contract Manufacturing
|
Albuquerque, New Mexico
|
|
220,000
|
|
DP
|
|
Contract Manufacturing
|
Aurangabad, India
|
|
208,000
|
|
API
|
|
Contract Manufacturing
|
Albany, New York
|
|
159,000*
|
|
Corporate, DDS
|
|
Administration &
Contract Research
|
Bon-Encontre, France
|
|
113,000
|
|
API
|
|
Contract Manufacturing
|
Springfield, Missouri
|
|
108,000
|
|
API
|
|
Contract Manufacturing
|
Rozzano, Italy
|
|
108,000
|
|
API
|
|
Contract Manufacturing
|
Leon, Spain
|
|
103,000*
|
|
API, DP
|
|
Contract Manufacturing
|
Tonneins, France
|
|
70,000
|
|
API
|
|
Contract Manufacturing
|
Holywell, United Kingdom
|
|
63,000
|
|
API
|
|
Contract Manufacturing
& Contract Research (Held-for-sale)
|
Frankfurt,.Germany
|
|
61,000*
|
|
DDS, FC
|
|
Contract Research
|
Hyderabad, India
|
|
54,000*
|
|
DDS
|
|
Contract Research
|
Burlington, Massachusetts
|
|
51,000*
|
|
DP
|
|
Contract Manufacturing
|
West Lafayette, Indiana
|
|
49,000
|
|
DDS
|
|
Contract Manufacturing
|
Grafton, Wisconsin
|
|
43,000*
|
|
API
|
|
Contract Manufacturing
|
Varese, Italy
|
|
32,000*
|
|
API, FC
|
|
Contract Manufacturing
|
Zejtun, Malta
|
|
31,000*
|
|
API
|
|
Contract Research
|
Glasgow, UK
|
|
30,000*
|
|
DP
|
|
Contract Manufacturing
|
Denver, Colorado
|
|
25,000*
|
|
API
|
|
Contract Research
and Administration
|
Lebanon, New Jersey
|
|
20,000*
|
|
DDS
|
|
Contract research
|
Singapore
|
|
18,000*
|
|
DDS
|
|
Contract Research
|
Waltham, Massachusetts
|
|
8,000*
|
|
Corporate
|
|
Administration
|
Gerenzano, Italy
|
|
7,000*
|
|
API, FC
|
|
Contract Research
|
*All or a portion of the square footage
of this location is leased.
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 2017.
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.
On November 12, 2014, a purported class
action lawsuit, John Gauquie v. Albany Molecular Research, Inc., et al., No. 14-cv-6637, was filed against the Company and
certain of its current and former officers in the United States District Court for the Eastern District of New York. An amended
complaint was filed on March 31, 2015. The amended complaint alleges claims under the Securities Exchange Act of 1934 arising
from the Company’s alleged failure to disclose in its August 5, 2014 announcement of its financial results for the second
quarter of 2014 that one of the manufacturing facilities experienced a power interruption in July 2014. The amended complaint
alleges that the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and
seeks unspecified monetary damages and attorneys’ fees and costs. The defendants submitted on July 29, 2015 a motion to
dismiss lead plantiffs’ amended complaint. Lead plantiffs submitted an opposition on October 7, 2015, and defendants submitted
a reply on November 20, 2015. On July 26, 2016, the court denied the defendants’ motion to dismiss. The Company filed a
motion to reconsider its July 29, 2015 motion to dismiss lead plantiff’s amended complaint. On December 12, 2016, the parties
agreed to a settlement in principle of all legal claims, subject to the court approval process, which will be funded by the Company’s
insurance.
ITEM 4. Mine Safety Disclosures
None.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Business and Operations:
Albany Molecular Research, Inc. (the
“Company”) is a leading global contract research and manufacturing organization providing customers fully integrated
drug discovery, development, and manufacturing services. The Company supplies a broad range of services and technologies supporting
the discovery and development of pharmaceutical products, the manufacture of fine chemicals and Active Pharmaceutical Ingredients
(“API”), the development and manufacture of drug product (“DP”) for new and generic drugs, as well as
research, development and manufacturing for the agrochemical and other industries. In addition, the Company offers analytical
and testing services to the medical device and personal care industry. With locations in the United States, Europe, and Asia,
the Company maintains geographic proximity to our customers and flexible cost models.
Basis of Presentation:
The consolidated financial statements
include the accounts of Albany Molecular Research, Inc. and its wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in 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 foreign currency exchange, and the statements of operations are translated at the average rates of foreign
currency exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded
in the consolidated statements of comprehensive loss and in accumulated other comprehensive loss, net 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 the assumptions regarding the Company’s accounting for business
combinations and goodwill impairment assessment, valuation of inventory, intangible assets and long-lived assets, and the amount
and realizability of deferred tax assets. Other significant estimates include assumptions utilized in determining actuarial obligations
in conjunction with the Company’s pension and postretirement health plans, assumptions utilized in determining stock-based
compensation, environmental remediation liabilities, as well as those utilized in determining the value of both the notes hedges
and the notes conversion derivative and the assumptions related to the collectability of trade receivables. Actual results can
vary from these estimates.
Contract Revenue Recognition:
The Company’s contract revenue consists primarily of amounts earned under contracts with third-party
customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs.
The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone
and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that
become approved by the applicable regulatory agencies for commercial sale. Generally, the Company’s contracts may be terminated
by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract.
The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single
unit of accounting in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards
Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin
(“SAB”) 104, “Revenue Recognition”. Allocation of revenue to individual elements that qualify for separate
accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated
based on relative fair value across the components of the arrangement. If separate selling prices are not available, the Company
will use its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant
market factors.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for 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 and when delivery
is made or title and risk of loss otherwise transfers to the customer, and collection is reasonably assured. In certain instances,
the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact
that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue
recognition process is considered complete when project documents have been delivered to the customer, as required under the arrangement,
or other customer-specific contractual conditions have been satisfied.
Full-time Equivalent (“FTE”).
An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration
of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may
not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or
longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.
These contracts involve the Company’s
scientists providing services on a “best efforts” basis on a project that may involve a research component with a
timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as
part of these services. As such, the Company recognizes revenue under FTE contracts 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 Revenues:
Recurring
royalties historically related to 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. These royalty payments ceased in May 2015 due to the expiration of patents under
the license agreement. The Company currently receives royalties in conjunction with a Development and Supply Agreement with Teva
Pharmaceuticals (“Teva”) .These royalties are earned on net sales of generic products sold by Allergan. The Company
records royalty revenue in the period in which the net sales of this product occur. Royalty payments from Allergan are due within
60 days after each calendar quarter and are determined based on sales of the qualifying products in that quarter. The Company
also receives royalties on certain other products and revenue is generally estimated and recognized when the sales of product
occur.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Collaboration Arrangement Revenues:
The Company enters into collaboration
arrangements with third parties for the development and manufacture of certain products and/or product candidates. T
hese
arrangements may include non-refundable, upfront payments, milestone payments and cost sharing arrangements during the development
stage, payments for manufacturing based on a cost plus an agreed percentage, as well as profit sharing payments during the product’s
commercial stage.
The Company recognizes revenue for payments
received for services performed under these arrangements as contract revenue in accordance with ASC 605, “Revenue Recognition.”
Development stage payments are recognized using the milestone method when the contractual milestones are determined to be substantive
and have been achieved. Certain contractual milestones are deemed to be achieved upon the occurrence of the contractual performance
events. Other non-performance based milestones, including the filing of an Abbreviated New Drug Application (ANDA) and approval
by the Food and Drug Administration (FDA), which are generally events that occur at the end of the development period, are recognized
upon occurrence of the related event. Contractual milestones that are deemed not substantive are recognized using proportional
performance over the remaining development period. Upfront, non-refundable payments are recognized over the term of the development
period using the proportional performance recognition model. Revenue associated with payments received for contract manufacturing
services are recognized upon delivery of the product to the Company’s collaborative partners. Revenue associated with payments
received for profit sharing payments are recognized as recurring royalties revenue when earned based on the terms of the agreements.
Cash, Cash Equivalents and Restricted
Cash:
Cash equivalents consist of money market
accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash and cash equivalents
are held at several financial institutions and at times may exceed insured limits. The Company has placed these funds in
high quality institutions in order to minimize risk relating to exceeding insured limits.
Restricted cash balances at December
31, 2016 and December 31, 2015 are required pursuant to the Company’s Singapore lease agreements. The additional restricted
cash balance at December 31, 2015 was required as collateral for the letters of credit associated with the Company’s debt
agreements.
Allowance for Doubtful Accounts:
The Company records an allowance for doubtful accounts for estimated trade receivable losses. Management
reviews outstanding trade 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
$3,730 and $1,096 as of December 31, 2016 and 2015, 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. Manufacturing inventories are valued on a first-in, first-out (“FIFO”) or average cost 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.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
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. Spare parts purchased for in-service property and equipment
are expensed as incurred.
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:
Machinery, 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.
The carrying value of the equity investment
at December 31, 2016 and 2015 was $956 and is included within “Other assets” on the accompanying consolidated
balance sheets.
Business
Combinations:
In accordance with the accounting guidance
for business combinations, the Company used the acquisition method of accounting to allocate costs of acquired businesses to the
assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of
acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as goodwill. The valuations
of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management
estimates and negotiated amounts, the Company used a variety of information sources to determine the estimated fair values of
the assets and liabilities, including third-party appraisals for the estimated value and lives of identifiable intangible assets
and property and equipment. The business and technical judgment of management and third-party experts was used in determining
the useful lives of finite-lived intangible assets in accordance with the accounting guidance for goodwill and intangible assets
and patents.
Long-Lived
Assets:
The Company assesses the impairment of
a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable.
Factors the Company considers important that could trigger an impairment review include, among others, the following:
|
·
|
a significant
change in the extent or manner in which a long-lived asset group is being used;
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
·
|
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.
Goodwill:
The
Company tests goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment
may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting
unit. The goodwill is tested for impairment at the reporting unit level, which is at the operating segment or one level below
(known as a component). If a component has similar economic characteristics, the components are aggregated and tested at the operating
segment level. For purposes of testing goodwill, the Company’s reporting units have been defined as
Active Pharmaceutical
Ingredients (“
API”), Drug Product (“DP”), Fine
Chemicals (“FC”), Discovery & Development Services (“DD”) and Analytical Services (“AS”).
Goodwill was tested at this level based on the manner in which the Company operates its businesses and goodwill is recoverable.
The API, DP and FC operating segments have been determined to be reporting units because the products, processes, and customers
are similar and resources are managed at the segment level. The Company’s Discovery and Development Services (DDS) operating
segment consists of two reporting units, DD and AS.
The Company tests goodwill for impairment
by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of
factors, including reporting unit specific operating results as well as industry, market, and general economic conditions, to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. Depending on the factors specific to some or all of our reporting units, the Company may be required to perform a two-step
quantitative test. A qualitative assessment was performed for the DD reporting unit given that the goodwill in this unit relates
to the acquisition of Euticals in 2016. A quantitative assessment was performed for API, DP and AS. The Company concluded there
were no impairments as of October 1, 2016, our annual impairment testing date. Additionally, the Company considered the qualitative
factors for each component subsequent to the annual impairment testing date and through December 31, 2016, noting no indicators
of potential impairment.
The valuations for API, DP and AS used
in the quantitative goodwill assessment were based on the discounted cash flow method using projected financial information of
the reporting unit. Consideration was also given to a market approach as a possible indication of value but not weighted. Key
assumptions used in the discounted cash flow method include prospective financial information and the discount rate or weighted-average
cost of capital (WACC). The prospective financial information includes Company-prepared five year projections, which are based
on information available to management as of October 1, 2016 and, for API and DP, includes projected revenue on generic drug products
in development and expected to be commercialized in the five year period. The long-term sales growth rate assumed for API, DP
and AS was 3%. The WACC takes into consideration the capital structure of both the Company and peer groups for each of the businesses.
In addition, the WACC includes a market equity and country specific risk premium. The country specific risk premium is based on
a blended average of the geographies in which the business units operate. A discount rate was estimated and applied to each revenue
stream, specifically contract revenue and royalties on long-term collaboration agreements for both API and DP. The discount rates
for contract revenue were 11.5%, 10.0% and 9.5% for API, DP and AS, respectively. The discount rates for royalty revenue on long-term
collaboration arrangements were 24.5% and 23.5% for API and DP, respectively, given the higher level of uncertainty surrounding
these cash flows.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The estimated fair value for the DP business
compared to its carrying value was relatively close given that DP is primarily comprised of recent acquisitions. The estimated
fair value of the DP business exceeded carrying value by approximately 13%. The future projections have included discounted cash
flows for the Company’s current DP manufacturing and development business as well as separate projections of estimated royalties
on the long-term collaboration agreements. The achievement of these royalties could be impacted by the complexity to develop the
product, the number of competitors in the market, and the timing of the product launch. These risks have been contemplated in
the Company’s projections. If the Company’s DP business is unable to achieve the future projections of the manufacturing
and development business or the projections of estimated royalties on the long-term collaboration agreements, some or all of the
goodwill allocated to DP may be impaired in future periods.
Patents, Patent Application Costs,
Trademarks, Tradenames, Customer Relationships and In-process Research & Development:
Customer relationships and trademarks
are being amortized on a straight-line basis over their estimated useful lives ranging from five to twenty years. Acquired tradenames
are not amortized, but instead are periodically reviewed for impairment.
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. An impairment charge is recognized to the extent
that the carrying amount of the intangible asset group exceeds its fair value and will reduce only the carrying amounts of the
intangible assets.
The costs of in-process research and development
(“IPR&D”), related to the Company’s business combination with Gadea, were recorded at fair value on the
acquisition date. IPR&D intangible assets are considered indefinite-lived intangible assets until completion or abandonment
of the associated research and development efforts. IPR&D is not amortized but is reviewed for impairment at least annually,
or when events or changes in the business environment indicate the carrying value may be impaired.
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 actuarial mortality assumptions, discount rates and expected return on plan assets, which are updated on an annual basis.
The Company considers 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.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Environmental Matters:
Liabilities for future remediation costs
are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other
than for assessments, the timing and magnitude of these accurals generally are based on the completion of investigations or other
studies or a commitment to a formal plan of action. Environmental remediation liabilities are based on best estimates of probable
undiscounted future costs using currently available technology and applying current regulations and contractual obligations.
Research
and Development:
Research and Development (“R&D”)
costs are charged to operations when incurred and are included in operating expenses.
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.
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. The Company considers all available evidence (positive and negative) in support of its ability to utilize
its deferred tax assets, including cumulative income or loss in recent years, taxable income in recent years against which future
losses may be carried back, future reversals of existing temporary differences, forecasted future taxable income and tax planning
strategies. A greater weight is placed on objectively verifiable evidence.
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, “Derivatives and Hedging”, which establishes accounting and reporting standards
requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value.
Additionally, changes in a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting
criteria are met. If the specific hedge accounting criteria is met, then changes in fair value are recorded in accumulative other
comprehensive loss, net.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Stock-Based
Compensation:
The Company records compensation expense
associated with stock options and other equity based compensation by establishing fair value as the measurement objective in accounting
for share-based payment transactions with employees and directors and recognizing expense on a straight-line basis over the applicable
vesting period.
Earnings Per Share:
The Company computes net (loss) earnings
per share by dividing net (loss) income 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 loss per share
calculations:
|
|
Year Ended December 31, 2016
|
|
|
Year Ended December 31, 2015
|
|
|
Year Ended December 31, 2014
|
|
|
|
Net
Loss
|
|
|
Weighted
Average
Shares
|
|
|
Per Share
Amount
|
|
|
Net
Loss
|
|
|
Weighted
Average
Shares
|
|
|
Per Share
Amount
|
|
|
Net
Loss
|
|
|
Weighted
Average
Shares
|
|
|
Per Share
Amount
|
|
Basic and diluted loss per
share
|
|
$
|
(70,171
|
)
|
|
|
38,304
|
|
|
$
|
(1.83
|
)
|
|
$
|
(2,301
|
)
|
|
|
33,169
|
|
|
$
|
(0.07
|
)
|
|
$
|
(3,278
|
)
|
|
|
31,526
|
|
|
$
|
(0.10
|
)
|
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, 2016, 2015 and 2014 because the net losses cause these outstanding
stock options and non-vested restricted shares to be anti-dilutive.
The weighted average number of anti-dilutive
common equivalents outstanding was 12,022, 11,971 and 12,502 for the years ended December 31, 2016, 2015 and 2014, respectively,
and were excluded from the calculation of diluted loss per share.
Restructuring Charges:
The Company accounts for its restructuring
costs as required by FASB ASC Subtopic 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.
Transfers of Financial Assets:
The Company enters into arrangements with
financial institutions to factor certain accounts receivable transactions. In these arrangements, the Company is obligated to
collect the factored accounts receivable from the Company’s customers on behalf of the financial institutions and remit
the collections to the financial institutions. The Company accounts for these transfers of financial assets as sales when it
has surrendered control over the related assets and the Company can demonstrate that the transferred financial assets have been
isolated from, and are beyond the reach of, the Company’s creditors. Whether control has been relinquished requires, among
other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s
continuing involvement with the assets transferred. Upon receipts of cash proceeds in connection with the transfer of financial
assets accounted for as sales, the Company removes the related assets from the Company’s consolidated balance sheets and
records the proceeds as “Cash and cash equivalents”. If gains and losses result from transfers reported as sales,
such amounts are included in “Other (expense) income, net” in the accompanying consolidated statements of operations.
If assets are obtained and liabilities incurred in connection with transfers reported as sales, such amounts are initially recognized
in the consolidated balance sheets at fair value. Accounts receivable factored under these arrangements was $8,433 as of December
31, 2016. No gains or losses were recognized during 2016.
Cash proceeds received in connection with
transfers of financial assets that do not qualify for sale accounting are reported as “Short-term borrowings” in the
consolidated balance sheets. Accordingly, the related assets remain on the Company’s consolidated balance sheets and continue
to be reported and accounted for as if the transfer had not occurred.
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 consolidated financial
statements are issued. The effects of conditions that existed at the date of the balance sheet date are recognized in the consolidated
financial statements. Events and conditions arising after the balance sheet date but before the consolidated financial statements
are issued are evaluated to determine if disclosure is required to keep the consolidated 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 consolidated financial statements, the Company evaluated subsequent events through the date the accompanying
consolidated financial statements were issued.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Recent Accounting Pronouncements:
Accounting Pronouncements Issued But Not Yet Adopted
In January 2017, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Simplifying the Test
for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. The ASU is effective for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of
this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01,
“Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance
to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption
is permitted for certain transactions. The adoption of this standard is not expected to have a material impact on the Company’s
consolidated financial statements and related disclosures.
In
November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” The standard addresses the classification and presentation
of restricted cash and restricted cash equivalents within the statement of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard
is not expected to have a material impact on the Company’s consolidated financial statements
.
In October 2016, the FASB issued ASU 2016-16,
“Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects
for an intra-entity asset transfer other than inventory. The ASU is effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard
will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
“Classification of Certain Cash Receipts and Cash Payments.” The standard addresses the classification of certain
transactions within the statement of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent
consideration payments made after a business combination, and distributions received from equity method investments. The ASU is
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is
permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related
disclosures.
In March 2016, the FASB issued ASU
2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects
of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either
equity or liabilities and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The adoption is not expected to
have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information
to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.
The Company is currently evaluating the impact of its pending adoption of this standard on its consolidated financial statements.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
In July 2015, the FASB issued ASU 2015-11,
“Simplifying the Measurement of Inventory.” This ASU simplifies the subsequent measurement of inventories by replacing
the current lower of cost or market test with a lower of cost or net realizable value test. The amendments in this ASU are effective
for fiscal years beginning after December 15, 2016, and interim periods therein. The adoption of this standard is not expected
to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
"Revenue from Contracts with Customers: (Topic 606)." This ASU affects any entity that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts
are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition
requirements in ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. In addition, the existing
requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer
(e.g., assets within the scope of ASC Topic 360, "Property, Plant, and Equipment," and intangible assets within the
scope of ASC Topic 350, "Intangibles-Goodwill and Other") are amended to be consistent with the guidance on recognition
and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective
date of ASU 2014-09. This ASU is now effective for calendar years beginning after December 15, 2017. Early adoption
is not permitted. We have begun to evaluate the impacts of this new standard on our consolidated financial statements, information
technology ("IT") systems, policies and business processes and controls. We have developed an implementation plan to
adopt this new guidance including determining the method of adoption. As part of this plan, we are currently assessing the potential
impact this standard will have on our consolidated financial statements and related disclosures. Based on our assessment procedures
performed to date, we are currently unable to estimate the impact this standard will have on our consolidated financial statements;
however, we anticipate that the adoption of the new standard may require us to make changes to our business processes and controls.
Accounting Pronouncements Recently Adopted
In August 2014, the FASB issued ASU 2014-15,
“Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The standard requires
management to assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year
after the issuance date and, as applicable, provide additional disclosures on management’s plan to alleviate the substantial
doubt. The ASU is effective for fiscal years ending after December 15, 2016, and interim periods within annual periods beginning
after December 15, 2016. Early adoption is permitted. During the fourth quarter of 2016, the Company adopted this standard, which
had no impact on the Company’s consolidated financial statements and related disclosures.
In June 2014, the FASB issued ASU No.
2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period." This ASU requires that a performance target
that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. The
performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized
in the period in which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes
probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should
be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during
and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to
reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and
still be eligible to vest in the award if the performance target is achieved. This ASU is effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. The Company adopted this ASU during 2016, which did not
have a material impact on its consolidated financial statements
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
2016 Acquisition
Euticals
On July 11, 2016, the Company purchased
from Lauro Cinquantasette S.p.A. all of the capital stock of Prime European Therapeuticals S.p.A. (“Euticals”) (the
“Euticals Acquisition”), a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and
the manufacture of active pharmaceutical ingredients with a network of facilities located in Italy, Germany, the U.S. and France.
The Euticals operations have been assigned to the API, DDS and FC segments based on the activities performed and markets served
at each location.
The aggregate net purchase price was $277,067
(net of cash acquired of $20,784), which consisted of (i) the issuance of 7,051 unregistered shares of common stock subject to
a six month lock-up provision, valued at $91,765 (net of lock-up provision discount of $9,633), (ii) the issuance of two unsecured
promissory notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, or $60,783, that were valued at $44,342
(net of an original issue discount of $16,441) (the “Euticals Seller Notes”), and (iii) $140,960 in cash, net of a
final working capital adjustment of $2,309.
The following table summarizes the allocation
of the aggregate purchase price to the estimated fair value of the net assets acquired:
|
|
July 11,
2016
|
|
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
30,977
|
|
Prepaid expenses and other current assets
|
|
|
4,492
|
|
Inventory
|
|
|
103,895
|
|
Income taxes receivable
|
|
|
189
|
|
Property and equipment
|
|
|
159,924
|
|
Intangible assets
|
|
|
59,457
|
|
Goodwill
|
|
|
67,364
|
|
Other long term-assets
|
|
|
713
|
|
Total assets acquired
|
|
$
|
427,011
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
61,011
|
|
Short-term borrowings
|
|
|
27,362
|
|
Deferred revenue
|
|
|
3,399
|
|
Deferred income taxes
|
|
|
31,734
|
|
Pension benefits
|
|
|
13,201
|
|
Environmental liabilities
|
|
|
11,716
|
|
Other long-term liabilities
|
|
|
1,521
|
|
Total liabilities assumed
|
|
|
149,944
|
|
Net assets acquired
|
|
$
|
277,067
|
|
The Company has attributed the goodwill
of $67,364 to an expanded global footprint and additional market opportunities that the Euticals business offers within the API
and DDS segments. The goodwill is not deductible for tax purposes. Intangible assets acquired consisted of customer relationships
of $7,073, with an estimated life of 9 years, developed technology of $44,648, with an estimated life of 16 years, and manufacturing
intellectual property and know-how of $7,736, with an estimated life of 18 years.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
In May 2016, the Company entered into
a forward contract to hedge the foreign currency exposure related to the purchase price of the Euticals Acquistion. In this arrangement,
the Company was obligated to purchase €150,000 at a fixed price on July 8, 2016. The forward contract did not qualify as
a hedging instrument in accordance with ASC 815, “Derivatives and Hedging.” As a result, as of June 30, 2016, an unrealized
loss of $6,401 was recorded in ‘Other (expense) income, net on the consolidated statements of operations. In connection
with the closing of the Euticals Acquisition, the forward contract was settled on July 8, 2016, at which time the Company recognized
an additional loss of approximately $90 related to this contract.
2015 Acquisitions
Whitehouse Laboratories
On December 15, 2015, the Company acquired
all of the outstanding equity interests of Whitehouse Analytical Laboratories, LLC (“Whitehouse”), a leading provider
of testing services that includes chemical and material analysis, method development and validation and quality control verification
services to the pharmaceutical, medical device and personal care industries. Whitehouse offers a comprehensive array of testing
solutions for life sciences from materials and excipients, container qualification and container closure integrity testing, routine
analytical chemistry, drug delivery systems and device qualification programs, packaging, distribution, and stability and storage
programs. The aggregate net purchase price was $55,986 (net of cash acquired of $377), which included the issuance of 137 shares
of common stock, valued at $1,800, with the balance comprised of $53,924 in cash, plus a working capital adjustment of $262. Whitehouse
has been assigned to the DDS segment.
During 2016, the purchase price was increased
by $262 due to the finalization of the net working capital adjustment and was reduced to recognize the discount associated with
the 137 unregistered shares issued in conjunction with the Whitehouse acquisition in the amount of $200. These adjustments resulted
in a net increase of goodwill of $62. The Company has attributed the goodwill of $26,670 to additional market opportunities that
the Whitehouse business offers within the DDS segment. The goodwill is deductible for tax purposes. Intangible assets acquired
consisted of customer lists of $25,600, with an estimated life of 13 years and a tradename of $600, with an estimated life of
8 years.
Gadea
On July 16, 2015, the Company completed
the purchase of Gadea Grupo Farmaceutico, S.L. (“Gadea”), a contract manufacturer of complex active pharmaceutical
ingredients and finished drug product. Gadea operates within the Company's API and DP segments. The aggregate net purchase
price was $127,572 (net of cash acquired of $10,961), which included the issuance of 2,200 shares of common stock, valued at $40,568,
with the balance comprised of $97,965 in cash. The purchase price has been allocated based on the fair value of assets and liabilities
acquired as of the acquisition date.
During 2016, the purchase price allocation was adjusted primarily
due to the recognition of an environmental remediation liability of $1,542 and a corresponding indemnification receivable from
the seller of $771. The purchase price allocation was also adjusted to reduce the estimated uncertain tax position liabilities
associated with pre-acquisition tax years by $498 and to reduce the corresponding indemnification receivable from the seller by
$293. These adjustments resulted in a net increase of goodwill of approximately $1,200.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The Company has attributed the goodwill
of $51,358 to an expanded global footprint and additional market opportunities that the Gadea business offers.
The goodwill has been allocated between business segments, with API of $30,879 and DP of $20,479, and is not deductible
for tax purposes. Intangible assets acquired consisted of customer relationships of $24,000 (with an estimated life of 13 years),
a tradename of $4,100 (with an indefinite estimated life), intellectual property of $11,900 (with an estimated life of 15 years),
in-process research and development of $18,000 (with an indefinite estimated life), and $200 of order backlog.
SSCI
On February 13, 2015, the Company completed
the purchase of assets and assumed certain liabilities of Aptuit’s Solid State Chemical Information business, now AMRI SSCI, LLC
(“SSCI”), for total consideration of $35,850. SSCI brings extensive material science knowledge and technology and
expands the Company’s capabilities in analytical testing to include peptides, proteins and oligonucleotides. SSCI has been
assigned to the DDS segment. The goodwill of $19,317 is primarily attributed to the synergies expected to arise after the acquisition
and is deductible for tax purposes. Intangible assets acquired consisted of patents of $2,370 (with an estimated life of 10 years).
Glasgow
On January 8, 2015, the Company completed
the purchase of all of the outstanding equity interests of Aptuit's Glasgow, U.K. business, now Albany Molecular Research (Glasgow)
Limited (“Glasgow”), for total consideration of $23,805 (net of cash acquired of $146). The Glasgow facility extends
the Company’s capabilities to sterile injectable drug product pre-formulation, formulation and clinical stage manufacturing.
Glasgow has been assigned to the DP segment. The goodwill of $12,505 is primarily attributed to the synergies expected to arise
after the acquisition and is not deductible for tax purposes. Intangible assets acquired consisted of customer relationships of
$6,100 (with an estimated life of 8 years).
2014 Acquisitions
OsoBio
On July 1, 2014, the Company completed
the purchase of all of the outstanding equity interests of Oso Biopharmaceuticals Manufacturing, LLC (OsoBio”), a contract
manufacturer of highly complex injectable drug products located in Albuquerque, NM. The acquisition of OsoBio extends the Company’s
industry leading expertise in developing and manufacturing highly complex injectable drug products and provides customers a single
source to address all their sterile fill/finish needs – from discovery to phase 1 development to commercial supply. The
aggregate purchase price was $109,194. OsoBio has been assigned to the DP segment. The goodwill of $44,879 is primarily attributed
to the synergies expected to arise after the acquisition and is deductible for tax purposes. Intangible assets acquired consisted
of customer relationships of $19,400 (with an estimated life of 20 years) and trademarks of $1,200 (with an estimated life of
5 years).
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Cedarburg
On April 4, 2014, the Company completed
a purchase of all of the outstanding shares of Cedarburg Pharmaceuitcals, Inc. (“Cedarburg), a contract developer and manufacturer
of technically complex active pharmaceutical ingredients for both generic and branded customers, located in Grafton, WI. The transaction
is consistent with the Company’s strategy to be the preeminent supplier of custom and complex drug development services
and product to both the branded and generic pharmaceutical industry. The aggregate purchase price was $39,028. Cedarburg has been
assigned to the API segment. The goodwill of $16,899 is primarily attributed to the synergies expected to arise after the acquisition
and is not deductible for tax purposes. Intangible assets acquired consisted of customer relationships of $12,100 (with an estimated
life of 20 years) and trademarks of $400 (with an estimated life of 5 years).
Proforma Information (Unaudited)
Revenue and operating loss for the Euticals
Acquisition included in these consolidated financial statements were $131,298 and $(23,367), respectively.
The following table shows revenue and
operating income for the 2015 business combinations included in these consolidated financial statements:
|
|
Whitehouse
|
|
|
Gadea
|
|
|
SSCI
|
|
|
Glasgow
|
|
Period
|
|
December 15-
December 31,
2015
|
|
|
July 16 –
December
31, 2015
|
|
|
February 13-
December
31, 2015
|
|
|
January 9-
December 31,
2015
|
|
Revenue
|
|
$
|
505
|
|
|
$
|
44,821
|
|
|
$
|
14,862
|
|
|
$
|
15,810
|
|
Operating income
|
|
$
|
204
|
|
|
$
|
2,802
|
|
|
$
|
2,925
|
|
|
$
|
3,673
|
|
The following table shows revenue and
operating income for the 2014 business combinations included in these consolidated financial statements:
|
|
OsoBio
|
|
|
Cedarburg
|
|
Period
|
|
July 1-
December 31,
2014
|
|
|
April 4 –
December
31, 2014
|
|
Revenue
|
|
$
|
16,721
|
|
|
$
|
9,945
|
|
Operating loss
|
|
$
|
(7,345
|
)
|
|
$
|
(849
|
)
|
The following table shows the unaudited
pro forma statements of operations for the years ended December 31, 2016, 2015 and 2014, respectively, as if the Euticals Acquisition
had occurred on January 1, 2015, the Whitehouse, Gadea, Glasgow and SSCI acquisitions had occurred on January 1, 2014, and the
OsoBio and Cedarburg acquisitions had occurred on January 1, 2013. This pro forma information does not purport to represent what
the Company’s actual results would have been if the acquisitions had occurred as of the date indicated or what such results
would be for any future periods.
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total revenue
|
|
$
|
686,272
|
|
|
$
|
707,333
|
|
|
$
|
429,966
|
|
Net loss
|
|
$
|
(19,689
|
)
|
|
$
|
(48,112
|
)
|
|
$
|
(18,022
|
)
|
Pro forma shares – basic and diluted
|
|
|
42,013
|
|
|
|
41,544
|
|
|
|
33,863
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(0.53
|
)
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The following table shows the pro forma
adjustments made to the weighted average shares outstanding for the periods noted:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
38,304
|
|
|
|
33,169
|
|
|
|
31,526
|
|
Pro forma impact of acquisition consideration
|
|
|
3,709
|
|
|
|
8,375
|
|
|
|
2,337
|
|
Pro forma weighted average shares – basic and diluted
|
|
|
42,013
|
|
|
|
41,544
|
|
|
|
33,863
|
|
For the years ended December 31, 2016,
2015 and 2014, pre-tax net income was adjusted for acquisition related costs by reducing expenses by $21,227, $2,072 and by increasing
expenses by $8,425, respectively.
For the years ended December 31, 2016,
2015 and 2014, pre-tax net income was adjusted for purchase accounting related depreciation and amortization by reducing expenses
by $393, and increasing expenses by $21,840 and $8,848, respectively.
For the years ended December 31, 2016,
2015 and 2014 pre-tax net income was adjusted for purchase accounting related inventory costs by reducing expenses by $33,347,
and increasing expense by $16,950, $16,991, respectively.
The Company partially funded the Euticals
Acquisition utilizing the proceeds from a $230,000 term loan that was provided for in conjunction with the Third Restated Credit
Agreement, entered into with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto (the
“Third Restated Credit Agreement”), which was completed on July 7, 2016, along with the issuance of the Euticals Seller
Notes on July 11, 2016 (see Note 7). The Company did not have sufficient cash on hand to complete the acquisition as of January
1, 2015. For the purposes of presenting the pro forma statements of operations for the years ended December 31, 2016 and 2015,
the Company has assumed that it entered into the Third Restated Credit Agreement and issued the Euticals Seller Notes on January
1, 2015 for an amount sufficient to fund the preliminary cash consideration to acquire Euticals as of that date. The pro forma
statements of operations for the years ended December 31, 2016 and 2015 reflect the recognition of interest expense that would
have been incurred had the Third Restated Credit Agreement and the Euticals Seller Notes been entered into on January 1, 2015.
The Company has recorded $7,682 and $15,364 of pro forma interest expense on the Third Restated Credit Agreement and the Euticals
Seller Notes for the purposes of presenting the pro forma statements of operations for the years ended December 31, 2016 and December
31, 2015, respectively.
A portion of Euticals’ debt was
paid by the Company at the closing of the Euticals Acquisition. For the purposes of presenting the pro forma statements of operations
for the years ended December 31, 2016 and 2015, the Company has reduced expenses by $3,245 and $6,491, respectively, assuming
the debt and accrued interest were paid on January 1, 2015.
During the year ended December 31, 2016,
the Company recognized foreign currency losses of $7,180 associated with the Euticals Acquisition. For the purposes of presenting
the pro forma condensed combined statements of operations for the years ended December 31, 2016 and 2015, the Company has assumed
that it would have recognized these losses during the year ended December 31, 2015, assuming a January 1, 2015 acquisition date.
During the year ended December 31, 2016,
the Company initiated a plan of restructuring with respect to certain operations in the United States and Europe, in connection
with its Euticals Acquisition. For the purposes of presenting the pro forma condensed combined statements of operations for the
years ended December 31, 2016 and 2015, pre-tax net income was increased by $6,187, and reduced by $7,300, respectively, assuming
that the Company would have initiated and completed the plan of restructuring during the year ended December 31, 2015 based upon
a January 1, 2015 acquisition date.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The Company partially funded the acquisition
of Whitehouse utilizing the proceeds from a $30,000 revolving line of credit. For purposes of presenting the pro forma statements
of operations for the years ended December 31, 2015 and 2014, the Company has assumed that it borrowed on the revolving line of
credit on January 1, 2014 for an amount sufficient to fund the cash consideration to acquire Whitehouse as of that date. The pro
forma statements of operations for the years ended December 31, 2015 and 2014 reflect the recognition of interest expense that
would have been incurred on the revolving line of credit had it been entered into on January 1, 2014. The Company has recorded
$1,458 and $1,521 of pro forma interest expense on the revolving line of credit for the purposes of presenting the pro forma statements
of operations for the years ended December 31, 2015 and December 31, 2014, respectively.
The Company partially funded the acquisition
of Gadea utilizing the proceeds from a $200,000 term loan that was provided for in conjunction with a $230,000 senior secured
credit agreement (the “Credit Agreement”) with Barclays Bank PLC that was completed in July 2015 (see note 7). The
Company did not have sufficient cash on hand to complete the acquisition as of January 1, 2014. For the purposes of presenting
the pro forma statements of operations for the years ended December 31, 2015 and 2014, the Company has assumed that it entered
into the Credit Agreement on January 1, 2014 for an amount sufficient to fund the preliminary cash consideration to acquire Gadea
as of that date. The pro forma statements of operations for the years ended December 31, 2015 and 2014 reflect the recognition
of interest expense that would have been incurred on the Credit Agreement had it been entered into on January 1, 2014. The Company
has recorded $3,839 and $7,678 of pro forma interest expense on the Credit Agreement for the purposes of presenting the pro forma
statements of operations for the years ended December 31, 2015 and December 31, 2014, respectively.
The Company funded the acquisitions of
SSCI and Glasgow utilizing the proceeds from a $75,000 senior secured credit agreement that was in place at the dates of acquisition
for SSCI and Glasgow. The Company did not have sufficient cash on hand to complete these acquisitions as of January 1, 2014. For
the purposes of presenting the pro forma statement of operations for the year ended December 31, 2014, the Company has included
the assumption of bridge financing as of January 1, 2014 to fund the acquisition of SSCI and Glasgow as of that date. The pro
forma statements of operations for the year reflects the recognition of interest expense on the assumed bridge financing for the
period January 1, 2014 to December 31, 2014, using the rate of interest that the Company paid on its senior secured credit facility
during the period. For the year ended December 31, 2015, pre-tax net income was adjusted by $98 of pro forma interest expense
on the senior secured facility to assume that the amount had been outstanding for the entire year. For the year ended December
31, 2014, pre-tax net income was adjusted by $1,584 of pro forma interest expense on the senior secured facility.
During the year ended December 31, 2016,
the Company recognized income tax expense of $4,715 to establish a deferred tax liability associated with the original issue discount
recorded in conjunction with the issuance of the Euticals Seller Notes. For the purposes of presenting the pro forma condensed
combined statements of operations for the years ended December 31, 2016 and 2015, the Company has assumed that it would have been
required to recognize this deferred tax liability on January 1, 2015, assuming a January 1, 2015 acquisition date. During the
year ended December 31, 2016, the Company established a valuation allowance against its U.S. deferred tax assets. For the
purposes of presenting the pro forma condensed combined statements of operations for the years ended December 31, 2016 and 2015,
the Company has assumed that it would have been required to establish a valuation allowance against the combined U.S. deferred
tax assets of the Company and Euticals on January 1, 2015, assuming a January 1, 2015 acquisition date. In addition, the
pro forma adjustments to net income incorporate, at the applicable effective rates (including the effect of establishing a valuation
allowance against the combined U.S. deferred tax assets of the Company and Euticals), the tax effects of the pro forma pre-tax
adjustments noted above
.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
2016 Activities
In December 2016, management committed to a plan to close the
Singapore site, transfer customer activities, and some employees, to other sites within the Company. As part of the transition,
Singapore operations will cease by the end of June 2017. This decision will impact approximately 53 employees in Singapore.
The Company recorded $469 in charges primarily associated with reduction in force and termination benefits during the year ended
December 31, 2016 in connection with this action. In conjunction with the Company’s actions to cease operations at its Singapore
facility, the Company also recorded property and equipment impairment charges of $899. These charges are included in the caption
“Impairment charges” on the consolidated statement of operations.
In August 2016, the Company announced
a restructuring plan in connection with the Euticals Acquisition. Under the restructuring plan, the Company reviewed its operations
and initiated a reduction in workforce in the US and Europe and ceased operations in one location in Italy. The Company
recorded a total of $7,069 in charges for reduction in force and termination benefits during the year ended December 31, 2016.
During 2016, the Company recognized a
change in estimate of $634, which reduced the restructuring liabilities related to the operations of Cedarburg. Other restructuring
and other charges for various sites for the year ended December 31, 2016 was a total of $3,222.
2015 Activities
In April 2015, the Company announced a
restructuring plan with respect to certain operations in the UK, within its API business segment. In connection with the restructuring
plan, the Company ceased all operations at its Holywell, UK facility effective in the fourth quarter of 2015. The Company recorded
$3,375 in charges for reduction in force and termination benefits related to the UK facility during the year ended December 31,
2015. In conjunction with the Company’s actions to cease operations at its Holywell, UK facility, the Company also recorded
property and equipment impairment charges of $3,090 in the API segment during the year ended December 31, 2015. These charges
are included under the caption “impairment charges” on the consolidated statement of operations. Also in 2015, the
Company made resource changes at its Singapore site (within the DDS segment) to optimize the cost profile of the facility, which
resulted in a restructuring charge of $1,323.
Restructuring and other charges for the
year ended December 31, 2016 and 2015 were $10,252 and $5,988, respectively, consisting primarily of employee termination charges
and costs associated with the Euticals Acquisition restructuring plan, costs associated with the closure and related transfer
of continuing products from the Holywell, U.K. facility to the Company’s other manufacturing locations, and resource optimization
and lease termination charges at the Company’s Singapore facility.
2014 Activities
In the third quarter of 2014, the Company
recorded restructuring charges related to optimizing both the Singapore and Hyderabad, India facilities. In the second quarter
of 2014, the Company announced a restructuring plan transitioning activities at its Syracuse, NY site to the Company’s other
sites and ceased operations in Syracuse at the end of June 2014. The actions taken are consistent with the Company’s ongoing
efforts to consolidate its facility resources to more effectively utilize its discovery and development resource pool and to further
reduce its facility cost structure.
In connection with these activities, the
Company recorded restructuring charges in its DDS operating segment of $3,357 during 2014. These amounts primarily consisted of
termination benefits, lease termination settlements, and charges related to additional operating costs of the Syracuse site.
In conjunction with the Cedarburg acquisition
in April 2014, the Company assumed a restructuring liability of $1,134 related to Cedarburg’s Denver, Colorado facility consisting
of lease termination and related costs. Cedarburg commenced this restructuring activity during the fourth quarter of 2013.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The following tables display the restructuring activity and
liability balances for the years ended and as of December 31, 2016 and 2015:
|
|
Balance at
January 1,
2016
|
|
|
Charges/
(reversals)
|
|
|
Amounts
Paid
|
|
|
Foreign
Currency
Translation &
Other
Adjustments
(1)
|
|
|
Balance at
December 31,
2016
|
|
Termination benefits and personnel realignment
|
|
$
|
539
|
|
|
$
|
7,069
|
|
|
$
|
(3,003
|
)
|
|
$
|
(134
|
)
|
|
$
|
4,471
|
|
Lease termination and relocation charges
|
|
|
2,153
|
|
|
|
(39
|
)
|
|
|
(2,028
|
)
|
|
|
57
|
|
|
|
143
|
|
Other
|
|
|
-
|
|
|
|
3,222
|
|
|
|
(1,691
|
)
|
|
|
(1,531
|
)
|
|
|
-
|
|
Total
|
|
$
|
2,692
|
|
|
$
|
10,252
|
|
|
$
|
(6,722
|
)
|
|
$
|
(1,608
|
)
|
|
$
|
4,614
|
|
|
(1)
|
Included in restructuring charges
are a non-cash inventory charge of $420 related to the Company’s Varese facility and non-cash accelerated depreciation charges
of $1,145 related to the Company’s Singapore facility. These charges are not liabilities at December 31
st
and
as such, are reported as adjustments in the “Other” line above.
|
|
|
Balance at
January 1,
2015
|
|
|
Charges/
(reversals)
|
|
|
Amounts
Paid
|
|
|
Foreign
Currency
Translation &
Other
Adjustments
(1)
|
|
|
Balance at
December 31,
2015
|
|
Termination benefits and personnel realignment
|
|
$
|
226
|
|
|
$
|
3,350
|
|
|
$
|
(3,004
|
)
|
|
$
|
(33
|
)
|
|
$
|
539
|
|
Lease termination and relocation charges
|
|
|
3,280
|
|
|
|
1,275
|
|
|
|
(1,721
|
)
|
|
|
(681
|
)
|
|
|
2,153
|
|
Other
|
|
|
-
|
|
|
|
1,363
|
|
|
|
(1,228
|
)
|
|
|
(135
|
)
|
|
|
-
|
|
Total
|
|
$
|
3,506
|
|
|
|
5,988
|
|
|
$
|
(5,953
|
)
|
|
$
|
(849
|
)
|
|
$
|
2,692
|
|
|
(1)
|
Included in restructuring charges
are non-cash accelerated depreciation charges of $577 related to the Company’s Singapore facility and $201 related to the
Company’s Holywell, UK facility. These charges are not liabilities at December 31
st
and as such, are reported
as adjustments in the “Other” line above.
|
Termination benefits and personnel realignment
costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring.
Lease termination charges relate to estimated costs associated with exiting a facility, net of estimated sublease income.
Restructuring charges are included under
the caption “Restructuring and other charges” in the consolidated statements of operations for the years ended December
31, 2016, 2015, and 2014 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, 2016 and 2015.
The Company is currently marketing its Holywell, U.K. facility
for sale. The facility is an asset of the API operating segment and is classified as held for sale with the long-lived assets
segregated to a separate line on the consolidated balance sheets until they are sold. Depreciation expense on the facility has
ceased. The carrying value of the facility is $1,148 at December 31, 2016.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
In conjunction with the Company’s
actions to optimize its location footprint, the Company also recorded property and equipment impairment charges of $2,925, $3,705
and $5,392 during the years ended December 31, 2016, 2015, and 2014, respectively. The 2016 charges were in the API, DP and DDS
segments, the 2015 charges were in the API and DDS segments and the 2014 charges were in the DDS segment. Included in the 2016
charges were the $1,669 impairment of fixed assets at the Rensselaer, NY location and the $899 impairment of fixed assets at our
Singapore location. Included in the 2015 charges were the impairment of fixed assets at the UK facility and the write-down of
the Syracuse, NY building. Included in the 2014 charges were $1,666 related to the Singapore facility, and $3,718 related to the
impairment of the Syracuse facility as well as certain equipment located at that facility. These charges are included under the
caption “Impairment charges” on the consolidated statement of operations for the years ended December 31, 2016, 2015
and 2014, respectively.
Inventory consisted of the following at
December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015 (a)
|
|
Raw materials
|
|
$
|
59,987
|
|
|
$
|
36,628
|
|
Work-in-process
|
|
|
74,599
|
|
|
|
37,574
|
|
Finished goods
|
|
|
32,525
|
|
|
|
15,029
|
|
Total inventory
|
|
$
|
167,111
|
|
|
$
|
89,231
|
|
|
(a)
|
Certain adjustments have been made to December 31, 2015
inventory classifications to conform to current year presentation.
|
|
5.
|
Property and Equipment
|
Property and equipment consists of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Machinery, laboratory equipment and fixtures
|
|
$
|
338,443
|
|
|
$
|
228,737
|
|
Office equipment
|
|
|
55,477
|
|
|
|
39,864
|
|
Leasehold improvements
|
|
|
38,522
|
|
|
|
38,528
|
|
Buildings
|
|
|
113,998
|
|
|
|
75,092
|
|
Land
|
|
|
17,136
|
|
|
|
10,975
|
|
|
|
|
563,576
|
|
|
|
393,196
|
|
Less accumulated depreciation and amortization
|
|
|
(237,903
|
)
|
|
|
(209,942
|
)
|
|
|
|
325,673
|
|
|
|
183,254
|
|
Construction-in-progress
|
|
|
39,133
|
|
|
|
26,254
|
|
|
|
$
|
364,806
|
|
|
$
|
209,508
|
|
Depreciation and amortization expense of property and equipment
was approximately $41,127, $22,655 and $16,804 for the years ended December 31, 2016, 2015 and 2014, respectively.
As discussed in Note 3, the Company recorded
property and equipment impairment charges of $2,925, $3,705 and $5,392 for the years ended December 31, 2016, 2015 and 2014, respectively.
For 2016, impairment charges represent the impairment of fixed assets at Rensselaer and Singapore. For 2015, impairment charges
represent the impairment of fixed assets at Holywell and the write-down of the Syracuse, NY building.
|
6.
|
Goodwill and Intangible Assets
|
The changes in the carrying amount of
goodwill for the years ended December 31, 2016 and 2015 were as follows:
|
|
DDS
|
|
|
API
|
|
|
DP
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
-
|
|
|
$
|
16,899
|
|
|
$
|
44,879
|
|
|
$
|
61,778
|
|
Goodwill acquired
|
|
|
45,987
|
|
|
|
29,668
|
|
|
|
32,984
|
|
|
|
108,639
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
(385
|
)
|
|
|
(561
|
)
|
|
|
(946
|
)
|
Balance as of December 31, 2015
|
|
|
45,987
|
|
|
|
46,182
|
|
|
|
77,302
|
|
|
|
169,471
|
|
Goodwill acquired
|
|
|
6,251
|
|
|
|
61,113
|
|
|
|
-
|
|
|
|
67,364
|
|
Measurement period adjustment
|
|
|
107
|
|
|
|
1,211
|
|
|
|
-
|
|
|
|
1,318
|
|
Foreign currency translation
|
|
|
(300
|
)
|
|
|
(3,950
|
)
|
|
|
(2,647
|
)
|
|
|
(6,897
|
)
|
Balance as of December 31, 2016
|
|
$
|
52,045
|
|
|
$
|
104,556
|
|
|
$
|
74,655
|
|
|
$
|
231,256
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The components of intangible assets are as follows:
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Foreign
exchange
translation
|
|
|
Net
|
|
|
Amortization
Period
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property and Know-How
|
|
$
|
28,457
|
|
|
$
|
(2,709
|
)
|
|
$
|
(4,639
|
)
|
|
$
|
(1,295
|
)
|
|
$
|
19,814
|
|
|
2-18 years
|
Customer Relationships
|
|
|
93,847
|
|
|
|
-
|
|
|
|
(10,522
|
)
|
|
|
(1,748
|
)
|
|
|
81,577
|
|
|
5-20 years
|
Product Portfolio
|
|
|
44,649
|
|
|
|
-
|
|
|
|
(1,253
|
)
|
|
|
(2,105
|
)
|
|
|
41,291
|
|
|
16 years
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(804
|
)
|
|
|
17,196
|
|
|
indefinite
|
Tradename
|
|
|
4,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(183
|
)
|
|
|
3,917
|
|
|
indefinite
|
Trademarks
|
|
|
2,272
|
|
|
|
-
|
|
|
|
(893
|
)
|
|
|
-
|
|
|
|
1,379
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
-
|
|
|
|
(204
|
)
|
|
|
4
|
|
|
|
-
|
|
|
n/a
|
Total
|
|
$
|
191,525
|
|
|
$
|
(2,709
|
)
|
|
$
|
(17,511
|
)
|
|
$
|
(6,131
|
)
|
|
$
|
165,174
|
|
|
|
|
|
Cost
|
|
|
Impairment
|
|
|
Accumulated
Amortization
|
|
|
Foreign
exchange
translation
|
|
|
Net
|
|
|
Amortization
Period
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property and Know-How
|
|
$
|
20,352
|
|
|
$
|
(2,508
|
)
|
|
$
|
(3,004
|
)
|
|
$
|
(165
|
)
|
|
$
|
14,675
|
|
|
2-16 years
|
Customer Relationships
|
|
|
86,774
|
|
|
|
-
|
|
|
|
(4,303
|
)
|
|
|
(408
|
)
|
|
|
82,063
|
|
|
5-20 years
|
Tradename
|
|
|
4,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57
|
)
|
|
|
4,043
|
|
|
indefinite
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
17,750
|
|
|
indefinite
|
Trademarks
|
|
|
2,200
|
|
|
|
-
|
|
|
|
(727
|
)
|
|
|
-
|
|
|
|
1,473
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
n/a
|
Total
|
|
$
|
131,626
|
|
|
$
|
(2,508
|
)
|
|
$
|
(8,034
|
)
|
|
$
|
(880
|
)
|
|
$
|
120,204
|
|
|
|
Amortization expense related to intangible
assets for the years ended December 31, 2016, 2015 and 2014 was $9,477, $4,394 and $1,549, respectively. The weighted average
amortization period is 12.41 years.
As a result of a semi-annual review of
the Company’s proprietary drug development programs in 2014, it was concluded that the Company would no longer actively
pursue partnering opportunities for all programs that we were not already partnered and would not continue to fund additional
patent filing or required maintenance costs for these programs. Based on the aforementioned conclusions, the Company recorded
intangible asset impairment charges in the DDS segment of $2,443 for the year ended December 31, 2014, which is included under
the caption “Impairment charges” in the consolidated statements of operations.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The following chart represents estimated
future annual amortization expense related to intangible assets:
Year ending December 31,
|
|
|
|
2017
|
|
$
|
8,681
|
|
2018
|
|
|
11,935
|
|
2019
|
|
|
11,934
|
|
2020
|
|
|
11,934
|
|
2021
|
|
|
11,934
|
|
Thereafter
|
|
|
87,643
|
|
Total
|
|
$
|
144,061
|
|
Short-Term Borrowings
In connection with the Euticals Acquisition,
the Company assumed the short-term borrowing obligations of Euticals, consisting of multiple bank revolving lines of credit with
a maximum borrowing capacity of €40,750 or $42,871 at December 31, 2016 (the “Euticals Revolving Credit Facilities”).
The Euticals Revolving Credit Facilities support Euticals’ short-term working capital needs and are collateralized, in part,
by certain Euticals’ trade receivables balances. The Euticals Revolving Credit Facilities are subject to variable interest
rates and the average effective interest rate was 3.68% during the period July 12, 2016 to December 31, 2016.
As of December 31, 2016, the aggregate
outstanding balance under the Euticals Revolving Credit Facilities was $22,515 and the related trade receivables collateral was
$14,744.
Long-Term Debt
The following table summarizes long-term debt:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Convertible senior notes, net of unamortized discount
|
|
$
|
135,652
|
|
|
$
|
128,917
|
|
Term loan, net of unamortized discount
|
|
|
423,698
|
|
|
|
198,343
|
|
Euticals Seller Notes, net of unamortized discount
|
|
|
43,947
|
|
|
|
–
|
|
Various borrowings with institutions, Gadea loans
|
|
|
25,784
|
|
|
|
39,655
|
|
Capital leases – equipment & other
|
|
|
1,263
|
|
|
|
111
|
|
Revolving credit facility
|
|
|
–
|
|
|
|
30,000
|
|
Industrial development authority bonds
|
|
|
–
|
|
|
|
2,080
|
|
|
|
|
630,344
|
|
|
|
399,106
|
|
Less deferred financing fees
|
|
|
(11,951
|
)
|
|
|
(9,823
|
)
|
Less current portion
|
|
|
(13,917
|
)
|
|
|
(15,591
|
)
|
Total long-term debt
|
|
$
|
604,476
|
|
|
$
|
373,692
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The aggregate maturities of long-term debt, exclusive of unamortized
debt discount of $30,907 at December 31, 2016, are as follows:
2017
|
|
$
|
13,917
|
|
2018
|
|
|
580,321
|
|
2019
|
|
|
25,083
|
|
2020
|
|
|
21,376
|
|
2021
|
|
|
19,890
|
|
Thereafter
|
|
|
663
|
|
Total
|
|
$
|
661,250
|
|
Term Loans
In connection with the Euticals Acquisition,
on July 7, 2016, the Company entered into the Third Amended and Restated Agreement (the “Third Restated Credit Agreement”),
which (i) provided incremental senior secured first lien term loans in an aggregate principal amount of $230,000 (the “Incremental
Term Loans”) which increased the aggregate principal amount of senior secured first lien term loans under the prior credit
agreement to $428,500 and (ii) increased the first lien revolving credit facility commitments by $5,000 to $35,000. The Company
used the proceeds of the Incremental Term Loans primarily to: (i) pay a portion of the cash consideration for the Euticals Acquisition;
(ii) pay various fees and expenses incurred in connection with the Euticals Acquisition and related financing activities; and
(iii) repay the $30,000 outstanding under the first lien revolving credit facility.
The Third Restated Credit Agreement
requires that we make quarterly repayments of $600 toward the Incremental Term Loans principal beginning on September 30,
2016, with all remaining unpaid principal amounts of the Incremental Term Loans maturing and payable on July 16, 2021. The
revolving credit facility commitments under the Third Restated Credit Agreement terminate and all amounts then outstanding
thereunder are payable on July 16, 2020, subject, in each case, to earlier acceleration (i) to six months prior to the
scheduled maturity date of our 2.25% Cash Convertible Senior Notes issued on December 4, 2013 (the “Notes”) if on
such date, both (x) more than $25,000 of the Notes shall remain outstanding and (y) the ratio of the secured debt of the
Company and its subsidiaries to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00 and (ii) to April 7, 2019,
April 7, 2020 or April 7, 2021, respectively, in each case to the extent that at any such date we have not (x) prepaid or
otherwise satisfied the amortization or final maturity payment amounts to next come due under each Euticals Seller Note (as
defined below) then outstanding or (y) refinanced such amortization or final maturity payment amount to next come due under
each Euticals Seller Note then outstanding in a manner permitted by the Third Restated Credit Agreement.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
At the Company’s election, loans
made under the Third Restated Credit Agreement bear interest at (a) the one-month, three-month or six-month LIBOR rate subject
to a floor of 1.0% (the “LIBOR Rate”) or (b) a base rate determined by reference to the highest of (i) the United
States federal funds rate plus 0.50%, (ii) the rate of interest quoted by The Wall Street Journal as the “Prime Rate,”
and (iii) a daily rate equal to the one-month LIBOR Rate plus 1.0%, subject to a floor of 2.0% (the “Base Rate”),
plus an applicable margin of 4.75% per annum for LIBOR Rate loans and 3.75% per annum for Base Rate loans.
The obligations under the Third Restated
Credit Agreement are guaranteed by each material domestic subsidiary of the Company (each a “Guarantor”) and are secured
by first priority liens on, and security interests in, substantially all of the present and after-acquired assets of the Company
and each Guarantor subject to certain customary exceptions.
The face value of the term loans reconcile
to the net carrying amount as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Principal amount – term loan
|
|
$
|
426,341
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(2,643
|
)
|
|
|
(1,657
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of term loan
|
|
$
|
423,698
|
|
|
$
|
198,343
|
|
For the years ended December 31, 2016,
2015 and 2014, the Company recognized $1,222, $343 and $0, respectively, of amortization of the debt discount as interest expense
based upon the effective rate of approximately 6.2%.
Euticals Seller Notes
As indicated in Note 2, in connection
with the Euticals Acquisition, on July 11, 2016, the Company issued two notes to Lauro Cinquantasette S.p.A. with a combined face
value of €55,000, that were valued at $44,342 (net of original issue discount of $16,441). The Euticals Seller Notes are
unsecured promissory notes, guaranteed by the Company, and are subject to customary representations and warranties and events
of default with repayment to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the
Euticals Acquisition closing date. The repayment is subject to certain set off rights of the Company relating to the seller’s
indemnification obligations. The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which is due
and payable in cash on the first day of January, April, July and October during each calendar year. The Euticals Seller Notes
were recognized net of an original issue discount of $16,441. For the year ended December 31, 2016, the Company recorded $1,755
of amortization of the debt discount as interest expense based upon an effective rate of 8.32%.
As of December 31, 2016, the face value
of the Euticals Seller Notes reconcile to the net carrying amount as follows:
Principal amount
|
|
$
|
57,862
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(13,915
|
)
|
|
|
|
|
|
Net carrying amount of notes
|
|
$
|
43,947
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Convertible Senior Notes
On December 4, 2013, the Company completed
the private offering of $150,000 aggregate principal amount of the Notes. The Notes mature on November 15, 2018, unless
earlier repurchased or converted into cash in accordance with their terms prior to such date, and interest is paid in arrears
semiannually on each of May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and
sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
The Notes are not convertible into the
Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their
option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following
circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during
such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether
or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five
business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount
of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the
Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events.
On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu
of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount
in cash equal to the settlement amount, determined in the manner set forth in the indenture. The initial conversion rate is 63.9844
shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price
of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment upon certain events as described
in the indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events
that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate
for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in
the indenture.
The Company may not redeem the Notes prior
to the maturity date, and no sinking fund is provided for the Notes.
The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation
from the Notes in accordance with ASC 815, “Derivatives and Hedging,” and is accounted for as a derivative liability.
The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original
debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using
the effective interest method over the term of the Notes. For the years ended December 31, 2016, 2015 and 2014, the Company recorded
$6,735, $6,221 and $5,765, respectively, of amortization of the debt discount as interest expense based upon an effective rate
of 7.69%.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The fair value of the Notes reconcile
to the net carrying amount as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Principal amount
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(14,348
|
)
|
|
|
(21,083
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of Notes
|
|
$
|
135,652
|
|
|
$
|
128,917
|
|
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 with two counterparties (the “Option Counterparties”).
The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that
it is required to make upon conversion of the Notes in excess of the principal amount of converted Notes if the Company’s
common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with
ASC 815, “Derivatives and Hedging.” The aggregate cost of the note hedge transaction was $33,600.
At the same time, the Company also entered
into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares
of the Company's common stock underlying the Note Hedges. The Note Hedges are intended to offset cash payments due upon any conversion
of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per
share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price
of the warrants. The initial strike price of the warrants is $18.9440 per share, which was 60% above the last reported sale price
of the Company's common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received from the Option Counterparties
from the sale of the warrants.
Aside from the initial payment of a $33,600
premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under
the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount
by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation
period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market
price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants
during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties
a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's
common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.
Neither the Notes Conversion Derivative
nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized
immediately in the statement of operations. As of December 31, 2016 and December 31, 2015, 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 statement of operations.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The following table summarizes the fair
value and the presentation in the consolidated balance sheet:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Notes hedges asset
|
|
$
|
51,003
|
|
|
$
|
76,393
|
|
|
|
|
|
|
|
|
|
|
Notes conversion derivative liability
|
|
$
|
(51,003
|
)
|
|
$
|
(76,393
|
)
|
IDA Bonds
In May 2016, the sale of the Company’s
Syracuse, N.Y. facility, within the DDS operating segment, was completed for $675. Commensurate with the sale of the facility,
the industrial development authority (“IDA”) bonds associated with the facility were repaid in full, with a final
payment of $1,760.
The components of (loss) income before taxes
and income tax expense (benefit) are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
(Loss) income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(63,452
|
)
|
|
$
|
(9,589
|
)
|
|
$
|
(5,598
|
)
|
Non-U.S
|
|
|
3,493
|
|
|
|
6,120
|
|
|
|
130
|
|
|
|
$
|
(59,959
|
)
|
|
$
|
(3,469
|
)
|
|
$
|
(5,468
|
)
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,273
|
|
|
$
|
(2,213
|
)
|
|
$
|
(280
|
)
|
State
|
|
|
34
|
|
|
|
159
|
|
|
|
─
|
|
Non-U.S
|
|
|
7,962
|
|
|
|
3,799
|
|
|
|
191
|
|
|
|
|
9,269
|
|
|
|
1,745
|
|
|
|
(89
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,515
|
|
|
|
(1,112
|
)
|
|
|
(1,552
|
)
|
State
|
|
|
61
|
|
|
|
(3
|
)
|
|
|
(13
|
)
|
Non-U.S
|
|
|
(9,633
|
)
|
|
|
(1,798
|
)
|
|
|
(536
|
)
|
|
|
|
943
|
|
|
|
(2,913
|
)
|
|
|
(2,101
|
)
|
|
|
$
|
10,212
|
|
|
$
|
(1,168
|
)
|
|
$
|
(2,190
|
)
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The differences between income tax expense (benefit) and income
taxes computed using a federal statutory rate of 35% for the years ended December 31, 2016, 2015 and 2014, were as follows:
|
|
Year Ended
December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.S. Federal income tax benefit at statutory rate
|
|
$
|
(20,986
|
)
|
|
$
|
(1,214
|
))
|
|
$
|
(1,914
|
)
|
Increase (reduction) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit and valued credits
|
|
|
22
|
|
|
|
11,207
|
|
|
|
(220
|
)
|
Rate differential on non-U.S. operations
|
|
|
101
|
|
|
|
(930
|
)
|
|
|
(1,108
|
)
|
Change in valuation allowance
|
|
|
24,486
|
|
|
|
(9,948
|
)
|
|
|
(508
|
)
|
Research and development credits
|
|
|
(1,157
|
)
|
|
|
(500
|
)
|
|
|
—
|
|
Employee Stock Purchase Plan
|
|
|
199
|
|
|
|
152
|
|
|
|
105
|
|
Original issue discount deferred tax impact – Italy
|
|
|
4,008
|
|
|
|
—
|
|
|
|
—
|
|
Non-deductible business acquisition costs
|
|
|
2,192
|
|
|
|
471
|
|
|
|
195
|
|
(Reduction) increase in uncertain tax position reserves
|
|
|
(600
|
)
|
|
|
293
|
|
|
|
(180
|
)
|
Enhanced capital allowance - Singapore
|
|
|
—
|
|
|
|
(330
|
)
|
|
|
—
|
|
Write-off of deferred tax asset - Hungary
|
|
|
—
|
|
|
|
—
|
|
|
|
3,206
|
|
Other, net
|
|
|
1,947
|
|
|
|
(369
|
)
|
|
|
(1,766
|
)
|
|
|
$
|
10,212
|
|
|
$
|
(1,168
|
)
|
|
$
|
(2,190
|
|
The tax effects of temporary differences giving rise to significant
portions of the deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Non-deductible accrued expenses
|
|
$
|
4,213
|
|
|
$
|
548
|
|
Library amortization and impairment charges
|
|
|
1,469
|
|
|
|
1,582
|
|
Inventories
|
|
|
6,358
|
|
|
|
1,867
|
|
Investment write-downs and losses
|
|
|
-
|
|
|
|
867
|
|
Share-based compensation
|
|
|
3,684
|
|
|
|
2,483
|
|
Goodwill and intangibles
|
|
|
1,978
|
|
|
|
3,445
|
|
Arbitration reserve
|
|
|
158
|
|
|
|
-
|
|
Restructuring
|
|
|
9
|
|
|
|
3,778
|
|
Pension
|
|
|
3,487
|
|
|
|
3,191
|
|
Net operating loss carry-forwards
|
|
|
33,480
|
|
|
|
15,594
|
|
Federal tax credit carry-forward
|
|
|
608
|
|
|
|
114
|
|
|
|
|
55,444
|
|
|
|
33,469
|
|
Less: valuation allowance
|
|
|
(33,249
|
)
|
|
|
(10,947
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
|
22,195
|
|
|
|
22,522
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment depreciation differences
|
|
|
(24,601
|
)
|
|
|
(11,148
|
)
|
Prepaid real estate taxes
|
|
|
(225
|
)
|
|
|
(267
|
)
|
Goodwill and intangibles
|
|
|
(35,698
|
)
|
|
|
(20,186
|
))
|
Other, net
|
|
|
(1,225
|
)
|
|
|
(984
|
))
|
Net deferred tax liability
|
|
$
|
(39,554
|
)
|
|
$
|
(10,063
|
)
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The Company has tax-effected foreign net
operating loss carry-forwards (“NOLs”) of $4,610, which begin to expire beginning in 2017, and tax-effected foreign
NOLs of $6,784, which do not expire. The Company has tax-effected U.S. Federal NOL’s carryforwards of $21,591 that
begin to expire in 2025. The Company has U.S. Federal research tax credit carryforwards of $114 which will begin to expire in
2035.
Based on the weighting of available evidence,
including a recent history of cumulative losses, the scheduled reversal of deferred tax liabilities, projected future taxable
income and carry back opportunities, the Company determined during 2016 that a full valuation allowance against its U.S. deferred
tax assets is required, as it does not expect these assets to be realized. The acquired U.S. subsidiary of Euticals, Euticals
Inc., also has a history of losses. Therefore, the acquisition of Euticals did not affect the Company’s overall conclusion
that a full valuation allowance is required in the U.S. jurisdiction.
As of December 31, 2016, a valuation allowance
is included in deferred tax assets above as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
$
|
23,374
|
|
|
$
|
945
|
|
Non-U.S.
|
|
|
9,875
|
|
|
|
10,002
|
|
Total valuation allowance
|
|
$
|
33,249
|
|
|
$
|
10,947
|
|
All remaining net deferred tax assets
are more likely than not to be realized, and therefore no valuation allowance is required in any other jurisdictions.
A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at January 1
|
|
$
|
2,605
|
|
|
$
|
495
|
|
Increases related to tax positions
|
|
|
205
|
|
|
|
256
|
|
Decreases related to tax positions
|
|
|
(1,755
|
)
|
|
|
(65
|
)
|
Increases for acquired uncertain tax positions
|
|
|
2,574
|
|
|
|
1,919
|
|
Balance at December 31
|
|
$
|
3,629
|
|
|
$
|
2,605
|
|
As of December 31, 2016, the total amount
of gross unrecognized tax benefits, which excludes interest and penalties, was $3,629. The 2016 balance is primarily related to
uncertain tax positions at the Company’s acquired entities. The statute of limitation on positions related to the non-U.S.
acquired entities will begin to expire in 2017 through 2027. As of December 31, 2015, the total amount of gross unrecognized tax
benefits, which excludes interest and penalties, was $2,605. The Company classifies interest and, if applicable, penalties for
any unrecognized tax benefits as a component of income tax expense. As of December 31, 2016 and December 31, 2015, the Company
had accumulated interest and penalties of $366 and $351, respectively.
The Company files U.S. income tax returns,
as well as multiple state and non-U.S. jurisdiction tax returns. As of December 31, 2016, tax years 2013 to 2016 are subject to
examination by US Federal tax authorities and the years 2010 to 2016 are open for examination by certain state tax authorities.
The Company is open to examination by certain non–U.S. tax authorities for years 2006 to 2016.
The Company has not provided for U.S. income
taxes on undistributed earnings of its non-U.S. subsidiaries totaling approximately $54,878 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 are not practicable as of December 31, 2016.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
9.
|
Share-based
Compensation
|
During the years ended December 31,
2016, 2015 and 2014, the Company recognized total share-based compensation cost of $8,425, $6,291, and $4,122, respectively, and
received cash from stock option exercises and employee stock purchase plan purchases in the amount of $2,026, $3,458, and $2,313,
respectively.
The following are the shares of common stock
reserved for issuance at December 31, 2016:
|
|
Number of
Shares
|
|
Stock Option Plans
|
|
|
2,692
|
|
Employee Stock Purchase Plan
|
|
|
464
|
|
Shares reserved for issuance
|
|
|
3,156
|
|
Employee Stock Purchase Plan
The Company’s 1998 Employee Stock
Purchase Plan (the “Purchase Plan”) was adopted during August 1998 and amended, most recently in June 2015. Up
to 1,600 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, and certain
non-US 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 2 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 consisting of the purchase discount
(15% of a share of non-vested stock) and the fair value of the look-back feature, which consists of a six-month call option on
.85 of a share of stock and a six-month put option on .15 of a share of stock. The value of the non-vested 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 options
are 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, 2016, 2015 and 2014,
100, 73 and 75 shares, respectively, were issued under the Purchase Plan.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Stock Option Plan
The Company has adopted the 2008 Stock
Option and Incentive Plan, as amended (the “2008 Option Plan”), through which incentive stock options or non-qualified
stock options, as well as other equity instruments such as restricted shares and restricted stock units, 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-employee
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:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected life in years
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Interest rate
|
|
|
1.27
|
%
|
|
|
1.59
|
%
|
|
|
1.52
|
%
|
Volatility
|
|
|
42
|
%
|
|
|
42
|
%
|
|
|
53
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Following is a summary of the status of stock option activity
during 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2014
|
|
|
2,046
|
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
327
|
|
|
|
10.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(380
|
)
|
|
|
4.34
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(98
|
)
|
|
|
6.67
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(91
|
)
|
|
|
11.73
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
|
|
1,804
|
|
|
$
|
6.18
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
266
|
|
|
|
16.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(428
|
)
|
|
|
5.74
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(202
|
)
|
|
|
6.85
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1
|
)
|
|
|
10.11
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
1,439
|
|
|
$
|
8.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
295
|
|
|
|
15.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(125
|
)
|
|
|
5.57
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31
|
)
|
|
|
2.93
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
1,578
|
|
|
$
|
9.93
|
|
|
|
6.4
|
|
|
$
|
13,935
|
|
Options exercisable, December 31, 2016
|
|
|
962
|
|
|
$
|
7.30
|
|
|
|
5.3
|
|
|
$
|
11,431
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The weighted average fair value per share
of stock options granted during the years ended December 31, 2016, 2015 and 2014 was $5.98, $6.51 and $4.85, respectively.
The total intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $1,148,
$5,555 and $4,262, respectively. The excess tax benefit for tax deductions from stock option exercises was $0, $2,108 and $1,642
during the years ended December 31, 2016, 2015 and 2014.
As of December 31, 2016, there was
$2,086 of total unrecognized compensation cost related to non-vested stock options. That cost is expected to be recognized over
a weighted-average period of 2.6 years. The total fair value of shares vested during the years ended December 31, 2016, 2015
and 2014 was approximately $1,156, $940 and $783, respectively. Of the 1,578 stock options outstanding, we currently expect all
options to vest.
Restricted Stock
The Company also issues restricted shares
of common stock of the Company under the 2008 Option Plan. The shares are issued as restricted stock and are held in the custody
of the Company until all vesting restrictions are satisfied. The vesting of restricted stock is either time-based or performance-based.
The time-based restricted stock granted to certain employees generally vests 25% per year over four years. The performance-based
restricted stock will vest if the Company achieves certain goals in respect to the Company’s share price compared to the
Russell 2000 Stock Index over the applicable performance period. 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 using an actual forfeiture rate to account for the impact of shares of restricted stock that are expected to be forfeited
before becoming fully vested.
Following is a summary of the restricted
stock activity during 2016, 2015 and 2014:
|
|
Number of
Shares
|
|
|
Weighted
Average Grant Date
Fair Value
|
|
Outstanding, January 1, 2014
|
|
|
509
|
|
|
$
|
6.28
|
|
Granted
|
|
|
691
|
|
|
|
13.02
|
|
Vested
|
|
|
(205
|
)
|
|
|
5.74
|
|
Forfeited
|
|
|
(72
|
)
|
|
|
8.63
|
|
Outstanding, December 31, 2014
|
|
|
923
|
|
|
$
|
11.26
|
|
Granted
|
|
|
470
|
|
|
|
16.95
|
|
Vested
|
|
|
(229
|
)
|
|
|
10.67
|
|
Forfeited
|
|
|
(144
|
)
|
|
|
10.65
|
|
Outstanding, December 31, 2015
|
|
|
1,020
|
|
|
$
|
13.71
|
|
Granted
|
|
|
604
|
|
|
|
14.88
|
|
Vested
|
|
|
(227
|
)
|
|
|
14.53
|
|
Forfeited
|
|
|
(143
|
)
|
|
|
14.72
|
|
Outstanding, December 31, 2016
|
|
|
1,254
|
|
|
$
|
14.01
|
|
During the years ended December 31, 2016 and 2015, a total
of 143 and 144 shares, respectively, with an unrecognized compensation expense of $2,103 and $1,535, respectively, were forfeited.
The amount amortized to expense during years ended December 31, 2016, 2015 and 2014, net of the impact of forfeitures, was
approximately $5,593, $4,000 and $2,558, respectively. As of December 31, 2016, there was $10,838 of total unrecognized compensation
cost related to non-vested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.5 years.
Of the 1,254 shares outstanding, 312 shares of restricted stock outstanding have market-based vesting provisions and as such,
the grant date fair value assumptions for these shares contain a vesting probability factor to reflect the Company’s expectation
that not all shares will vest. Of the remaining 937 outstanding shares, the Company currently expects all shares to vest.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
10.
|
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 100% of the participant’s contributions to the Plan for each payroll period up to
the first 4% of the participant’s eligible compensation as defined by the Plan (“Plan Compensation”). The
Company then matches 50% on the next 2% of Plan Compensation, to a maximum company match of 5%. In addition, the Company made
no discretionary profit sharing contributions. Employer matching contributions are fully (100%) vested after completion of
two years of service. Employer matching contributions were approximately $3,778, $3,326 and $1,821 for the years ended
December 31, 2016, 2015 and 2014, respectively.
The Company also sponsors a savings and
profit sharing plan under section 401(k) of the Internal Revenue Code covering U.S. based 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
were $145, $145 and $131 for the years ended December 31, 2016, 2015 and 2014, respectively.
U.S. 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 postretirement 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 settle the medical component of the post-retirement plan, significantly reducing the level of benefits available
to the participants. As a result, the Company recorded $1,285 of operating income in the first quarter of 2014 due to the settlement
of this obligation.
The Company recognizes the overfunded
or underfunded status of its postretirement plans in its consolidated 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.
Non-U.S. Defined Benefit and Post-Employment
Plans
The Company maintains a non-contributory
defined benefit plan for employees in Italy. Pursuant to Article 2120 of the Italian Civil Code, a defined benefit plan is maintained
by each company operating in Italy (Trattamento di Fine Rapporto – “TFR”), to which all employees are eligible
regardless of their status and which provides for a lump sum to be paid to each employee upon termination of the employment contract.
For each year of service, the severance pay liability is based on total annual compensation divided by 13.5. Although the benefit
is paid in full by the employer, part (0.5% of pay) of the annual accrual is paid to Instituto Nazionale Previdenza Sociale (“INPS”),
which is the main Italian public pension system, by the employer, and is subtracted from the severance pay liability for the contribution
reference period. As of December 31
st
of every year, the severance pay liability as of December 31
st
of
the preceding year is revalued by a legally stipulated index as follows: 1.5% plus 75% of the increase over the last 12 months
in the consumer price index for families of blue-collar workers and employees, as determined by the Italian Statistical Institute
(“ISTAT”).
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
The Company maintains a non-contributory
defined benefit plan for employees in France, consisting of both retirement benefits and a long-term service award benefits. As
required by French law, the retirement benefits must be paid by the employer upon the employee retiring. The benefit liability
to be paid upon retirement is defined by the collective bargaining agreement of the Chemical Industry, which is calculated utilizing
a salary multiple based on the respective employee’s years of service. The pensionable salary utilized in the calculation
of the liability is the average monthly salary of the employee over the last 12 months prior to the retirement date. The Company
also provides long service awards to employees in France, which are payable based on every ten years of service to the Company.
The Company maintains a non-contributory
defined benefit plan for employees in Germany, which is eligible to all employees who have attained the age of 35 and 10 years
of service or attained the age of 30 and 5 years of service. Under the provisions of the plan, the Company pays a notional monthly
contribution based on a set formula that considers employee pensionable salary and the German Social Security Contribution Ceiling.
The pensionable salary utilized in the calculation of the liability is the employee’s gross monthly salary (for salaried
employees) and the employee’s gross basic wage multiplied by the number of hours worked during that month (for non-salaried
employees).
Benefit Plan Obligations
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,
2016 and 2015, 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:
|
|
2016
|
|
|
2015
|
|
|
|
US Plan
|
|
|
Non-US Plan
|
|
|
Total
|
|
|
US Plan
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
|
25,702
|
|
|
|
|
|
|
|
25,702
|
|
|
|
28,295
|
|
Benefit obligations acquired (
a
)
|
|
|
|
|
|
|
13,124
|
|
|
|
13,124
|
|
|
|
|
|
Service cost
|
|
|
|
|
|
|
190
|
|
|
|
190
|
|
|
|
-
|
|
Interest cost
|
|
|
972
|
|
|
|
124
|
|
|
|
1,096
|
|
|
|
955
|
|
Actuarial loss (gain)
|
|
|
11
|
|
|
|
(107
|
)
|
|
|
(96
|
)
|
|
|
(1,908
|
)
|
Benefits paid
|
|
|
(1,656
|
)
|
|
|
(411
|
)
|
|
|
(2,067
|
)
|
|
|
(1,640
|
)
|
Foreign exchange translation
|
|
|
0
|
|
|
|
(641
|
)
|
|
|
(641
|
)
|
|
|
0
|
|
Benefit obligation at December 31
|
|
|
25,029
|
|
|
|
12,279
|
|
|
|
37,308
|
|
|
|
25,702
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
|
18,265
|
|
|
|
-
|
|
|
|
18,265
|
|
|
|
19,540
|
|
Actual return on plan assets
|
|
|
1,185
|
|
|
|
-
|
|
|
|
1,185
|
|
|
|
(272
|
)
|
Employer contributions
|
|
|
412
|
|
|
|
-
|
|
|
|
412
|
|
|
|
637
|
|
Benefits paid
|
|
|
(1,656
|
)
|
|
|
-
|
|
|
|
(1,656
|
)
|
|
|
(1,640
|
)
|
Fair value of plan assets at December 31
|
|
|
18,206
|
|
|
|
-
|
|
|
|
18,206
|
|
|
|
18,265
|
|
Funded status
|
|
|
(6,823
|
)
|
|
|
(12,279
|
)
|
|
|
(19,102
|
)
|
|
|
(7,437
|
)
|
|
(a)
|
The
Company’s non-U.S. plans were assumed with the Euticals Acquisition on July 11,
2016.
|
The Company included $519 and $793 in other
comprehensive loss for the years ended December 31, 2016 and 2015, respectively, which represent the respective net fluctuations
in the unrecognized actuarial gains and losses.
At December 31, 2016 and 2015, 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 benefit plans totaled $37,308 and $25,702, respectively.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Net Periodic Benefit Cost
The following table provides the components
of net periodic benefit cost (income) for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
US Plans
|
|
|
Non-US Plans
|
|
|
Total
|
|
|
US Plans
|
|
|
US Plans
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
179
|
|
|
$
|
179
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
972
|
|
|
|
124
|
|
|
|
1,096
|
|
|
|
955
|
|
|
|
1,018
|
|
Expected return on plan assets
|
|
|
(1,264
|
)
|
|
|
-
|
|
|
|
(1,264
|
)
|
|
|
(1,302
|
)
|
|
|
(1,254
|
)
|
Amortization of net loss (gain)
|
|
|
719
|
|
|
|
140
|
|
|
|
859
|
|
|
|
885
|
|
|
|
613
|
|
Net periodic benefit cost
|
|
|
427
|
|
|
|
443
|
|
|
|
870
|
|
|
|
538
|
|
|
|
377
|
|
Recognized in Accumulated Other
Comprehensive Loss (AOCL) (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
8,489
|
|
|
|
(107
|
)
|
|
|
8,382
|
|
|
|
9,119
|
|
|
|
10,337
|
|
Total recognized in AOCL (pre-tax)
|
|
|
8,489
|
|
|
|
(107
|
)
|
|
|
8,382
|
|
|
|
9,119
|
|
|
|
10,337
|
|
Total recognized in consolidated statements of operations and AOCL
|
|
$
|
8,916
|
|
|
$
|
336
|
|
|
$
|
9,252
|
|
|
$
|
9,657
|
|
|
$
|
10,714
|
|
Assumptions Utilized
The following assumptions were used to
determine the periodic pension cost for the defined benefit pension plans for the year ended December 31:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
US
|
|
|
Germany
|
|
|
Italy
|
|
|
France
|
|
|
US
|
|
|
US
|
|
Discount rate
|
|
|
3.75
|
%
|
|
|
1.30
|
%
|
|
|
1.50
|
%
|
|
|
1.40
|
%
|
|
|
3.90
|
%
|
|
|
3.50
|
%
|
Expected return on plan assets
|
|
|
7.25
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7.50
|
%
|
|
|
7.30
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
2.50
|
%
|
|
|
2.63
|
%
|
|
|
2.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
For the U.S. plan, 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 3.75% at December 31, 2016 and 3.9% at December 31, 2015.
For the Italy plan, the discount rate
utilized for determining the Company’s pension obligation and net periodic benefit cost was selected using high-quality
long-term corporate bond indices as of the plan’s measurement date. The rate utilized reflects an estimate of the timing
and amounts of future payments of the benefits to the employees. The rate selected as a result of this process is the iBoxx Corporate
Eurozone AA 10+ index, which is a composite index calculated every day, made of a portfolio of corporate bonds issued by companies
rated AA with average duration higher than 10 years. As a result of this modeling process, the discount rate was 1.50% at December
31, 2016.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
For the France plan, the discount rate
utilized for determining the Company’s pension obligation and net periodic benefit cost was selected using high-quality
long-term corporate bond indices as of the plan’s measurement date. The rate utilized was based on the yields of AA EuroZone
Corporate Bonds +10 years. As a result of this modeling process, the discount rate was 1.40% at December 31, 2016.
For the Germany plan, the discount rate utilized for determining
the Company’s pension obligation and net periodic benefit cost was based on the zero coupon yield curve derived from AA
(including AA+, AA- or equivalent) EuroZone Corporate Bonds. As a result of this modeling process, the discount rate was 1.30%
at December 31, 2016.
U.S. Benefit Plan Assets
The Company’s pension plan weighted-average asset allocations
at December 31 by asset category are as follows:
|
|
2016
|
|
|
2015
|
|
|
|
Market Value
|
|
|
%
|
|
|
Market Value
|
|
|
%
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
6,459
|
|
|
|
36
|
%
|
|
$
|
7,921
|
|
|
|
43
|
%
|
Debt securities
|
|
|
7,959
|
|
|
|
44
|
|
|
|
8,598
|
|
|
|
47
|
|
Real estate
|
|
|
929
|
|
|
|
5
|
|
|
|
1,012
|
|
|
|
6
|
|
Commodities
|
|
|
729
|
|
|
|
4
|
|
|
|
585
|
|
|
|
3
|
|
Strategic opportunities
|
|
|
1,868
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
262
|
|
|
|
1
|
|
|
|
149
|
|
|
|
1
|
|
Total
|
|
$
|
18,206
|
|
|
|
100
|
%
|
|
$
|
18,265
|
|
|
|
100
|
%
|
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, 2016 and 2015. There is no weighted-average asset allocation for non-US plans, as there are no plan
assets.
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.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
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 2016 target allocation was as follows:
Equity securities
|
|
|
34
|
%
|
Debt securities
|
|
|
45
|
|
Real estate
|
|
|
5
|
|
Commodities
|
|
|
4
|
|
Strategic Opportunities
|
|
|
10
|
|
Other
|
|
|
2
|
|
Total
|
|
|
100
|
%
|
Future Benefit Payments
The expected future benefit payments are
as follows for the years ending December 31:
|
|
Pension
Benefits
|
|
2017
|
|
$
|
1,979
|
|
2018
|
|
$
|
2,072
|
|
2019
|
|
$
|
2,009
|
|
2020
|
|
$
|
2,140
|
|
2021
|
|
$
|
2,125
|
|
2022 - 2026
|
|
$
|
11,321
|
|
Based on current actuarial assumptions,
the Company expects to make contributions of $347 to its U.S. benefit plan in 2017. The Company expects to make non-U.S. plan
benefit payments of $323 in 2017.
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 manufacturing and research and development laboratory facilities. The expiration dates on the present
leases range from January 2017 to December 2033. Certain 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, 2016 are as follows:
Year ending December 31,
|
|
|
|
2017
|
|
$
|
3,893
|
|
2018
|
|
|
3,380
|
|
2019
|
|
|
2,677
|
|
2020
|
|
|
1,875
|
|
2021
|
|
|
1,247
|
|
Thereafter
|
|
|
5,981
|
|
Total
|
|
$
|
19,053
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Rental expense amounted to approximately
$4,037, $3,984 and $3,022 during the years ended December 31, 2016, 2015, and 2014, respectively.
Minimum lease payments have not been reduced
by minimum sublease rentals of $711 due in the future under non-cancelable leases.
|
12.
|
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 technology developments. This program has been
subsequently discontinued, however eligible participants are able to share in awards based on a percentage of the licensing, royalty
or milestone revenue received by the Company, as defined by the Plan.
In 2015 and 2014, 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. The amounts awarded
and included in the consolidated statements of operations for all TIC awards for the years ended December 31, 2016, 2015
and 2014 are $0, $554, and $1,621, respectively. As a result of the expiration of patents associated with the active ingredient
in Allegra, no further TIC payments are anticipated. At both December 31, 2016 and 2015, there are no unpaid Technology Development
Incentive Compensation awards.
(b) Contract Revenue
On February 4, 2016, Anthony J. Maddaluna
was elected to the Board of Directors. During 2016, Mr. Maddaluna was the Executive Vice President/ President of Pfizer Global
Supply, a pharmaceutical company to which Company provided a variety of services in 2016. The Company received
$23,270 in contract revenue from this customer and its affiliates in 2016.
Litigation:
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.
On November 12, 2014, a purported class
action lawsuit, John Gauquie v. Albany Molecular Research, Inc., et al., No. 14-cv-6637, was filed against the Company and
certain of its current and former officers in the United States District Court for the Eastern District of New York. An amended
complaint was filed on March 31, 2015. The amended complaint alleges claims under the Securities Exchange Act of 1934 arising
from the Company’s alleged failure to disclose in its August 5, 2014 announcement of its financial results for the second
quarter of 2014 that one of the manufacturing facilities experienced a power interruption in July 2014. The amended complaint alleges
that the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and seeks unspecified
monetary damages and attorneys’ fees and costs. The defendants submitted on July 29, 2015 a motion to dismiss lead plantiffs’
amended complaint. Lead plantiffs submitted an opposition on October 7, 2015, and defendants submitted a reply on November 20,
2015. On July 26, 2016, the court denied the defendants’ motion to dismiss. The Company filed a motion to reconsider its
July 29, 2015 motion to dismiss lead plantiff’s amended complaint. On December 12, 2016, the parties agreed to a settlement
in principle of all legal claims, subject to the court approval process, which will be funded by the Company’s insurance.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Environmental Remediation Obligations:
With the acquisitions of Euticals and Gadea in July 2016 and July 2015, respectively, the Company assumed
environmental remediation liabilities associated with the Euticals Springfield, MO manufacturing location (related to ongoing groundwater
contamination monitoring and remediation activities as required by the Missouri Department of Natural Resources and the U.S. Environmental
Protection Agency) and the Gadea Spain manufacturing location, in the amount of $11,716 and $1,543, respectively. These obligations
are recorded within “Other long-term liabilities” on the Company’s consolidated balance sheets. As of December
31, 2016, the environmental remediation liabilities for Euticals and Gadea were $11,572 and $1,381, respectively. There were no
environmental remediation liabilities for Euticals and Gadea as of December 31, 2015 as the liabilities were recorded in 2016 in
connection with the purchase accounting for the respective acquisitions.
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 was required to pay for monitoring and reporting into 2019. 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, 2016, 2015 and 2014, no costs have been paid by the Company.
Other:
In October 2016, the Company reached agreement
with one of its insurers (the “Paying Insurer”) with respect to the resolution of an outstanding insurance claim related
to a business interruption loss sustained by the Company’s subsidiary, Oso Bio, in 2014 (the “Loss”).
During 2016, in full settlement of the claim, the Company received a total net payment of $7,385 and has further released the
Paying Insurer from any further claims regarding the Loss and has assigned to the Paying Insurer all of the Company’s rights
against one other possible insurer with respect to the Loss. During 2015, the Company received an initial business interruption
insurance recovery of $600, relating to this matter. The recovery amounts were recorded as “Other (expense) income, net”
in the consolidated statement of operations.
|
14.
|
Concentration
of Business and Geographic Information
|
Total percentages of contract revenues
by each segment’s three largest customers for years ended December 31, 2016, 2015 and 2014 are indicated in the following
table:
|
|
Year ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
DDS
|
|
10%, 4%, 2%
|
|
10%, 8%, 4%
|
|
9%, 8%, 8%
|
API
|
|
12%, 7%, 4%
|
|
20%, 9%, 7%
|
|
22%, 18%, 10%
|
DP
|
|
9%, 9%, 7%
|
|
15%, 12%, 6%
|
|
18%, 11%, 9%
|
FC
|
|
30%, 25%, 11%
|
|
–
|
|
–
|
Total contract revenue from GE Healthcare (“GE”),
the Company’s largest customer, represented 7%, 11% and 13% of the Company’s total contract revenue for the years
ended December 31, 2016, 2015 and 2014. The Company’s second largest
customer
represented 5%, 5% and 10% of total contract revenue for the years ended December 31, 2016, 2015, and 2014, respectively.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
|
53
|
%
|
|
|
64
|
%
|
|
|
68
|
%
|
Europe
|
|
|
37
|
%
|
|
|
26
|
%
|
|
|
23
|
%
|
Asia
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
Other
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Long-lived assets by geographic region
are as follows:
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
357,711
|
|
|
$
|
323,151
|
|
Asia
|
|
|
14,195
|
|
|
|
14,336
|
|
Europe
|
|
|
389,330
|
|
|
|
161,696
|
|
Total long-lived assets
|
|
$
|
761,236
|
|
|
$
|
499,183
|
|
The Company organizes its operations into
the DDS, API, DP, and following the Euticals Acquisition, FC segments. The API segment provides pilot to commercial scale manufacturing
of active pharmaceutical ingredients and intermediates. The DP segment provides pre-formulation, formulation and process development
through commercial scale production of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations.
The DDS segment provides activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing.
The FC segment provides lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales
and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating
segments.
The following table contains earnings data by operating segment,
reconciled to totals included in the consolidated financial statements:
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
104,473
|
|
|
$
|
-
|
|
|
$
|
29,275
|
|
|
$
|
11,567
|
|
API
|
|
|
337,835
|
|
|
|
9,391
|
|
|
|
56,434
|
|
|
|
29,411
|
|
DP
|
|
|
98,377
|
|
|
|
629
|
|
|
|
15,979
|
|
|
|
7,826
|
|
FC
|
|
|
19,745
|
|
|
|
-
|
|
|
|
1,689
|
|
|
|
1,800
|
|
Corporate (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
(122,136
|
)
|
|
|
-
|
|
Total
|
|
$
|
560,430
|
|
|
$
|
10,020
|
|
|
$
|
(18,759
|
)
|
|
$
|
50,604
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS (b)
|
|
$
|
89,973
|
|
|
$
|
5,541
|
|
|
$
|
25,979
|
|
|
$
|
8,568
|
|
API
|
|
|
204,868
|
|
|
|
12,077
|
|
|
|
50,479
|
|
|
|
12,547
|
|
DP (b)
|
|
|
89,897
|
|
|
|
—
|
|
|
|
14,585
|
|
|
|
5,934
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(77,394
|
)
|
|
|
—
|
|
Total
|
|
$
|
384,738
|
|
|
$
|
17,618
|
|
|
$
|
13,649
|
|
|
$
|
27,049
|
|
|
|
Contract
Revenue
|
|
|
Recurring
Royalty
Revenue
|
|
|
Income
(Loss)
from
Operations
|
|
|
Depreciation
and
Amortization
|
|
For the year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDS
|
|
$
|
74,611
|
|
|
$
|
16,257
|
|
|
$
|
17,208
|
|
|
$
|
6,904
|
|
API
|
|
|
146,474
|
|
|
|
9,610
|
|
|
|
42,713
|
|
|
|
8,776
|
|
DP
|
|
|
29,619
|
|
|
|
—
|
|
|
|
(5,300
|
)
|
|
|
2,673
|
|
Corporate (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
(48,897
|
)
|
|
|
—
|
|
Total
|
|
$
|
250,704
|
|
|
$
|
25,867
|
|
|
$
|
5,724
|
|
|
$
|
18,353
|
|
|
a)
|
Corporate consists primarily of
the ‘Selling, general and administrative’ expense activities of the Company.
|
|
b)
|
A portion of the 2015 amounts were
reclassified from DDS to DP to better align business activities within segments. This
reclassification impacted contract revenue and income (loss) from operations for 2015.
|
The following tables summarize other information by segment
as of December 31, 2016, 2015 and 2014:
The following tables summarize other information by segment
as of December 31, 2016, 2015 and 2014:
2016
|
|
DDS
|
|
|
API
|
|
|
DP
|
|
|
FC
|
|
|
Total
|
|
Long-lived assets
|
|
$
|
146,290
|
|
|
$
|
425,207
|
|
|
$
|
165,781
|
|
|
$
|
23,958
|
|
|
$
|
761,236
|
|
Goodwill included in long-lived assets
|
|
$
|
52,045
|
|
|
$
|
104,556
|
|
|
$
|
74,655
|
|
|
$
|
—
|
|
|
$
|
231,256
|
|
Total assets
|
|
$
|
256,055
|
|
|
$
|
707,443
|
|
|
$
|
207,706
|
|
|
$
|
38,444
|
|
|
$
|
1,209,648
|
|
Investments in unconsolidated affiliates
|
|
$
|
956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
956
|
|
Capital expenditures
|
|
$
|
18,428
|
|
|
$
|
27,690
|
|
|
$
|
4,720
|
|
|
$
|
590
|
|
|
$
|
51,428
|
|
2015
|
|
DDS
|
|
|
API
|
|
|
DP
|
|
|
Total
|
|
Long-lived assets
|
|
$
|
136,387
|
|
|
$
|
201,219
|
|
|
$
|
161,577
|
|
|
$
|
499,183
|
|
Goodwill included in long-lived assets
|
|
$
|
45,987
|
|
|
$
|
46,182
|
|
|
$
|
77,302
|
|
|
$
|
169,471
|
|
Total assets
|
|
$
|
174,203
|
|
|
$
|
523,036
|
|
|
$
|
168,328
|
|
|
$
|
865,567
|
|
Investments in unconsolidated affiliates
|
|
$
|
956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
956
|
|
Capital expenditures
|
|
$
|
7,181
|
|
|
$
|
10,159
|
|
|
$
|
4,701
|
|
|
$
|
22,041
|
|
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
2014
|
|
DDS
|
|
|
API
|
|
|
DP
|
|
|
Total
|
|
Long-lived assets
|
|
$
|
64,392
|
|
|
$
|
88,028
|
|
|
$
|
107,381
|
|
|
$
|
259,801
|
|
Goodwill included in long-lived assets
|
|
$
|
—
|
|
|
$
|
16,899
|
|
|
$
|
44,879
|
|
|
$
|
61,778
|
|
Total assets
|
|
$
|
100,804
|
|
|
$
|
276,668
|
|
|
$
|
138,396
|
|
|
$
|
515,868
|
|
Investments in unconsolidated affiliates
|
|
$
|
956
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
956
|
|
Capital expenditures
|
|
$
|
4,271
|
|
|
$
|
10,262
|
|
|
$
|
2,656
|
|
|
$
|
17,189
|
|
|
16.
|
Fair Value of Financial Instruments
|
The Company uses a framework for measuring
fair value in generally accepted accounting principles and making disclosures about fair value measurements. A three-tiered
fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.
These tiers include:
Level 1 – defined as quoted prices
in active markets for identical instruments;
Level 2 – defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company determines the fair value
of its financial instruments using the following methods and assumptions:
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, 2016 was $193. The Notes Hedges
and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded
and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the
Company's common stock, risk-free interest rate and other factors.
Interest rate swaps:
At December
31, 2016, the Company had contracted a derivative financial instrument to reduce the impact of fluctuations in variable interest
rates on a loan that a financial institution granted in February 2015, which is a level 2 input. The estimated fair value of the
swap at December 31, 2016 was $(43). The Company hedges the interest risk of the initial amount of the aforementioned bank loan
through an interest rate swap. In this arrangement, the interest rates are exchanged so that the Company receives from the financial
institution a variable rate of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal (0.3%). The
variable interest rate received for the derivative offsets the interest payment on the hedged transaction, with the end result
being a fixed interest payment on the hedged financing. At December 31, 2016, the derivative financial instrument had not been
designated as a hedge.
To determine the fair value of the interest rate swap, the
Company uses cash flow discounting based on the implicit rates determined by the euro interest rate curve, according to market
conditions at the valuation date.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
Instrument
|
|
Nominal Amount
at 12/31/2016
|
|
|
Contract
Date
|
|
Contract
Date
Expiration
|
|
Interest
Rate
Payable
|
|
Interest Rate
Receivable
|
Interest rate swap
|
|
$
|
4,717
|
|
|
2/19/2015
|
|
2/19/2020
|
|
3-month Euribor
|
|
Fixed rate of 0.30%
|
Long-term debt, other than convertible
senior notes:
The carrying value of long-term debt approximated fair value at December 31, 2016 due to the resetting dates
of the variable interest rates.
Nonrecurring Measurements:
The Company has assets, including intangible
assets, property and equipment, and equity method investments which are not required to be carried at fair value on a recurring
basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a
non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial
instrument be recorded at the lower of historical cost or its fair value.
The fair values of these assets are then
determined by the application of a discounted cash flow model using Level 3 inputs. Cash flows are determined based on Company
estimates of future operating results, and estimates of market participant weighted average costs of capital (“WACC”)
are used as a basis for determining the discount rates to apply 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.
These long-lived asset impairment charges
are included under the caption “Impairment charges” in the consolidated statements of operations for the years ended
December 31, 2016, 2015 and 2014.
|
17.
|
Accumulated Other Comprehensive Loss, Net
|
The accumulated balances for each classification
of other comprehensive loss are as follows:
|
|
Pension and
postretirement
benefit plans
|
|
|
Foreign
currency
adjustments
|
|
|
Total
Accumulated
Other
Comprehensive
Loss, Net
|
|
Balance at January 1, 2014, net of tax
|
|
$
|
(4,140
|
)
|
|
$
|
(7,137
|
)
|
|
$
|
(11,277
|
)
|
Net current period change, net of tax
|
|
|
(2,234
|
)
|
|
|
(923
|
)
|
|
|
(3,157
|
)
|
Balance at December 31, 2014, net of tax
|
|
$
|
(6,374
|
)
|
|
$
|
(8,060
|
)
|
|
$
|
(14,434
|
)
|
Net current period change, net of tax
|
|
|
793
|
|
|
|
(4,760
|
)
|
|
|
(3,967
|
)
|
Balance at December 31, 2015, net of tax
|
|
$
|
(5,581
|
)
|
|
$
|
(12,820
|
)
|
|
$
|
(18,401
|
)
|
Net current period change, net of tax
|
|
|
519
|
|
|
|
(21,848
|
)
|
|
|
(21,329
|
)
|
Balance at December 31, 2016, net of tax
|
|
$
|
(5,062
|
)
|
|
$
|
(34,668
|
)
|
|
$
|
(39,730
|
)
|
Amounts recognized into net earnings from
accumulated other comprehensive loss related to the actuarial losses on pension and postretirement benefits were $859, $885 and
$398 for the years ended December 31, 2016, 2015 and 2014, respectively. The amount reclassified out of accumulated other comprehensive
loss related to cumulative translation loss related to a foreign subsidiary dissolution was $734 in 2014.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
18.
|
Collaboration Arrangements
|
The Company enters into collaboration
arrangements with third parties for the development and manufacture of certain products and/or product candidates. Although each
of these arrangements is unique in nature, both parties are active participants in the activities of the collaboration and are
exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements typically include
research and development and manufacturing. The rights and obligations of the parties can be global or limited to geographic regions
and the activities under these collaboration agreements are performed with no guarantee of either technological or commercial
success.
The Company is obligated under these arrangements
to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component
of the arrangement commences during the development activities and continues through the commercial stage of each product, during
which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally
responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements
vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the
Company generally has the right to receive payment for all unpaid development costs incurred through the date of termination.
Additionally, in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to
a third party on a contract research and manufacturing basis provided that it does not use the technology developed during the
collaboration arrangement. On December 8, 2016, the product Sodium Nitroprusside Injection was approved by the FDA. As a result,
this product has reached commercial contract manufacturing stage. None of the product candidates being developed pursuant to the
Company’s other collaboration arrangements have reached the contract manufacturing or commercial and profit sharing stages.
The Company recognizes costs as incurred
during the performance of development activities and classifies these costs as ‘Research and development’ expense.
Costs incurred by the Company during the performance of the contract manufacturing activities are classified as ‘Cost of
contract revenue’ when the related revenue is recognized.
Contract revenue, recurring royalties
revenue and R&D expense associated with these collaboration arrangements recognized during the year ended December 31, 2016,
2015 and 2014 were as follows:
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Contract revenue
|
|
$
|
8,618
|
|
|
$
|
4,005
|
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring royalties revenue
|
|
$
|
629
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D expense
|
|
$
|
9,757
|
(a)
|
|
$
|
4,026
|
(a)
|
|
$
|
411
|
(a)
|
|
(a)
|
$185, $2,727 and $411 of these amounts were recorded in ‘Cost
of contract revenue’ in the consolidated statement of operations for the years ended
December 31, 2016, 2015 and 2014, respectively.
|
Contract revenue for the year ended December 31, 2016 includes
$1,685 of termination revenue related to the early termination of one of the Company’s collaboration arrangements. The Company
has secured a new collaboration partner for this program.
ALBANY MOLECULAR RESEARCH, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2016, 2015 and 2014
(In thousands, except for per share
amounts)
|
19.
|
Selected
Quarterly Consolidated Financial Data (unaudited)
|
The following tables present unaudited consolidated
financial data for each quarter of 2016 and 2015:
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
102,838
|
|
|
$
|
116,457
|
|
|
$
|
151,681
|
|
|
$
|
189,454
|
|
Recurring royalties
|
|
|
2,741
|
|
|
|
4,353
|
|
|
|
1,057
|
|
|
|
1,869
|
|
Total revenue
|
|
$
|
105,579
|
|
|
$
|
120,810
|
|
|
$
|
152,738
|
|
|
$
|
191,323
|
|
(Loss) Income from operations
|
|
$
|
(4,152
|
)
|
|
$
|
6,466
|
|
|
$
|
(15,661
|
)
|
|
$
|
(5,412
|
)
|
Net loss
|
|
$
|
(10,067
|
)
|
|
$
|
(21,267
|
)
|
|
$
|
(23,425
|
)
|
|
$
|
(15,412
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.37
|
)
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
75,132
|
|
|
$
|
85,226
|
|
|
$
|
101,348
|
|
|
$
|
123,032
|
|
Recurring royalties
|
|
|
6,685
|
|
|
|
4,322
|
|
|
|
3,231
|
|
|
|
3,380
|
|
Total revenue
|
|
$
|
81,817
|
|
|
$
|
89,548
|
|
|
$
|
104,579
|
|
|
$
|
126,412
|
|
Income from operations
|
|
$
|
1,230
|
|
|
$
|
6,167
|
|
|
$
|
10
|
|
|
$
|
6,242
|
|
Net (loss) income
|
|
$
|
(2,223
|
)
|
|
$
|
2,307
|
|
|
$
|
(4,170
|
)
|
|
$
|
1,785
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.05
|
|