(All amounts in thousands, except per share amounts, unless
otherwise noted)
Note 1 — Summary of Operations and Significant Accounting
Policies
Nature of Business and Operations
Albany Molecular Research, Inc. (the
“Company”) is a leading global contract research and manufacturing organization providing customers fully integrated
drug discovery, development, and manufacturing services. The Company supplies a broad range of services and technologies supporting
the discovery and development of pharmaceutical products (“DDS”), the manufacture of fine chemicals (“FC”)
and Active Pharmaceutical Ingredients (“API”), the development and manufacture of drug product (“DP”)
for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. In addition,
the Company offers analytical and testing services to customers in the medical device and personal care industries. With locations
in the United States, Europe, and Asia, the Company maintains geographic proximity to its customers and flexible cost models.
Basis of Presentation
The accompanying unaudited Condensed Consolidated
Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited
Condensed Consolidated Financial Statements do not include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete consolidated financial statements. The year-end Condensed Consolidated Balance Sheet data was
derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered
necessary for a fair statement of the results for the interim period have been included. Operating results for the three months
ended March 31, 2017 are not necessarily indicative of the results that may be expected for any other period or for the year ending
December 31, 2017. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with
the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2016.
The accompanying unaudited Condensed Consolidated
Financial Statements include the accounts of the Company and its wholly-owned subsidiaries as of and for the three months ended
March 31, 2017. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of
non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average
rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded
in the unaudited Condensed Consolidated Statements of Comprehensive Loss and in ‘Accumulated other comprehensive loss, net’
in the accompanying unaudited Condensed Consolidated Balance Sheets. When necessary, balances of prior period unaudited Condensed
Consolidated Financial Statements have been reclassified to conform to the current year presentation.
Use of Management Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included
in the accompanying consolidated financial statements include the assumptions regarding the Company’s accounting for business
combinations, goodwill impairment assessment, valuation of inventory, intangible assets and long-lived assets, and the amount
and realizability of deferred tax assets. Other significant estimates include assumptions utilized in determining actuarial obligations
in conjunction with the Company’s pension and postretirement health plans, assumptions utilized in determining share-based
compensation, environmental remediation liabilities, as well as those utilized in determining the value of both the notes hedges
and the notes conversion derivative and the assumptions related to the collectability of trade receivables. Actual results can
vary from these estimates.
Contract Revenue Recognition
The Company’s contract revenue consists
primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed
expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts
that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology
and expertise lead to the discovery of new products that become approved by the applicable regulatory agencies for commercial
sale. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’
prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the
elements can be separated and accounted for individually or as a single unit of accounting in accordance with the Financial Accounting
Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 605-25, “Revenue
Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.”
Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined
for each component, and total contract consideration is then allocated based on relative fair value across the components of the
arrangement. If separate selling prices are not available, the Company will use its best estimate of such selling prices, consistent
with the overall pricing strategy and after consideration of relevant market factors.
The Company generates contract revenue
under the following types of contracts:
Fixed-Fee
. Under a fixed-fee contract,
the Company charges a fixed agreed-upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion
of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed and when delivery
is made or title and risk of loss otherwise transfers to the customer, and collection is reasonably assured. In certain instances,
the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact
that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue
recognition process is considered complete when project documents have been delivered to the customer, as required under the arrangement,
or other customer-specific contractual conditions have been satisfied.
Full-time Equivalent (“FTE”)
. An
FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the
contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be
incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer.
FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.
These contracts involve the Company’s
scientists providing services on a “best efforts” basis on a project that may involve a research component with a
timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as
part of these services. As such, the Company recognizes revenue under FTE contracts as services are performed according to the
terms of the contract.
Time and Materials
. Under a time
and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific
costs. The Company recognizes revenue for time and materials contracts based on the number of hours devoted to the project multiplied
by the customer’s billing rate plus other project specific costs incurred.
Recurring Royalty
The Company currently receives royalties
in conjunction with a Development and Supply Agreement with Teva Pharmaceuticals (“Teva”). These royalties are earned
on net sales of generic products sold by Teva. The Company records royalty revenue in the period in which the net sales of these
generic products occur. Royalty payments from Teva are due within 60 days after each calendar quarter and are determined based
on sales of the qualifying products in that quarter. The Company also receives royalties on certain other products, and royalty
revenue is generally estimated and recognized when the sales of product occur.
Collaboration Arrangement Revenues:
The Company enters into collaboration
arrangements with third parties for the development and manufacture of certain products and/or product candidates. These arrangements
may include non-refundable, upfront payments, milestone payments and cost sharing arrangements during the development stage, payments
for manufacturing based on a cost plus an agreed percentage, as well as profit sharing payments during the product’s commercial
stage.
The Company recognizes revenue for payments
received for services performed under these arrangements as contract revenue in accordance with ASC 605, “Revenue Recognition.”
Development stage payments are recognized using the milestone method when the contractual milestones are determined to be substantive
and have been achieved. Certain contractual milestones are deemed to be achieved upon the occurrence of the contractual performance
events. Other non-performance based milestones, including the filing of an Abbreviated New Drug Application (ANDA) and approval
by the Food and Drug Administration (FDA), which are generally events that occur at the end of the development period, are recognized
upon occurrence of the related event. Contractual milestones that are deemed not substantive are recognized using proportional
performance over the remaining development period. Upfront, non-refundable payments are recognized over the term of the development
period using the proportional performance recognition model. Revenue associated with payments received for contract manufacturing
services are recognized upon delivery of the product to the Company’s collaborative partners. Revenue associated with payments
received for profit sharing payments are recognized as recurring royalties revenue when earned based on the terms of the agreements.
Cash, Cash Equivalents and Restricted
Cash
Cash equivalents consist of money market
accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash and cash equivalents
are held principally at seven financial institutions and at times may exceed insured limits. The Company has placed these
funds in high quality institutions in order to minimize risk relating to exceeding insured limits.
Restricted cash balances at March 31,
2017 and December 31, 2016 are required pursuant to the Company’s Singapore lease agreements.
Long-Lived Assets
The Company assesses the impairment of
a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable.
Factors the Company considers important that could trigger an impairment review include, among others, the following:
|
·
|
a
significant change in the extent or manner in which a long-lived asset group is being
used;
|
|
·
|
a
significant change in the business climate that could affect the value of a long-lived
asset group; or
|
|
·
|
a
significant decrease in the market value of assets.
|
If the Company determines that the carrying
value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment,
the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset
group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated. An impairment charge is recognized
to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of
the long-lived assets.
Derivative
Instruments and Hedging Activities
The Company accounts for derivatives in
accordance with FASB ASC Topic 815, “Derivatives and Hedging,” which establishes accounting and reporting standards
requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value.
Additionally, changes in a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company recognizes changes in fair value associated with non-qualified derivatives in ‘Other (expense)
income, net’ in the Condensed Consolidated Statements of Operations. If required hedge accounting criteria are met, then
changes in fair value are recorded in accumulative other comprehensive loss, net.
Recent Accounting Pronouncements:
Accounting Pronouncements Issued But Not Yet Adopted
In March
2017, the FASB issued Accounting Standard Update (“ASU”) 2017-07,
"Compensation-Retirement
Benefits",
which requires the service cost component of net benefit costs be reported
with other compensation costs arising from services rendered by the pertinent employees during the period. The other components
of net benefit costs are required to be presented separately from the service cost component and outside of income from operations.
This amendment also allows only the service cost component to be eligible for capitalization when applicable. The ASU is effective
for interim and annual periods beginning after December 15, 2017. The Company is still evaluating the impact this standard will
have on its consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU
2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted
cash equivalents within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017,
and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected
to have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
“Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects
for an intra-entity asset transfer other than inventory. The ASU is effective for fiscal years beginning after December 15, 2017,
and for interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this
standard will have on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
“Classification of Certain Cash Receipts and Cash Payments.” The standard addresses the classification of certain
transactions within the statement of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent
consideration payments made after a business combination, and distributions received from equity method investments. The ASU is
effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption
is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and
related disclosures.
In February 2016, the FASB issued ASU
2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information
to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective
for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted.
The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
"Revenue from Contracts with Customers: (Topic 606)." This ASU affects any entity that either enters into contracts
with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts
are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition
requirements in ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. In addition, the existing
requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer
(e.g., assets within the scope of ASC Topic 360, "Property, Plant, and Equipment," and intangible assets within the
scope of ASC Topic 350, "Intangibles-Goodwill and Other") are amended to be consistent with the guidance on recognition
and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for calendar years beginning
after December 15, 2017. Early adoption is not permitted. The Company has begun to evaluate the impact of this new standard
on its consolidated financial statements, information technology ("IT") systems, policies and business processes and
controls. The Company has developed an implementation plan to adopt this new guidance including determining the method of adoption.
As part of this plan, the Company is currently reviewing customer contract provisions for all of its revenue streams and assessing
the potential impact this standard will have on the consolidated financial statements and related disclosures. Based on the Company’s
assessment procedures performed to date, it is currently unable to estimate the impact this standard will have on the consolidated
financial statements; however, the Company anticipates that the adoption of the new standard may require it to make changes to
its business processes and controls.
Accounting Pronouncements Recently Adopted
In January 2017, the FASB issued ASU 2017-04,
“Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by
removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The ASU is effective
for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a
prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-01,
“Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance
to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU
is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption
is permitted for certain transactions. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s
consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects
of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either
equity or liabilities and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after
December 15, 2016, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact
on its consolidated financial statements.
Note 2 — Earnings Per Share
The shares used in the computation of
the Company’s basic and diluted earnings per share are as follows:
|
|
Three Months Ended March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
42,385
|
|
|
|
34,718
|
|
The Company has excluded certain outstanding
stock options, non-vested restricted stock and warrants from the calculation of diluted earnings per share for the three months
ended March 31, 2017 and 2016 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents
outstanding (before the effects of the treasury stock method) was 11,579 and 11,703 for the three months ended March 31, 2017
and 2016, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.
Note 3 — Business Acquisitions
On July 11, 2016, the Company purchased
from Lauro Cinquantasette S.p.A. all of the capital stock of Prime European Therapeuticals S.p.A. (“Euticals”) (the
“Euticals Acquisition”), a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and
the manufacture of active pharmaceutical ingredients with a network of facilities located in Italy, Germany, the U.S. and France.
The Euticals operations have been assigned to the API, DDS and FC segments based on the activities performed and markets served
at each location.
The aggregate net purchase price was $277,067
(net of cash acquired of $20,784), which consisted of (i) the issuance of 7,051 unregistered shares of common stock subject to
a six month lock-up provision, valued at $91,765 (net of lock-up provision discount of $9,633), (ii) the issuance of two unsecured
promissory notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, or $60,783, that were valued at $44,342
(net of an original issue discount of $16,441) (the “Euticals Seller Notes”), and (iii) $140,960 in cash, net of a
final working capital adjustment of $2,309.
The following table summarizes the allocation
of the aggregate purchase price to the estimated fair value of the net assets acquired:
|
|
July 11,
|
|
|
|
2016
|
|
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
30,977
|
|
Prepaid expenses and other current assets
|
|
|
4,492
|
|
Inventory
|
|
|
103,895
|
|
Income taxes receivable
|
|
|
205
|
|
Property and equipment
|
|
|
159,924
|
|
Intangible assets
|
|
|
59,457
|
|
Goodwill
|
|
|
65,036
|
|
Other long term-assets
|
|
|
713
|
|
Total assets acquired
|
|
$
|
424,699
|
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
61,011
|
|
Short-term borrowings
|
|
|
27,362
|
|
Deferred revenue
|
|
|
3,399
|
|
Deferred income taxes
|
|
|
29,422
|
|
Pension benefits
|
|
|
13,201
|
|
Environmental liabilities
|
|
|
11,716
|
|
Other long-term liabilities
|
|
|
1,521
|
|
Total liabilities assumed
|
|
|
147,632
|
|
Net assets acquired
|
|
$
|
277,067
|
|
The purchase price allocation was adjusted
in the first quarter of 2017 due to the recognition of income tax receivables of $16 and deferred tax assets of $2,312. These
adjustments resulted in a net decrease of goodwill of $2,328. The Company does not expect any further significant adjustments
to the purchase price allocation.
The Company has attributed the goodwill
of $65,036 to an expanded global footprint and additional market opportunities that the Euticals’ business offers within
the API and DDS segments. The goodwill is not deductible for tax purposes. Intangible assets acquired consist of customer relationships
of $7,073, with an estimated life of 9 years, developed technology of $44,648, with an estimated life of 16 years, and manufacturing
intellectual property and know-how of $7,736, with an estimated life of 18 years.
Pro forma Information (Unaudited)
The following table shows the unaudited
pro forma statements of operations for the three months ended March 31, 2016, as if the Euticals Acquisition had occurred on January
1, 2015. This pro forma information does not purport to represent what the Company’s actual results would have been if the
acquisition had occurred as of the date indicated or what such results would be for any future periods.
|
|
Three months ended
|
|
|
|
March 31, 2016
|
|
|
|
|
|
Total revenue
|
|
$
|
162,124
|
|
Net loss
|
|
$
|
(17,222
|
)
|
Pro forma shares - basic and diluted
|
|
|
41,769
|
|
Loss per share:
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.41
|
)
|
The following table shows the pro forma
adjustments made to the weighted average shares outstanding for the three months ended March 31, 2016:
|
|
Three months ended
|
|
|
|
March 31, 2016
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
34,718
|
|
Pro forma impact of acquisition consideration
|
|
|
7,051
|
|
Pro forma weighted average shares - basic and diluted
|
|
|
41,769
|
|
For the three-month period ended March
31, 2016, pre-tax net income was adjusted by reducing expenses by $1,363 for acquisition-related costs and increasing expenses
by $2,796 for purchase accounting related depreciation and amortization.
The Company partially funded the Euticals
Acquisition utilizing the proceeds from a $230,000 term loan that was provided for in conjunction with the Third Amended and Restated
Credit Agreement, entered into with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto
(the “Third Restated Credit Agreement”), which was completed on July 7, 2016, along with the issuance of the Euticals
Seller Notes on July 11, 2016 (see Note 5). The Company did not have sufficient cash on hand to complete the acquisition as of
January 1, 2015. For the purposes of presenting the pro forma statements of operations for the three months ended March 31, 2016,
the Company has assumed that it entered into the Third Restated Credit Agreement and issued the Euticals Seller Notes on January
1, 2015 for an amount sufficient to fund the preliminary cash consideration to acquire Euticals as of that date. The pro forma
statement of operations for the three months ended March 31, 2016 reflects the recognition of interest expense that would have
been incurred had the Third Restated Credit Agreement and the Euticals Seller Notes been entered into and issued, respectively,
on January 1, 2015. The Company has recorded $3,841 of pro forma interest expense on the Third Restated Credit Agreement and the
Euticals Seller Notes for the purposes of presenting the pro forma statements of operations for the three months ended March 31,
2016.
A portion of Euticals’ debt was
paid by the Company at the closing of the Euticals Acquisition. For the purposes of presenting the pro forma statement of operations
for the three months ended March 31, 2016, the Company has reduced expenses by $1,623 assuming the debt and accrued interest were
paid on January 1, 2015.
Note 4 — Inventory
Inventory consisted of the following as of March 31, 2017 and
December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016(a)
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
59,100
|
|
|
$
|
57,071
|
|
Work-in-process
|
|
|
57,562
|
|
|
|
57,808
|
|
Finished goods
|
|
|
57,381
|
|
|
|
52,232
|
|
Total inventory
|
|
$
|
174,043
|
|
|
$
|
167,111
|
|
|
(a)
|
Certain adjustments have been made to December 31, 2016 inventory
classifications to conform to current year presentation.
|
Note 5 — Debt
Short-Term Borrowings
In connection with the Euticals Acquisition,
the Company assumed the short-term borrowing obligations of Euticals, consisting of multiple bank revolving lines of credit with
a maximum borrowing capacity of €42,050, or $44,919, at March 31, 2017 (the “Euticals Revolving Credit Facilities”).
The Euticals Revolving Credit Facilities support Euticals’ short-term working capital needs and are collateralized, in part,
by certain Euticals’ trade receivables balances. The Euticals Revolving Credit Facilities are subject to variable interest
rates and the average effective interest rate was 3.75% during the three months ended March 31, 2017.
As of March 31, 2017, the aggregate outstanding
balance under the Euticals Revolving Credit Facilities was $20,844 and the related trade receivables collateral was $13,212.
Long-Term Debt
The following table summarizes long-term debt:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible senior notes, net of unamortized discount
|
|
$
|
137,414
|
|
|
$
|
135,652
|
|
Term loan, net of unamortized discount
|
|
|
423,071
|
|
|
|
423,698
|
|
Euticals Seller Notes, net of unamortized discount
|
|
|
45,514
|
|
|
|
43,947
|
|
Various borrowings with institutions, Gadea loans
|
|
|
23,425
|
|
|
|
25,784
|
|
Capital leases – equipment & other
|
|
|
1,176
|
|
|
|
1,263
|
|
|
|
|
630,600
|
|
|
|
630,344
|
|
Less: deferred financing fees
|
|
|
(9,992
|
)
|
|
|
(11,951
|
)
|
Less: current portion
|
|
|
(13,362
|
)
|
|
|
(13,917
|
)
|
Total long-term debt, excluding current portion
|
|
$
|
607,246
|
|
|
$
|
604,476
|
|
The aggregate maturities of long-term debt, exclusive of unamortized
debt discount of $28,016 at March 31, 2017, are as follows:
2017 (remaining)
|
|
$
|
10,082
|
|
2018
|
|
|
580,491
|
|
2019
|
|
|
25,469
|
|
2020
|
|
|
21,705
|
|
2021
|
|
|
20,196
|
|
Thereafter
|
|
|
673
|
|
Total
|
|
$
|
658,616
|
|
Term Loans
In connection with the Euticals Acquisition,
on July 7, 2016, the Company entered into the Third Restated Credit Agreement, which (i) provided incremental senior secured first
lien term loans in an aggregate principal amount of $230,000 (the “Incremental Term Loans”) which increased the aggregate
principal amount of senior secured first lien term loans under the prior credit agreement to $428,500, and (ii) increased the
first lien revolving credit facility commitments by $5,000 to $35,000. The Company used the proceeds of the Incremental Term Loans
primarily to: (i) pay a portion of the cash consideration for the Euticals Acquisition; (ii) pay various fees and expenses incurred
in connection with the Euticals Acquisition and related financing activities; and (iii) repay the $30,000 outstanding under the
first lien revolving credit facility.
The Third Restated Credit Agreement requires
that we make quarterly repayments of $600 toward the Incremental Term Loans principal beginning on September 30, 2016. All remaining
unpaid principal amounts of the Incremental Term Loans will mature and become payable on July 16, 2021 and the revolving credit
facility commitments under the Third Restated Credit Agreement terminate and all amounts then outstanding thereunder are payable
on July 16, 2020, subject, in each case, to earlier acceleration, on (i) the date that is six months prior to the scheduled maturity
date of our 2.25% Cash Convertible Senior Notes issued on December 4, 2013 (the “Notes”) if on such date, both (x)
more than $25,000 of the Notes shall remain outstanding and (y) the ratio of the secured debt of the Company and its subsidiaries
to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00, or (ii) April 7, 2019, April 7, 2020 or April 7, 2021, respectively,
in each case to the extent that at any such date we have not (x) prepaid or otherwise satisfied the amortization or final maturity
payment amounts to next come due under each Euticals Seller Note then outstanding or (y) refinanced such amortization or final
maturity payment amount to next come due under each Euticals Seller Note then outstanding in a manner permitted by the Third Restated
Credit Agreement.
At the Company’s election, loans
made under the Third Restated Credit Agreement bear interest at (a) the one-month, three-month or six-month LIBOR rate subject
to a floor of 1.0% (the “LIBOR Rate”) or (b) a base rate determined by reference to the highest of (i) the United
States federal funds rate plus 0.50%, (ii) the rate of interest quoted by The Wall Street Journal as the “Prime Rate,”
and (iii) a daily rate equal to the one-month LIBOR Rate plus 1.0%, subject to a floor of 2.0% (the “Base Rate”),
plus an applicable margin of 4.75% per annum for LIBOR Rate loans and 3.75% per annum for Base Rate loans.
The obligations under the Third Restated
Credit Agreement are guaranteed by each material domestic subsidiary of the Company (each a “Guarantor”) and are secured
by first priority liens on, and security interests in, substantially all of the present and after-acquired assets of the Company
and each Guarantor subject to certain customary exceptions.
The face value of the term loans reconciles
to the net carrying amount as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Principal amount - term loan
|
|
$
|
425,262
|
|
|
$
|
426,341
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(2,191
|
)
|
|
|
(2,643
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of term loan
|
|
$
|
423,071
|
|
|
$
|
423,698
|
|
For the three months ended March 31, 2017
and 2016, the Company recognized $452 and $171, respectively, of amortization of the debt discount as interest expense based upon
the effective rate of approximately 6.2%.
Euticals Seller Notes
As indicated in Note 3, in connection
with the Euticals Acquisition, on July 11, 2016, the Company issued two notes to Lauro Cinquantasette S.p.A. with a combined face
value of €55,000, that were valued at $44,342 (net of original issue discount of $16,441). The Euticals Seller Notes are
unsecured promissory notes, guaranteed by the Company, and are subject to customary representations and warranties and events
of default with repayment to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the
Euticals Acquisition closing date. The repayment is subject to certain set off rights of the Company relating to the seller’s
indemnification obligations. The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which is due
and payable in cash on the first day of January, April, July and October during each calendar year. The Euticals Seller Notes
were recognized net of an original issue discount of $16,441. For the three months ended March 31, 2017, the Company recorded
$889 of amortization of the debt discount as interest expense based upon an effective rate of 8.32%.
The face value of the Euticals Seller Notes reconciles to the
net carrying amount as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Principal amount - Euticals Seller Notes
|
|
$
|
58,753
|
|
|
$
|
57,862
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(13,239
|
)
|
|
|
(13,915
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of Euticals Seller Notes
|
|
$
|
45,514
|
|
|
$
|
43,947
|
|
Convertible Senior Notes
On December 4, 2013, the Company completed
the private offering of $150,000 aggregate principal amount of the Notes. The Notes mature on November 15, 2018, unless earlier
repurchased or converted into cash in accordance with their terms prior to such date, and interest is paid in arrears semiannually
on each of May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
The Notes are not convertible into the
Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their
option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following
circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during
such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether
or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five
business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount
of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the
Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events.
On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date,
holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu
of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount
in cash equal to the settlement amount, determined in the manner set forth in the indenture. The initial conversion rate is 63.9844
shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price
of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment upon certain events as described
in the indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events
that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate
for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in
the indenture.
The Company may not redeem the Notes prior
to the maturity date, and no sinking fund is provided for the Notes.
The cash conversion feature of the Notes
(“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC 815, “Derivatives
and Hedging,” and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time
of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component
of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For
the three months ended March 31, 2017 and 2016, the Company recorded $1,762 and $1,644, respectively, of amortization of the debt
discount as interest expense based upon an effective rate of 7.69%.
The fair value of the Notes reconciles
to the net carrying amount as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Principal amount
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt discount
|
|
|
(12,586
|
)
|
|
|
(14,348
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of Notes
|
|
$
|
137,414
|
|
|
$
|
135,652
|
|
In connection with the pricing of the
Notes, in November 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating
to a notional number of shares of the Company's common stock underlying the Notes with two counterparties (the “Option Counterparties”).
The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that
it is required to make upon conversion of the Notes in excess of the principal amount of converted Notes if the Company’s
common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with
ASC 815, “Derivatives and Hedging.” The aggregate cost of the note hedge transaction was $33,600.
At the same time, the Company also entered
into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares
of the Company's common stock underlying the Note Hedges. The Note Hedges are intended to offset cash payments due upon any conversion
of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per
share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price
of the warrants. The initial strike price of the warrants is $18.9440 per share, which was 60% above the last reported sale price
of the Company's common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received from the Option Counterparties
from the sale of the warrants.
Aside from the initial payment of a $33,600
premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under
the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount
by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation
period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market
price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants
during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties
a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's
common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.
Neither the Notes Conversion Derivative
nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized
immediately in the statement of operations. During the three months ended March 31, 2017 and 2016, the changes in fair market
value of the Notes Conversion Derivative and the Notes Hedges were equal and offsetting; therefore the net impact recognized in
the statement of operations was zero.
The following table summarizes the fair
value and the presentation in the consolidated balance sheet:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Notes hedges asset
|
|
$
|
18,535
|
|
|
$
|
51,003
|
|
|
|
|
|
|
|
|
|
|
Notes conversion derivative liability
|
|
$
|
(18,535
|
)
|
|
$
|
(51,003
|
)
|
The change in fair value from December 31, 2016 to March 31,
2017 is primarily the result of the decrease in the Company’s stock price at March 31, 2017 as compared to December 31,
2016.
Note 6 — Restructuring and Other Charges
In August 2016, the Company announced
a restructuring plan in connection with the Euticals Acquisition. Under the restructuring plan, the Company initiated a reduction
in workforce in the U.S. and Europe and ceased operations in one location in Italy. During the three months ended March
31, 2017, the Company recorded approximately $1,502 in expense related to this initiative primarily for lease termination charges
for one site in Italy and $298 for employee termination benefits. The Company also recorded approximately $149 in employee termination
benefits and $180 of other costs associated with other previously announced restructuring initiatives.
The following table displays the restructuring activity and
liability balances for the three month period ended and as of March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Translation &
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
Charges/
|
|
|
Amounts
|
|
|
Other
|
|
|
March 31,
|
|
|
|
2017
|
|
|
(reversals)
|
|
|
Paid
|
|
|
Adjustments
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits and personnel realignment
|
|
$
|
4,471
|
|
|
$
|
447
|
|
|
$
|
(2,610
|
)
|
|
$
|
(6
|
)
|
|
$
|
2,302
|
|
Lease termination and relocation charges
|
|
|
143
|
|
|
|
1,550
|
|
|
|
(35
|
)
|
|
|
219
|
|
|
|
1,877
|
|
Other
|
|
|
-
|
|
|
|
162
|
|
|
|
(113
|
)
|
|
|
(49
|
)
|
|
|
-
|
|
Total
|
|
$
|
4,614
|
|
|
$
|
2,159
|
|
|
$
|
(2,758
|
)
|
|
$
|
164
|
|
|
$
|
4,179
|
|
Termination benefits and personnel realignment
costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring.
Lease termination charges relate to estimated costs associated with exiting a facility, net of estimated sublease income.
Restructuring charges are included under
the caption ‘Restructuring and other charges’ in the Condensed Consolidated Statements of Operations for the three
months ended March 31, 2017 and 2016 and the restructuring liabilities are included in ‘Accounts payable and accrued expenses’
and ‘Other long-term liabilities’ on the Condensed Consolidated Balance Sheets at March 31, 2017 and December 31,
2016.
Anticipated cash outflow for the remainder
of 2017 related to the above restructuring liabilities as of March 31, 2017 is approximately $4,179.
As a result of a prior restructuring initiative
to close the Holywell, U.K. site, the Company is currently marketing its Holywell, U.K. facility for sale. The facility is an
asset of the API operating segment and is classified as held for sale with the long-lived assets segregated to a separate line
on the Condensed Consolidated Balance Sheets until it is sold. Depreciation expense on the facility has ceased. The carrying value
of the facility is $1,161 at March 31, 2017.
Note 7 — Goodwill and Intangible Assets
The changes in the carrying amount of
goodwill for the three months ended March 31, 2017 were as follows:
|
|
DDS
|
|
|
API
|
|
|
DP
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
52,045
|
|
|
$
|
104,556
|
|
|
$
|
74,655
|
|
|
$
|
231,256
|
|
Measurement period adjustment
|
|
|
19
|
|
|
|
(2,347
|
)
|
|
|
-
|
|
|
|
(2,328
|
)
|
Foreign exchange translation
|
|
|
91
|
|
|
|
1,445
|
|
|
|
422
|
|
|
|
1,958
|
|
Balance as of March 31, 2017
|
|
$
|
52,155
|
|
|
$
|
103,654
|
|
|
$
|
75,077
|
|
|
$
|
230,886
|
|
The components of intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Exchange
|
|
|
|
|
|
Amortization
|
|
|
Cost
|
|
|
Impairment
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
Period
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property and Know-How
|
|
$
|
28,570
|
|
|
$
|
(2,709
|
)
|
|
$
|
(5,026
|
)
|
|
$
|
(1,028
|
)
|
|
$
|
19,807
|
|
|
2-18 years
|
Customer Relationships
|
|
|
93,847
|
|
|
|
-
|
|
|
|
(12,166
|
)
|
|
|
(1,294
|
)
|
|
|
80,387
|
|
|
5-20 years
|
Product Portfolio
|
|
|
44,649
|
|
|
|
-
|
|
|
|
(1,929
|
)
|
|
|
(1,469
|
)
|
|
|
41,251
|
|
|
16 years
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(539
|
)
|
|
|
17,461
|
|
|
indefinite
|
Tradename
|
|
|
4,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
3,977
|
|
|
indefinite
|
Trademarks
|
|
|
2,272
|
|
|
|
-
|
|
|
|
(993
|
)
|
|
|
-
|
|
|
|
1,279
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
-
|
|
|
|
(204
|
)
|
|
|
4
|
|
|
|
-
|
|
|
n/a
|
Total
|
|
$
|
191,638
|
|
|
$
|
(2,709
|
)
|
|
$
|
(20,318
|
)
|
|
$
|
(4,449
|
)
|
|
$
|
164,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Exchange
|
|
|
|
|
|
Amortization
|
|
|
Cost
|
|
|
Impairment
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
Period
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property and Know-How
|
|
$
|
28,457
|
|
|
$
|
(2,709
|
)
|
|
$
|
(4,639
|
)
|
|
$
|
(1,295
|
)
|
|
$
|
19,814
|
|
|
2-18 years
|
Customer Relationships
|
|
|
93,847
|
|
|
|
-
|
|
|
|
(10,522
|
)
|
|
|
(1,748
|
)
|
|
|
81,577
|
|
|
5-20 years
|
Product Portfolio
|
|
|
44,649
|
|
|
|
-
|
|
|
|
(1,253
|
)
|
|
|
(2,105
|
)
|
|
|
41,291
|
|
|
16 years
|
In-Process Research and Development
|
|
|
18,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(804
|
)
|
|
|
17,196
|
|
|
indefinite
|
Tradename
|
|
|
4,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(183
|
)
|
|
|
3,917
|
|
|
indefinite
|
Trademarks
|
|
|
2,272
|
|
|
|
-
|
|
|
|
(893
|
)
|
|
|
-
|
|
|
|
1,379
|
|
|
5 years
|
Order Backlog
|
|
|
200
|
|
|
|
-
|
|
|
|
(204
|
)
|
|
|
4
|
|
|
|
-
|
|
|
n/a
|
Total
|
|
$
|
191,525
|
|
|
$
|
(2,709
|
)
|
|
$
|
(17,511
|
)
|
|
$
|
(6,131
|
)
|
|
$
|
165,174
|
|
|
|
Amortization expense related to intangible assets was $2,823
and $1,942 for the three months ended March 31, 2017 and 2016, respectively. The weighted average amortization period is 12.71
years.
The following chart represents estimated
future annual amortization expense related to definite-lived intangible assets:
Year ending December 31,
|
|
|
|
|
2017 (remaining)
|
|
$
|
8,423
|
|
2018
|
|
|
11,690
|
|
2019
|
|
|
11,689
|
|
2020
|
|
|
11,689
|
|
2021
|
|
|
11,689
|
|
Thereafter
|
|
|
87,544
|
|
Total
|
|
$
|
142,724
|
|
Note 8 — Share-Based Compensation
During the three months ended March 31,
2017 and 2016, the Company recognized total share based compensation cost of $2,355 and $2,146, respectively.
The Company grants share-based compensation,
including restricted shares, under its 1998 Stock Option Plan, its 2008 Stock Option and Incentive Plan, as amended, as well as
its 1998 Employee Stock Purchase Plan, as amended (“ESPP”). The 1998 Stock Option Plan, the 2008 Stock Option and
Incentive Plan and ESPP are together referred to as the “Stock Option and Incentive Plans.”
Restricted Stock
A summary of unvested restricted stock activity during the
three months ended March 31, 2017 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant Date
|
|
|
|
Number of
|
|
|
Fair Value Per
|
|
|
|
Shares
|
|
|
Share
|
|
Outstanding, January 1, 2017
|
|
|
1,254
|
|
|
$
|
14.01
|
|
Granted
|
|
|
444
|
|
|
$
|
19.31
|
|
Vested
|
|
|
(349
|
)
|
|
$
|
11.89
|
|
Forfeited
|
|
|
(22
|
)
|
|
$
|
16.75
|
|
Outstanding, March 31, 2017
|
|
|
1,327
|
|
|
$
|
16.33
|
|
As of March 31, 2017, there was $18,561
of total unrecognized compensation cost related to unvested restricted shares. That cost is expected to be recognized over a weighted-average
period of 2.91 years. Of the 1,327 shares outstanding, 175 shares of restricted stock outstanding have market-based vesting provisions.
The grant date fair value assumptions for these shares contain a vesting probability factor to reflect the Company’s expectation
that not all shares will vest. Of the remaining 1,152 shares of restricted stock outstanding, the Company currently expects all
shares to vest.
Stock Options
The per share weighted-average fair value
of stock options granted is determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected life in years
|
|
|
5
|
|
|
|
5
|
|
Interest rate
|
|
|
1.81
|
%
|
|
|
1.25
|
%
|
Volatility
|
|
|
44
|
%
|
|
|
42
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
A summary of stock option activity during
the three months ended March 31, 2017 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price Per Share
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding, January 1, 2017
|
|
|
1,578
|
|
|
$
|
9.93
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
540
|
|
|
$
|
18.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(9
|
)
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
|
2,109
|
|
|
$
|
12.13
|
|
|
|
7.14
|
|
|
$
|
7,614
|
|
Options exercisable, March 31, 2017
|
|
|
1,183
|
|
|
$
|
8.64
|
|
|
|
5.63
|
|
|
$
|
6,999
|
|
The weighted average fair value of stock
options granted for the three months ended March 31, 2017 and 2016 was $7.49 and $5.98, respectively. As of March 31, 2017, there
was $5,717 of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over
a weighted-average period of 3.28 years. Of the 2,109 stock options outstanding, we currently expect all options to vest.
Employee Stock Purchase Plan
During the three months ended March 31,
2017 and 2016, 53 and 37 shares, respectively, were issued under the Company’s ESPP.
During the three months ended March 31,
2017 and 2016, cash received from stock option exercises and employee stock purchases under the ESPP was $632 and $620, respectively.
The excess tax benefit realized for the tax deductions from share-based compensation was $0 for both the three months ended March
31, 2017 and 2016, respectively.
Note 9 — Business Segments
The Company organizes its operations into
the DDS, API, DP and FC segments. The API segment provides pilot to commercial scale manufacturing of active pharmaceutical ingredients
and intermediates. The DP segment provides pre-formulation, formulation and process development through commercial scale production
of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations. The DDS segment provides activities
such as drug lead discovery, optimization, drug development and small and medium scale commercial manufacturing. The FC segment
provides lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales and marketing
and administrative functions, as well as research and development costs that have not been allocated to the operating segments.
The following table contains earnings data by operating segment,
reconciled to totals included in the unaudited Condensed Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
(Loss)
|
|
|
Depreciation
|
|
|
|
Contract
|
|
|
Royalty
|
|
|
from
|
|
|
and
|
|
|
|
Revenue
|
|
|
Revenue
|
|
|
Operations
|
|
|
Amortization
|
|
For the three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
API
|
|
$
|
103,364
|
|
|
$
|
2,765
|
|
|
$
|
12,569
|
|
|
$
|
11,589
|
|
DDS
|
|
|
29,167
|
|
|
|
-
|
|
|
|
4,475
|
|
|
|
1,963
|
|
DP
|
|
|
22,534
|
|
|
|
832
|
|
|
|
860
|
|
|
|
2,060
|
|
FC
|
|
|
5,160
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
552
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,818
|
)
|
|
|
693
|
|
Total
|
|
$
|
160,225
|
|
|
$
|
3,597
|
|
|
$
|
2,081
|
|
|
$
|
16,857
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
(Loss)
|
|
|
Depreciation
|
|
|
|
Contract
|
|
|
Royalty
|
|
|
from
|
|
|
and
|
|
|
|
Revenue (a)
|
|
|
Revenue
|
|
|
Operations (b)
|
|
|
Amortization (b)
|
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
API
|
|
$
|
54,369
|
|
|
$
|
2,741
|
|
|
$
|
8,479
|
|
|
$
|
3,109
|
|
DDS
|
|
|
23,536
|
|
|
|
-
|
|
|
|
1,455
|
|
|
|
3,180
|
|
DP
|
|
|
24,933
|
|
|
|
-
|
|
|
|
329
|
|
|
|
1,821
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,415
|
)
|
|
|
414
|
|
Total
|
|
$
|
102,838
|
|
|
$
|
2,741
|
|
|
$
|
(4,152
|
)
|
|
$
|
8,524
|
|
|
(a)
|
A portion of the 2016 amounts
were reclassified between API and DDS to better align business activities within the
Company’s reporting segments and conform to current year presentation.
|
|
(b)
|
A portion of the 2016 amounts
were reclassified between Corporate, API, DDS and DP to better align business activities
within the Company’s reporting segments and conform to current year presentation.
|
The following table summarizes other information by segment
as of and for the three-month period ended March 31, 2017:
|
|
API
|
|
|
DDS
|
|
|
DP
|
|
|
FC
|
|
|
Corporate
|
|
|
Total
|
|
Long-lived assets
|
|
$
|
419,816
|
|
|
$
|
116,598
|
|
|
$
|
166,086
|
|
|
$
|
23,504
|
|
|
$
|
29,326
|
|
|
$
|
755,330
|
|
Goodwill included in total assets
|
|
$
|
103,654
|
|
|
$
|
52,155
|
|
|
$
|
75,077
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,886
|
|
Total assets
|
|
$
|
704,846
|
|
|
$
|
163,487
|
|
|
$
|
207,966
|
|
|
$
|
37,100
|
|
|
$
|
50,130
|
|
|
$
|
1,163,529
|
|
Investments in unconsolidated affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
956
|
|
|
$
|
956
|
|
Capital expenditures
|
|
$
|
2,175
|
|
|
$
|
655
|
|
|
$
|
918
|
|
|
$
|
5
|
|
|
$
|
196
|
|
|
$
|
3,949
|
|
The following table summarizes other information by segment
as of December 31, 2016 and capital expenditures for the three-month period ended March 31, 2016:
|
|
API
|
|
|
DDS
|
|
|
DP
|
|
|
FC
|
|
|
Corporate
|
|
|
Total
|
|
Long-lived assets
|
|
$
|
425,207
|
|
|
$
|
117,174
|
|
|
$
|
165,781
|
|
|
$
|
23,958
|
|
|
$
|
29,116
|
|
|
$
|
761,236
|
|
Goodwill included in total assets
|
|
$
|
104,556
|
|
|
$
|
52,045
|
|
|
$
|
74,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
231,256
|
|
Total assets
|
|
$
|
706,838
|
|
|
$
|
172,408
|
|
|
$
|
209,689
|
|
|
$
|
38,444
|
|
|
$
|
82,269
|
|
|
$
|
1,209,648
|
|
Investments in unconsolidated affiliates
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
956
|
|
|
$
|
956
|
|
Capital expenditures (three months ended March 31, 2016)
|
|
$
|
4,194
|
|
|
$
|
4,278
|
|
|
$
|
857
|
|
|
$
|
-
|
|
|
$
|
2,300
|
|
|
$
|
11,629
|
|
Note 10 — Financial Information by Customer Concentration
and Geographic Area
Total percentages of contract revenues
by each segment’s three largest customers for the three months ended March 31, 2017 and 2016 are indicated in the following
table:
|
|
For
the Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
API
|
|
12%,
9%, 7%
|
|
18%,
10%, 8%
|
|
DDS
|
|
6%,
5%, 4%
|
|
11%,
4%, 3%
|
|
DP
|
|
9%,
7%, 7%
|
|
13%,
13%, 6%
|
|
FC
|
|
39%,
11%, 10%
|
|
-
|
|
Total contract revenue from GE Healthcare
(“GE”), the Company’s largest customer, represented 8% and 9% of total contract revenue for the three months
ended March 31, 2017 and 2016, respectively.
Contract revenue by geographic region,
based on the location of the customer, and expressed as a percentage of total contract revenue follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
United States
|
|
|
61
|
%
|
|
|
62
|
%
|
Europe
|
|
|
25
|
|
|
|
29
|
|
Asia
|
|
|
10
|
|
|
|
5
|
|
Other
|
|
|
4
|
|
|
|
4
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Long-lived assets by geographic region
are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
355,206
|
|
|
$
|
357,711
|
|
Asia
|
|
|
14,699
|
|
|
|
14,195
|
|
Europe
|
|
|
385,425
|
|
|
|
389,330
|
|
Total long-lived assets
|
|
$
|
755,330
|
|
|
$
|
761,236
|
|
Note 11 — Fair Value of Financial Instruments
The Company uses a framework for measuring
fair value in generally accepted accounting principles and making disclosures about fair value measurements. A three-tiered
fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.
These tiers include:
Level 1 – defined as quoted prices
in active markets for identical instruments;
Level 2 – defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 – defined as unobservable
inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company determines the fair value
of its financial instruments using the following methods and assumptions:
Cash and cash equivalents, restricted
cash, receivables, and accounts payable:
The carrying amounts reported in the consolidated balance sheets approximate
their fair value because of the short maturities of these instruments.
Convertible senior notes, derivatives
and hedging instruments:
The fair value of the Company’s Notes, which differ from their carrying value, are influenced
by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed
in market trading, which are level 2 inputs. The estimated fair value of the Notes at March 31, 2017 was $162.527. The Notes Hedges
and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded
and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the
Company's common stock, risk-free interest rate and other factors.
Interest rate swaps:
At March 31,
2017, the Company remained contracted under a derivative financial instrument to reduce the impact of fluctuations in variable
interest rates on a loan that a financial institution granted in February 2015, which is a level 2 input. The estimated fair value
of the swap at March 31, 2017 was a liability of $35. The Company hedges the interest rate risk of the initial amount of the aforementioned
bank loan through an interest rate swap. In this arrangement, the interest rates are exchanged so that the Company receives from
the financial institution a variable rate of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal
amount (0.3%). The variable interest rate received for the derivative offsets the interest payment on the hedged transaction,
with the end result being a fixed interest payment on the hedged financing. At March 31, 2017, the derivative financial instrument
had not been designated as a hedging instrument.
To determine the fair value of the interest
rate swap, the Company uses cash flow discounting based on the implicit rates determined by the euro interest rate curve, according
to market conditions at the valuation date.
|
|
|
|
|
|
Contract
|
|
Interest
|
|
|
|
|
Nominal
Amount
|
|
Contract
|
|
Date
|
|
Rate
|
|
Interest
Rate
|
Instrument
|
|
at
March 31, 2017
|
|
Date
|
|
Expiration
|
|
Payable
|
|
Receivable
|
Interest rate swap
|
|
$
|
4,419
|
|
February
19, 2015
|
|
February 19, 2020
|
|
3-month
Euribor
|
|
Fixed
rate of 0.30%
|
Long-term debt, other than convertible
senior notes:
The carrying value of long-term debt approximated fair value at March 31, 2017 due to the resetting dates
of the variable interest rates.
Nonrecurring Measurements:
The Company has assets, including intangible
assets, property and equipment, and equity method investments which are not required to be carried at fair value on a recurring
basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a
non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial
instrument be recorded at the lower of historical cost or its fair value.
The fair values of these assets are then
determined by the application of a discounted cash flow model using Level 3 inputs. Cash flows are determined based on Company
estimates of future operating results, and estimates of market participant weighted average costs of capital (“WACC”)
are used as a basis for determining the discount rates to apply to the future expected cash flows, adjusted for the risks and
uncertainty inherent in the Company’s internally developed forecasts.
Although the fair value amounts have been
determined by the Company using available market information and appropriate valuation methodologies, the estimates presented
are not necessarily indicative of the amounts that the Company could realize in current market exchanges.
Note 12 — Accumulated Other Comprehensive Loss, Net
The activity related to accumulated other comprehensive loss,
net was as follows:
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Pension and
|
|
|
Foreign
|
|
|
Other
|
|
|
|
postretirement
|
|
|
currency
|
|
|
Comprehensive
|
|
|
|
benefit plans
|
|
|
adjustments
|
|
|
Loss
|
|
Balance at December 31, 2016, net of tax
|
|
$
|
(5,062
|
)
|
|
$
|
(34,668
|
)
|
|
$
|
(39,730
|
)
|
Net current period change, net of tax
|
|
|
118
|
|
|
|
7,287
|
|
|
|
7,405
|
|
Balance as of March 31, 2017, net of tax
|
|
$
|
(4,944
|
)
|
|
$
|
(27,381
|
)
|
|
$
|
(32,325
|
)
|
The following table provides additional details of the amounts
recognized into net earnings from accumulated other comprehensive loss, net:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Actuarial losses before tax effect (a)
|
|
$
|
182
|
|
|
$
|
177
|
|
Tax benefit on amounts reclassified into earnings
|
|
|
(64
|
)
|
|
|
(62
|
)
|
|
|
$
|
118
|
|
|
$
|
115
|
|
|
(a)
|
Amounts represent amortization of net actuarial loss from
shareholders’ equity into postretirement benefit plan cost. This amount was primarily
recognized as cost of contract revenue in the consolidated statements of operations.
|
Note 13 — Collaboration Arrangements
The Company enters into collaboration
arrangements with third parties for the development and manufacture of certain products and/or product candidates. Although each
of these arrangements is unique in nature, both parties are active participants in the activities of the collaboration and are
exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements typically include
research and development and manufacturing. The rights and obligations of the parties can be global or limited to geographic regions
and the activities under these collaboration agreements are performed with no guarantee of either technological or commercial
success.
The Company is obligated under these arrangements
to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component
of the arrangement commences during the development activities and continues through the commercial stage of each product, during
which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally
responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements
vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the
Company generally has the right to receive payment for all unpaid development costs incurred through the date of termination.
Additionally, in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to
a third party on a contract research and manufacturing basis provided that it does not use the technology developed during the
collaboration arrangement. On December 8, 2016, the product Sodium Nitroprusside Injection was approved by the FDA. As a result,
this product has reached commercial contract manufacturing and profit sharing stage. None of the product candidates being developed
pursuant to the Company’s other collaboration arrangements have reached the contract manufacturing or commercial and profit
sharing stages.
The Company recognizes costs as incurred
during the performance of development activities and classifies these costs as ‘Research and development’ expense
while any development activity revenues earned are recorded as contract revenues. Costs incurred by the Company during the performance
of the contract manufacturing activities are classified as ‘Cost of contract revenue’ when the related revenue is
recognized.
Amounts associated with these collaboration
arrangements recognized during the three months ended March 31, 2017 and 2016 were as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
2,136
|
|
|
$
|
1,269
|
|
|
|
|
|
|
|
|
|
|
Recurring royalties revenue
|
|
$
|
832
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cost of contract revenue
|
|
$
|
464
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
R&D expense
|
|
$
|
2,304
|
|
|
$
|
2,438
|
|