10-K 1 v432872_10k.htm 10-K

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

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

For the fiscal year ended December 31, 2015

or

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

For the transition period from _________to __________

Commission file number 001-35622

 

 

Albany Molecular Research, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   14-1742717
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
26 Corporate Circle    
Albany, New York   12212
(Address of principal executive offices)   (zip code)

 

(518) 512-2000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of exchange on which registered
Common Stock, par value $.01 per share   The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights    
     

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Each Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨   No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

 

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

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on June 30, 2015 was approximately $472.6 million based upon the closing price per share of the Registrant’s Common Stock as reported on the Nasdaq Global Market on June 30, 2015. 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 29, 2016, there were 35,828,534 outstanding shares of the Registrant’s Common Stock, excluding treasury shares of 5,543,938.

  

 

 

DOCUMENTS INCORPORATED BY REFERENCE

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 June 1, 2016, pursuant to Regulation 14A to be filed with the Securities and Exchange Commission.

 

 

 

 

 

 

ALBANY MOLECULAR RESEARCH, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K

 

        Page No.
    Cover page    
    Part I.    
Forward-Looking Statements   3
Item 1.   Business   4
Item 1A.   Risk Factors   13
Item 1B.   Unresolved Staff Comments   22
Item 2.   Properties   22
Item 3.   Legal Proceedings   22
Item 4.   Mine Safety Disclosures   23
    Part II.    
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   24
Item 6.   Selected Financial Data   27
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   28
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk   41
Item 8.   Financial Statements and Supplementary Data   42
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   42
Item 9A.   Controls and Procedures   42
Item 9B.   Other Information   43
    Part III.    
Item 10.   Directors, Executive Officers and Corporate Governance of the Registrant   44
Item 11.   Executive Compensation   44
Item 12.   Security Ownership of Certain Beneficial Owners and Management   44
Item 13.   Certain Relationships, Related Transactions and Director Independence   44
Item 14.   Principal Accountant Fees and Services   44
    Part IV.    
Item 15.   Exhibits and Financial Statement Schedules   45

 

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Forward-Looking Statements

 

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. This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “intend,” “expect,” “anticipate,” “believe,” and “continue” or similar words, and include, but are not limited to, statements concerning the Company’s relationship with its largest customers; trends in pharmaceutical and biotechnology companies’ outsourcing of manufacturing services and chemical research and development, including softness in these markets; the impact on the Company of the cessation of royalties on Allegra® products in 2015 and future the success of the sales of other products for which the Company receives royalties; the expected benefits from past or future acquisitions, including Cedarburg Pharmaceuticals, Inc. (“Cedarburg”), Albany Molecular Research (Glasgow) Limited (“Glasgow”), AMRI SSCI, LLC (“SSCI”), Oso Biopharmaceuticals Manufacturing, LLC (“OsoBio”), Gadea Grupo Farmaceutico, S.L. (“Gadea”) and Whitehouse Analytical Laboratories, LLC (“Whitehouse”); the Company’s ability to take advantage of proprietary technology and expand the scientific tools available to it; the ability of the Company’s strategic investments and acquisitions to perform as expected; the Company’s forward looking view of revenue, earnings, contract revenue, and costs and margins; the potential outcome of pending litigation matters; the impact to our business of government regulation; the impact to our business of customer spending and business trends; the expected contributions from foreign operations, including increasing options and solutions for customers; assumptions regarding business growth and the expansion of the Company’s global market; and expectations regarding tax matters and future tax rates. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Part I, Item 1A “Risk Factors” in this annual report. 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.

 

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PART I

 

ITEM 1.    BUSINESS.

 

Overview

 

Albany Molecular Research, Inc. is a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. We supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”) and drug product manufacturing (“DPM”) for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. With locations in the United States, Europe, and Asia, AMRI maintains geographic proximity to our customers and flexible cost models.

 

Our Capabilities

 

The problem-solving abilities of our scientists provide added value throughout the drug discovery, development and manufacturing processes. We perform services and offer solutions in drug discovery, chemical development, pharmaceutical development, and manufacturing and testing of API, pharmaceutical intermediates, and drug product for many of the world’s leading healthcare companies. Our comprehensive suite of services and flexible business model allow our customers to contract with a single partner, eliminating the time and cost of transitioning projects among multiple vendors. Customers can also contract with us for specific services or products, depending on their needs.

 

Industry Overview and Trends

 

We believe that market trends in the pharmaceutical and biotech industries demonstrate an increasing emphasis towards outsourcing, as companies seek to reduce internal resources and fixed overhead costs in favor of variable models that offer high quality and higher accountability alternatives to meet their drug discovery, development and manufacturing needs. We believe that ongoing announcements from many large pharmaceutical companies regarding their reorganization plans and strategy changes point to outsourcing as an increasingly important and strategic part of future R&D and manufacturing efforts. We also believe that announcements from several pharmaceutical companies regarding regulatory scrutiny of their manufacturing facilities, and in some instances, closure or divestiture of these facilities, provide opportunities for AMRI to benefit from increased outsourcing of drug discovery as well as API and drug product manufacturing services.

 

Business Strategy

 

AMRI is uniquely positioned in the marketplace to provide a competitive advantage to a diverse group of customers. Our reputation of providing the highest quality service on a global basis with a variety of pricing options provides companies with the security of sourcing discovery, development, small and large-scale manufacturing projects seamlessly across our global network of research and manufacturing facilities. We have a comprehensive portfolio 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 multi-year strategic relationships and enhance our revenue growth with a variety of customers. We have divided our business into three segments and have taken many actions to provide for both revenue growth and increased profitability across the discovery and early development, API and DPM service offerings. Our strategy to accomplish this includes the following:

  

·Enhance revenue growth and mix

Market trends continue to point to outsourcing as an increasingly important part of business strategies for our customers across the discovery, development and API and drug product manufacturing areas, including both generic and branded products. 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 offer our customers the option of insourcing, a strategic relationship that embeds AMRI scientists into customers’ facilities, allowing them to access AMRI’s expertise while cost-effectively leveraging their unused laboratory space.

 

We also focus our efforts on important customer segments, including generic and specialty pharmaceutical companies, small and large biotech companies, medical device companies, non-profit/government entities and related industries such as the agricultural, nutraceutical and food industries. We believe maintaining a balance within our customer portfolio between large pharmaceutical, non-profit/government, biotech and other companies will help ensure sustained sales and reduce concentration risk.

 

 4 

 

 

We have made investments to grow our Discovery and Development Services (“DDS”), API and DPM businesses in areas that have either higher growth opportunities, or are differentiated and have high barriers to entry. 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 controlled substances and steroids, areas where there are high regulatory standards and/or a limited number of suppliers. We also believe our injectable Drug Product business has significant potential in the marketplace, driven by the growth in biologically based compounds which are formulated and manufactured on an aseptic basis.

 

·Streamline operations to improve margins

 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.

 

·Maximize licensing/partnering of products and services to enhance future cash flow

Since 2014, we have focused on advancing our leadership in the development and manufacturing of generic products by entering into multiple co-development programs in which AMRI has the opportunity to capture revenue over the lifetime of the generic product, through development, commercial supply and, if commercialized, through royalty revenue. Through 2015, AMRI had entered into approximately 12 such programs, which collectively will address over $3 billion in market value, and could generate significant royalties in future years.

 

·Acquisitions

We may consider additional acquisitions that enhance or complement our existing service offerings. In addition to growing organically, any acquisitions would generally be expected to contribute to AMRI’s growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle.

 

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.

 

Whitehouse Laboratories

 

On December 15, 2015, we acquired all the outstanding equity interests of Whitehouse Analytical Laboratories, LLC (“Whitehouse”). Total consideration was $54 million in cash, and an additional $2 million in shares of AMRI common stock, contingent upon Whitehouse achieving certain 2015 targets, which were satisfied subsequent to year-end.

 

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.

 

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Gadea Pharmaceutical Group

 

On July16, 2015, we acquired all the outstanding shares of Gadea Pharmaceutical Group (“Gadea”), a privately-held company located in Valladolid, Spain. The purchase price was $126.9 million (net of cash acquired of $10.9 million), including the issuance of 2.2 million shares of common stock to Gadea's owners, valued at $40.6 million, with the balance paid in cash of $97.0 million plus a working capital adjustment. 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. The acquisition of Gadea significantly expands our API portfolio and extends our development and manufacturing capabilities in steroids, hormones and sterile API. The acquisition of Gadea also augments our sterile drug product offerings with the addition of ophthalmic and parental suspension dosage forms. Gadea’s central location in Europe and extensive customer base, provides us with a strong footprint for sales and operations and significantly expands our presence in non-US markets.

 

SSCI

 

On February 13, 2015, we completed the purchase of assets and assumed certain liabilities of Aptuit’s SSCI business, now 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 completed the purchase of all of the outstanding equity interests of Aptuit's Glasgow, UK business, now 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. With this acquisition, we now provide customers a single source to address their sterile fill/finish needs from formulation complete to commercial supply. Additionally, having a Glasgow base of operations provides us with an expanded footprint and customer base in Europe for our parenteral offerings, furthering one of our strategic goals.

 

Oso Biopharmaceuticals

 

On July 1, 2014, we 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 for an aggregate purchase price of $109.2 million. The addition of OsoBio provides AMRI 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 completed the purchase of 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 transaction 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 three distinct segments: DDS, API and DPM. 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 and small-scale commercial manufacturing. API includes pilot to commercial scale manufacturing of API, including intermediates, high potency and controlled substances, steroids and hormones and sterile API. DPM includes formulation through commercial scale production of complex liquid-filled and lyophilized parenteral formulations. 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.

 

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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 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.

 

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 hub for industry, government and academic collaborations that will provide unique services and solutions to the drug discovery community. This center will increase translation to the clinic by leveraging expertise in biology, HTS, medicinal chemistry and pharmacology, integrated with a single site in the U.S. In cooperation with The SUNY Polytechnic Institute, we are managing the operations of this center. Equipment and facilities have been purchased and are owned by The SUNY Polytechnic Institute.

 

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 co-located with our manufacturing facilities around the globe, we have become a top choice for an increasing number of bio-pharmaceutical 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 services are designed to ensure that the right tools are used to solve even the most difficult problem.

 

Our recently acquired SSCI business provides extensive capabilities in analytical services, a critical support function for pharmaceutical development, current good manufacturing practices (“cGMP”), API and drug product manufacturing. Servicing more than 250 customers, SSCI has an industry-leading reputation for solving the most difficult drug substance and formulated drug product issues and as an expert in the field of solid-state chemistry and analytical services. SSCI also provides state-of-the-art spectroscopic and microscopy expertise and extends our capabilities in analytical testing to include peptides, proteins and oligonucleotides.

 

Our newly acquired Whitehouse Labs business offers a comprehensive array of testing solutions, 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. These services augment our discovery, development and manufacturing services and meet the increasingly complex needs of customers we serve.

 

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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 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.

 

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) new proprietary API for which we have a semi-exclusive 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 for commercialized drug products. As of December 31, 2015, we had agreements in place to manufacture and supply over 130 commercial APIs for customers and over 30 non-proprietary Drug Master Files (“DMF”s) available for customers to license. Our API pipeline included: (i) 1 product pending commercial launch; and (ii) approximately 63 additional APIs under development. We will continue to expand our generic, non-proprietary API portfolio both through internal development and through in-licensing or acquisitions.

 

Our recently acquired Gadea business significantly expands our API portfolio through Crystal Pharma to include steroids, hormones and sterile API, positioning us as a leading source of specialty and generic API.

 

DPM 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 and preformulation groups, we offer formulation development services for dosage forms including solid dosage, solution, suspension, topicals, injectables, cGMP early clinical phase capsules filling and cGMP early clinical powder in bottle for solution and suspension. Our acquisition of the Glasgow facility has extended our capabilities platform to include sterile injectable drug product formulation and clinical stage manufacturing. The acquisition of the Gadea drug product business augments our sterile drug product offerings with the addition of ophthalmic and parenteral suspension dosage forms and prefilled syringe and lyophilization capability.

 

We also provide cGMP contract manufacturing services in sterile syringe 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, 2015, we had agreements in place to manufacture and supply 18 commercial drug products for customers. Our drug product pipeline includes approximately 107 products under development with customers.

 

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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 develop APIs and Drug Products, including the development of processes for the manufacture of generic APIs with commercial potential, and the development of alternative manufacturing processes, with the goal to license these APIs and drug products in return for manufacturing revenue, sharing of R&D costs and potential downstream royalty payments for commercialized products.

 

Licensing Agreements

 

Allergan Agreement

 

The Company currently receives royalties in conjunction with a Development and Supply Agreement with Allergan, plc (“Allergan”). 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 determined based on sales of the qualifying products in that quarter.

 

Genentech Agreement

 

In January 2011, we entered into a research and licensing agreement with Genentech. Under the terms of the agreement, Genentech received an exclusive license to develop and commercialize multiple potential products from our proprietary antibacterial program. Additionally, we have collaborated with Genentech in a research program with the objective of identifying novel antibacterial agents.  

 

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 related to a license agreement with Sanofi 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.

 

Other Agreements

 

The Company may receive royalty payments from time to time based on certain agreements with its customers. The Company has several agreements that span its API and DPM 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 the third-party pharmaceutical company. The drug products are in various development stages. If the drugs are approved and commercialized, the Company will supply active pharmaceutical ingredients and/or formulated drug products and the third party pharmaceutical company will sell and distribute those products. The Company will receive a percentage of the profits on those product sales.

 

Customers

 

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, 2015, contract revenue from our three largest customers represented 11%, 5% and 4%, respectively, of our 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. For the year ended December 31, 2013, contract revenue from our three largest customers represented 15%, 9% and 5%, 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 $173.8 million at December 31, 2015, as compared to $159.7 million at December 31, 2014. 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.

 

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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 customers or regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.

 

Sales and Marketing

 

Our services are sold primarily by our dedicated sales 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 targeted mailings, meetings with senior management of pharmaceutical and biotechnology companies, maintenance of an extensive Internet web site, participation in trade conferences and shows, and advertisements in scientific and trade journals. We also receive a significant amount of business from customer referrals and through expansion of existing contracts.

 

Employees

 

As of December 31, 2015, we had 2,220 employees. Of these employees, 902 are at our international facilities. Our U.S. large-scale manufacturing hourly work force has 99 employees who are subject to a collective bargaining agreement with the International Chemical Workers Union. A 3-year collective bargaining agreement was signed in January 2014 with the union and expires in January 2017. Additionally, we have 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 March 2016, for which negotiations are ongoing to reach an agreement for future years. 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:

 

§Our globalization of both research and manufacturing facilities, which allows us to increase our access to key global markets,

 

§Our ability to offer a flexible combination of high quality, cost-effective services,

 

§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.

 

We have been issued various United States and international patents covering fexofenadine HC1 and certain related manufacturing processes, with most of these patents covered by our license agreements with Sanofi, described herein. These patents expired in 2015. Additionally, our United States patents related to substituted biaryl purines as potent anticancer agents and a series of aryl and heteroaryl tetrahydroisoquinolines related to central nervous system indications begin to expire in 2020.

 

Many of our current contracts with our customers provide that ownership of proprietary technology developed by us in the course of work performed under the contract is vested in the customer, and we retain little or no ownership interest.

 

We also rely upon trade secrets and proprietary know-how for certain unpatented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. We cannot provide assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, we cannot provide assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, we cannot be certain that third parties will not independently develop substantially equivalent or better technology.

 

Government Regulation

 

The manufacture, transportation and storage of our products are subject to certain international, Federal, state and local laws and regulations. Our future profitability is indirectly dependent on the sales of pharmaceuticals and other products developed by our customers. Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by us or our customers. The nature and the extent to which such regulation may apply to us or our customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by us or our customers will require regulatory approval by governmental agencies prior to commercialization. Human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time consuming and require the expenditure of substantial resources.

 

Generally, in order to gain 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.

 

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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.

 

All of our manufacturing facilities in U.S. and EU have undergone FDA or European Medicines Agency (“EMA”), which includes both the Medicines and Healthcare Products Regulatory Agency (“MHRA”) and the Spanish Agency of Medicines and Medical Devices (“AEMPS”), inspections within the last three years. For those inspections, we have received GMP certificates for all EMA inspections, and did not receive any Official Action Indicated (“OAI”) from the FDA.

 

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.

 

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ITEM 1A.  RISK FACTORS.

 

The following factors should be considered carefully in addition to the other information in this Form 10-K. Except as mentioned under “Item 7A - Quantitative and Qualitative Disclosure About Market Risk” and except for the historical information contained herein, the discussion in this Form 10-K contains “forward-looking statements,” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, that involve risks and uncertainties. Our actual results could differ materially from those discussed in this Form 10-K. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein.

 

Failure to manage the business to consistent profitability without Allegra and/or other royalties will have a significant impact on operations and stock value.

 

The recurring royalties we received on the sales of Allegra/Telfast have historically provided a material portion of our revenue, earnings and operating cash flows. Recently, we have begun to receive royalties on the sales of other products. We continue to develop our business and manage our operating costs in order to be in a position to maintain a business that can operate profitably as these royalties 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. We have added revenue generating businesses that are expected to produce consistent and growing revenue and profit over time and have taken certain cost cutting steps in order to right size the business operations to support the profitability that is achievable from our core contract research and manufacturing businesses. In the future, we may need to take additional cost cutting measures if our revenues do not continue to increase or are not profitable enough to support our operations. In addition, if we are not able to increase operating revenue and decrease operating costs in order to replace Allegra and other royalty income, there will be a material and adverse impact on our business, including negative impacts on our operating cash flow, access to capital and ability to implement required capital improvements to our facilities.

 

If we fail to meet strict regulatory requirements, we could be required to pay fines or even close our facilities.

 

All facilities and manufacturing techniques used to manufacture active pharmaceutical ingredients and drug product for clinical use or for commercial sale in the United States must conform to cGMP standards that are established by the FDA and other comparable regulatory authorities in other countries, as well as for some facilities, the DEA. The FDA and other regulatory authorities conduct unscheduled periodic inspections of our facilities to monitor our compliance with regulatory standards. If the FDA or any other relevant regulatory authority finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us or, if it is determined that our non-compliance is severe, it may close our facilities. Any adverse action by the FDA or other applicable regulatory bodies could have a material adverse effect on our operations and could result in loss of a customer contract.

 

If we are not successful in selecting and integrating the businesses and technologies we acquire, or in managing our current and future divestitures, our business may suffer.

 

During the past few years, we have expanded our business through acquisitions. We plan to continue to acquire businesses and technologies and form strategic alliances. However, businesses and technologies may not be available on terms and conditions we find acceptable. We risk spending time and money investigating and negotiating with potential acquisition or alliance partners, but not completing transactions.

 

Even if completed, acquisitions and alliances involve numerous risks which may include:

 

·difficulties and expenses incurred in assimilating and integrating operations, services, products or technologies;

 

·challenges with identifying, successfully acquiring, 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;

 

·diversion of management's attention from other business concerns;

 

·potential losses resulting from undiscovered liabilities of acquired companies that are not covered by the indemnification we may obtain from the seller;

 

·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 percentage of ownership of our existing shareholders;

 

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·loss of key employees;

 

·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;

 

·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;

 

·integration and support of preexisting supplier, distribution and customer relationships;

 

·the presence or absence of adequate internal controls and/or fraud in the financial systems of acquired companies;

 

·difficulties in achieving business and financial success including spending time and money investigating and negotiating with potential targets that may not be completed; and

 

·new technologies and products may be developed which cause businesses or assets we acquire to become less valuable.

 

In the event that an acquired business or technology or an alliance does not meet our expectations, 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:

 

·difficulties in the separation of operations, services, products and personnel; and

 

·the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture.

 

We continually evaluate the performance and strategic fit of our businesses and operating facilities. Any divestitures 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. We may not be successful in managing these or any other significant risks that we encounter in divesting a business, site or product line, and as a result, we may not achieve some or all of the expected benefits of the divestiture.

 

We may experience disruptions in or the inability to source raw materials to support our production processes or to deliver goods to our customers.

 

We rely on independent suppliers for key raw materials, consisting primarily of various chemicals. We generally use raw materials available from more than one source and do not enter into long-term contracts for such materials. We could experience inventory shortages if we were required to use an alternative manufacturer on short notice, which could lead to raw materials being purchased on less favorable terms than we have with our regular supplier. Additionally, we rely on various third-party delivery services to transport both goods from our vendors and finished products to our customers. A disruption in our ability to source or transport materials could delay or halt production and delivery of certain of our products thereby adversely impacting our ability to market and sell such products and our ability to compete.

 

Our sales forecast and/or revenue projections may not be accurate.

 

We use a backlog system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate a customer will make a purchase decision and the potential size of the order. We aggregate these estimates on a quarterly basis in order to generate a sales backlog. While this process provides us with some guidance in business planning and forecasting, it is based on estimates only and is therefore subject to risks and uncertainties. We believe our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons. First, contracts vary in duration, and as such the timing and amount of revenues recognized from backlog can vary from period to period. Second, 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 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.

 

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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, 2015, revenues from GE Healthcare, our largest customer, represented approximately 11% of our contract revenue, or 10% of our total revenue. During the year ended December 31, 2014, revenues from our largest customer represented approximately 13% of our contract revenue, or 11% of our total revenue. Our existing agreement with this customer extends through 2018. In total, our five largest customers in 2015 represented approximately 26% of our contract revenue and 25% of our total revenue. These customers, along with most of our other customers, typically may cancel their contracts with 30 days’ to two-years’ prior notice, depending on the size of the contract, for a variety of reasons, some of which are beyond our control. If any one of our major customers cancels its contract with us, our contract revenues may materially decrease.

 

We have a significant amount of indebtedness. We may not be able to generate enough cash flow from our operations to service our indebtedness, we may fail to meet our current credit facility’s financial covenants and we may incur additional indebtedness in the future, which could each adversely affect our business, financial condition and results of operations.

 

We have a significant amount of indebtedness, including $150.0 million in aggregate principal with additional accrued interest under our Convertible Senior Notes due 2018, a $200.0 million term loan, $30.0 million under our revolving line of credit under our existing credit facility and approximately $39.7 million in Gadea related debt. Our ability to make payments on, and to refinance, our indebtedness, and to fund planned capital expenditures, research and development efforts, working capital, acquisitions and other general corporate purposes depends on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory and other factors, some of which are beyond our control. If we do not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to pay our indebtedness, including payments of principal upon conversion of outstanding convertible notes or on their maturity or in connection with a transaction involving us that constitutes a fundamental change under the indenture governing the convertible notes, or to fund our liquidity needs, we may be forced to refinance all or a portion of our indebtedness, including the convertible notes, on or before the maturity thereof, sell assets, reduce or delay capital expenditures, seek to raise additional capital or take other similar actions. We may not be able to execute any of these actions on commercially reasonable terms or at all. Our ability to refinance our indebtedness will depend on our financial condition at the time, the restrictions in the instruments governing our indebtedness and other factors, including market conditions. In addition, in the event of a default under the convertible notes, the holders and/or the trustee under the indentures governing the convertible notes may accelerate the payment obligations under the convertible notes, which could have a material adverse effect on our business, financial condition and results of operations. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would likely have an adverse effect, which could be material, on our business, financial condition and results of operations.

 

In addition, our significant indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:  

 

·make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;

 

·limit our flexibility in planning for, or reacting to, changes in our business and our industry;

 

·place us at a disadvantage compared to our competitors who have less debt; and

 

·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 due 2018, we are required to offer to repurchase the convertible notes upon the occurrence of a fundamental change, which could include, among other things, any acquisition of us for consideration other than publicly traded securities. The repurchase price must be paid in cash, and this obligation may have the effect of discouraging, delaying or preventing an acquisition of the Company that would otherwise be beneficial to our security holders.

 

Pharmaceutical and biotechnology companies may discontinue or decrease their usage of our services.

 

We depend on pharmaceutical and biotechnology companies that use our services for a large portion of our revenues. Although there has been a trend among pharmaceutical and biotechnology companies to outsource drug research and development functions, this trend may not continue. We have experienced increasing pressure on the part of our customers to reduce expenses, including the use of our services, as a result of negative economic trends generally and more specifically in the pharmaceutical industry.

 

We may be adversely affected in future periods as a result of general economic and/or pharmaceutical industry downturns which may result in a diminished availability of liquidity in the marketplace. If pharmaceutical and biotechnology companies discontinue or decrease their usage of our services, including as a result of a slowdown in the overall global economy, our revenues and earnings could be lower than we currently expect and our revenues may decrease or not grow at historical rates.

 

We face increased competition.

 

We compete directly with the in-house research and manufacturing departments of pharmaceutical companies and biotechnology companies, as well as contract research companies, and research and academic institutions. We also experience significant competition from foreign companies operating under lower cost structures, primarily those in China and other Asian countries. While we operate in certain lower relative cost jurisdictions, such as India and Singapore, we do not have operations in China. Many of our competitors have greater financial and other resources than we have. As new companies enter the market and as more advanced technologies become available, we currently expect to face increased competition. In the future, any one of our competitors may develop technological advances that render the services that we provide obsolete. While we plan to develop technologies, which will give us competitive advantages, our competitors plan to do the same. We may not be able to develop the technologies we need to successfully compete in the future, and our competitors may be able to develop such technologies before we do or provide those services at a lower cost. Consequently, we may not be able to successfully compete in the future.

 

Along with significat 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.

 

Factors we consider important which could result in long-lived asset impairment include 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; and

 

·a significant decrease in the market value of assets.

 

In April 2015, we recorded non-cash fixed asset charges of $3.1 million in our API segment primarily related to the closing of our Holywell, UK facility. Also in 2015, we recorded a non-cash fixed asset charge of $0.6 million related to our facility in Syracuse, NY.

 

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.

 

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Agreements we have with our employees, customers, consultants and other third parties may not afford adequate protection for our valuable intellectual property, confidential information and other proprietary information.

 

Some of the most valuable assets to the company and its customers include patents. In addition to patent protection, we also rely on trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our customer’s information, such as trade secrets, proprietary information and other customer confidential information, as well as our own, we require our employees, consultants and advisors to execute confidentiality and proprietary information agreements. However, these agreements may not provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure. Furthermore, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all proprietary information of their previous employers, these individuals, or we, may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques causing some technologies that we develop to be patented by other companies. Our failure to protect our proprietary information and techniques may inhibit our ability to compete effectively and our investment in those technologies may not yield the benefits we expected. In addition, we may be subject to claims that we are infringing on the intellectual property of others. We could incur significant costs defending such claims and if we are unsuccessful in defending these claims, we may be subject to liability for infringement. To the extent that we are unable to protect confidential customer information, we may encounter material harm to our reputation and to our business.

 

We may not be able to effectively manage our international operations.

 

There are significant risks associated with the establishment of foreign operations, including, but not limited to: geopolitical risks, foreign currency exchange rates and the impact of shifts in the U.S. and local economies on those rates, compliance with local laws and regulations, the protection of our intellectual property and that of our customers, the ability to integrate our corporate culture with local customs and cultures, and the ability to effectively and efficiently supply our international facilities with the required equipment and materials. If we are unable to effectively manage these risks, these locations may not produce the revenues, earnings, or strategic benefits that we anticipate, or we may be subject to fines or other regulatory actions if we do not comply with local laws and regulations, which could have a material adverse effect on our business.

 

Delays in, or failure of, the approval of our customers’ regulatory submissions could impact our revenue and earnings.

 

The successful transition of clinical and preclinical candidates into long term commercial supply agreements is a key component of the Drug Product and API business strategy. If our customers do not receive approval of their FDA regulatory submissions, this could have a significant negative impact on our revenue and earnings. In addition, the manufacture of controlled substances requires timely approval by the DEA of sufficient controlled substance quota. If we do not receive sufficient DEA quota to meet our customers’ demands, and/or if our customers do not receive sufficient quota to take delivery of and/or formulate the product at their facilities, this could have a significant negative impact on our revenue and earnings.

 

We may not be able to recruit and retain the highly skilled employees we need.

 

Our future growth and profitability depends upon the research and efforts of our highly skilled employees, such as our scientists, and their ability to keep pace with changes in drug discovery and development technologies. We compete vigorously with pharmaceutical firms, biotechnology firms, contract research firms, and academic and research institutions to recruit scientists. If we cannot recruit and retain scientists and other highly skilled employees, we will not be able to continue our existing services and will not be able to expand the services we offer to our customers.

 

We may lose one or more of our key employees.

 

Our business is highly dependent on our senior management and scientific staff, including:

 

·William Marth, our Chief Executive Officer and President;

 

·George Svokos, our Senior Vice President and Chief Operating Officer;

 

·Felicia Ladin, our Senior Vice President, Chief Financial Officer and Treasurer;

 

·Steven R. Hagen, Ph.D., our Senior Vice President, Manufacturing and Pharmaceuticals; and

 

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·Lori M. Henderson, our Senior Vice President, General Counsel and Secretary.

 

The loss of any of our key employees, including our scientists, may have a material adverse effect on our business.

 

We may be held liable for harm caused by drugs that we develop and test.

 

We develop, test and manufacture drugs that are used by humans. If any of the drugs that we develop, test or manufacture harm people, we may be required to pay damages. Although we carry liability insurance, we may be required to pay damages in excess of the amounts of our insurance coverage. Damages awarded in a product liability action could be substantial and could have a material adverse effect on our financial condition.

 

We may be liable for contamination or other harm caused by hazardous materials that we use.

 

Our manufacturing and research and development processes involve the use of hazardous or potentially hazardous materials and substances. We are subject to Federal, state and local laws and regulation governing the use, manufacture, handling, storage and disposal of such materials, including but not limited to radioactive compounds and certain waste products. Additionally, we are subject to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and emissions and wastewater discharges. Although we believe that our activities currently comply with the standards prescribed by such laws and regulations, we cannot completely eliminate the risk of contamination or injury resulting from these materials. We may incur liability as a result of any contamination or injury. In addition, we cannot predict the extent of regulations that might result from any future legislative or administrative actions, therefore we could be required to incur significant costs to comply with environmental laws and regulations and these actions could restrict our operations in the future. Such expenses, liabilities or restrictions could have a material adverse effect on our operations and financial condition.

 

We completed an environmental remediation assessment associated with groundwater contamination at our Rensselaer, New York location. This contamination is associated with past practices at the facility prior to 1990, and prior to our investment or ownership of the facility. Ongoing costs associated with the remediation include biannual monitoring and reporting to the State of New York’s Department of Environmental Conservation. Under the remediation plan, we were responsible for payment of monitoring and reporting into 2019. Under a 1999 agreement with the facility’s previous owner, our maximum liability under the remediation is $5.5 million. If the State of New York Department of Environmental Conservation finds that we fail to comply with the appropriate regulatory standards, it may impose fines on us which could have a material adverse effect on our operations.

 

Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our facilities.

 

We depend on our laboratories, factories and equipment for the continued operation of our business. Our research and development, manufacturing and all administrative functions are primarily conducted at our facilities in Albany and Rensselaer, New York, Albuquerque, New Mexico, Valladolid, Spain, 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. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event at any of our facilities could have a significant negative impact on our operations.

 

Terrorist attacks or acts of war may seriously harm our business.

 

Terrorist attacks or acts of war may cause damage or disruption to our company, our employees, our facilities and our customers, which could significantly impact our revenues, costs and expenses and financial condition. The potential for terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties, which could materially adversely affect our business, results of operations, and financial condition in ways that we currently cannot predict.

 

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Our systems and networks may be subject to cyber security breaches and other disruptions that could compromise our information 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. The secure processing and maintenance of this information is critical to our operations and business strategy. Our security measures could be compromised and, as a result, our data, customers’ data, information technology or infrastructure could be accessed improperly, made unavailable, improperly modified, corrupted by computer hackers, nefarious actors, computer viruses or other malicious software programs that could attack our servers, or could be breached due to employee error or malfeasance, all of which could create system disruptions and cause shutdowns or denials of service. This is also true for third-party products or services that we use. In addition, subcontractors, teaming 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 customers’ protected information. The occurrence of any of these events could cause our services to be perceived as vulnerable, cause our customers to lose confidence in our services, negatively affect our ability to attract new customers, cause existing customers to terminate or not renew their agreements with us or damage our reputation, 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 cyber security breach, including repairing system damage, increasing cyber security protection costs by deploying additional personnel and protection technologies, paying regulatory fines and litigating 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 incorporate some of our products, which in turn, could reduce the demand for or amounts that they have available to retain our services.

 

We depend on contracts with pharmaceutical and biotechnology companies for a majority of our revenues. We therefore depend upon the ability of pharmaceutical and biotechnology companies to earn enough profit on the drugs they market to devote substantial resources to the research and development of new drugs. Additionally, we rely on our collaborative partners to obtain acceptable prices or an adequate level of reimbursement for our current and potential future products. Continued efforts of government and third-party payors to contain or reduce the cost of health care through various means, could affect our levels of revenues and earnings. In certain foreign markets, pricing and/or profitability of pharmaceutical products are subject to governmental control. Domestically, there have been and may continue to be proposals to implement similar governmental control. Future legislation may limit the prices pharmaceutical and biotechnology companies can charge for the drugs they market and cost control initiatives could affect the amounts that third-party payors agree to reimburse for those drugs. There is no assurance that our collaborative partners will be able to obtain acceptable prices for our products which would allow us to sell these products on a competitive and profitable basis. As a result, such laws and initiatives may have the effect of reducing the resources that pharmaceutical and biotechnology companies can devote to the research and development of new drugs. If pharmaceutical and biotechnology companies decrease the resources they devote to the research and development of new drugs, the amount of services that we perform, and therefore our revenues, could be reduced.

 

The ability of our stockholders to control our policies and effect a change of control of our company is limited, which may not be in every shareholder’s best interests.

 

There are provisions in our certificate of incorporation and bylaws which may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

 

·Our certificate of incorporation provides for three classes of directors with the term of office of one class expiring each year, commonly referred to as a “staggered board.” By preventing stockholders from voting on the election of more than one class of directors at any annual meeting of stockholders, this provision may have the effect of keeping the current members of our board of directors in control for a longer period of time than stockholders may desire.

 

·Our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control.

 

 19 

 

 

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock.

 

Our officers and directors have significant control over us and their interests as shareholders may differ from our other shareholders.

 

As of February 29, 2016, our directors and officers beneficially owned or controlled approximately 27.7% of our outstanding common stock. Individually and in the aggregate, these stockholders significantly influence our management, affairs and all matters requiring stockholder approval. In particular, this concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of us and may adversely affect the market price of our common stock.

 

Our stock price is volatile and could experience substantial change.

 

The market price of our common stock has historically experienced and may continue to experience volatility. Our quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially.

 

Because we do not intend to pay dividends, our shareholders will benefit from an investment in our common stock only if it appreciates in value.

 

We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of our shareholders’ investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which shareholders purchased their shares.

 

We may experience significant increases in operational costs beyond our control.

 

Costs for certain items which are needed to run our business, such as energy and certain materials, have the potential to fluctuate. As these cost increases are often dependent on market conditions, and although we do our best to manage these price increases, we may experience increases in our costs due to the volatility of prices and market conditions. Increases in these costs could negatively impact our results of operations to the extent that we are unable to incorporate these increases into the pricing of our goods and services.

 

Our business may be adversely affected if we encounter complications in connection with 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, 2015, we began to implement a global, enterprise wide ERP system. The gradual implementation is expected to occur in phases over the next several years. The implementation of a worldwide ERP system will likely affect 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 integrated, wide-scale 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.

 

We are subject to foreign currency risks.

 

Our global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors. If we fail to effectively manage such risks, it could have a negative impact on our consolidated financial statements. Our acquisitions of Gadea, with operations in Spain, and Aptuit’s Glasgow, UK business heighten our exposure to foreign market risks. For a further discussion of our foreign currency risks, please see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.

 

 20 

 

 

A reduction or delay in government funding of research and development may adversely affect our business.

 

A portion of our overall revenue is derived either from governmental sources directly, such as the U.S. National Institutes of Health (“NIH”), or indirectly, from customers whose funding is partially dependent on both the level and timing of funding from government sources. A reduction in government funding for the NIH or other government research agencies could adversely affect our business and our financial results and there is no guarantee that government funding will be directed towards projects and studies that require use of our services.

 

Our business is subject to risks relating to operating internationally.

 

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 36%, 32% and 40% of our total contract revenue in 2015, 2014, and 2013, respectively. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks associated with our international business including:

 

·foreign currencies we receive for sales and in which we record expenses outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue and cash flow (and increase the amount of expenses) that we recognize and cause fluctuations in reported financial results;

 

·certain contracts are denominated in currencies other than the currency in which we incur expenses related to those contracts and where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations;

 

·general economic and political conditions in the markets in which we operate;

 

·potential international conflicts, including terrorist acts;

 

·potential trade restrictions, exchange controls, adverse tax consequences, and legal restrictions on the repatriation of funds into the U.S.;

 

·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;

 

·unexpected changes in regulatory requirements;

 

·the difficulties of compliance with a wide variety of foreign laws and regulations;

 

·unfavorable labor regulations in foreign jurisdictions;

 

·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;

 

·exposure to business disruption or property damage due to geographically unique natural disasters;

 

·longer accounts receivable cycles in certain foreign countries; and

 

·import and export licensing requirements. 

 

 21 

 

 

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.

 

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 its 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 including those related to the Albuquerque business interruption event in the third quarter of 2014, 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.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.    PROPERTIES.

 

The aggregate square footage of our operating facilities is approximately 1,856,000 square feet, of which 1,497,000 square feet are owned and 359,000 square feet are leased. Set forth below is information on our principal facilities:

 

Location   Square Feet   Segment   Primary Purpose
Rensselaer, New York   276,000   API   Contract Manufacturing 
Zamora, Spain   259,000   API   Contract Manufacturing 
Albuquerque, New Mexico   226,000   DPM   Contract Manufacturing 
Aurangabad, India   208,000   API   Contract Manufacturing
Valladolid, Spain   182,000   API   Contract Manufacturing 
Albany, New York   169,000   DDS,API   Contract Manufacturing, Contract Research and Administration
Leon, Spain   97,000   API, DPM   Contract Manufacturing
Holywell, United Kingdom   68,000   API   Contract Manufacturing & Contract Research 
East Greenbush, New York   64,000   API   Contract Research 
Hyderabad, India   54,000   DDS   Contract Research
West Lafayette, Indiana   49,000   DDS   Contract Manufacturing
Burlington, Massachusetts   46,000   DPM   Contract Manufacturing
Grafton, Wisconsin   43,000   API   Contract Manufacturing
Zejtun, Malta   31,000   API   Contract Research
Glasgow, UK   30,000   DPM   Contract Manufacturing
Singapore   30,000   DDS   Contract Research 
Lebanon, New Jersey   18,000   DDS   Contract Research
Waltham, Massachusetts   4,000   Corporate   Administration
Buffalo, New York   2,000   DDS   Contract Research

 

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 2016.

 

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.

 

 22 

 

 

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.  The complaint alleges claims under the Securities Exchange Act of 1934 arising from the Company’s August 5, 2014 announcement of its financial results for the second quarter of 2014, including that the OsoBio New Mexico facility experienced a power interruption in July 2014, which would have a material impact on the Company’s results.  The complaint alleges that the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and seeks certification as a class action, unspecified monetary damages and attorneys’ fees and costs. The complaint was amended on March 31, 2015 to request certification of a class of investors during the period between August 5, 2014 and November 5, 2014. On October 2, 2015, the Company submitted a motion to dismiss the complaint, as amended.

 

The Company has settled all of the pending United States and foreign litigations surrounding the marketing of generic versions of Allegra and Allegra-D products. All of the prior legal proceedings have been settled or resolved to the mutual satisfaction of the parties and the related litigations have been dismissed by the mutual consent of the parties. The Company, along with Aventis Pharmaceuticals Inc., the U.S. pharmaceutical business of Sanofi, pursued those prior legal proceedings against several companies seeking to market or which are currently marketing generic versions of Allegra and Allegra-D products. In accordance with the Company’s agreements with Sanofi, Sanofi bears the external legal fees and expenses for these legal proceedings, but in general, the Company must consent to any settlement or other arrangement with any third party. Under those same agreements, the Company received royalties from Sanofi and certain approved sub-licensees on U.S. Patent No. 5,578,610 until it expired in November 2013, and received royalties on U.S. Patent No. 5,750,703 until its expiration in 2015.

 

ITEM 4.    MINE SAFETY DISCLOSURES.

 

None.

 

 23 

 

 

PART II

 

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

(a)     Market Information. Our Common Stock is traded on the NASDAQ Global Market (“NASDAQ”) under the symbol “AMRI.” The following table sets forth the high and low closing prices for our Common Stock as reported by NASDAQ for the periods indicated:

 

Period  High   Low 
Year ending December 31, 2015          
First Quarter  $19.08   $15.07 
Second Quarter  $20.80   $17.72 
Third Quarter  $22.20   $17.23 
Fourth Quarter  $20.50   $17.08 
           
Year ending December 31, 2014          
First Quarter  $19.91   $10.16 
Second Quarter  $20.12   $14.63 
Third Quarter  $22.89   $18.70 
Fourth Quarter  $23.26   $14.19 

 

Stock Performance Graph

 

The following graph provides a comparison, from December 31, 2010 through December 31, 2015, of the cumulative total stockholder return (assuming reinvestment of any dividends) among the Company, NASDAQ OMX Global Indexes (the “NASDAQ Index”) and the “NASDAQ Pharmaceuticals Index”, respectively (the “Pharmaceuticals Index”). The historical information set forth below is not necessarily indicative of future performance.

 

 

 

  

Albany Molecular

Research, Inc.

   NASDAQ Stock
Market (U.S.
Companies) Index
    NASDAQ Pharmaceutical
 Index
 
December 31, 2010   100.000    100.000    100.000 
December 31, 2011   52.135    100.311    117.484 
December 31, 2012   93.950    116.792    134.308 
December 31, 2013   179.359    153.773    182.234 
December 31, 2014   289.680    175.326    221.991 
December 31, 2015   353.203    176.169    234.054 

 

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(b)Holders.

 

The number of record holders of our Common Stock as of February 29, 2016 was approximately 232. We believe that the number of beneficial owners of our Common Stock at that date was substantially greater than 232.

 

(c)Dividends.

 

We have not declared any cash dividends on our Common Stock since our inception in 1991. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future.

 

(d)Equity Compensation Plan Information.

 

The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, 2015:

Plan Category  (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants
and rights
   (b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
   (c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
Equity compensation plans approved by security holders(1)   1,438,940   $8.20    3,981,232(2)
Equity compensation plans not approved by security holders            
Total   1,438,940   $8.20    3,981,232 

 

(1)Consists of our 1998 Stock Option Plan, 2008 Stock Option Plan and Employee Stock Purchase Plan (“ESPP”). Does not include purchase rights accruing under the ESPP because the purchase price (and therefore the number of shares to be purchased) will not be determined until the end of the purchase period.

 

(2)Includes 3,416,706 shares available under the 2008 Stock Option Plan and 564,526 shares available under the ESPP.

 

(e)Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

 25 

 

 

The following table represents treasury share repurchases during the three months ended December 31, 2015:

 

Period  (a)
Total Number
of Shares
Purchased (1)
   (b)
Average Price
Paid Per
Share
   (c)
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
   (d)
Maximum
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Program
 
October 1, 2015 – October 31, 2015   2,147   $17.93    N/A    N/A 
November 1, 2015 – November 30, 2015      $    N/A    N/A 
December 1, 2015 – December 31, 2015      $    N/A    N/A 
Total   2,147   $17.93    N/A    N/A 

 

(1) Consists of shares repurchased by the Company for certain employees’ restricted stock that vested in order to satisfy minimum tax withholding obligations that arose on the vesting of the restricted stock.

 

(e)     Recent Sales of Unregistered Securities and Equity Purchases by the Company

 

In connection the Company’s acquisition of Gadea in July 2015, the Company issued and sold an aggregate of 2,200,000 unregistered shares of the Company’s common stock to the stockholders of Gadea (in addition to cash consideration) in exchange for 100% of Gadea’s capital stock.

 

In connection with the Gadea acquisition, the Company entered into a Registration Rights Agreement with 3-Gutinever, S.L. (“3-Gutinever”), a stockholder of Gadea, pursuant to which the Company agreed to (i) file a registration statement (the “Demand Registration Statement”) with the Securities and Exchange Commission covering the resale of the 2,200,000 shares of common stock, no later than 30 days following the receipt of a demand notice from 3-Gutinever during the period from 9 months after the closing of the Gadea acquisition and the earlier of (A) the two (2) year anniversary of the closing of the Gadea acquisition or (B) the date on which the number of shares held by the certain participating stockholders is less than 1,000,000, and (ii) use commercially reasonable efforts, subject to receipt of necessary information from 3-Gutinever, to cause the Securities and Exchange Commission to declare the Demand Registration Statement effective. The Company also granted piggyback registration rights to 3-Gutinever.

 

The 2,200,000 shares of common stock were offered and sold outside the United States to an eligible investor pursuant to Regulation S of the Securities Act of 1933, as amended.

 

 26 

 

 

ITEM 6.    SELECTED FINANCIAL DATA.

 

The selected financial data shown below for the years ended December 31, 2015, 2014 and 2013, and as of December 31, 2015 and 2014, have been derived from our audited consolidated financial statements included in this Form 10-K. The selected financial data set forth below for the years ended December 31, 2012 and 2011 and as of December 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements for those years, which are not included in this Form 10-K. The information should be read in conjunction with the our audited Consolidated Financial Statements and related notes and other financial information included herein, including Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

   As of and for the Year Ended December 31, 
   2015   2014   2013   2012   2011 
   (in thousands, except per share data) 
Consolidated Statement of Operations Data:                    
Contract revenue  $384,738   $250,704   $210,001   $189,858   $169,611 
Recurring royalties   17,618    25,867    36,574    35,988    35,034 
Milestone revenue               840    3,000 
Total revenue   402,356    276,571    246,575    226,686    207,645 
Cost of contract revenue   295,527    209,193    171,923    168,064    168,470 
Technology incentive award   554    1,621    2,767    3,143    3,557 
Research and development   5,474    1,004    414    906    7,939 
Selling, general and administrative   77,394    48,897    42,256    40,904    41,071 
Postretirement benefit plan settlement gain       (1,285)            
Goodwill impairment                   15,812 
Impairment charges   3,770    7,835    1,857    8,334    5,530 
Restructuring charges   5,988    3,582    7,183    4,632    1,271 
Arbitration charge                   127 
Total costs and expenses   388,707    270,847    226,400    225,983    243,777 
Income (loss) from operations   13,649    5,724    20,175    703    (36,132)
Interest (expense) income, net   (19,338)   (10,957)   (1,244)   (454)   (583)
Other (expense) income, net   2,220    (235)   772    (130)   77 
(Loss) income before income tax (benefit) expense   (3,469)   (5,468)   19,703    119    (36,638)
Income tax (benefit) expense   (1,168)   (2,190)   7,935    4,380    (3,266)
Net (loss) income  $(2,301)  $(3,278)  $11,768   $(4,261)  $(33,372)
Basic (loss) income per share  $(0.07)  $(0.10)  $0.38   $(0.14)  $(1.11)
Diluted (loss) income per share  $(0.07)  $(0.10)  $0.37   $(0.14)  $(1.11)
Weighted average common shares outstanding, basic   33,169    31,526    30,912    30,318    29,961 
Weighted average common shares outstanding, diluted   33,169    31,526    31,845    30,318    29,961 
Consolidated Balance Sheet Data:                         
Cash, cash equivalents and investment securities - unrestricted  $49,343   $46,995   $175,928   $23,293   $20,198 
Property and equipment, net   209,508    165,475    127,775    135,519    149,729 
Working capital    181,149    139,851    228,626    73,097    58,421 
Total assets    865,567    515,868    440,184    262,161    262,558 
Long-term debt, excluding current installments    373,692    155,895    118,050    6,526    2,391 
Total stockholders’ equity    287,223    241,822    240,757    202,106    202,883 
Other Consolidated Data:                         
Capital expenditures   $22,041   $17,189   $11,135   $9,890   $10,837 

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which updated guidance to clarify the required presentation of debt issuance costs.   The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.   We have retrospectively adopted this ASU during 2015 which has reduced working capital by $3,870, $2,471, $1,544, $306 and $612 at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.

 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

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 manufacturing of active pharmaceutical ingredients and the manufacturing of drug product 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.

 

We continue to integrate our research and manufacturing facilities worldwide, increasing our access to key global markets and enabling us to provide our customers with a flexible combination of high quality services and competitive cost structures to meet their individual outsourcing needs.  Our service offerings range from early stage discovery through formulation and manufacturing. We believe that the ability to partner with a single provider is of significant benefit to our customers as we are able to provide them with a more efficient transition of experimental compounds through the research and development process, ultimately reducing the time and cost involved in bringing these compounds from concept to market. Compounds 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 customers’ facility allowing the customer to cost-effectively leverage their unused laboratory space.

 

As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. We use a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging the Company’s 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.

 

Over the last few years, we have implemented a number of organizational and rationalization initiatives and acquired new businesses to better align our operations to most efficiently support our customers’ needs and grow our revenue and overall profitability. The goal of these restructuring activities has been to advance our strategy of increasing global competitiveness and managing costs by aligning resources to meet shifting customer demand and market preferences, while optimizing our location footprint. Our acquisitions enhance and complement our existing service offerings and have contributed to our growth.

 

We may consider additional acquisitions that enhance or complement our existing service offerings. In addition to growing organically, any acquisitions would generally be expected to contribute to our growth by integrating with and expanding our current services, or adding services within the drug discovery, development and manufacturing life cycle. During 2015, we have entered into acquisition transactions with Whitehouse Labs in December, Gadea in July, SSCI in February and Glasgow in January, all of which have contributed to our results of operations and will continue to contribute to our future operations.

 

Our backlog of open manufacturing orders and accepted service contracts was $173.8 million at December 31, 2015 as compared to $159.7 million at December 31, 2014. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

 

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Our total revenue for 2015 was $402.3 million, including $384.7 million from our contract service business and $17.6 million from royalties on sales of Allegra/Telfast, certain products sold by Actavis, Inc. (“Actavis”) and certain royalties paid to Gadea. We generated $39.6 million in cash from operations, and we used $199.6 million for the acquisitions of Whitehouse, Gadea, SSCI and Glasgow, and $22.0 million for capital expenditures on our facilities and equipment, primarily related to maintaining and upgrading our U.S. facilities. Our net loss was $2.3 million in 2015, largely due to the impact of impairment charges related to improving our global footprint and restructuring charges related to the closing of the Holywell, UK facility and optimizing the footprint at the Singapore facility. As of December 31, 2015, we had $52.3 million in cash and cash equivalents and restricted cash and $421.8 million in bank and other related debt (at face value).

 

Results of Operations

 

Operating Segment Data

 

We have organized our operations into the Discovery and Development Services (“DDS”), Active Pharmaceutical Ingredients (“API”) and Drug Product Manufacturing (“DPM”) segments. DDS includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. DPM includes pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable and opthalmic formulations. 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. A portion of 2014 contract revenue and cost of revenue was reclassified from DDS to API to better align with the business activities within our reporting segments.

 

In the third quarter of 2015, we acquired all the outstanding shares of Gadea, a privately-held company located in Valladolid, Spain. The purchase price was $126.9 million (net of cash acquired of $10.9 million), which included the issuance of 2.2 million shares of common stock, valued at $40.6 million, with the balance comprised of $97.0 million in cash plus a working capital adjustment. Gadea, along with their Crystal Pharma division, is widely recognized as an industry leader in the development and manufacture of technically complex API and finished drug product. Gadea significantly expands our API portfolio and extends our development and manufacturing capabilities in steroids, hormones and sterile API. Gadea also augments our sterile drug product offerings with the addition of ophthalmic and parental suspension dosage forms. Gadea’s central location in Europe and extensive customer base, provides us with a strong footprint for sales and operations and significantly expands our presence into non-US markets.

 

Contract Revenue

 

Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Our contract revenues for our DDS, API and DPM segments were as follows:

 

   Year Ended December 31, 
   2015   2014   2013 
   (in thousands) 
DDS  $89,973   $74,611   $77,418 
API   204,868    146,474    125,870 
DPM   89,897    29,619    6,713 
Total  $384,738   $250,704   $210,001 

 

DDS contract revenue for 2015 increased from 2014 primarily due to incremental revenue of $14.9 million from our acquisition of the Solid State Chemical Information (“SSCI”) business in February 2015. We currently expect DDS contract revenue for full year 2016 to increase from amounts in 2015 driven by higher demand for our services due partially to the launch of the integrated discovery facility in Buffalo, New York, new activities undertaken as well as incremental revenue from our December 2015 acquisition of Whitehouse Laboratories (“Whitehouse”).

 

DDS contract revenue for the year ended December 31, 2014 decreased from 2013 primarily due to decreases in U.S. chemistry and biology services, partially offset by an increase in U.S. development and small-scale services.

 

API contract revenue for the year ended December 31, 2015 increased from 2014 primarily due to $6.5 million of incremental revenue from the Cedarburg acquisition in April 2014, incremental revenues from our July 2015 acquisition of Gadea of $41.4 million, increased demand for our commercial and clinical manufacturing services in the U.S. and improved pricing. We currently expect continued growth in API contract revenue for full year 2016 due to on-going demand for our commercial and clinical manufacturing services worldwide and incremental revenue from a full year of Gadea operations.

 

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API contract revenue for the year ended December 31, 2014 increased from 2013 primarily due to an increase in demand at our existing manufacturing facilities as well as incremental revenue of $9.9 million from the Cedarburg acquisition in April 2014.

 

DPM contract revenue for the year ended December 31, 2015 increased from 2014 due to incremental revenue of $36.7 million from a full year of revenue from OsoBio which we acquired in July 2014, $15.6 million from our acquisition of the Glasgow, U.K. facility in January 2015, and increased demand and pricing at our Burlington, MA facility. Additionally, during 2014, DPM contract revenues at OsoBio were impacted due to a business interruption at the Albuquerque, NM facility. We currently expect continued growth in DPM contract revenue for full year 2016, based on continued demand for our commercial and development services as well as a full year of revenue from our acquisition of Gadea in July 2015.

 

DPM revenue for the year ended December 31, 2014 increased from 2013 due to $16.7 million in revenue from the acquisition of OsoBio, as well as increased demand at our Burlington, MA facility.

 

Recurring royalty revenue

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$17,618   $25,867   $36,574 

 

Our recurring royalties consisted of a royalty on worldwide sales of Allegra/Telfast and Sanofi over-the-counter product and authorized generics. Additionally, we earn recurring royalty revenue in conjunction with a Development and Supply Agreement with Allergan. During the third quarter of 2015, we began earning royalties under an agreement with a customer of Gadea. Recurring royalties decreased during the year ended December 31, 2015 as compared to 2014 as a result of patent expirations associated with Allegra/Telfast during the second quarter of 2015. These amounts were partially offset by an increase in the other royalties during the period. We currently expect full year 2016 recurring royalties to further decline due to the expiration of the patents underlying the Allegra royalties in the second quarter of 2015.  Beginning in 2016, we will be reflecting royalties within the results of the operating segment, rather than within a corporate royalty line item.

 

The recurring royalties on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. All patents covered by our license agreements have expired during the second quarter of 2015, and we will not receive any additional royalties on the sales of fexofenadine product in future periods.

 

Recurring royalties decreased during the year ended December 31, 2014 from 2013 primarily due to the introduction of generic fexofenadine in Japan. Additionally, there was a decrease in Allegra royalties as a result of patent expirations that began in late 2013, as well as a less severe allergy season in Japan in 2014.

 

Cost of Contract Revenue

 

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

  

   Year Ended December 31, 
   2015   2014   2013 
   (in thousands) 
DDS   $66,508   $60,101   $66,604 
API    154,670    114,171    95,144 
DPM   74,349    34,921    10,175 
Total   $295,527   $209,193   $171,923 
DDS Gross Contract Margin    26.1%   19.4%   14.0%
API Gross Contract Margin    24.5%   22.1%   24.4%
DPM Gross Contract Margin   17.3%   (17.9)%   (51.6)%
Total Gross Contract Margin    23.2%   16.6%   18.1%

 

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DDS contract revenue gross margin percentage increased for the year ended December 31, 2015 compared to 2014 due to the margins realized on SSCI revenues, as well as the benefits of cost reduction initiatives and facility optimization. We currently expect DDS contract margin percentage for 2016 to improve over amounts recognized in 2015 based on mix of activities.

 

DDS contract revenue gross margin percentage increased for the year ended December 31, 2014 compared to 2013. The increase was primarily due to cost reduction initiatives and facility optimization.

 

API’s contract revenue gross margin percentage increased for the year ended December 31, 2015 compared to 2014. This was due to our acquisition of Gadea in July of 2015 and the mix of business within the segment. We currently expect improvement in API contract margins for 2016 driven by an increase in capacity utilization at all of our large-scale facilities worldwide and a full year of Gadea operations.

 

API’s contract revenue gross margin percentage decreased for the year ended December 31, 2014 compared to 2013 due to lower facility utilization as well as an increase in lower margin commercial sales.

 

DPM contract revenue gross margin percentage increased for the year ended December 31, 2015 compared to 2014 primarily due to the benefit of the Glasgow business acquired in January 2015 and increased profitability at our Burlington, MA facility. Additionally, during the third quarter of 2014, DPM gross margins at OsoBio were impacted due to a business interruption at the Albuquerque, NM facility. We currently expect continued improvement in DPM contract margins for 2016 based on higher profitability in our Burlington, MA facility and expansion in margins for our commercial products.

 

DPM contract revenue gross margin percentage increased for the year ended December 31, 2014 compared to 2013 primarily due to increases in Burlington, MA revenues in relation to their fixed costs. DPM cost of contract revenue in 2014 includes $6.4 million of business interruption charges at our OsoBio facility which negatively impacted DPM gross contract margin.

 

Technology Incentive Award

 

We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. These royalties from Allegra ceased during the second quarter of 2015 due to the expiration of underlying patents. The incentive awards were as follows:

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$554   $1,621   $2,767 

 

Technology incentive award expense decreased for the years ended December 31, 2015 and 2014 due to the expiration of patents under the Sanofi license agreements.

  

Research and Development

 

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

 

Our R&D activities are primarily in our API segment and relate to the potential manufacture of new products, the development of processes for the manufacture of generic products with commercial potential, and the development of alternative manufacturing processes.

 

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Research and development expenses were as follows:

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$5,474   $1,004   $414 

 

R&D expense for year ended December 31, 2015 increased compared to 2014 relating primarily to development efforts on new APIs and investments in developing generic API and drug products with third party partners. We currently expect 2016 R&D expense to be higher than 2015 in line with our strategy and due to our acquisition of Gadea.

 

R&D expense for the year ended December 31, 2014 increased compared to 2013 relating primarily to development efforts towards new niche generic products and improving process efficiencies in our manufacturing plants.

 

Selling, General and Administrative

 

Selling, general and administrative (“SG&A”) expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows:

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$77,394   $48,897   $42,256 

 

SG&A expenses for the year ended December 31, 2015 increased compared to the same period in 2014 primarily due to costs associated with investments made to grow the business, merger and acquisition activities, including the acquisitions of Glasgow, SSCI, Whitehouse and Gadea, full period SG&A costs from our OsoBio and Cedarburg facilities, as well as incremental SG&A costs, including amortization of identifiable intangible assets, from the acquired businesses. We currently expect SG&A expenses for full year 2016 to increase due to a full year of operations at the facilities we acquired in 2015. In addition, as our business grows, we are making investments in key supporting functions such as corporate quality and compliance, procurement and finance, as well as in training and developing our people. We expect SG&A to remain relatively consistent as a percentage of revenue when compared to 2015.

 

SG&A expenses for the year ended December 31, 2014 increased compared to 2013 primarily due to costs associated with merger and acquisition activities, including the acquisitions of Cedarburg and OsoBio, as well as incremental SG&A costs from the acquired businesses.

 

Impairment Charges

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$3,770   $7,835   $1,857 

 

During the year ended December 31, 2015, we recorded property and equipment impairment charges of $3.2 million in our API segment associated with the Company’s decision to cease operations at our Holywell, U.K. facility. Additionally, during the fourth quarter of 2015, we recorded an impairment charge of $0.6 million in our DDS segment related to our Syracuse, NY building, which closed in 2014 and now is held for sale and being marketed.

 

During 2014, we recorded property and equipment impairment charges of $5.4 million in our DDS segment. Part of the charge was associated with our consolidation of facility resources at our Singapore site, for which we recorded $1.7 million of impairment charges. Additionally, we recorded property and equipment impairment charges of $3.7 million in our DDS segment associated with our decision to cease operations at our Syracuse, New York facility.

 

During the fourth quarter of 2014, as a result of a semi-annual review of our proprietary drug development programs, we concluded that we will no longer actively pursue partnering opportunities for all programs that are not currently partnered and will not continue to fund additional patent filing or required maintenance costs for these programs. Based on the aforementioned conclusions, we recorded intangible asset impairment charges of $2.4 million for the year ended December 31, 2014 in the DDS segment.

 

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During 2013, we recorded total long-lived asset impairment charges of $1.9 million in our DDS segment, consisting of property and equipment impairment charges of $1.3 million related to the disposition of certain moveable equipment located at our former Hungary facility and property and equipment impairment charges of $0.6 million associated with our decision to cease operations at our Bothell, WA facility.

  

Postretirement benefit plan settlement gain

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$—     $(1,285)  $—   

 

In the first quarter of 2014, we recognized a gain on settlement of post-retirement liability in the API segment.

 

Restructuring Charges

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$5,988   $3,582   $7,183 

 

In the first quarter of 2015, we announced a proposal, subject to consultation with our U.K. workforce, to close our U.K. facility in Holywell, Wales, within the API segment, by the fourth quarter of 2015. Additionally, we made additional resource changes at the DDS Singapore site to optimize the cost profile of the facility. These actions were consistent with our ongoing efforts to consolidate our facility resources to more effectively utilize our resource pool and to further reduce our facility cost structure.

 

Restructuring charges for the year ended December 31, 2015 consisted primarily of U.K. termination charges, employee termination costs and transitioning activities at our Singapore facility and costs associated with the transfer of continuing products from the Holywell, U.K. facility to our other manufacturing locations as well as lease termination and other charges associated with the previously announced restructuring at our Syracuse, NY facility.

 

In the third quarter of 2014, we recorded restructuring charges related to our activities to optimize both the Singapore and Hyderabad, India facility’s footprint. In the second quarter of 2014, we announced a restructuring plan, transitioning activities at our Syracuse, NY site to other sites within AMRI and we ceased operations in Syracuse, NY at the end of June 2014. In connection with these activities, we recorded restructuring charges in our DDS operating segment related to termination benefits, lease termination settlements, and additional operating costs related to the Syracuse, NY site.

 

In 2013, we recorded restructuring charges related to our decision to cease operations at our Budapest, Hungary and Bothell, WA facilities within the DDS segment. These activities consisted of termination benefits, lease termination settlements, fees and other administrative costs.

 

Anticipated cash outflow for 2016 related to the restructuring reserves as of December 31, 2015 is approximately $1.9 million.

  

Interest (expense) income, net

 

   Year Ended December 31, 
(in thousands)  2015   2014   2013 
Interest expense  $(19,352)  $(10,960)  $(1,561)
Interest income   14    3    11 
Interest (expense) income, net  $(19,338)  $(10,957)  $(1,550)

 

Net interest expense increased for the year ended December 31, 2015 from 2014 primarily due to increased levels of outstanding debt under our $200 million revolving credit facility and $30 million line of credit used to finance our acquisitions, as well as an increase in the accretion of discount and deferred financing amortization of $1.7 million related to these borrowings.

 

The increase in net interest expense during the year ended December 31, 2014 compared to 2013 was primarily due to interest and accretion related to the issuance of $150.0 million of convertible debt in November 2013, as well as related deferred financing amortization. The non-cash charges for the accretion of discount and deferred financing amortization were $9.0 million, $7.3 million and $0.8 million for the years ended December 31, 2015, 2014, and 2013, respectively.

 

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Other income (expense), net

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$2,220   $(235)  $1,078 

 

Other income for the year ended December 31, 2015 was primarily related to the fluctuation in exchange rates associated with foreign currency transactions. In addition, we had an insurance recovery of $0.6 million related to a business interruption at the OsoBio facility.

 

Other expense of $0.2 million for the year ended December 31, 2014 compared to other income of $1.1 million in 2013 resulted primarily from a foreign currency translation loss of $0.7 million associated with the Hungary legal entity dissolution during December 2014, partially offset by rates associated with foreign currency transactions.

 

Income tax (benefit) expense

 

Year Ended December 31, 
2015   2014   2013 
(in thousands) 
$(1,168)  $(2,190)  $7,935 

 

Income tax (benefit) for the year ended December 31, 2015 decreased as compared to the same periods in 2014 due to increases in U.S. tax losses offset by taxes in newly acquired entities and the lapsing of the tax holiday in Singapore.

 

The company recorded a 2014 income tax benefit of $2.2 million versus an income tax expense in 2013 of $7.9 million primarily due to less pre-tax income at our U.S. locations.

 

Liquidity and Capital Resources

 

We have historically funded our business through operating cash flows and proceeds from borrowings. As of December 31, 2015, we had $52.3 million in cash, cash equivalents, and restricted cash and $421.8 million in bank and other related debt (at face value).

 

During 2015, we generated cash of $39.6 million from operating activities, compared to cash provided by operations of $1.9 million during 2014. The increase was primarily driven by improvements in financial results in 2015 compared to 2014. During 2015, cash used in investing activities was $221.7 million, resulting primarily from the use of $86.0 million in cash (net of cash acquired and debt assumed) to acquire Gadea, $35.8 million in cash to acquire SSCI, $23.9 million to acquire the facility in Glasgow, U.K., $54.0 million in cash to acquire Whitehouse and $22.0 million used for the acquisition of property and equipment. Additionally, during 2015, we generated cash of $185.4 million from financing activities, primarily to borrowings on our credit facility and proceeds from exercises of stock options and employee stock purchase plan purchases.

 

Total capital expenditures for the year ended December 31, 2015 were $22.0 million as compared to $17.2 million for the year ended December 31, 2014. Capital expenditures in 2015 were primarily related to the growth, maintenance and upgrading of our existing facilities including the addition of Gadea, SSCI and Glasgow, U.K. and a full year of OsoBio operations.

 

In February 2016 as part of our press release and earnings announcement on February 17, 2016, we disclosed that cash generated from operations for 2015 was $43.0 million and capital expenditures for 2015 were $26.0 million. We have updated the disclosure in this 10-K to reflect the actual results as finalized during our financial statement audit. In addition, for the fourth quarter of 2015, the Company had $8.3 million in capital expenditures, compared with our prior disclosure of $12.3 million and the Company had $1.0 million cash generated by operating activities compared with our prior disclosure of $5.0 million. These changes result from the elimination of the effect of unpaid capital expenditures from operating and investing activities. All other figures in the February press release and conference call were unchanged.

 

During 2016, we expect to incur approximately $45.0 million in capital expenditures that includes a number of strategic projects including, but not limited to, a new prefilled syringe line in our Albuquerque, New Mexico facility, investment in our ERP upgrade and implementation, and expansion of sterile API manufacturing in Spain. There is also investment in additional R&D and manufacturing capacity to support increased customer demand for our specialty manufacturing, as well as maintenance of our existing facilities including the recently acquired facilities mentioned above.

 

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Working capital, defined as current assets less current liabilities, was $181.1 million at December 31, 2015 as compared to $140.0 million as of December 31, 2014. This increase primarily relates to increased inventory and accounts receivable levels associated with the companies acquired in 2015.

 

Term Loan and Revolving Credit Facility

 

On August 19, 2015, we entered into the Second Amended and Restated Credit Agreement (the “Second Restated Credit Agreement”) with Barclays Bank PLC, as Administrative Agent, Collateral Agent, L/C Issuer and Swing Line Lender, and the other lenders party thereto.

 

The Second Restated Credit Agreement, subject to the terms and conditions set forth therein, provides for a $200 million six-year term loan and a $30.0 million five-year revolving credit facility, which includes a $10.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swingline loans. The proceeds of any borrowings under the Second Restated Credit Agreement are used for working capital and other of our or our subsidiaries’ general corporate purposes, subject to the terms and conditions set forth in the Second Restated Credit Agreement.

 

At our election, term loans made under the Second Restated Credit Agreement initially bear interest at the Adjusted Eurodollar Rate (as defined below) plus 4.75% or the Base Rate (as defined below) plus 3.75%. Upon achievement of a certain senior secured leverage ratio, the rates will step down to 4.50% and 3.50%, respectively. The Base Rate means, for any day, a fluctuating rate per annum equal to the highest of (i) the federal funds rate plus ½ of 1.00%, (ii) the prime rate in effect on such day and (iii) the Adjusted Eurodollar Rate for a one month interest period beginning on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00%; provided that, in the case of the term loans, the Base Rate shall at all times be deemed to be not less than the 2.00%. The Adjusted Eurodollar Rate means for the interest period for each Eurodollar loan comprising part of the same group, the quotient obtained (expressed as a decimal, carried out to five decimal places) by dividing (i) the applicable Eurodollar rate for such interest period by (ii) 1.00% minus the Eurodollar reserve percentage; provided that, in the case of the term loans only, the Adjusted Eurodollar Rate shall at all times be deemed to be not less than 1.00%.

  

The Second Restated Credit Agreement includes a springing maturity provision such that the loans under the Second Restated Credit Agreement will mature six months prior to the maturity date of the Notes (as defined below) if more than $25 million of the Notes are outstanding and the secured leverage ratio is greater than 1.50 to 1.00 on such date.

  

The borrowings under the Second Amended Credit Agreement are prepayable at our option, subject to a 1.00% prepayment premium in certain circumstances if prepaid within the first twelve months, and otherwise without premium or penalty (other than customary breakage costs for Eurodollar loans). Amounts prepaid under the term loan facility are not available for reborrowing, but amounts prepaid under the revolving credit facility are available for reborrowing unless we decide to permanently reduce the commitments under the revolving credit facility, subject to the terms and conditions of the Second Restated Credit Agreement.

 

The obligations under the Second Restated Credit Agreement are guaranteed by certain of our domestic subsidiaries (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 ours and each Guarantor subject to certain customary exceptions.

 

The Second Restated Credit Agreement contains customary representations and warranties relating to us and our subsidiaries. The Second Restated Credit Agreement also contains certain affirmative and negative covenants including negative covenants that limit or restrict, among other things, liens, indebtedness, investments and acquisitions, mergers and fundamental changes, asset sales, restricted payments, changes in the nature of the business, transactions with affiliates and other matters customarily restricted in such agreements. The Second Restated Credit Agreement is also subject to certain customary “Market Flex” provisions, which, if utilized, could alter certain of the terms.

 

In December of 2015, we drew $30.0 million on the line of credit in order to partially finance the acquisition of Whitehouse Labs. The amount available on the line of credit is $0 at December 31, 2015.

 

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On October 24, 2014, we entered into a $50.0 million senior secured credit agreement (the “Credit Agreement”) consisting of a three-year, $50.0 million revolving credit facility, which included a $15.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swing line loans. The Credit Agreement also included an accordion feature that, subject to securing additional commitments from existing lenders or new lending institutions, would have allowed us to increase the aggregate commitments under the Credit Agreement by up to $10.0 million. On December 23, 2014, the Credit Agreement was amended to increase the available commitment to $75.0 million, increasing and using the accordion feature in its entirety (“Amendment No 1. to the Credit Agreement”). On July 16, 2015, we entered into an Amendment and Restatement to the Credit Agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement permitted us to repay the entire outstanding principal outstanding under Amendment No. 1 to the Credit Agreement and to apply that prepayment on a non-pro rata basis among the lenders under Amendment No. 1 to the Credit Agreement. The proceeds from borrowings under the Amended and Restated Credit Agreement were used to repay the entire outstanding principal outstanding under the Amendment No. 1 to the Credit Agreement on July 16, 2015 and amended the Credit Agreement.

 

In June 2014, we terminated our previous credit agreement while still maintaining letters of credit, thus requiring us to continue to maintain restricted cash to collateralize these letters of credit. The balance required to be maintained as restricted cash must be at least 110% of the maximum potential amount of the outstanding letters of credit.  As of December 31, 2015, we had $2.1 million of outstanding letters of credit secured by restricted cash of $3.0 million and $0.96 million of outstanding letters of credit that were unsecured.

 

Convertible Senior Notes

 

On December 4, 2013, we completed a private offering of 2.25% Cash Convertible Senior Notes (the “Notes”), in the aggregate principal amount of $150 million, between us and Wilmington Trust, National Association, as Trustee.  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 May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").

 

The Notes are not convertible into our 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 our 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 our 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 our 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 our common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment in some events as described in the Indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, we have 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.

 

We may not redeem the Notes prior to the maturity date, and no sinking fund is provided for the Notes.

 

Loans with various institutions – Gadea Loans

 

In connection with the Gadea acquisition, we assumed various unsecured debt instruments as part of the transaction totaling $39.7 million at December 31, 2015. These loans are issued by various financial institutions and public bodies, have interest rates ranging from 0.5% to 2.21% (generally at a rate equivalent to the Euribor plus a market spread or a fixed rate) and have various due dates ranging from March 2016 to August 2022. The loans are all euro-denominated, with payments made on a monthly, quarterly and biannual basis.

 

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Off Balance Sheet Arrangements

 

We do not use special purpose entities or other off-balance sheet financing techniques that we believe have or are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity or capital resources.

 

Contractual Obligations

 

The following table sets forth our long-term contractual obligations and commitments as of December 31, 2015:

 

Payments Due by Period (in thousands)

 

   Total   Less
than 1 Year
   1-3 Years   4-5 Years   More
than 5  Years
 
Long-Term Debt Obligations (principal)  $421,846    15,591    396,508    8,467    1,280 
Operating Leases Obligations   14,684    4,964    6,785    2,670    265 
Purchase Obligations   55,067    55,067             

Restructuring Liabilities

   2,691    1,916    486    289     
Pension Plan Contributions   2,700    540    1,080    1,080    * 

  

* Pension and other postretirement benefits include estimated payments made from Company assets. No estimate of payments after five years has been provided due to many uncertainties.

 

Critical Accounting Estimates

 

Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. All of these estimates reflect our best judgment and are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Under different assumptions or conditions, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of inventories, and long-lived assets, as well as increased pension liabilities, the establishment of valuation allowances on deferred tax assets and increased tax liabilities, among other effects. Also see Note 1, Summary of Significant Accounting Policies, in Part II, Item 8. “Financial Statements and Supplementary Data” of this report, which discusses the significant accounting policies that we have selected from acceptable alternatives.

 

Business Combinations

 

In accordance with the accounting guidance for business combinations, we 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, we 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.

 

Inventory

 

Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in our large-scale manufacturing plants. API and Drug Product manufacturing inventories are valued on a first-in, first-out (“FIFO”) basis. Inventories are valued at the lower of cost or market. We regularly review inventories on hand and record a charge for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The charge for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories. Total inventories recorded on our consolidated balance sheet at December 31, 2015 and 2014 were $89.2 and $49.9 million, respectively. We recorded charges to reduce obsolete inventory balances of $1.7 million, $0.6 million and $0.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.

 

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Income Taxes

 

Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties and the need for valuation allowances. We review our tax positions quarterly and adjust the balances as new information becomes available. Our income tax rate is significantly affected by the tax rates on our international operations, each of which are subject to local country tax laws and regulations.

 

Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carry-forwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings with focus on our U.S. operations and available tax planning strategies. These sources of income inherently rely heavily on estimates. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. We use our historical experience and our short and long-range business forecasts to provide insight. Amounts recorded for deferred tax assets (liabilities), net of valuation allowances, were ($10.1) million and $7.2 million at December 31, 2015 and 2014, respectively. The change from a net deferred tax asset in 2014 to a net deferred tax liability in 2015 is due to purchase accounting associated primarily with the Gadea acquisition. Such 2015 year-end amounts are expected to be fully recoverable within the applicable statutory expiration periods.

 

Derivative Instruments and Hedging Activities

 

We record derivative instruments on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. A change in inputs or estimates, including but not limited to, interest rates and the trading price and implied volatility of our common stock, may materially impact the resulting fair value measurements of these instruments and may also impact our results of operations. At December 31, 2015 and 2014, amounts recorded for both the Note Hedges and the Notes Conversion Derivative were $76.4 million and $58.9 million, respectively. The increase in the amounts recorded is due to the increase in the market value of our common stock that underlies these instruments.

 

Goodwill and intangible assets

 

We test 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 to be aggregated and tested at the operating segment level. Our goodwill impairment test was performed for the DDS, API and DPM segments based on the manner in which we operate the business and goodwill is recoverable. Our operating segments have been determined to be our reporting units because the products, processes, and customers are similar and resources are managed at the segment level. The total goodwill related to DDS, API and DPM is $45.9 million, $46.2 million and $77.3 million, respectively.

 

We test 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 values of reporting unit is less than its carrying amount, including goodwill. Depending on the factors specific to some or all of our reporting units, we may be required to perform a two-step quantitative test. A qualitative assessment was performed for the DDS reporting unit given that the goodwill in this unit relates to acquisitions made in 2015. A quantitative assessment was performed for both API and DPM. We concluded there were no impairments as of October 1, 2015, our annual impairment testing date. Additionally, we considered the qualitative factors for each component subsequent to the annual impairment testing date and through December 31, 2015 noting no indicators of potential impairment.

 

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The valuations for API and DPM used in the quantitative goodwill assessment were based on the discounted cash flow method using projected financial information of the reporting unit, including projected revenue on generic drug products in development and expected to be commercialized. Consideration was 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 our five year projections, which are based on information available to management as of October 1, 2015 and 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 both API and DPM 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 of our two revenue streams, specifically contract revenue and royalties on long-term collaboration agreements. The discount rates for the contract revenue were 10.5% and 10.0% for API and DPM, respectively. The discount rates for the royalty revenue were 23.5% for both API and DPM, given the higher level of uncertainty surrounding these cash flows.

 

The estimated fair value for the DPM business compared to its carrying value was relatively close given that DPM is primarily comprised of recent acquisitions. The estimated fair value of the DPM business exceeded carrying value by only 1%. Our future projections have included discounted cash flows for our current DPM 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 based on 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 our projections. If our DPM 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 DPM may be impaired.

 

We test intangible assets and patents with defined useful lives and subject to amortization by comparing the carrying amount to the fair value of the asset. 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. Total intangible assets and patents recorded on our consolidated balance sheet at December 31, 2015 and 2014 was $120.2 million and $32.5 million, respectively.

 

Other Long-Lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Factors we consider 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; and
·A significant decrease in the market value of assets.

 

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset group, the useful life over which cash flows will occur, their amount, and the asset group’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We derive the required undiscounted cash flow estimates from our historical experience, internal business plans and our understanding of current marketplace valuation estimates. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.

 

In April 2015, we recorded non-cash fixed asset charges of $3.1 million in our API segment primarily related to the closing of our Holywell, UK facility. Also in 2015, we recorded a non-cash fixed asset charge of $0.6 million in our DDS segment related to our facility in Syracuse, NY.

 

Recent Accounting Pronouncements

 

Accounting Pronouncements Issued But Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board ("FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of this standard on our financial statements.

 

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In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein. We are currently evaluating the impact this ASU will have on its consolidated financial statements.

 

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. Earlier adoption is permitted. We do not expect this ASU to have a material impact on our 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 are currently evaluating the impact this ASU will have on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement is effective for annual reporting periods ending after December 15, 2016, with early adoption permitted. We do not expect this ASU to have a material impact on our consolidated financial statements.

 

Accounting Pronouncements Recently Adopted

 

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”), which amends the accounting guidance related to balance sheet classification of deferred taxes. The amendment requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred tax assets and liabilities into current and noncurrent amounts. ASU 2015-17 will be effective beginning in the first quarter of fiscal year 2018. Early adoption is permitted and the amendment can be adopted either prospectively or retrospectively. We have prospectively adopted this ASU during the fourth quarter of 2015 and reflected its impact in our consolidated financial statements.

 

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In September 2015, FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. ASU No. 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth new disclosure requirements related to the adjustments. The new standard is effective for fiscal years beginning after December 15, 2015 and for interim periods therein with early adoption permitted. We adopted this ASU during 2015.

 

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. The ASU applies to entities that measure an investment’s fair value using the net asset per share (or an equivalent) practical expedient, while the amendments of the ASU eliminate the requirement to classify the investment within the fair value hierarchy. In addition, the requirement to make specific disclosures for all investments eligible to be assessed at fair value with the net asset value per share practical expedient has been removed. Instead, such disclosures are restricted only to investments that the entity has decided to measure using the practical expedient. The amendments in this ASU apply for fiscal years starting after December 15, 2015, and the interim periods within. The amendments are to be applied retrospectively to all periods offered, with early adoption permitted. We adopted this ASU during 2015 and it did not have a material impact on our consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which updated guidance to clarify the required presentation of debt issuance costs.   The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.   Amortization of debt issuance costs is to be reported as interest expense.   The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The update requires retrospective application and represents a change in accounting principle. The updated guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted.   We adopted this ASU during 2015 and have reflected $9.8 million and $4.1 million as reduction of long-term debt at December 31, 2015 and December 31, 2014, respectively. Previously, these costs were recorded as part of other assets.

  

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have market risk with respect to foreign currency exchange rates and interest rates. The market risk is the potential loss arising from adverse changes in these rates as discussed below.

 

The Company has facilities and customers in foreign jurisdictions and therefore is subject to foreign currency risk. This risk is composed of both potential losses from the translation of foreign currency financial statements and the remeasurement of foreign currency transactions. The total net assets of non-U.S. operations not denominated in our functional currency, the U.S. dollar, and subject to potential loss amount to approximately $232.5 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to approximately $23.2 million. Furthermore, related to foreign currency transactions, the Company has exposure to non-functional currency balances totaling approximately $17.6 million. This amount includes, on an absolute basis, exposures to foreign currency assets and liabilities. On a net basis, the Company had approximately $2.6 million of foreign currency assets as of December 31, 2015. As currency rates change, these non-functional currency balances are revalued, and the corresponding adjustment is recorded in the consolidated statement of operations. A hypothetical change of 10% in currency rates could result in an adjustment to the consolidated statement of operations of approximately $0.4 million.

 

With respect to interest rates, the risk is composed of changes in future cash f lows due to changes in interest rates on our $30.0 million revolving credit facility, $2.1 million industrial development authority bonds and $39.6 million of Gadea debt. The potential loss in 2015 cash flows from a 10% adverse change in quoted interest rates would approximate $0.2 million.

 

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Financial statements and notes thereto appear on pages F-1 to F-39 of this Annual Report on Form 10-K.

 

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A.  CONTROLS AND PROCEDURES.

 

(a) Evaluation of Disclosure Controls and Procedures

 

As required by rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management conducted an evaluation under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation the Company’s management has concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015.

 

During the fiscal year ended December 31, 2015, the Company began to implement a global ERP system, which, when completed, will handle the business and financial processes within Company’s operations and its corporate and administrative functions. The Company has modified and will continue to modify its internal controls relating to its business and financial processes throughout the ERP system implementation, which is expected to progress through the end of 2017. While the Company believes that this new system and the related changes to internal controls will ultimately strengthen its internal controls over financial reporting, there are inherent risks in implementing any new ERP system and the Company will continue to evaluate and test control changes relating to certification of its effectiveness, in all material respects, of its internal controls over financial reporting.

 

(b) Management’s Annual Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

 

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and, that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

 

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, assessed as of December 31, 2015 the effectiveness of the Company’s internal control over financial reporting. In making this assessment, management used the criteria set forth in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, management has concluded that the Company’s internal control over financial reporting as of December 31, 2015 was effective.

 

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During 2015, the Company acquired the following entities (together, the “Acquired Companies”):

 

·January 8, 2015 - Aptuit’s Glasgow, UK business, now Albany Molecular Research (Glasgow), Limited (“Glasgow”)

 

·February 13, 2015 – Aptuit’s Solid State Chemical Information business, now AMRI SSCI, LLC

 

·July 16, 2015 – Gadea Groupo Farmaceutico, S.L. (“Gadea”)

 

·December 15, 2015 – Whitehouse Analytical Laboratories, LLC (“Whitehouse”)

 

These acquisitions represent a material change in the internal control over financial reporting since management’s last assessment of effectiveness. Management has excluded the Acquired Companies from its assessment of internal control over financial reporting as of December 31, 2015. Total assets of the Acquired Companies, excluding goodwill and other intangible assets which were included in management’s assessment of internal control over financial reporting as of December 31, 2015, are $146.7 million at December 31, 2015. Total revenues of the Acquired Companies are $76.0 million for the year ended December 31, 2015. The total assets and total revenues excluded from management’s assessment of internal control over financial reporting as of December 31, 2015, represent approximately 17% and 19%, respectively, of the Company’s related consolidated financial statement amounts as of and for the year end December 31, 2015.

 

The Company’s independent registered public accounting firm has issued a report on the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2015, which is included in Item 8 of this Annual Report on Form 10-K and incorporated herein by reference.

 

(c) Changes in Internal Control Over Financial Reporting

 

Other than the effects of the acquisitions referred to above, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule 15d-15 under the Exchange Act that occurred during the Company’s fiscal quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B.  OTHER INFORMATION.

 

None.

 

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PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information appearing under the captions “Directors and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics and Business Conduct Guidelines” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 1, 2016 is incorporated herein by reference.

 

ITEM 11.  EXECUTIVE COMPENSATION.

 

The information appearing under the captions “Compensation of Directors”, “Compensation Committee Interlocks and Insider Participation”, and “Agreements with Named Executive Officers,” and “Corporate Governance and Board Matters” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 1, 2016 is incorporated herein by reference.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

The information appearing under the caption “Principal and Management Stockholders” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 1, 2016 is incorporated herein by reference.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information appearing under the caption “Related Party Transactions” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 1, 2016 is incorporated herein by reference.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information appearing under the caption “Independent Registered Public Accounting Firm” in the Company’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held on or around June 1, 2016 is incorporated herein by reference.

 

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PART IV

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

(a) (1) Financial Statements.

 

The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

 

    Page
Number
Report of Independent Registered Public Accounting Firm   F-2
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013    F-3
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2015, 2014 and 2013   F-4
Consolidated Balance Sheets at December 31, 2015 and 2014   F-5
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013   F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013   F-7
Notes to Consolidated Financial Statements   F-8

 

(a) (2)     Financial Statement Schedules

 

The following financial schedule of Albany Molecular Research, Inc. is included in this annual report on Form 10-K.

 

 Schedule II—Valuation and Qualifying Accounts

  F-50

 

Schedules other than that which is listed above have been omitted since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes.

 

(a) (3)     Exhibits

 

EXHIBIT INDEX

 

Exhibit
No.
  Description
2.1   LLC Interest Purchase Agreement by and among Albany Molecular Research, Inc. and Brian W. Mulhall and Alan Weiss as the members of Whitehouse Analytical Laboratories, LLC, dated December 15, 2015 (filed herein).
2.2   Share Purchase Agreement by and among Albany Molecular Research, Inc., Gadea Grupo Farmaceutico, S.L., Exirisk Spain, S.L. and certain other persons thereto, dated as of July 16, 2015 (incorporated herein by reference to Exhibit 2.1 to the Company’s 8-K filed with the Securities and Exchange Commission on July 16, 2015, File No. 001-35622).  
2.3   Purchase Agreement by and between Aptuit, LLC and Albany Molecular Luxembourg S.à r.l., dated as of January 8, 2015 (incorporated herein by reference to Exhibit 2.2 to the Company’s 8-K filed with the Securities and Exchange Commission on January 15, 2015, File No. 001-35622).  
2.4   Asset Purchase Agreement by and among Aptuit (West Lafayette), LLC, Aptuit, LLC, AMRI Americium, LLC, and Albany Molecular Research, Inc. dated as of January 8, 2015 (incorporated herein by reference to Exhibit 2.1 to the Company’s 8-K filed with the Securities and Exchange Commission on January 15, 2015, File No. 001-35622).
2.5   Membership Interest Purchase Agreement by and among Oso Biopharm Holdings, LLC, Oso Biopharmaceuticals Manufacturing, LLC, ALO Acquisition LLC, and Albany Molecular Research, Inc. dated as of June 1, 2014 (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed with the Securities and Exchange Commission on August 11, 2014, File No. 001-35622).

 

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Exhibit
No.
  Description
2.6   Agreement and Plan of Merger by and among Albany Molecular Research, Inc., AICu Acquisition Corp., Cedarburg Pharmaceuticals, Inc. and James Gale, dated March 22, 2014 (incorporated herein by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, filed with the Securities and Exchange Commission on May 9, 2014, File No. 001-35622).
3.1   Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
3.2   Amended and Restated By-Laws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 000-25323).
3.3   Certificate of Amendment to the Restated Certificate of Incorporation of Albany Molecular Research, Inc. dated  June 3, 2015  (incorporated herein by reference to Exhibit 3.1 to the Company’s 8-K filed on June 5, 2015, File No. 001-35622).
3.4   Registration Rights Agreement by and between Albany Molecular Research, Inc. and 3-Gutinver, S.L., dated as of July 16, 2015 ( incorporated herein by reference to Exhibit 3.2 to the Company’s 8-K filed with the Securities and Exchange Commission on July 16, 2015, File No. 001-35622).
4.1   Specimen certificate for shares of Common Stock, $0.01 par value, of the Company (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3, File No. 333-207247).
4.2   Amendment and Termination of Shareholder Rights Agreement by and between Albany Molecular Research, Inc. and Computershare, Inc., dated August 5, 2015 (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 5, 2015,  File No. 001-35622).
4.3   Certificate of Elimination of Series A Junior Participating Preferred Stock, dated August 5, 2015 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2015, File No. 001-35622).
4.4   Indenture, dated as of November 25, 2013, by and between Albany Molecular Research, Inc. and Wilmington Trust, National Association (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
4.5   Form of 2.25% Cash Convertible Senior Note due 2018 (included in Exhibit 4.4).
10.1  

Form of Indemnification Agreement between Albany Molecular Research, Inc. and each of its directors and executive officers (filed herein).

10.2   License Agreement dated March 15, 1995 by and between Albany Molecular Research, Inc. and Marion Merrell Dow Inc. (now Sanofi) (excluding certain portions which have been omitted as indicated based upon an order for confidential treatment, but which have been filed separately with the Commission) (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.3*   Amendment to 1998 Stock Option and Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, File No. 000-25323).
10.4*   Amended and Restated Technology Development Incentive Plan of the Company (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, File No. 001-35622).
10.5   Form of Employee Innovation, Proprietary Information and Post-Employment Activity Agreement between Albany Molecular Research, Inc. and each of its executive officers (incorporated herein by reference to Exhibit 10.14 to Amendment No. 3 to the Company’s Registration Statement on Form S-1, File No. 333-58795).
10.6*   Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between Albany Molecular Research, Inc. and Lori M. Henderson (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.7*   Form of Restricted Stock Award Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2005, File No. 000-25323).

 

 46 

 

 

Exhibit
No.
  Description
10.8*   Albany Molecular Research, Inc. Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2005, File No. 000-25323).
10.9*   Form of Incentive Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
10.10*   Form of Non-Qualified Stock Option Agreement under 1998 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 filed with the Securities and Exchange Commission on May 10, 2005, File No. 000-25323).
10.11   Supply Agreement, effective as of January 1, 2012, between AMRI Rensselaer and GE Healthcare AS (incorporated herein by reference to Exhibit 10.15 (with certain information omitted pursuant to a request for confidential treatment and filed with the Securities and Exchange Commission) to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on August 27, 2013, File No. 001-35622).
10.12   License and Research Agreement, dated as of October 20, 2005, between Albany Molecular Research, Inc., AMR Technology, Inc. and Bristol-Myers Squibb Company (incorporated herein by reference to Exhibit 10.22to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, File No. 000-25323).
10.13   Amendment to License Agreement Regarding Sublicensing, dated November 18, 2008, by and between Albany Molecular Research, Inc., AMR Technology, Inc. (formerly a subsidiary of AMRI, which has subsequently been merged into AMRI) and Sanofi U.S. LLC (filed with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) (incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, File No. 000-25323).
10.14*   Amended and Restated Employment Agreement, dated as of April 5, 2012, by and between the Company and Steven R. Hagen, Ph.D. (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2012, File No. 000-25323).
10.15   Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., AMRI Bothell Research Center, Inc. and Wells Fargo Bank, National Association. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 12, 2012, File No. 000-25323)
10.16   First Amendment, dated December 20, 2012, to Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., and AMRI Bothell Research Center, Inc., as the borrower and Wells Fargo Bank, National Association as the lender (incorporated herein by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.17   Second Amendment, dated November 13, 2013, to Credit and Security Agreement dated April 11, 2012, by and among Albany Molecular Research, Inc., AMRI Rensselaer, Inc., AMRI Burlington, Inc., and AMRI Bothell Research Center, Inc., as the borrower and Wells Fargo Bank, National Association as the lender (incorporated herein by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on March 17, 2014, File No. 001-35622).

 

 47 

 

 

Exhibit
No.
  Description
10.18   Development and Supply Agreement between Organichem Corporation (now AMRI Rensselaer, Inc., a wholly-owned subsidiary of the Company) and Purepac Pharmaceuticals Co. (now Actavis, Inc.) effective May 10, 2000 (incorporated herein by reference to Exhibit 10.26 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.19*   Amended Form of Restricted Stock Award Agreement under the 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.20*   Amended Form of Non-Qualified Stock Option Agreement under the 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 18, 2013, File No. 001-35622).
10.21*   Employment Agreement, dated September 5, 2013, by and between Albany Molecular Research, Inc. and William S. Marth (incorporated herein by reference to Exhibit 10.1 the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, filed with the Securities and Exchange Commission on November 8, 2013, File No. 001-35622).
10.22   Call Option Transaction Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.23   Call Option Transaction Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.24   Base Warrants Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.25   Base Warrants Confirmation, dated November 19, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 25, 2013, File No. 001-35622).
10.26   Amendment to Call Option Transaction Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.27   Amendment to Call Option Transaction Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.28   Additional Warrants Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and JPMorgan Chase Bank, National Association, London Branch (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).
10.29   Additional Warrants Confirmation, dated November 29, 2013, between Albany Molecular Research, Inc. and Morgan Stanley & Co. International plc (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 4, 2013, File No. 001-35622).

 

 48 

 

 

Exhibit
No.
  Description
10.30*   Employment Agreement dated December 13, 2013, by and between Albany Molecular Research, Inc. and George Svokos (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2014, filed with the Securities and Exchange Commission on May 9, 2014, File No. 001-35622).
10.31   Amendment No. 1, dated December 23, 2014, to Credit Agreement dated October 24, 2014, by and among Albany Molecular Research, Inc., Barclays Banks plc, each Lender thereto and each Loan Party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 30, 2014, File No. 001-35622).
10.32*   Employment Agreement dated February 11, 2015, by and between Albany Molecular Research, Inc. and Felicia Ladin (incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 16, 2015, File No. 001-001-35622).
10.33*   Separation Agreement, dated February 11, 2015, by and between Albany Molecular Research, Inc. and Michael M. Nolan (incorporated herein by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on March 16, 2015, File No. 001-001-35622).
10.34   Amendment No. 2 to Credit Agreement, dated as of July 14, 2015, among Albany Molecular Research, Inc., Barclays Bank PLC, as administrative agent and collateral agent, each Lender party Research, Inc., Barclays Bank PLC, as administrative agent and collateral agent, each Lender party thereto and each other Loan Party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s 8-K filed with the Securities and Exchange Commission on July 16, 2015, File No. 001-35622).
10.35   First Amended and Restated Credit Agreement, dated as of July 16, 2015, among Albany Molecular Research, Inc., Barclays Bank PLC, as administrative agent, Collateral Agent, L/C Issuer and Swing Line Lender, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015, filed with the Securities and Exchange Commission on November 9, 2015, File No. 001-35622).
10.36   Second Amended and Restated Credit Agreement, dated as of August 19, 2015, among Albany Molecular Research, Inc., Barclays Bank PLC, as administrative agent, Collateral Agent, L/C Issuer and Swing Line Lender, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015, filed with the Securities and Exchange Commission on November 9, 2015, File No. 001-35622).
10.37   Amendment No. 1 to Supply Agreement between GE Healthcare AS and AMRI Rensselaer, Inc. for Supply of Aminobisamide HCL, dated September 30, 2015 (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015, filed with the Securities and Exchange Commission on November 9, 2015, File No. 001-35622,  with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission).
10.38*  

Third Amended 1998 Employee Stock Purchase Plan of the Company, approved on June 3, 2015 (filed herein).

10.39*   Third Amended 2008 Stock Option and Incentive Plan, approved on June 3, 2015 (filed herein).
10.40   Albany Molecular Research, Inc. Senior Executive Cash Incentive Bonus Plan (filed herein).
21.1   Subsidiaries of the Company (filed herein).
23.1   Consent of KPMG LLP (filed herein).
31.1   Rule 13a-14(a)/15d-14(a) certification (filed herein).
31.2   Rule 13a-14(a)/15d-14(a) certification (filed herein).
32.1   Section 1350 certification (furnished herein). (1)
32.2   Section 1350 certification (furnished herein). (1)

 

 49 

 

 

Exhibit
No.
  Description
101  

XBRL (extensible Business Reporting Language). The following materials from Albany Molecular Research, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.

 

 

*Denotes management contract of compensation plan or arrangement

 

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

 

 50 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: March 29, 2016 Albany Molecular Research, Inc.
   
  By: /s/ William S. Marth
    William S. Marth
    President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ William S. Marth   President, Chief Executive Officer   March 29, 2016
William S. Marth   (Principal Executive Officer)    
         
/s/ Felicia I. Ladin   Chief Financial Officer   March 29, 2016
Felicia I. Ladin   (Principal Financial and Accounting Officer)    
         
/s/ Thomas E. D’Ambra   Chairman of the Board   March 29, 2016
Thomas E. D’Ambra, Ph.D.        
         
/s/ Veronica G.H. Jordan   Director   March 29, 2016
Veronica G.H. Jordan, Ph.D.        
         

/s/ David H. Deming

  Director   March 29, 2016
David H. Deming        
         
/s/ Anthony J. Maddaluna   Director   March 29, 2016
Anthony Maddaluna        
         
/s/ Kevin O’Connor   Director   March 29, 2016
Kevin O’Connor        
         
/s/ Arthur J. Roth   Director   March 29, 2016
Arthur J. Roth        
         
/s/ Una S. Ryan   Director   March 29, 2016
Una S. Ryan, Ph.D., O.B.E.        
         
/s/ Gerardo Gutierrez Fuentes   Director   March 29, 2016
Gerardo Gutierrez Fuentes        

 

 51 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ALBANY MOLECULAR RESEARCH, INC.

 

    Page
Report of Independent Registered Public Accounting Firm   F-2
     
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013   F-3
     
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2015, 2014 and 2013       F-4
     
Consolidated Balance Sheets at December 31, 2015 and 2014   F-5
     
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014 and 2013   F-6
     
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013   F-7
     
Notes to Consolidated Financial Statements   F-8

 

F-1 

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Albany Molecular Research, Inc.:

 

We have audited the accompanying consolidated balance sheets of Albany Molecular Research, Inc. and subsidiaries (“Albany Molecular Research, Inc.” or “the Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying accounts. We also have audited Albany Molecular Research, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Albany Molecular Research, Inc.’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule, and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Albany Molecular Research, Inc. as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Albany Molecular Research, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Albany Molecular Research, Inc. acquired Aptuit’s Glasgow, UK business on January 8, 2015, Aptuit’s Solid State Chemical Information business on February 13, 2015, Gadea Grupo Farmaceutico, S.L. on July 16, 2015, and Whitehouse Analytical Laboratories, LLC on December 15, 2015 (collectively, the “Acquired Businesses”), and management excluded from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2015, the Acquired Businesses’ internal control over financial reporting associated with assets representing 17% of consolidated assets, and revenues representing approximately 19% of consolidated revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2015. Our audit of internal control over financial reporting of Albany Molecular Research, Inc. also excluded an evaluation of the internal control over financial reporting of the Acquired Businesses.

 

 

/s/ KPMG LLP

 

Albany, New York

March 29, 2016

 

F-2 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Years Ended December 31, 2015, 2014 and 2013

 

(In thousands, except per share amounts)

 

   Year Ended December 31, 
   2015   2014   2013 
Contract revenue  $384,738   $250,704   $210,001 
Recurring royalties   17,618    25,867    36,574 
Total revenue   402,356    276,571    246,575 
Cost of contract revenue   295,527    209,193    171,923 
Technology incentive award   554    1,621    2,767 
Research and development   5,474    1,004    414 
Selling, general and administrative   77,394    48,897    42,256 
Postretirement benefit plan settlement gain       (1,285)    
Impairment charges   3,770    7,835    1,857 
Restructuring charges   5,988    3,582    7,183 
Total costs and expenses   388,707    270,847    226,400 
Income from operations   13,649    5,724    20,175 
Interest expense   (19,352)   (10,960)   (1,561)
Interest income   14    3    11 
Other income (expense), net   2,220    (235)   1,078 
(Loss) income before income tax (benefit) expense   (3,469)   (5,468)   19,703 
Income tax (benefit) expense   (1,168)   (2,190)   7,935 
Net (loss) income   (2,301)  $(3,278)  $11,768 
                
Basic (loss) earnings per share  $(0.07)  $(0.10)  $0.38 
Diluted (loss) earnings per share  $(0.07)  $(0.10)  $0.37 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-3 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

Consolidated Statements of Comprehensive (LOSS) Income

 

Years Ended December 31, 2015, 2014 and 2013

 

(In thousands)

 

   Years Ended December 31, 
   2015   2014   2013 
Net (loss) income  $(2,301)  $(3,278)  $11,768 
Reclassification adjustment of foreign currency translation loss upon dissolution of a foreign subsidiary       734     
Foreign currency translation loss   (4,760)   (1,657)   (2,529)
Net actuarial gain (loss) of pension and postretirement benefits   793    (2,234)   1,547 
Total comprehensive (loss) income  $(6,268)  $(6,435)  $10,786 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-4 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

CONSOLIDATED BALANCE SHEETS

 

December 31, 2015 and 2014

 

(In thousands, except share amounts)

 

   December 31, 
   2015   2014 
Assets          
Current assets:          
Cash and cash equivalents  $49,343   $46,995 
Restricted cash   2,966    4,052 
Accounts receivable, net   110,427    71,644 
Royalty income receivable   6,184    5,061 
Inventory   89,231    49,880 
Prepaid expenses and other current assets   16,159    8,566 
Income taxes receivable   5,419    2,343 
Property and equipment held for sale   516     
Total current assets   280,245    188,541 
           
Property and equipment, net   209,508    165,475 
Notes hedges   76,393    58,928 
Goodwill   169,471    61,778 
Intangible assets and patents, net   120,204    32,548 
Deferred income taxes   6,342    4,884 
Other assets   3,404    3,714 
Total assets  $865,567   $515,868 
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable and accrued expenses  $60,890   $32,160 
Deferred revenue and licensing fees   14,718    11,171 
Accrued compensation   7,319    3,597 
Arbitration reserve       327 
Income taxes payable       350 
Accrued pension benefits   578    638 
Current installments of long-term debt   15,591    447 
Total current liabilities   99,096    48,690 
Long-term liabilities:          
Long-term debt, excluding current installments, net   373,692    155,895 
Notes conversion derivative   76,393    58,928 
Income taxes payable   2,956     
Pension and postretirement benefits   6,909    8,167 
Deferred income taxes   16,405     
Other long-term liabilities   2,893    2,366 
Total liabilities   578,344    274,046 
Commitments and contingencies (Notes 11 and 13)          
Stockholders’ equity:          
Preferred stock, $0.01 par value, authorized 2,000 shares, none issued or outstanding        
Common stock, $0.01 par value, authorized 50,000 shares, 41,130 shares issued in 2015 and 38,098 shares issued in 2014   411    381 
Additional paid-in capital   296,337    243,874 
Retained earnings   77,331    79,632 
Accumulated other comprehensive loss, net   (18,401)   (14,434)
    355,678    309,453 
Less, treasury shares at cost, 5,512 shares in 2015 and 5,465 shares in 2014   (68,455)   (67,631)
Total stockholders’ equity   287,223    241,822 
Total liabilities and stockholders’ equity  $865,567   $515,868 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-5 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

Years Ended December 31, 2015, 2014 and 2013

 

(In thousands)

 

                       Accumulated             
       Common Stock   Additional       Other   Treasury Stock     
   Preferred   Number of   Par   Paid-in   Retained   Comprehensive   Number of         
   Stock   Shares   Value   Capital   Earnings   Income (Loss)   Shares   Amount   Total 
Balances at January 1, 2013  $    36,326   $363   $207,784   $71,142   $(10,295)   5,411   $(66,888)  $202,106 
Net income                       11,768                   11,768 
Pension and other postretirement benefits:                                             
Amortization of actuarial loss, net of taxes                            535              535 
Current year actuarial gain, net of taxes                            1,012              1,012 
Foreign currency translation gain                            (2,529)             (2,529)
Excess tax benefit from share-based compensation                  785                        785 
Share-based payment expense                  2,620                        2,620 
Issuance of restricted stock        266    3    (2)                       1 
Forfeiture of unearned compensation - restricted stock        (49)   (1)   (3)                       (4)
Issuance of common stock in connection with stock option  plan and ESPP        480    5    1,522                        1,527 
Treasury repurchases                                 14   (164)   (164)
Sale of warrants                  23,100                        23,100 
Balances at December 31, 2013  $    37,023    370    235,806    82,910    (11,277)   5,425   (67,052)   240,757 
Net loss                       (3,278)                  (3,278)
Pension and other postretirement benefits:                                             
Amortization of actuarial loss, net of taxes                            398              398 
Current year actuarial loss, net of taxes                            (2,632)             (2,632)
Reclassification adjustment of foreign currency translation loss upon dissolution of a foreign subsidiary                            734              734 
Foreign currency translation gain                            (1,657)             (1,657)
Excess tax benefit from share-based compensation                  1,642                        1,642 
Share-based payment expense                  4,122                        4,122 
Issuance of restricted stock        691    7    (7)                        
Forfeiture of unearned compensation - restricted stock        (72)       2                        2 
Issuance of common stock in connection with stock option  plan and ESPP        456    4    2,309                        2,313 
Treasury repurchases                                 40   (579)   (579)
Balances at December 31, 2014  $    38,098   $381   $243,874   $79,632   $(14,434)   5,465  $(67,631)  $241,822 
Net loss                       (2,301)                  (2,301)
Pension and other postretirement benefits:                                             
Current year actuarial loss, net of taxes                            793              793 
Foreign currency translation gain                            (4,760)             (4,760)
                                              
 Excess tax benefit from share-based compensation                  2.108                        2,108 
Share-based payment expense                  6,291                        6,291 
Issuance of restricted stock        471    5    64                        64 
Issuance of restricted stock due to acquisition        2,200    22    40,546                        40,568 
Forfeiture of unearned compensation - restricted stock        (144)       (1)                       (1)
Issuance of common stock in connection with stock option  plan and ESPP        505    3    3,455                        3,458 
Treasury repurchases                                             
                                 47   (824)   (824)
Balances at December 31, 2015  $    41,130   $411   $296,337   $77,331   $(18,401)   5,512  $(68,455)  $287,223 

 

See Accompanying Notes to Consolidated Financial Statements.

 

F-6 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

December 31, 2015, 2014 and 2013

 

(In thousands)

 

   Year ended December 31, 
   2015   2014   2013 
Operating Activities               
                
Net (loss) income  $(2,301)  $(3,278)  $11.768 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:               
Depreciation and amortization   27,049    18,353    15,565 
Deferred financing amortization   2,470    1,537    306 
Accretion of discount on long-term debt   6,564    5,765    531 
Provision for doubtful accounts   1,289    343    267 
Deferred income tax (benefit) expense   (2,915)   (2,101)   125 
Impairment charges   3,770    7,835    1,857 
Loss on disposal of property and equipment   118    166    234 
Cumulative translation loss related to foreign subsidiary dissolution       734     
Share-based compensation expense   6,291    4,122    2,620 
Gain on settlement of post-retirement liability       (1,285)    
Excess tax benefit of stock option exercises   (2,108)   (1,642)   (785)
Other           20 
Changes in operating assets and liabilities that provide (use) cash, net of impact of business combinations:               
Accounts receivable   (9,353)   (12,664)   (9,987)
Royalty income receivable   (1,167)   2,462    657 
Inventory   7,732    (7,967)   (5,141)
Prepaid expenses and other assets   (753)   (814)   541 
Accounts payable, accrued compensation and accrued expenses   6,815    (4,866)   7,697 
Income taxes receivable/payable   (4,918)   (5,842)   4,503 
Deferred revenue and licensing fees   1,442    1,225    (1,708)
Pension and postretirement benefits   (99)   (215)   145 
Other long-term liabilities   (298)   37    (1,039)
Net cash provided by operating activities   39,628    1,905    28,176 
Investing Activities               
Purchase of businesses, net of cash acquired   (199,580)   (145,752)    
Purchases of property and equipment   (22,041)   (17,189)   (11,135)
Payments for patent applications and other costs   (126)   (398)   (411)
Proceeds from disposal of property and equipment   31    80    300 
Net cash used in investing activities   (221,716)   (163,259)   (11,246)
Financing Activities               
Issuance of long-term debt   269,661    35,000    150,000 
Proceeds from sale of warrants           23,100 
Payment for bond hedge options           (33,600)
Principal payments on long-term debt   (81,864)   (5,063)   (775)
Deferred financing costs   (8,209)   (544)   (4,690)
Purchases of treasury stock   (824)   (579)   (164)
Changes in restricted cash   1,086    472    702 
Excess of tax benefit of stock option exercises   2,108    1,642    785 
Proceeds from exercise of options and Employee Stock Purchase Plan   3,458    2,313    1,527 
Net cash provided by financing activities   185,416    33,241    136,885 
Effect of exchange rate changes on cash flows   (980)   (820)   (1,180)
Increase (decrease) in cash and cash equivalents   2,348    (128,933)   152,635 
Cash and cash equivalents at beginning of year   46,995    175,928    23,293 
Cash and cash equivalents at end of year  $49,343   $46,995   $175,928 
Supplemental disclosure of non-cash activities:               
Actuarial loss on pension and other postretirement liability, net of tax  $793   $2,234   $1,547 
Issuance of common stock for business acquisition  $40,568   $   $ 
Issuance of restricted stock  $9,482   $8,660   $1,960 
Non-cash forgiveness of arbitration reserve  $   $1,024   $1,366 
Supplemental disclosures of cash flow information:               
Cash paid during the period for:               
Interest  $11,574   $3,536   $1,251 
Income taxes  $8,204   $5,928   $3,398 

 

See Accompanying Notes to the Consolidated Financial Statements

 

F-7 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 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. We supply a broad range of services and technologies supporting the discovery and development of pharmaceutical products, the manufacturing of Active Pharmaceutical Ingredients (“API”) and the manufacturing of drug product for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. With locations in the United States, Europe, and Asia, we maintain 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 exchange, and the statements of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in the consolidated statements of comprehensive (loss) income and in accumulated other comprehensive loss in the accompanying consolidated balance sheets.

 

Use of Management Estimates:

 

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

 

Contract Revenue Recognition:

 

The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become commercial. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two 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 pro rata 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.

 

F-8 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 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 and Milestone Revenues:

 

Recurring Royalty Revenue. Recurring royalties have 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 Allergan, plc (“Allergan”). 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.

 

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

 

In 2014, the Company entered into development and supply agreements with Genovi Pharmaceuticals Limited which have subsequently been transferred to HBT Labs, Inc. (“HBT”) to manufacture select generic parenteral drug products for registration and subsequent commercialization in the U.S., Europe, and select emerging markets. 

 

F-9 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

Under the terms of these HBT Agreements, the Company may receive milestone payments for each drug product candidate upon achievement of certain developments milestones including technology transfer activities, analytical development activities, and manufacture of regulatory submission batches.  Following U.S. Food and Drug Administration approval, the Company will supply generic parenteral drug products to HBT pursuant to the HBT Agreements and receive payments based on HBT's sales of such products.

 

The Company has determined these milestones payments to be substantive milestones in accordance with ASC 605-28-25, “Revenue Recognition – Milestone Method” (“ASC 605”). In evaluating these milestones, the Company considered the following:

 

  · Each individual milestone is considered to be commensurate with the enhanced value of the underlying licensed intellectual property or drug product candidate as they are advanced from the development stage to a commercialized product, and considered them to be reasonable when evaluated in relation to the total agreement consideration, including other milestones.
  · The milestones are deemed to relate solely to past performance, as each milestone is payable to the Company only after the achievement of the related event defined in the agreement, and is not refundable if additional future success events do not occur.

 

For the years ended December 31, 2015, 2014, and 2013, no milestone revenue was recognized by the Company.

 

Proprietary Drug Development Arrangements:

 

The Company has discovered and conducted the early development of several new drug candidates, with a view to out-licensing these candidates to partners for further development in return for a potential combination of up-front license fees, milestone payments and recurring royalty payments if compounds resulting from our intellectual property are successfully developed into new drugs and reach the market. The Company does not anticipate milestone or recurring royalty payments under its current license arrangements to have a significant impact on the Company’s consolidated operating results, financial position, or cash flows.

 

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 maintains letters of credit requiring the maintenance of a certain restricted cash balance to collateralize outstanding letters of credit.

 

Allowance for Doubtful Accounts:

 

The Company records an allowance for doubtful accounts for estimated receivable losses. Management reviews outstanding receivable balances on a regular basis in order to assess the collectability of these balances, and adjusts the allowance for doubtful accounts accordingly. The allowance and related accounts receivable are reduced when the account is deemed uncollectible.

 

Allowances for doubtful accounts were $1,096 and $1,274 as of December 31, 2015 and 2014, respectively.

  

F-10 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

  

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”) basis. Inventories are stated at the lower of cost or market. The Company writes down inventories equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Any such write-down, which represents a new cost basis for the inventory, results in a charge to operations.

 

Property and Equipment:

 

Property and equipment are initially recorded at cost or, if acquired as part of a business combination, at fair value. Expenditures for maintenance and repairs are expensed when incurred. When assets are sold, retired, or otherwise disposed of, the applicable costs and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized.

 

Depreciation is determined using the straight-line method over the estimated useful lives of the individual assets. Accelerated methods of depreciation have been used for income tax purposes.

 

The Company provides for depreciation of property and equipment over the following estimated useful lives:

 

Laboratory equipment and fixtures   7-18 years  
Office equipment   3-7 years  
Computer equipment   3-5 years  
Buildings   39 years  

 

Leasehold improvements are amortized over the lesser of the useful life of the asset or the lease term.

 

Equity Investments:

 

The Company maintains an equity investment in a company that has operations in areas within the Company’s strategic focus. This investment is in a leveraged start-up company and was recorded at historical cost. The Company accounts for this investment using the cost method of accounting as the Company’s ownership interest in the investee is below 20% and the Company does not have the ability to exercise significant influence over the investee.

 

The Company records an impairment charge when an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in the Company’s inability to recover the carrying value of the investment thereby requiring an impairment charge in the future.

 

The carrying value of the equity investment at December 31, 2015 and 2014 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.

 

F-11 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

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.

 

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 to be aggregated and tested at the operating segment level. The goodwill impairment test was performed for Drug Discovery Services (“DDS”), Active Pharmaceutical Ingredients (“API”), and Drug Product Manufacturing (“DPM”) based on the manner in which the Company operates its businesses and goodwill is recoverable. The Company’s 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 total goodwill related to DDS, API and DPM is $45,987, $46,182 and $77,302, respectively.

 

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 values of 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 DDS reporting unit given that the goodwill in this unit relates to an acquisition made in 2015. A quantitative assessment was performed for both API and DPM. The Company concluded there were no impairments as of October 1, 2015, 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, 2015 noting no indicators of potential impairment.

 

The valuations for API and DPM used in the quantitative goodwill assessment were based on the discounted cash flow method using projected financial information of the reporting unit, including projected revenue on generic drug products in development and expected to be commercialized. Consideration was 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, 2015 and 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 both API and DPM 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 of our two revenue streams, specifically contract revenue and royalties on long-term collaboration agreements. The discount rates for the contract revenue were 10.5% and 10.0% for API and DPM, respectively. The discount rates for the royalty revenue were 23.5% for both API and DPM, given the higher level of uncertainty surrounding these cash flows.

 

F-12 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The estimated fair value for the DPM business compared to its carrying value was relatively close given that DPM is primarily comprised of recent acquisitions. The estimated fair value of the DPM business exceeded carrying value by only 1%. The future projections have included discounted cash flows for our current DPM 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 based on 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 our projections. If our DPM 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 DPM may be impaired.

 

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.

  

F-13 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

Research and Development:

 

Research and development 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 based on an assessment of estimated future taxable income that incorporates ongoing, prudent and feasible tax-planning strategies.

 

Additionally, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach.

 

Derivative Instruments and Hedging Activities:

 

The Company accounts for derivatives in accordance with FASB ASC Topic 815, “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 income (loss).

 

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) earnings 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).

 

F-14 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The following table provides basic and diluted earnings (loss) per share calculations:

 

   Year Ended December 31, 2015   Year Ended December 31, 2014   Year Ended December 31, 2013 
   Net
Loss
   Weighted
Average
Shares
   Per Share
Amount
   Net
Loss
   Weighted
Average
Shares
   Per Share
Amount
   Net
Income
   Weighted
Average
Shares
   Per Share
Amount
 
Basic (loss) earnings  per share  $(2,301)   33,169   $(0.07)  $(3,278)   31,526   $(0.10)  $11,768    30,912   $0.38 
Dilutive effect of share-based equity                               936    (0.01)
Diluted (loss) earnings  per share  $(2,301)   33,169   $(0.07)  $(3,278)   31,526   $(0.10)  $11,768    31,848   $0.37 

 

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, 2015 and 2014 because the net loss causes these outstanding stock options and non-vested restricted shares to be anti-dilutive. The Company has excluded certain outstanding stock options and non-vested restricted shares from the calculation of diluted earnings per share for the year ended December 31, 2013 because of anti-dilutive effects.

 

The weighted average number of anti-dilutive common equivalents outstanding was 11,971, 12,502, and 1,363 for the years ended December 31, 2015, 2014 and 2013, respectively, and were excluded from the calculation of diluted earnings (loss) per share.

 

Restructuring Charges:

 

The Company accounts for its restructuring costs as required by 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.

 

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.

 

Recent Accounting Pronouncements:

 

Accounting Pronouncements Issued But Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board ("FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

  

F-15 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost or net realizable value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016 and for interim periods therein. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

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. Earlier adoption is permitted. The Company does not expect this ASU to have a material impact 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. 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. The Company is currently evaluating the impact this ASU will have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU, No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which defines management’s responsibility to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern. The pronouncement is effective for annual reporting periods ending after December 15, 2016, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.

     

F-16 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

Accounting Pronouncements Recently Adopted

 

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”), which amends the accounting guidance related to balance sheet classification of deferred taxes. The amendment requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position, thereby simplifying the current guidance that requires an entity to separate deferred tax assets and liabilities into current and noncurrent amounts. ASU 2015-17 will be effective beginning in the first quarter of fiscal year 2018. Early adoption is permitted. The amendment can be adopted either prospectively or retrospectively. The Company has prospectively adopted this ASU during the fourth quarter of 2015 and reflected its impact in its consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. ASU No. 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth new disclosure requirements related to the adjustments. The new standard is effective for fiscal years beginning after December 15, 2015 and for interim periods therein with early adoption permitted. The Company adopted this ASU during 2015; see note 2 for discussion on adjustments to provisional accounting for business combinations related to interim periods in 2015.

 

In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. The ASU applies to entities that measure an investment’s fair value using the net asset per share (or an equivalent) practical expedient, while the amendments of the ASU eliminate the requirement to classify the investment within the fair value hierarchy. In addition, the requirement to make specific disclosures for all investments eligible to be assessed at fair value with the net asset value per share practical expedient has been removed. Instead, such disclosures are restricted only to investments that the entity has decided to measure using the practical expedient. The amendments in this ASU apply for fiscal years starting after December 15, 2015, and the interim periods within. The amendments are to be applied retrospectively to all periods offered, with early adoption permitted. The Company adopted this ASU during 2015 and it did not have a material impact on the consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which updated guidance to clarify the required presentation of debt issuance costs.   The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.   Amortization of debt issuance costs is to be reported as interest expense.   The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The update requires retrospective application and represents a change in accounting principles. The updated guidance is effective for reporting periods beginning after December 15, 2015, with early adoption permitted.   The Company has adopted this ASU during 2015 and has reflected $9,823 and $4,085 as reduction of long-term debt at December 31, 2015 and December 31, 2014, respectively. Previously, these costs were recorded as part of other assets.

 

2.Business Acquisitions

 

2015 Acquisitions

 

Whitehouse Laboratories

 

On December 15, 2015, we acquired all 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 purchase price is $55,924 (net of cash acquired of $377), including $2,000 in shares of AMRI common stock that were contingent upon Whitehouse achieving certain 2015 targets. 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.

  

F-17 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The aggregate purchase price has been preliminarily allocated based on an estimate of the fair value of assets and liabilities acquired as of the acquisition date. The allocation of acquisition consideration for Whitehouse is based on estimates, assumptions, valuations and other studies which have not yet been finalized in order to make a definitive allocation. The Company is finalizing the allocation of purchase price to property and equipment and working capital. Allocation adjustments are not expected to be significant. The following table summarizes the allocation of the preliminary aggregate purchase price to the estimated fair value of the net assets acquired:

 

  

December

15, 2015

 
Assets Acquired     
Accounts receivable  $2,084 
Prepaid expenses and other current assets   34 
Property and equipment   982 
Intangible assets   26,200 
Goodwill   26,670 
Total assets acquired  $55,970 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $46 
Total liabilities assumed   46 
Net assets acquired  $55,924 

 

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.

 

In March 2016, it was determined that Whitehouse met the contingency terms of the agreement which resulted in the issuance of 137,080 shares of AMRI common stock (approximately $2,000) in March 2016. This contingent value is included in the aggregate purchase price.

 

Gadea Grupo

 

On July 16, 2015, the Company completed the purchase of Gadea Grupo Farmaceutico, S.L. (“Gadea”), a contract manufacturer of complex API and finished drug product. Gadea operates within the Company's API and DPM segments. The aggregate net purchase price is $126,896 (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 $96,961 in cash plus a working capital adjustment of $328. The purchase price has been allocated based on an estimate of the fair value of assets and liabilities acquired as of the acquisition date. The following table summarizes the allocation of the aggregate purchase price to the estimated fair value of the net assets acquired:

 

F-18 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

  

   July 16,
2015
 
Assets Acquired     
Accounts receivable  $23,756 
Prepaid expenses and other current assets   2,563 
Inventory   47,400 
Property and equipment   29,389 
Deferred tax assets   1,115 
Intangible assets   58,200 
Goodwill   50,147 
Other long term-assets   2,053 
Total assets acquired  $214,623 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $16,561 
Debt   44,523 
Income taxes payable   5,920 
Deferred income taxes   19,179 
Other long-term liabilities   1,544 
Total liabilities assumed   87,727 
Net assets acquired  $126,896 

  

The Company has attributed the goodwill of $50,147 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 $29,668 and DPM 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.

 

The purchase price allocation was adjusted in the fourth quarter of 2015, which resulted in a net reduction of goodwill of approximately $1,500 primarily for identified in-process research and development intangible assets of $18,000, a reduction in value of the previously-recognized intangible assets of $7,800, and a reduction in the fair value of property and equipment of $9,300. Additionally, an adjustment to the purchase price consideration was made to recognize the discount associated with the 2,200 shares of restricted shares issued in conjunction with the Gadea acquisition in the amount of $3,177. The impact to depreciation and amortization expense was not significant. The Company will finalize the purchase price allocation in the first half of 2016. Allocation adjustments are not expected to be significant.

 

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 following table summarizes the final allocation of the purchase price to the fair value of the net assets acquired:

 

   February 13,
2015
 
Assets Acquired     
Accounts receivable  $2,255 
Prepaid expenses and other current assets   802 
Property and equipment   11,971 
Intangible assets   2,370 
Goodwill   19,317 
Total assets acquired  $36,715 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $647 
Deferred revenue   218 
Total liabilities assumed   865 
Net assets acquired  $35,850 

 

F-19 

 

  

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

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, UK business, now Albany Molecular Research (Glasgow) Limited (“Glasgow”) for total consideration of $23,805 (net of cash acquired of $146). The Glasgow facility will extend the Company’s capabilities to sterile injectable drug product pre-formulation, formulation and clinical stage manufacturing. Glasgow has been assigned to the DPM segment.

 

The following table summarizes the final allocation of the purchase price to the fair value of the net assets acquired:

 

   January 8,
2015
 
Assets Acquired     
Accounts receivable  $3,381 
Prepaid expenses and other current assets   1,144 
Inventory   244 
Property and equipment   4,285 
Intangible assets   6,100 
Goodwill   12,505 
Deferred tax asset   1,274 
Other long term-assets   33 
Total assets acquired  $28,966 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $1,510 
Deferred revenue   1,935 
Deferred tax liabilities   1,528 
Other long-term liabilities   188 
Total liabilities assumed   5,161 
Net assets acquired  $23,805 

  

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).

  

F-20 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The following table shows revenue and operating income for the 2015 business combinations included in these consolidated financial statements:

 

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 our 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 complete to commercial supply. The aggregate purchase price was $109,194. OsoBio has been assigned to the DPM segment.

 

The following table summarizes the allocation of the purchase price to the fair value of the net assets acquired:

 

   July 1, 2014 
Assets Acquired     
Cash  $2,223 
Accounts receivable   6,270 
Inventory   6,459 
Prepaid expenses and other current assets   1,992 
Property and equipment   35,476 
Customer relationships   19,400 
Trademarks   1,200 
Goodwill   44,879 
Total assets acquired  $117,899 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $7,129 
Deferred revenue   943 
Other long-term liabilities   633 
Total liabilities assumed   8,705 
Net assets acquired  $109,194 

 

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).

 

Cedarburg

 

On April 4, 2014, the Company completed the purchase of all of the outstanding shares of Cedarburg Pharmaceuticals, 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.

 

 F-21

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The following table summarizes the allocation of the purchase price to the fair value of the net assets acquired:

 

   April 4, 2014 
Assets Acquired     
Cash  $247 
Accounts receivable   837 
Inventory   3,463 
Prepaid expenses and other current assets   549 
Property and equipment   8,351 
Customer relationships   12,100 
Trademarks   400 
Goodwill   16,899 
Total assets acquired  $42,846 
      
Liabilities Assumed     
Accounts payable and accrued expenses  $1,697 
Deferred revenue   489 
Capital lease obligations   566 
Restructuring liabilities   1,038 
Deferred tax liabilities   28 
Total liabilities assumed   3,818 
Net assets acquired  $39,028 

 

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).

 

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)

 

 F-22

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

The following table shows the unaudited pro forma statements of operations for the years ended December 31, 2015, 2014 and 2013, respectively, as if the Whitehouse, Gadea, Glasgow and SSCI acquisitions had occurred on January 1, 2014 and as if 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, 
   2015   2014   2013 
Total revenue  $462,696   $404,584   $310,579 
Net income (loss)  $11,837   $(2,382)  $9,877 
Pro forma shares – basic   34,458    33,827    30,912 
Pro forma shares – diluted   35,622    33,827    31,848 
Earnings (loss) per share:               
Basic  $0.34   $(0.07)  $0.32 
Diluted  $0.33   $(0.07)  $0.31 

 

The following table shows the pro forma adjustments made to the weighted average shares outstanding for the periods noted:

 

   Year ended December 31, 
   2015   2014   2013 
Weighted average common shares outstanding – basic   33,169    31,526    30,912 
Pro forma impact of acquisition consideration   1,289    2,301     
Pro forma weighted average shares – basic   34,458    33,827    30,912 
Dilutive effect of warrants and share-based compensation   1,164        936 
Pro forma weighted average shares – diluted   35,622    33,827    31,848 

 

For the years ended December 31, 2015, 2014 and 2013, pre-tax net income was adjusted for acquisition related costs by reducing expenses by $2,235, $1,676 and by increasing expense of $1,629, respectively.

 

For the years ended December 31, 2015, 2014 and 2013 pre-tax net income was adjusted by increasing expenses by $3,439, $6,052 and $3,199, respectively, for purchase accounting related depreciation and amortization.

 

F-23 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

For the year ended December 31, 2014, the estimated acquisition accounting adjustment for inventory of $14,650 was included in cost of contract revenue to show the proforma impact of the Gadea acquisition occurring on January 1, 2014. This amount is recognized over time into cost of revenue based on Gadea’s inventory turns. For the year ended December 31, 2015, a pro forma adjustment was made to reduce cost of revenue by $8,152.

 

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 $1,488 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 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 5). 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 a 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 $4,208 of pro forma interest expense on the Credit Agreement for the purposes of presenting the pro forma statements of operations for the year ended December 31, 2015, and $8,417 for the year ended 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. 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 $1,500 of pro forma interest expense on the senior secured facility.

 

The Company funded the acquisitions of Cedarburg and OsoBio utilizing the proceeds from a private offering of $150,000 aggregate principal amount of 2.25% Cash Convertible Senior Notes (the “Notes”) that was completed in December 2013. The Company did not have sufficient cash on hand to complete these acquisitions as of January 1, 2013. For the purposes of presenting the pro forma combined condensed statement of operations for the year ended December 31, 2013, the Company has included the assumption of bridge financing as of January 1, 2013 to fund the acquisition of Cedarburg and OsoBio as of that date. The pro forma combined condensed statement of operations for the year ended December 31, 2013 reflects the recognition of interest expense on the assumed bridge financing for the period January 1, 2013 to December 4, 2013 using the rate of interest that the Company paid on its term loan facility, at which point it is further assumed that a portion of the Notes financing would have been utilized to satisfy the bridge financing. For the year ended December 31, 2013, pre-tax net income was adjusted by $10,074 of pro forma interest expense on the bridge financing.

 

3.Restructuring

 

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 additional 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.

 

F-24 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

 

Restructuring charges for the year ended December 31, 2015 were $5,988, consisting primarily of UK termination charges and costs associated with the transfer of continuing products from the Holywell, UK facility to our other manufacturing locations, resource optimization charges at our Singapore facility and lease termination and other charges associated with the previously announced restructuring at the Company’s Syracuse, NY 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.

 

Prior Activities

 

During 2012, the Company announced its decisions to cease operations at its Budapest, Hungary and Bothell, WA facilities. The goal of these restructuring activities was to advance the Company’s continued strategy of increasing global competitiveness and remaining diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing our location footprint. In connection with these activities, the Company recorded restructuring charges in its DDS operating segment of $525, $481, and $6,538 during 2015, 2014 and 2013, respectively. 

 

The following tables displays the restructuring activity and liability balances for the years ended and as of December 31, 2015 and 2014:

 

   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 our Singapore facility and $201 related to our Holywell, UK facility.

  

F-25 

 

 

ALBANY MOLECULAR RESEARCH, INC.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2015 and 2014

(In thousands, except for per share amounts)

  

   Balance at
January 1,
2014
   Charges/
(reversals)