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AMRI > SEC Filings for AMRI > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for ALBANY MOLECULAR RESEARCH INC


8-Aug-2013

Quarterly Report


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

Forward-Looking Statements

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

Strategy and Overview

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

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

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

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

As our customers continue to seek innovative new strategies for R&D efficiency and productivity, we are aggressively realigning our business and resources to address their needs. AMRI SMARTSOURCING™ is a cross-functional approach that maximizes the strengths of both insourcing and outsourcing, by leveraging AMRI's people, know-how, facilities, expertise and global project management to provide exactly what is needed across the discovery or development process. We have also streamlined our sales and marketing organization to optimize cross-selling opportunities and enhanced our commitment to quality with the appointment of key personnel at our Burlington aseptic services facility, both underscoring our dedication to client service. Our improved organizational structure, combined with more focused marketing efforts, should enable us to continue to drive long term growth and profitability.

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

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

Our backlog of open manufacturing orders and accepted service contracts was $138.3 million at June 30, 2013, as compared to $109.4 million at June 30, 2012. Our manufacturing and services contracts are completed over varying durations, from short to extended periods of time.

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

Our total revenue for the quarter ended June 30, 2013 was $59.3 million, which included $50.8 million from our contract service business and $8.5 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc. ("Actavis"). Consolidated gross margin was 16.4% for the quarter ended June 30, 2013 as compared to 14.5% for the quarter ended June 30, 2012.

During the six months ended June 30, 2013, cash provided by operations was $19.5 million compared to cash used by operations of $0.1 million for the same period of 2012. This change from the six months ended June 30, 2012 resulted primarily from increases in the Company's revenue and margins. During the six months ended June 30, 2013, we spent $4.9 million on capital expenditures, primarily related to growth and maintenance of our existing facilities. As of June 30, 2013, we had $42.8 million in cash, cash equivalents and restricted cash and $7.6 million in bank and other related debt.

Results of Operations - Three and Six Months ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012

Revenues

Total contract revenue

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

                       Three Months Ended June 30,             Six Months Ended June 30,
  (in thousands)        2013                 2012              2013                2012

  DDS              $       19,513       $       16,657     $      39,609       $      36,117
  LSM                      31,251               25,733            57,648              48,983
  Total            $       50,764       $       42,390     $      97,257       $      85,100

DDS contract revenues for the three months ended June 30, 2013 increased from the same period in 2012. This increase was primarily due to an increase in demand for U.S. chemistry services. DDS contract revenues for the six months ended June 30, 2013 increased from the same period in 2012 primarily due to an increase in demand for U.S. chemistry services, offset in part by reduced U.S. biology business due to the closure of our Bothell facility.

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

LSM revenue increased for the three and six months ended June 30, 2013 from the same period in 2012 primarily due to an increase in commercial manufacturing services at our Rensselaer, NY facility, offset in part by decreases in our clinical supply manufacturing services.

We currently expect continued growth in LSM contract revenue for full year 2013 due to strong demand for our commercial manufacturing services, as well as an increase in demand for our aseptic fill and finish services at our Burlington, MA facility.

Recurring royalty revenue

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 8,528 $ 7,529 $ 21,441 $ 18,514

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

Recurring royalties increased during the three and six months ended June 30, 2013 from the same periods in 2012 primarily due to the receipt of Actavis royalties, offset in part by lower Allegra royalties.

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

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

Costs and Expenses

Cost of contract revenue

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

Segment                                   Three Months Ended June 30,             Six Months Ended June 30,
(in thousands)                             2013                 2012              2013                2012

                DDS                   $       16,951       $       16,308     $      33,723       $      35,148
                LSM                           25,499               19,943            46,549              40,773
               Total                  $       42,450       $       36,251     $      80,272       $      75,921

         DDS Gross Margin                       13.1 %                2.1 %            14.9 %               2.7 %
         LSM Gross Margin                       18.4 %               22.5 %            19.2 %              16.8 %
        Total Gross Margin                      16.4 %               14.5 %            17.5 %              10.8 %

DDS contract revenue gross margin percentage increased for the three and six months ended June 30, 2013 compared to contract revenue gross margin percentage for the same periods in 2012. These increases are primarily due to previously announced cost savings initiatives as well as an increase in facility utilization.

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

LSM's contract revenue gross margin percentages decreased for the three months ended June 30, 2013 compared to the same period in 2012 primarily due to changes in the composition of products included in contract revenue.

LSM's contract revenue gross margin percentages improved for the six months ended June 30, 2013 compared to the same period in 2012 primarily due to an increase in sales of higher margin products for our U.S. manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

We currently expect full year improvement in LSM contract margins for 2013 as compared to 2012 driven by an increase in capacity utilization.

Technology incentive award

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

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 569 $ 753 $ 1,683 $ 1,852

Technology incentive award expense decreased for the three and six months ended June 30, 2013 from the same periods in 2012 as a direct result of the decreases in Allegra royalty revenue in 2013.

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

Research and development

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

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

Research and development expenses were as follows:

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 171 $ 231 $ 276 $ 604

R&D expense for the three and six months ended June 30, 2013 decreased from the same periods in 2012 as a result of our continued efforts to support our strategic decision to cease R&D operations related to our internal discovery research and development programs, excluding our generics program.

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

Selling, general and administrative

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

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 12,454 $ 9,841 $ 22,003 $ 19,687

The increase in SG&A expenses for the three and six months ended June 30, 2013 from the comparable prior year period is primarily attributable to a one-time charge of $1.92 million for the settlement of a U.S. litigation matter. The settlement, which will be effective during the third quarter, will serve to settle the litigation and dismiss all claims between the parties. Additionally, there was an increase in the second quarter of 2013 as compared to the same period in 2012 due to executive transition costs and increases in compensation and benefits, offset in part by cost savings actions.

We currently expect SG&A expenses for 2013 to approximate amounts recognized in 2012 inclusive of the above mentioned one-time settlement litigation charge of $1.92 million.

Restructuring

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 4,953 $ 1,439 $ 5,832 $ 2,127

During 2012, we approved restructuring plans to cease all operations at our Budapest, Hungary, and Bothell, WA facilities. The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and to remain diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences, while optimizing our location footprint. Additionally, we intend to expand and better integrate our in vitro biology services with the total drug discovery service platform and to further optimize the Company's location footprint. In connection with these actions, we recorded restructuring charges of $5.8 million in the first half of 2013 and $4.6 million in 2012. The second quarter restructuring charge includes lease termination charges for our Bothell, WA facility of $2.9 million. We exited the Bothell, WA facility in the second quarter of 2013.

We exited the Budapest, Hungary facility in the third quarter of 2012. During the second quarter of 2013, we reached agreement with the landlord of that facility under which AMRI Hungary will pay approximately $1.89 million to settle the litigation in Hungary that resulted from the termination of the lease following the cessation of operations in Budapest, Hungary. Of this amount, $1.1 million was recorded in 2012 as our initial estimate of our liability under this lease. The remaining $0.8 million is included in the restructuring charge taken during the second quarter of 2013.

Anticipated cash outflow related to the restructurings for the remainder of 2013 is approximately $5.0 million, which includes the settlement of the Hungary lease.

Property and Equipment Impairment

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 906 $ - $ 1,440 $ 3,967

In the second quarter of 2013, as a result of resolving the termination of the lease at our former Hungary facility, we recorded additional property and equipment impairment charges of $0.9 million in our DDS segment reflecting updated assumptions regarding the expected disposition of certain moveable equipment currently located at the former Hungary facility.

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

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

Interest expense, net

                                          Three Months Ended June 30,             Six Months Ended June 30,
(in thousands)                            2013                  2012              2013                  2012

Interest expense                      $        (85 )       $         (116 )   $        (168 )       $       (262 )
Interest income                                  4                      3                 5                    7
Interest expense, net                 $        (81 )       $         (113 )   $        (163 )       $       (255 )

Net interest expense decreased for the three and six months ended June 30, 2013 from the same period in 2012 primarily due to decreased interest rates on our interest bearing liabilities.

Other income (expense), net

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 321 $ 136 $ 773 $ (656 )

Other income for the three months ended June 30, 2013 was primarily related to the fluctuation in exchange rates associated with the foreign currency transactions. Included in other income for the six months ended June 30, 2013 was an insurance demutualization gain of $0.4 million.

Other expense for the six months ended June 30, 2012 was primarily due to deferred financing amortization expense related to our prior credit agreement that was amended in June 2011 with a one year term.

Income tax expense

Three Months Ended June 30, Six Months Ended June 30, 2013 2012 2013 2012

(in thousands)

$ 276 $ 1,260 $ 3,544 $ 2,185

Income tax expense decreased for the three months ended June 30, 2013 as compared to the same period in 2012 due primarily to decreased pre-tax income at the Company's U.S. locations.

Income tax expense increased for the six months ended June 30, 2013 as compared to the same period in the prior year due primarily to improved pre-tax income at the Company's U.S. locations.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows and proceeds from borrowings. During the first six months of 2013, we generated cash of $19.5 million in operating activities which was primarily due to increased levels of revenue and timing of cash receipts.

During the first six months of 2013, cash used in investing activities was $5.0 million, resulting primarily from the acquisition of property and equipment. Additionally, during the first half of 2013, we generated $1.3 million in financing activities, relating primarily to stock option exercises and Employee Stock Purchase Plan ("ESPP") purchases, offset in part by payments made on our credit facilities.

Working capital was $90.1 million at June 30, 2013 as compared to $77.4 million as of December 31, 2012. This increase primarily relates to cash generated from operations.

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. The Company used a portion of the initial proceeds from borrowings against the term loan to repay all amounts due under its prior credit agreement. As of June 30, 2013, the Company had no amounts outstanding under the line of credit and $8.6 million of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at June 30, 2013 was $6.4 million.

Upon entering into the credit agreement in April 2012, the Company is required to maintain a $5.0 million restricted cash balance to partially collateralize the revolving line of credit. In conjunction with an amendment to the credit agreement dated December 20, 2012, the restricted cash requirement is directly reduced by the amount of principal payments made on the term loan which began in May 2013. The amount of restricted cash collateralizing the revolving line of credit was $4.9 million at June 30, 2013.

Borrowings under this agreement bear interest at a fluctuating rate equal to:
(i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of June 30, 2013, the interest rate on the . . .

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