Albany Molecular Research 10-Q 2017 Q2 Quarterly report

 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
¨	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 12203

(Address of principal executive offices)

(518) 512-2000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 (§ 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	Accelerated filerx
Non-accelerated filer¨	Smaller reporting company¨
Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨ No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 31, 2017
Common Stock, $.01 par value	43,119,283 excluding treasury shares of 5,689,657

ALBANY MOLECULAR RESEARCH, INC.

INDEX

Part I.	Financial Information		3
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Statements of Comprehensive Income (Loss)	4
		Condensed Consolidated Balance Sheets	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
	Item 4.	Controls and Procedures	34
Part II.	Other Information		35
	Item 1.	Legal Proceedings	35
	Item 1A.	Risk Factors	35
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 6.	Exhibits	38
Signatures			39
Exhibit Index

2 

INTRODUCTORY NOTE

On June 6, 2017, we announced that we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by affiliates Carlyle Partners VI, L.P. and GTCR Fund XI/A LP, GTCR Fund XI/C LP, and GTCR Co-Invest XI LP. Under the terms of the Merger Agreement, our stockholders will be entitled to receive $21.75 per share following the closing of the proposed merger. The merger, which is expected to close in the third quarter of 2017, is subject to approval by our stockholders, regulatory approvals and other customary closing conditions.

PART I — FINANCIAL INFORMATION

Item 1.       Condensed Consolidated Financial Statements (Unaudited)

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except for per share data)		2017			2016			2017			2016
Contract revenue	$	170,720		$	116,457		$	330,945		$	219,295
Recurring royalties		2,212			4,353			5,809			7,094
Total revenue		172,932			120,810			336,754			226,389
Cost of contract revenue		131,715			82,214			254,493			161,577
Research and development		3,463			3,479			6,836			6,647
Selling, general and administrative		38,645			27,924			72,075			52,525
Restructuring and other charges		153			526			2,311			3,126
Impairment charges		512			201			512			201
Total operating expenses		174,488			114,344			336,227			224,076
(Loss) income from operations		(1,556	)		6,466			527			2,313
Interest expense, net		(12,710	)		(7,064	)		(25,540	)		(14,200	)
Other expense, net		(633	)		(5,661	)		(1,425	)		(6,657	)
Loss before income tax (benefit) expense		(14,899	)		(6,259	)		(26,438	)		(18,544	)
Income tax (benefit) expense		(4,652	)		15,008			(5,501	)		12,791
Net loss	$	(10,247	)	$	(21,267	)	$	(20,937	)	$	(31,335	)
Basic and diluted loss per share	$	(0.24	)	$	(0.61	)	$	(0.49	)	$	(0.90	)

See notes to unaudited Condensed Consolidated Financial Statements.

3 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2017			2016			2017			2016
Net loss	$	(10,247	)	$	(21,267	)	$	(20,937	)	$	(31,335	)
Foreign currency translation gain (loss)		26,017			(5,761	)		33,304			33
Net actuarial gain on pension and postretirement benefits		118			115			236			230
Total comprehensive income (loss)	$	15,888		$	(26,913	)	$	12,603		$	(31,072	)

See notes to unaudited Condensed Consolidated Financial Statements.

4 

Albany Molecular Research, Inc.

Condensed Consolidated Balance Sheets

(unaudited) 

	June 30,			December 31,
(Dollars in thousands, except for per share data)		2017			2016
Assets
Current assets:
Cash and cash equivalents	$	42,227		$	52,000
Restricted cash		300			236
Accounts receivable, net		139,342			144,795
Royalty income receivable		2,755			3,486
Inventory		186,409			167,111
Prepaid expenses and other current assets		26,138			22,109
Income taxes receivable		5,532			2,026
Property and equipment held for sale		1,209			1,148
Total current assets		403,912			392,911
Property and equipment, net		362,036			364,806
Notes hedges		64,677			51,003
Goodwill		238,702			231,256
Intangible assets and patents, net		168,382			165,174
Deferred income taxes		563			504
Other assets		4,102			3,994
Total assets	$	1,242,374		$	1,209,648
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	116,919		$	122,210
Deferred revenue		20,188			13,370
Income taxes payable		2,222			2,826
Accrued pension benefits		958			680
Short-term borrowings		20,810			22,515
Current installments of long-term debt		431,562			13,917
Total current liabilities		592,659			175,518
Long-term liabilities:
Long-term debt, excluding current installments, net		195,591			604,476
Notes conversion derivative		64,677			51,003
Income taxes payable		3,068			3,769
Pension and postretirement benefits		18,412			18,615
Deferred income taxes		34,782			40,058
Other long-term liabilities		16,162			17,227
Total liabilities		925,351			910,666
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, authorized 2,000 shares, none issued or outstanding		-			-
Common stock, $0.01 par value, authorized 100,000 shares, 48,643 shares issued as of June 30, 2017 and 48,465 shares issued as of December 31, 2016		486			485
Additional paid-in capital		407,884			400,496
(Accumulated deficit) retained earnings		(13,777	)		7,160
Accumulated other comprehensive loss, net		(6,190	)		(39,730	)
		388,403			368,411
Less, treasury shares at cost, 5,680 shares as of June 30, 2017 and 5,573 shares as of December 31, 2016		(71,380	)		(69,429	)
Total stockholders’ equity		317,023			298,982
Total liabilities and stockholders’ equity	$	1,242,374		$	1,209,648

See notes to unaudited Condensed Consolidated Financial Statements. 

5 

Albany Molecular Research, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Six Months Ended June 30,
(Dollars in thousands)	2017				2016
Operating activities
Net loss	$	(20,937	)		$	(31,335	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and intangible asset amortization		34,218				16,280
Deferred financing costs amortization		3,945				1,938
Accretion of discount on long-term debt		6,354				3,649
Unrealized loss on hedge instrument		-				6,401
Deferred income taxes		(6,648	)			9,667
Loss (gain) on disposal of property and equipment		369				(139	)
Impairment charges		512				201
Allowance for bad debts		1,003				275
Share-based compensation expense		6,467				4,630
Changes in operating assets and liabilities that provide (use) cash, net of impact
of business combinations:
Accounts receivable		10,169				9,886
Royalty income receivable		830				274
Inventory		(11,165	)			(3,203	)
Prepaid expenses and other assets		(2,834	)	��		(5,729	)
Accounts payable and accrued expenses		(12,275	)			1,180
Income taxes		(3,907	)			3,969
Deferred revenue		6,193				(4,225	)
Pension and postretirement benefits		(582	)			(70	)
Other long-term liabilities		(3,192	)			1,592
Net cash provided by operating activities		8,520				15,241
Investing activities
Purchases of businesses, net of cash acquired		-				(1,056	)
Purchases of property and equipment		(10,486	)			(24,966	)
Payments for patent applications and other costs		(151	)			(158	)
Proceeds from disposal of property and equipment		-				675
Net cash used in investing activities		(10,637	)			(25,505	)
Financing activities
Issuance of short-term borrowings		52,547				-
Principal payments on short-term borrowings		(55,986	)			-
Borrowings on long-term debt		-				250
Principal payments on long-term debt		(7,352	)			(10,773	)
Change in restricted cash		(64	)			2,253
Proceeds from exercise of options and Employee Stock Purchase Plan		921				903
Purchases of treasury stock		(1,951	)			(770	)
Net cash used in financing activities		(11,885	)			(8,137	)
Effect of exchange rate changes on cash and cash equivalents		4,229				(267	)
Decrease in cash and cash equivalents		(9,773	)			(18,668	)
Cash and cash equivalents at beginning of period		52,000				49,343
Cash and cash equivalents at end of period	$	42,227			$	30,675
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	15,478			$	8,603
Income taxes, net	$	4,974			$	1,101

See notes to unaudited Condensed Consolidated Financial Statements.

6 

(All amounts in thousands, except per share amounts, unless otherwise noted)

Note 1 — Summary of Operations and Significant Accounting Policies

Nature of Business and Operations

Albany Molecular Research, Inc. (the “Company”) is a leading global contract research and manufacturing organization providing customers fully integrated drug discovery, development, and manufacturing services. The Company supplies a broad range of services and technologies supporting the discovery and development of pharmaceutical products (“DDS”), the manufacture of fine chemicals (“FC”) and Active Pharmaceutical Ingredients (“API”), the development and manufacture of drug product (“DP”) for new and generic drugs, as well as research, development and manufacturing for the agrochemical and other industries. In addition, the Company offers analytical and testing services to customers in the medical device and personal care industries. With locations in the United States, Europe, and Asia, the Company maintains geographic proximity to its customers and flexible cost models.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited Condensed Consolidated Financial Statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by U.S. generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for any other period or for the year ending December 31, 2017. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries as of and for the three and six months ended June 30, 2017. All intercompany balances and transactions have been eliminated during consolidation. Assets and liabilities of non-U.S. operations are translated at period-end rates of exchange, and the statements of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating non-U.S. currency financial statements are recorded in the unaudited Condensed Consolidated Statements of Comprehensive Loss and in ‘Accumulated other comprehensive loss, net’ in the accompanying unaudited Condensed Consolidated Balance Sheets. When necessary, balances of prior period unaudited Condensed Consolidated Financial Statements have been reclassified to conform to the current year presentation.

Use of Management Estimates

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

Contract Revenue Recognition

The Company’s contract revenue consists primarily of amounts earned under contracts with third-party customers and reimbursed expenses under such contracts. Reimbursed expenses consist of chemicals and other project specific costs. The Company also seeks to include provisions in certain contracts that contain a combination of up-front licensing fees, milestone and royalty payments should the Company’s proprietary technology and expertise lead to the discovery of new products that become approved by the applicable regulatory agencies for commercial sale. Generally, the Company’s contracts may be terminated by the customer upon 30 days’ to two years’ prior notice, depending on the terms and/or size of the contract. The Company analyzes its agreements to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 605-25, “Revenue Arrangements with Multiple Deliverables,” and Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” Allocation of revenue to individual elements that qualify for separate accounting is based on the separate selling prices determined for each component, and total contract consideration is then allocated based on relative fair value across the components of the arrangement. If separate selling prices are not available, the Company will use its best estimate of such selling prices, consistent with the overall pricing strategy and after consideration of relevant market factors.

7 

The Company generates contract revenue under the following types of contracts:

Fixed-Fee. Under a fixed-fee contract, the Company charges a fixed agreed-upon amount for a deliverable. Fixed-fee contracts have fixed deliverables upon completion of the project. Typically, the Company recognizes revenue for fixed-fee contracts after projects are completed and when delivery is made or title and risk of loss otherwise transfers to the customer, and collection is reasonably assured. In certain instances, the Company’s customers request that the Company retain materials produced upon completion of the project due to the fact that the customer does not have a qualified facility to store those materials or for other reasons. In these instances, the revenue recognition process is considered complete when project documents have been delivered to the customer, as required under the arrangement, or other customer-specific contractual conditions have been satisfied.

Full-time Equivalent (“FTE”). An FTE agreement establishes the number of Company employees contracted for a project or a series of projects, the duration of the contract period, the price per FTE, plus an allowance for chemicals and other project specific costs, which may or may not be incorporated in the FTE rate. FTE contracts can run in one month increments, but typically have terms of six months or longer. FTE contracts typically provide for annual adjustments in billing rates for the scientists assigned to the contract.

These contracts involve the Company’s scientists providing services on a “best efforts” basis on a project that may involve a research component with a timeframe or outcome that has some level of unpredictability. There are no fixed deliverables that must be met for payment as part of these services. As such, the Company recognizes revenue under FTE contracts as services are performed according to the terms of the contract.

Time and Materials. Under a time and materials contract, the Company charges customers an hourly rate plus reimbursement for chemicals and other project specific costs. The Company recognizes revenue for time and materials contracts based on the number of hours devoted to the project multiplied by the customer’s billing rate plus other project specific costs incurred.

Recurring Royalty

The Company currently receives royalties in conjunction with a Development and Supply Agreement with Teva Pharmaceuticals (“Teva”). These royalties are earned on net sales of generic products sold by Teva. The Company records royalty revenue in the period in which the net sales of these generic products occur. Royalty payments from Teva are due within 60 days after each calendar quarter and are determined based on sales of the qualifying products in that quarter. The Company also receives royalties on certain other products, and royalty revenue is generally estimated and recognized when the sales of product occur.

Collaboration Arrangement Revenues:

The Company enters into collaboration arrangements with third parties for the development and manufacture of certain products and/or product candidates. These arrangements may include non-refundable, upfront payments, milestone payments and cost sharing arrangements during the development stage, payments for manufacturing based on cost plus an agreed percentage, as well as profit sharing payments during the product’s commercial stage.

The Company recognizes revenue for payments received for services performed under these arrangements as contract revenue in accordance with ASC 605, “Revenue Recognition.” Development stage payments are recognized using the milestone method when the contractual milestones are determined to be substantive and have been achieved. Certain contractual milestones are deemed to be achieved upon the occurrence of the contractual performance events. Other non-performance based milestones, including the filing of an Abbreviated New Drug Application (ANDA) and approval by the Food and Drug Administration (FDA), which are generally events that occur at the end of the development period, are recognized upon occurrence of the related event. Contractual milestones that are deemed not substantive are recognized using proportional performance over the remaining development period. Upfront, non-refundable payments are recognized over the term of the development period using the proportional performance recognition model. Revenue associated with payments received for contract manufacturing services are recognized upon delivery of the product to the Company’s collaborative partners. Revenue associated with payments received for profit sharing payments are recognized as recurring royalties revenue when earned based on the terms of the agreements.

Cash, Cash Equivalents and Restricted Cash

Cash equivalents consist of money market accounts and overnight deposits. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash and cash equivalents are held principally at seven financial institutions and at times may exceed insured limits.  The Company has placed these funds in high quality institutions in order to minimize risk relating to exceeding insured limits.

8 

Restricted cash balances at June 30, 2017 and December 31, 2016 are required pursuant to the Company’s Singapore lease agreements.

Long-Lived Assets

The Company assesses the impairment of a long-lived asset group whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, among others, the following:

· a significant change in the extent or manner in which a long-lived asset group is being used;

· a significant change in the business climate that could affect the value of a long-lived asset group; or

· a significant decrease in the market value of assets.

If the Company determines that the carrying value of long-lived assets may not be recoverable, based upon the existence of one or more of the above indicators of impairment, the Company compares the carrying value of the asset group to the undiscounted cash flows expected to be generated by the asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is indicated. An impairment charge is recognized to the extent that the carrying amount of the asset group exceeds its fair value and will reduce only the carrying amounts of the long-lived assets.

Derivative Instruments and Hedging Activities

The Company accounts for derivatives in accordance with FASB ASC Topic 815, “Derivatives and Hedging,” which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or a liability measured at fair value. Additionally, changes in a derivative’s fair value shall be recognized currently in earnings unless specific hedge accounting criteria are met. The Company recognizes changes in fair value associated with non-qualified derivatives in ‘Other (expense) income, net’ in the Condensed Consolidated Statements of Operations. If required hedge accounting criteria are met, then changes in fair value are recorded in accumulative other comprehensive loss, net.

Recent Accounting Pronouncements:

Accounting Pronouncements Issued But Not Yet Adopted

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits", which requires the service cost component of net benefit costs be reported with other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented separately from the service cost component and outside of income from operations. This amendment also allows only the service cost component to be eligible for capitalization when applicable. The ASU is effective for interim and annual periods beginning after December 15, 2017. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, “Restricted Cash.” The standard addresses the classification and presentation of restricted cash and restricted cash equivalents within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory.” The standard requires the immediate recognition of tax effects for an intra-entity asset transfer other than inventory. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” The standard addresses the classification of certain transactions within the statement of cash flows, including cash payments for debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investments. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases.” The standard established the principles that lessees and lessors will apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The ASU is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements and related disclosures.

9 

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers: (Topic 606)." This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of ASC Topic 360, "Property, Plant, and Equipment," and intangible assets within the scope of ASC Topic 350, "Intangibles-Goodwill and Other") are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for calendar years beginning after December 15, 2017. Early adoption is not permitted. The Company has begun to evaluate the impact of this new standard on its consolidated financial statements, information technology ("IT") systems, policies and business processes and controls. The Company has developed an implementation plan to adopt this new guidance including determining the method of adoption. As part of this plan, the Company is currently reviewing customer contract provisions for all of its revenue streams and assessing the potential impact this standard will have on the consolidated financial statements and related disclosures. Based on the Company’s assessment procedures performed to date, it is currently unable to estimate the impact this standard will have on the consolidated financial statements; however, the Company anticipates that the adoption of the new standard will require it to make changes to its business processes and controls.

Accounting Pronouncements Recently Adopted

In May 2017, the FASB issued ASU 2017-09, “Scope of Modification Accounting.” The standard provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company has early adopted this ASU as of April 1, 2017 with no impact on the Company’s consolidated financial statements resulting from its adoption.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s consolidated financial statements resulting from its adoption.

In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business.” The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted for certain transactions. The Company has early adopted this ASU as of January 1, 2017 with no impact on the Company’s consolidated financial statements resulting from its adoption.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The standard reduces complexity in several aspects of the accounting for employee share-based compensation, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Note 2 — Earnings Per Share

The shares used in the computation of the Company’s basic and diluted earnings per share are as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Weighted average common shares outstanding – basic and diluted	42,520	34,935	42,452	34,826

10 

The Company has excluded certain outstanding stock options, non-vested restricted stock and warrants from the calculation of diluted earnings per share for the three and six months ended June 30, 2017 and 2016 because of anti-dilutive effects. The weighted average number of anti-dilutive common equivalents outstanding (before the effects of the treasury stock method) was 12,148 and 11,662 for the three months ended June 30, 2017 and 2016, respectively, and 11,937 and 11,765 for the six months ended June 30, 2017 and 2016, respectively. These amounts are not included in the calculation of weighted average common shares outstanding.

Note 3 — Business Acquisitions

On July 11, 2016, the Company purchased from Lauro Cinquantasette S.p.A. all of the capital stock of Prime European Therapeuticals S.p.A. (“Euticals”) (the “Euticals Acquisition”), a privately-held company headquartered in Lodi, Italy, specializing in custom synthesis and the manufacture of active pharmaceutical ingredients with a network of facilities located in Italy, Germany, the U.S. and France. The Euticals operations have been assigned to the API, DDS and FC segments based on the activities performed and markets served at each location.

The aggregate net purchase price was $277,067 (net of cash acquired of $20,784), which consisted of (i) the issuance of 7,051 unregistered shares of common stock subject to a six month lock-up provision, valued at $91,765 (net of lock-up provision discount of $9,633), (ii) the issuance of two unsecured promissory notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, or $60,783, that were valued at $44,342 (net of an original issue discount of $16,441) (the “Euticals Seller Notes”), and (iii) $140,960 in cash, net of a final working capital adjustment of $2,309.

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

	July 11,
	2016
Assets Acquired
Accounts receivable	$	30,977
Prepaid expenses and other current assets		5,564
Inventory		103,895
Income taxes receivable		396
Property and equipment		159,924
Intangible assets		59,457
Goodwill		64,018
Other long term-assets		713
Total assets acquired	$	424,944
Liabilities Assumed
Accounts payable and accrued expenses	$	61,256
Short-term borrowings		27,362
Deferred revenue		3,399
Deferred income taxes		29,422
Pension benefits		13,201
Environmental liabilities		11,716
Other long-term liabilities		1,521
Total liabilities assumed		147,877
Net assets acquired	$	277,067

The purchase price allocation was adjusted in the first quarter of 2017 due to the recognition of income tax receivables of $16 and deferred tax assets of $2,312. The purchase price allocation was adjusted in the second quarter of 2017 due to the recognition of income tax indemnification receivables from Lauro Cinquantasette S.p.A of $1,072, the recognition of a liability associated with a customer concession of $245, and the recognition of income tax receivables of $191. These adjustments resulted in a net decrease to goodwill of $3,346. The Company does not expect any further adjustments to the purchase price allocation.

The Company has attributed the goodwill of $64,018 to an expanded global footprint and additional market opportunities that the Euticals’ business offers within the API and DDS segments. The goodwill is not deductible for tax purposes. Intangible assets acquired consist of customer relationships of $7,073, with an estimated life of 9 years, developed technology of $44,648, with an estimated life of 16 years, and manufacturing intellectual property and know-how of $7,736, with an estimated life of 18 years.

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Pro forma Information (Unaudited)

The following table shows the unaudited pro forma statements of operations for the three and six months ended June 30, 2016, as if the Euticals Acquisition had occurred on January 1, 2015. This pro forma information does not purport to represent what the Company’s actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods.

	Three months ended			Six months ended
	June 30, 2016			June 30, 2016
Total revenue	$	177,355		$	339,478
Net loss	$	(11,741	)	$	(28,963	)
Pro forma shares - basic and diluted		41,986			41,877
Loss per share:
Basic and diluted	$	(0.28	)	$	(0.69	)

The following table shows the pro forma adjustments made to the weighted average shares outstanding for the three and six months ended June 30, 2016:

	Three months ended		Six months ended
	June 30, 2016		June 30, 2016
Weighted average common shares outstanding - basic and diluted		34,935		34,826
Pro forma impact of acquisition consideration		7,051		7,051
Pro forma weighted average shares - basic and diluted		41,986		41,877

For the three and six month periods ended June 30, 2016, pre-tax net income was adjusted by reducing expenses by $3,198 and $4,561, respectively, for acquisition-related costs and increasing expenses by $2,825 and $5,621, respectively, for purchase accounting related depreciation and amortization.

The Company’s historical financial statements for the three and six months ended June 30, 2016 include the recognition of an unrealized loss associated with the foreign currency derivative that was entered into for the purpose of hedging the euro denominated Euticals purchase price. For purposes of presenting the pro forma statements of operations for the three month and six month periods ended June 30, 2016, pre-tax net income was adjusted by reducing expenses by $6,401, as the unrealized loss on the foreign currency derivative would have been recognized during the year ended December 31, 2014 assuming a January 1, 2015 acquisition date.

The Company partially funded the Euticals Acquisition utilizing the proceeds from a $230,000 term loan that was provided for in conjunction with the Third Amended and Restated Credit Agreement, entered into with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders party thereto (the “Third Restated Credit Agreement”), which was completed on July 7, 2016, along with the issuance of the Euticals Seller Notes on July 11, 2016 (see Note 5). The Company did not have sufficient cash on hand to complete the acquisition as of January 1, 2015. For the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2016, the Company has assumed that it entered into the Third Restated Credit Agreement and issued the Euticals Seller Notes on January 1, 2015 for an amount sufficient to fund the preliminary cash consideration to acquire Euticals as of that date. The pro forma statement of operations for the three and six months ended June 30, 2016 reflects the recognition of interest expense that would have been incurred had the Third Restated Credit Agreement and the Euticals Seller Notes been entered into and issued, respectively, on January 1, 2015. The Company has recorded $3,841 and $7,682, respectively, of pro forma interest expense on the Third Restated Credit Agreement and the Euticals Seller Notes for the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2016.

A portion of Euticals’ debt was paid by the Company at the closing of the Euticals Acquisition. For the purposes of presenting the pro forma statement of operations for the three and six months ended June 30, 2016, the Company has reduced expenses by $1,623 and $3,246, respectively, assuming the debt and accrued interest were paid on January 1, 2015.

During the three month period ended June 30, 2016, the Company established a valuation allowance against its U.S. deferred tax assets.  For the purposes of presenting the pro forma statements of operations for the three and six months ended June 30, 2016, the Company has assumed that it would have been required to establish a valuation allowance against the combined U.S. deferred tax assets of the Company and Euticals on January 1, 2015 assuming a January 1, 2015 acquisition date.  In addition, the pro forma adjustments to income tax expense (benefit), at the applicable effective rates (including the effect of establishing a valuation allowance against the combined U.S. deferred tax assets of the Company and Euticals), the tax effects of the pro forma pre-tax adjustments recorded in the statements of operations.

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Note 4 — Inventory

Inventory consisted of the following as of June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016(a)
Raw materials	$	59,556	$	57,071
Work-in-process		61,305		57,808
Finished goods		65,548		52,232
Total inventory	$	186,409	$	167,111

(a) Certain adjustments have been made to December 31, 2016 inventory classifications to conform to current year presentation.

Note 5 — Debt

Short-Term Borrowings

In connection with the Euticals Acquisition, the Company assumed the short-term borrowing obligations of Euticals, consisting of multiple bank revolving lines of credit with a maximum borrowing capacity of €42,200, or $48,206, at June 30, 2017 (the “Euticals Revolving Credit Facilities”). The Euticals Revolving Credit Facilities support Euticals’ short-term working capital needs and are collateralized, in part, by certain Euticals’ trade receivables balances. The Euticals Revolving Credit Facilities are subject to variable interest rates and the average effective interest rate was 3.51% during the six months ended June 30, 2017.

As of June 30, 2017, the aggregate outstanding balance under the Euticals Revolving Credit Facilities was $20,810 and the related trade receivables collateral was $11,700.

Long-Term Debt

The following table summarizes long-term debt:

	June 30,			December 31,
	2017			2016
Convertible senior notes, net of unamortized discount	$	139,210		$	135,652
Term loan, net of unamortized discount		422,451			423,698
Euticals Seller Notes, net of unamortized discount		49,606			43,947
Various borrowings with institutions, Gadea loans		22,703			25,784
Capital leases – equipment & other		1,190			1,263
		635,160			630,344
Less: deferred financing fees		(8,007	)		(11,951	)
Less: current portion		(431,562	)		(13,917	)
Total long-term debt, excluding current portion	$	195,591		$	604,476

The aggregate maturities of long-term debt, exclusive of unamortized debt discount of $25,744 at June 30, 2017, are as follows:

2017 (remaining)	$	7,087
2018		581,069
2019		27,229
2020		23,207
2021		21,594
Thereafter		718
Total	$	660,904

Term Loans

In connection with the Euticals Acquisition, on July 7, 2016, the Company entered into the Third Restated Credit Agreement, which (i) provided incremental senior secured first lien term loans in an aggregate principal amount of $230,000 (the “Incremental Term Loans”) thereby increasing the aggregate principal amount of senior secured first lien term loans under the prior credit agreement to $428,500, and (ii) increased the first lien revolving credit facility commitments by $5,000 to $35,000. The Company used the proceeds of the Incremental Term Loans primarily to: (i) pay a portion of the cash consideration for the Euticals Acquisition; (ii) pay various fees and expenses incurred in connection with the Euticals Acquisition and related financing activities; and (iii) repay the $30,000 outstanding under the first lien revolving credit facility.

13 

The Third Restated Credit Agreement requires that the Company make quarterly repayments of $600 toward the Incremental Term Loans principal beginning on September 30, 2016. Pursuant to their terms, all remaining unpaid principal amounts of the Incremental Term Loans matures and becomes payable on July 16, 2021 and the revolving credit facility commitments under the Third Restated Credit Agreement terminates and all amounts then outstanding thereunder become payable on July 16, 2020, subject, in each case, to earlier acceleration, on (i) the date that is six months prior to the scheduled maturity date (November 15, 2018) of the Company’s 2.25% Cash Convertible Senior Notes issued on December 4, 2013 (the “Notes”) if on such date, both (x) more than $25,000 of the Notes shall remain outstanding and (y) the ratio of the secured debt of the Company and its subsidiaries to the EBITDA of the Company and its subsidiaries exceeds 1.50:1.00, or (ii) April 7, 2019, April 7, 2020 or April 7, 2021, respectively, in each case to the extent that at any such date the Company has not (x) prepaid or otherwise satisfied the amortization or final maturity payment amounts to next come due under each Euticals Seller Note then outstanding or (y) refinanced such amortization or final maturity payment amount to next come due under each Euticals Seller Note then outstanding in a manner permitted by the Third Restated Credit Agreement. In consideration of these repayment acceleration provisions the Company has included the net carrying amount of the Term Loans as part of Current installments of long-term debt on the Condensed Consolidated Balance Sheet as of June 30, 2017.

At the Company’s election, loans made under the Third Restated Credit Agreement bear interest at (a) the one-month, three-month or six-month LIBOR rate subject to a floor of 1.0% (the “LIBOR Rate”) or (b) a base rate determined by reference to the highest of (i) the United States federal funds rate plus 0.50%, (ii) the rate of interest quoted by The Wall Street Journal as the “Prime Rate,” and (iii) a daily rate equal to the one-month LIBOR Rate plus 1.0%, subject to a floor of 2.0% (the “Base Rate”), plus an applicable margin of 4.75% per annum for LIBOR Rate loans and 3.75% per annum for Base Rate loans.

The obligations under the Third Restated Credit Agreement are guaranteed by each material domestic subsidiary of the Company (each a “Guarantor”) and are secured by first priority liens on, and security interests in, substantially all of the present and after-acquired assets of the Company and each Guarantor subject to certain customary exceptions.

The face value of the term loans reconciles to the net carrying amount as follows:

	June 30,			December 31,
	2017			2016
Principal amount - term loan	$	424,183		$	426,341
Unamortized debt discount		(1,732	)		(2,643	)
Net carrying amount of term loan	$	422,451		$	423,698

For the three months ended June 30, 2017 and 2016, the Company recognized $458 and $172, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded $910 and $343, respectively, of amortization of the debt discount as interest expense based upon the effective rate of approximately 6.2%.

Euticals Seller Notes

As indicated in Note 3, in connection with the Euticals Acquisition, on July 11, 2016, the Company issued two notes to Lauro Cinquantasette S.p.A. with a combined face value of €55,000, that were valued at $44,342 (net of original issue discount of $16,441). The Euticals Seller Notes are unsecured promissory notes, guaranteed by the Company, and are subject to customary representations and warranties and events of default with repayment to be made in three equal annual installments made on the third, fourth and fifth anniversaries of the Euticals Acquisition closing date. The repayment is subject to certain set off rights of the Company relating to the seller’s indemnification obligations. The Euticals Seller Notes are subject to an interest rate equal to 0.25% per annum, which is due and payable in cash on the first day of January, April, July and October during each calendar year. The Euticals Seller Notes were recognized net of an original issue discount of $16,441. For the three and six months ended June 30, 2017, the Company recorded $995 and $1,884, respectively, of amortization of the debt discount as interest expense based upon an effective rate of 8.32%.

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The face value of the Euticals Seller Notes reconciles to the net carrying amount as follows:

	June 30,			December 31,
	2017			2016
Principal amount - Euticals Seller Notes	$	62,828		$	57,862
Unamortized debt discount		(13,222	)		(13,915	)
Net carrying amount of Euticals Seller Notes	$	49,606		$	43,947

Convertible Senior Notes

On December 4, 2013, the Company completed the private offering of $150,000 aggregate principal amount of the Notes. The Notes mature on November 15, 2018, unless earlier repurchased or converted into cash in accordance with their terms prior to such date, and interest is paid in arrears semiannually on each of May 15 and November 15 at an annual rate of 2.25% beginning on May 15, 2014. The Notes were offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.

The Notes are not convertible into the Company's common stock or any other securities under any circumstances. Holders may convert their Notes solely into cash at their option at any time prior to the close of business on the business day immediately preceding May 15, 2018 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2013 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per thousand dollars principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes solely into cash at any time, regardless of the foregoing circumstances. Upon conversion, in lieu of receiving shares of the Company's common stock, a holder will receive, per thousand dollars principal amount of Notes, an amount in cash equal to the settlement amount, determined in the manner set forth in the indenture. The initial conversion rate is 63.9844 shares of the Company's common stock per thousand dollars principal amount of Notes (equivalent to an initial conversion price of approximately $15.63 per share of common stock). The conversion rate is subject to adjustment upon certain events as described in the indenture but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company has agreed to pay a cash make-whole premium by increasing the conversion rate for a holder who elects to convert its Notes in connection with such a corporate event in certain circumstances as described in the indenture.

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

The cash conversion feature of the Notes (“Notes Conversion Derivative”) requires bifurcation from the Notes in accordance with ASC 815, “Derivatives and Hedging,” and is accounted for as a derivative liability. The fair value of the Notes Conversion Derivative at the time of issuance of the Notes was $33,600 and was recorded as original debt discount for purposes of accounting for the debt component of the Notes. This discount is amortized as interest expense using the effective interest method over the term of the Notes. For the three months ended June 30, 2017 and 2016, the Company recorded $1,796 and $1,664, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded $3,558 and $3,308, respectively, of amortization of the debt discount as interest expense based upon an effective rate of 7.69%. The cash conversion feature is expected to be exercised by the holders in connection with the repayment of the Notes upon the closing of the pending Merger disclosed in Note 14.

The fair value of the Notes reconciles to the net carrying amount as follows:

	June 30,			December 31,
	2017			2016
Principal amount	$	150,000		$	150,000
Unamortized debt discount		(10,790	)		(14,348	)
Net carrying amount of Notes	$	139,210		$	135,652

In connection with the pricing of the Notes, on November 19, 2013, the Company entered into cash convertible note hedge transactions (“Notes Hedges”) relating to a notional number of shares of the Company's common stock underlying the Notes with two counterparties (the “Option Counterparties”). The Notes Hedges, which are cash-settled, are intended to reduce the Company’s exposure to potential cash payments that it is required to make upon conversion of the Notes in excess of the principal amount of converted Notes if the Company’s common stock price exceeds the conversion price. The Notes Hedges are accounted for as a derivative instrument in accordance with ASC 815, “Derivatives and Hedging.” The aggregate cost of the note hedge transaction was $33,600.

15 

At the same time, the Company also entered into separate warrant transactions with each of the Option Counterparties initially relating, in the aggregate, to 9,598 shares of the Company's common stock underlying the Note Hedges. The Note Hedges are intended to offset cash payments due upon any conversion of the Notes. However, the warrant transactions could separately have a dilutive effect to the extent that the market price per share of the Company's common stock (as measured under the terms of the warrant transactions) exceeds the applicable strike price of the warrants. The initial strike price of the warrants is $18.9440 per share, which was 60% above the last reported sale price of the Company's common stock of $11.84 on November 19, 2013 and proceeds of $23,100 were received from the Option Counterparties from the sale of the warrants.

Aside from the initial payment of a $33,600 premium to the Option Counterparties, the Company is not required to make any cash payments to the Option Counterparties under the Note Hedges and will be entitled to receive from the Option Counterparties an amount of cash, generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Note Hedges during the relevant valuation period. The strike price under the Note Hedges is initially equal to the conversion price of the Notes. Additionally, if the market price per share of the Company's common stock, as measured under the warrant transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, the Company will be obligated to issue to the Option Counterparties a number of shares of the Company's common stock in an amount based on the excess of such market price per share of the Company's common stock over the strike price of the warrants. The Company will not receive any proceeds if the warrants are exercised.

Neither the Notes Conversion Derivative nor the Notes Hedges qualify for hedge accounting, thus any changes in the fair market value of the derivatives is recognized immediately in the statement of operations. During the six months ended June 30, 2017 and 2016, the changes in fair market value of the Notes Conversion Derivative and the Notes Hedges were equal and offsetting; therefore the net impact recognized in the statement of operations was zero.

The following table summarizes the fair value and the presentation in the consolidated balance sheet:

	June 30,			December 31,
	2017			2016
Notes hedges asset	$	64,677		$	51,003
Notes conversion derivative liability	$	(64,677	)	$	(51,003	)

The change in fair value from December 31, 2016 to June 30, 2017 is primarily a result of the increase in the Company’s stock price since December 31, 2016 resulting from the Merger Agreement disclosed in Note 14.

Note 6 — Restructuring and Other Charges

During the three months ended June 30, 2017, the Company recorded $85, ($192) and $344 related to employee termination benefits, leased facility closure costs and other restructuring costs, respectively, associated with previously initiated restructuring actions in Europe and Singapore. 

During the six months ended June 30, 2017, the Company recorded $447, $1,358 and $506 related to employee termination benefits, leased facility closure costs and other restructuring costs, respectively, associated with previously initiated restructuring actions in Europe and Singapore.

16 

The following table displays the restructuring activity and liability balances for the six-month period ended and as of June 30, 2017:

								Foreign
								Currency
	Balance at							Translation &			Balance at
	January 1,				Amounts			Other			June 30,
	2017		Charges		Paid			Adjustments			2017
Termination benefits and personnel realignment	$	4,471	$	447	$	(4,087	)	$	72		$	903
Lease termination and relocation charges		143		1,358		(37	)		319			1,783
Other		-		506		(113	)		(393	)		-
Total	$	4,614	$	2,311	$	(4,237	)	$	(2	)	$	2,686

Termination benefits and personnel realignment costs relate to severance packages, outplacement services, and career counseling for employees affected by the restructuring. Lease termination charges relate to estimated costs associated with exiting a facility, net of estimated sublease income.

Anticipated cash outflow for the remainder of 2017 related to the above restructuring liabilities as of June 30, 2017 is approximately $2,686.

As a result of a prior restructuring initiative to close the Holywell, U.K. site, the Company is currently marketing its Holywell, U.K. facility for sale. The facility is an asset of the API operating segment and is classified as held for sale with the long-lived assets segregated to a separate line on the Condensed Consolidated Balance Sheets until it is sold. Depreciation expense on the facility has ceased. The carrying value of the facility is $1,209 at June 30, 2017.

Note 7 — Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2017 were as follows:

	DDS		API			DP		Total
Balance as of December 31, 2016	$	52,045	$	104,556		$	74,655	$	231,256
Measurement period adjustment		1		(3,348	)		-		(3,347	)
Foreign exchange translation		549		8,017			2,227		10,793
Balance as of June 30, 2017	$	52,595	$	109,225		$	76,882	$	238,702

The components of intangible assets are as follows:

									Foreign
						Accumulated			Exchange				Amortization
	Cost		Impairment			Amortization			Translation		Net		Period
June 30, 2017
Intellectual Property and Know-How	$	28,608	$	(2,709	)	$	(5,426	)	$	93	$	20,566	2-18 years
Customer Relationships		93,847		-			(13,838	)		602		80,611	5-20 years
Product Portfolio		44,649		-			(2,639	)		1,092		43,102	16 years
In-Process Research and Development		18,000		-			-			672		18,672	indefinite
Tradename		4,100		-			-			153		4,253	indefinite
Trademarks		2,272		-			(1,094	)		-		1,178	5 years
Order Backlog		200		-			(204	)		4		-	n/a
Total	$	191,676	$	(2,709	)	$	(23,201	)	$	2,616	$	168,382

17 

									Foreign
						Accumulated			Exchange					Amortization
	Cost		Impairment			Amortization			Translation			Net		Period
December 31, 2016
Intellectual Property and Know-How	$	28,457	$	(2,709	)	$	(4,639	)	$	(1,295	)	$	19,814	2-18 years
Customer Relationships		93,847		-			(10,522	)		(1,748	)		81,577	5-20 years
Product Portfolio		44,649		-			(1,253	)		(2,105	)		41,291	16 years
In-Process Research and Development		18,000		-			-			(804	)		17,196	indefinite
Tradename		4,100		-			-			(183	)		3,917	indefinite
Trademarks		2,272		-			(893	)		-			1,379	5 years
Order Backlog		200		-			(204	)		4			-	n/a
Total	$	191,525	$	(2,709	)	$	(17,511	)	$	(6,131	)	$	165,174

Amortization expense related to intangible assets was $2,883 and $1,958 for the three months ended June 30, 2017 and 2016, respectively, and $5,690 and $3,900 for the six months ended June 30, 2017 and 2016, respectively. The weighted average amortization period is 12.67 years.

The following chart represents estimated future annual amortization expense related to intangible assets:

Year ending December 31,
2017 (remaining)	$	5,739
2018		11,744
2019		11,743
2020		11,743
2021		11,743
Thereafter		92,745
Total	$	145,457

Note 8 — Share-Based Compensation

During the three and six months ended June 30, 2017, the Company recognized total share-based compensation cost of $4,112 and $6,467, respectively, as compared to total share-based compensation cost for the three and six months ended June 30, 3016 of $2,484 and $4,630, respectively.

The Company grants share-based compensation, including restricted shares, under its 1998 Stock Option Plan, its 2008 Stock Option and Incentive Plan, as amended, as well as its 1998 Employee Stock Purchase Plan, as amended (“ESPP”). The 1998 Stock Option Plan, the 2008 Stock Option and Incentive Plan and ESPP are together referred to as the “Stock Option and Incentive Plans.”

Restricted Stock

A summary of unvested restricted stock activity during the six months ended June 30, 2017 is presented below:

				Weighted
				Average Grant Date
	Number of			Fair Value Per
	Shares			Share
Outstanding, January 1, 2017		1,254		$	14.01
Granted		458		$	19.23
Vested		(370	)	$	12.17
Forfeited		(45	)	$	17.30
Outstanding, June 30, 2017		1,297		$	16.32

As of June 30, 2017, there was $16,644 of total unrecognized compensation cost related to unvested restricted shares. That cost is expected to be recognized over a weighted-average period of 2.71 years. Of the 1,297 shares outstanding, 175 shares of restricted stock outstanding have market-based vesting provisions. The grant date fair value assumptions for these shares contain a vesting probability factor to reflect the Company’s expectation that not all shares will vest. Of the remaining 1,122 shares of restricted stock outstanding, the Company currently expects all shares to vest.

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Stock Options

The per share weighted-average fair value of stock options granted is determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

	For the Six Months Ended June 30,
	2017			2016
Expected life in years		5			5
Interest rate		1.81	%		1.25	%
Volatility		44	%		42	%
Dividend yield		-			-

A summary of stock option activity during the six months ended June 30, 2017 is presented below:

				Weighted		Weighted Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual Term		Intrinsic
	Shares			Price Per Share		(Years)		Value
Outstanding, January 1, 2017		1,578		$	9.93
Granted		540		$	18.41
Exercised		(29	)	$	10.69
Forfeited		-		$	-
Expired		-		$	-
Outstanding, June 30, 2017		2,089		$	12.11		6.96	$	20,032
Options exercisable, June 30, 2017		1,213		$	8.63		5.54	$	15,859

The weighted average fair value of stock options granted for the six months ended June 30, 2017 and 2016 was $7.49 and $5.98, respectively. As of June 30, 2017, there was $5,131 of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 3.07 years. Of the 876 stock options outstanding and not exercisable, we currently expect all options to vest.

The Company recognized $1,600 of stock based compensation expense during the three months ended June 30, 2017 related to certain modifications approved during the period to granted and unexercised stock options of two Company directors who completed their service on the Board of Directors during the period.

Employee Stock Purchase Plan

During the six months ended June 30, 2017 and 2016, 53 and 54 shares, respectively, were issued under the Company’s ESPP.

During the six months ended June 30, 2017 and 2016, cash received from stock option exercises and employee stock purchases under the ESPP was $921 and $903, respectively. The excess tax benefit realized for the tax deductions from share-based compensation was $0 for both the six months ended June 30, 2017 and 2016, respectively. After entering into the “Merger Agreement” the Company seized taking contributions under the ESPP.

Note 9 — Business Segments

The Company organizes its operations into the API, DDS, DP and FC segments. The API segment provides pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. The DP segment provides pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations. The DDS segment provides activities such as drug lead discovery, optimization, drug development and small and medium scale commercial manufacturing. The FC segment provides lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments.

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The following table contains earnings data by operating segment, reconciled to totals included in the unaudited Condensed Consolidated Financial Statements:

					Income
			Recurring		(Loss)			Depreciation
	Contract		Royalty		from			and
	Revenue		Revenue		Operations			Amortization
For the three months ended June 30, 2017
API	$	100,448	$	1,580	$	(2,420	)	$	11,853
DDS		30,865		-		9,568			1,957
DP		31,853		632		7,281			2,115
FC		7,554		-		1,301			708
Corporate		-		-		(17,286	)		729
Total	$	170,720	$	2,212	$	(1,556	)	$	17,362

					Income
			Recurring		(Loss)			Depreciation
	Contract		Royalty		from			and
	Revenue (a)		Revenue		Operations (b)			Amortization (b)
For the three months ended June 30, 2016
API	$	64,706	$	4,353	$	16,358		$	3,440
DDS		26,561		-		3,871			2,055
DP		25,190		-		3,445			1,864
Corporate		-		-		(17,208	)		397
Total	$	116,457	$	4,353	$	6,466		$	7,756

					Income
			Recurring		(Loss)			Depreciation
	Contract		Royalty		from			and
	Revenue		Revenue		Operations			Amortization
For the six months ended June 30, 2017
API	$	203,810	$	4,345	$	10,149		$	23,440
DDS		60,033		-		14,043			3,920
DP		54,387		1,464		8,143			4,176
FC		12,715		-		1,296			1,260
Corporate		-		-		(33,104	)		1,422
Total	$	330,945	$	5,809	$	527		$	34,218

					Income
			Recurring		(Loss)			Depreciation
	Contract		Royalty		from			and
	Revenue (a)		Revenue		Operations (b)			Amortization (b)
For the six months ended June 30, 2016
API	$	119,076	$	7,094	$	24,836		$	6,548
DDS		50,096		-		5,326			5,235
DP		50,123		-		3,774			3,685
Corporate		-		-		(31,623	)		812
Total	$	219,295	$	7,094	$	2,313		$	16,280

(a) A portion of the 2016 amounts were reclassified between API and DDS to better align business activities within the Company’s reporting segments.

(b) A portion of the 2016 amounts were reclassified between Corporate, API, DDS and DP to better align business activities within the Company’s reporting segments.

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The following table summarizes other information by segment as of June 30, 2017 and capital expenditures for the six-month period ended June 30, 2017:

	API		DDS		DP		FC		Corporate		Total
Long-lived assets	$	430,449	$	116,647	$	169,251	$	24,108	$	28,665	$	769,120
Goodwill included in total assets		109,225		52,595		76,882		-		-	$	238,702
Total assets		728,513		152,780		213,014		38,475		109,592	$	1,242,374
Investments in unconsolidated affiliates		-		-		-		-		956	$	956
Capital expenditures (six months ended June 30, 2017)		5,758		1,542		2,368		5		813	$	10,486

The following table summarizes other information by segment as of December 31, 2016 and capital expenditures for the six-month period ended June 30, 2016:

	API		DDS		DP		FC		Corporate		Total
Long-lived assets	$	425,207	$	117,174	$	165,781	$	23,958	$	29,116	$	761,236
Goodwill included in total assets		104,556		52,045		74,655		-		-		231,256
Total assets		706,838		172,408		209,689		38,444		82,269		1,209,648
Investments in unconsolidated affiliates		-		-		-		-		956		956
Capital expenditures (six months ended June 30, 2016)		13,707		4,718		4,054		-		2,487		24,966

Note 10 — Financial Information by Customer Concentration and Geographic Area

Total percentages of contract revenues by each segment’s three largest customers for the three and six months ended June 30, 2017 and 2016 are indicated in the following table:

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2017	2016	2017	2016
API	13%, 11%, 5%	16%, 12%, 8%	12%, 9%, 7%	17%, 11%, 6%
DDS	6%, 5%, 3%	10%, 4%, 4%	6%, 5%, 3%	11%, 4%, 4%
DP	12%, 10%, 9%	12%, 11%, 10%	11%, 8%, 7%	12%, 7%, 7%
FC	26%, 23%, 14%	-	29%, 18%, 10%	-

Total contract revenue from GE Healthcare (“GE”), the Company’s largest customer, represented 7% of total contract revenue for both the three and six months ended June 30, 2017, respectively. Total contract revenue from GE represented 9% of total contract revenue for both the three and six months ended June 30, 2016, respectively.

Contract revenue by geographic region, based on the location of the customer, and expressed as a percentage of total contract revenue follows:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
United States		50	%		59	%		50	%		61
Europe		30			31			31			30
Asia		14			6			14			5
Other		6			4			5			4
Total		100	%		100	%		100	%		100

Long-lived assets by geographic region are as follows:

		June 30,		December 31,
		2017		2016
United States	$	351,217	$	357,711
Asia		14,416		14,195
Europe		403,487		389,330
Total long-lived assets	$	769,120	$	761,236

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Note 11 — Fair Value of Financial Instruments

The Company uses a framework for measuring fair value in generally accepted accounting principles and making disclosures about fair value measurements. A three-tiered fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value.  

These tiers include:  

Level 1 – defined as quoted prices in active markets for identical instruments;

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company determines the fair value of its financial instruments using the following methods and assumptions:

Cash and cash equivalents, restricted cash, receivables, and accounts payable: The carrying amounts reported in the consolidated balance sheets approximate their fair value because of the short maturities of these instruments.

Convertible senior notes, derivatives and hedging instruments: The fair value of the Company’s Notes, which differ from their carrying value, are influenced by interest rates and the Company's stock price and stock price volatility and are determined by prices for the Notes observed in market trading, which are level 2 inputs. The estimated fair value of the Notes at June 30, 2017 was $214,655. The Notes Hedges and the Notes Conversion Derivative are measured at fair value using level 2 inputs. These instruments are not actively traded and are valued using an option pricing model that uses observable market data for all inputs, such as implied volatility of the Company's common stock, risk-free interest rate and other factors.

Interest rate swaps:At June 30, 2017, the Company remained contracted under a derivative financial instrument to reduce the impact of fluctuations in variable interest rates on a loan that a financial institution granted in February 2015, which is a level 2 input. The estimated fair value of the swap at June 30, 2017 was a liability of $31. The Company hedges the interest rate risk of the initial amount of the aforementioned bank loan through an interest rate swap. In this arrangement, the interest rates are exchanged so that the Company receives from the financial institution a variable rate of the 3-month Euribor, in exchange for a fixed interest payment for the same nominal amount (0.3%). The variable interest rate received for the derivative offsets the interest payment on the hedged transaction, with the end result being a fixed interest payment on the hedged financing. At June 30, 2017, the derivative financial instrument had not been designated as a hedging instrument.

To determine the fair value of the interest rate swap, the Company uses cash flow discounting based on the implicit rates determined by the euro interest rate curve, according to market conditions at the valuation date.

				Contract	Interest
	Notional Amount		Contract	Date	Rate	Interest Rate
Instrument	at June 30, 2017		Date	Expiration	Payable	Receivable
Interest rate swap	$	4,327	February 19, 2015	February 19, 2020	3-month Euribor	Fixed rate of 0.30%

Long-term debt, other than convertible senior notes: The carrying value of long-term debt approximated fair value at June 30, 2017 due to the resetting dates of the variable interest rates.

Nonrecurring Measurements:

The Company has assets, including intangible assets, property and equipment, and equity method investments which are not required to be carried at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.

The fair values of these assets are then determined by the application of a discounted cash flow model using Level 3 inputs. Cash flows are determined based on Company estimates of future operating results, and estimates of market participant weighted average costs of capital (“WACC”) are used as a basis for determining the discount rates to apply to the future expected cash flows, adjusted for the risks and uncertainty inherent in the Company’s internally developed forecasts. 

Although the fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges.

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Note 12 — Accumulated Other Comprehensive Loss, Net

The activity related to accumulated other comprehensive loss, net was as follows:

							Total
							Accumulated
	Pension and			Foreign			Other
	postretirement			currency			Comprehensive
	benefit plans			adjustments			Loss
Balance at December 31, 2016, net of tax	$	(5,062	)	$	(34,668	)	$	(39,730	)
Net current period change, net of tax		236			33,304			33,540
Balance as of June 30, 2017, net of tax	$	(4,826	)	$	(1,364	)	$	(6,190	)

The following table provides additional details of the amounts recognized into net earnings from accumulated other comprehensive loss, net:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2017			2016			2017			2016
Actuarial losses before tax effect (a)	$	182		$	177		$	364		$	354
Tax benefit on amounts reclassified into earnings		(64	)		(62	)		(128	)		(124	)
	$	118		$	115		$	236		$	230

(a) Amounts represent amortization of net actuarial loss from shareholders’ equity into postretirement benefit plan cost. This amount was primarily recognized as cost of contract revenue in the consolidated statements of operations.

Note 13 — Collaboration Arrangements

The Company enters into collaboration arrangements with third parties for the development and manufacture of certain products and/or product candidates. Although each of these arrangements is unique in nature, both parties are active participants in the activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements typically include research and development and manufacturing. The rights and obligations of the parties can be global or limited to geographic regions and the activities under these collaboration agreements are performed with no guarantee of either technological or commercial success.

The Company is obligated under these arrangements to perform the development activities and contract manufacturing of the product. Generally, the contract manufacturing component of the arrangement commences during the development activities and continues through the commercial stage of each product, during which time the collaboration partner is obligated to purchase the product from the Company. The collaboration partners are generally responsible for obtaining regulatory approval and for sale and distribution of the product. The original terms of these arrangements vary in length but generally range from 7 to 10 years in duration. In the event the arrangements are terminated prematurely, the Company generally has the right to receive payment for all unpaid development costs incurred through the date of termination. Additionally, in the event of termination, the Company is generally permitted to develop, manufacture and sell the product to a third party on a contract research and manufacturing basis provided that it does not use the technology developed during the collaboration arrangement. On December 8, 2016, the product Sodium Nitroprusside Injection was approved by the FDA. As a result, this product has reached commercial contract manufacturing stage. None of the product candidates being developed pursuant to the Company’s other collaboration arrangements have reached the contract manufacturing or commercial and profit sharing stages.

The Company recognizes costs as incurred during the performance of development activities and classifies these costs as ‘Research and development’ expense while any development activity revenues earned are recorded as contract revenues. Costs incurred by the Company during the performance of the contract manufacturing activities are classified as ‘Cost of contract revenue’ when the related revenue is recognized.

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Amounts associated with these collaboration arrangements recognized during the three and six months ended June 30, 2017 and 2016 were as follows:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Contract revenue	$	436	$	3,151	$	2,572	$	4,420
Recurring royalties revenue	$	632	$	-	$	1,464	$	-
Cost of contract revenue	$	-	$	-	$	464	$	-
R&D expense	$	1,514	$	1,584	$	3,818	$	4,022

Note 14 — Merger Agreement

On June 5, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with UIC Parent Corporation (“Parent”) and UIC Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Acquiring Parties”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by (i) affiliates of Carlyle Partners VI, L.P. (“Carlyle”) and (ii) GTCR Fund XI/A LP, GTCR Fund XI/C LP, and GTCR Co-Invest XI LP (collectively “GTCR”). The Merger Agreement was unanimously approved by the members of the board of directors of the Company (the “Board”) and by a special committee of the Board (the “Special Committee”), and the Board, upon the recommendation of the Special Committee, unanimously resolved to recommend approval of the Merger Agreement to the Company’s stockholders (the “Board Recommendation”). A special meeting of the Company’s stockholders will be held on August 18, 2017 (the “Stockholder Meeting”), to, among other things, vote on approval of the Merger Agreement and the Merger.

Subject to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by the Acquiring Parties or the Company and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be automatically cancelled and converted into the right to receive $21.75 in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”).

As of the Effective Time, each AMRI stock option, whether or not vested and exercisable, that is outstanding and unexercised immediately prior to the Effective Time and which has an exercise price less than the Merger Consideration will be automatically converted into the right to receive an amount in cash equal to the product of (x) the excess, if any, of the Merger Consideration over the per share exercise price of such AMRI stock option and (y) the aggregate number of shares of AMRI common stock that were issuable upon exercise or settlement of such AMRI stock option immediately prior to the Effective Time. As of the Effective Time, (i) each outstanding share of AMRI restricted stock shall become fully vested and the restrictions with respect thereto shall lapse and each such share shall be converted into the right to receive the Merger Consideration and shall be treated in the same manner as the other shares of AMRI common stock, (ii) each outstanding AMRI time-based and performance-based restricted stock unit shall be cancelled in exchange for the right to receive an amount in cash equal to the product of (X) the Merger Consideration and (Y) the aggregate number of shares of AMRI common stock subject to such AMRI restricted stock unit award (with such performance-based restricted stock unit deemed fully earned at the greater of 100% of the specified target award level and the percentage of the target award level that would be earned based on the achievement of the applicable performance metric as of the Effective Time), and (iii) each outstanding AMRI phantom stock award shall be converted into the right to receive an amount in cash equal to the product of (A) the Merger Consideration and (B) the aggregate number of shares of AMRI common stock subject to such AMRI phantom stock award.

The Merger Agreement contains customary representations, warranties and covenants of the Company and the Acquiring Parties, including, among others, covenants by the Company to conduct its business in the ordinary course during the period between execution of the Merger Agreement and consummation of the Merger (the “Closing”) and prohibiting the Company from engaging in certain kinds of activities during such period without the consent of the Acquiring Parties. The Merger Agreement also contains customary termination provisions for both the Company and Parent, as discussed in more detail below.

The Merger, which is expected to close in the third quarter of 2017, is subject to approval by our stockholders, regulatory approvals and other customary closing conditions.

The Company will be subject to a customary “no-shop” provision whereby, subject to certain exceptions, it will be prohibited from (i) soliciting, initiating, knowingly facilitating, or knowingly encouraging any inquiries, proposals or offers that constitute, or that could reasonably be expected to lead to, an alternative transaction (an “Acquisition Proposal”), (ii) engaging in, continuing or otherwise participating in discussions or negotiations with third parties regarding an Acquisition Proposal, or furnishing to third parties any information or providing any access to the business, properties, assets or personnel of the Company or any of its subsidiaries relating in any way to, or for the purpose of encouraging or facilitating an Acquisition Proposal, or (iii) entering into any letter of intent or agreement with respect to an Acquisition Proposal or requiring the Company to abandon the Merger. The “no shop” provision is subject to a customary “fiduciary out” provision that allows the Company, under certain circumstances and in compliance with certain obligations, to provide information and engage in discussions or negotiations with respect to an Acquisition Proposal that constitutes, or could reasonably be expected to result in, a superior acquisition proposal (a “Superior Proposal”) and, until approval of the Merger at the Stockholder Meeting, to accept a Superior Proposal and terminate the Merger Agreement, subject to the payment of a termination fee in certain instances, as described below.

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The Company is required to pay a $35 million termination fee (i) if Parent terminates the Merger Agreement because the Board withdraws or otherwise acts in a manner adverse to the Board Recommendation (including by failing to include the Board Recommendation in the proxy statement or reaffirm the Board Recommendation under certain circumstances or there is a material breach by the Company of the “no shop” or “fiduciary out” provisions noted above), (ii) if the Company terminates the Merger Agreement because the Board withdraws the Board Recommendation and, concurrently with such termination, enters into a Superior Proposal for at least 50% of the assets or voting equity of the Company, or (iii) if (x) the Merger Agreement is terminated by the Company or Parent because the Company fails to obtain approval of the Merger by the Company’s stockholders or by Parent for certain uncured breaches by the Company or by either the Company or Parent if the end date under the Merger Agreement has occurred and the Company has materially breached the Merger Agreement, (y) an Acquisition Proposal was made under certain circumstances, and (z) a Superior Proposal for at least 50% of the assets or voting equity of the Company is consummated or entered into within twelve months after termination and is subsequently consummated (whether during such twelve month period or thereafter). In no event would the Company be required to pay a termination fee on more than one occasion.

The Merger Agreement provides that Parent shall pay to the Company a $70 million termination fee (the “Parent Termination Fee”) if the Company terminates the Merger Agreement in certain circumstances due to certain breaches by the Acquiring Parties or if the Acquiring Parties fail to consummate the Merger and all other conditions to Closing are satisfied or waived (other than those conditions that would be and are capable of being satisfied at Closing).

Parent has obtained equity and debt financing commitments to finance the transactions contemplated by the Merger Agreement, including the payment of the Merger Consideration, payments in respect of equity awards, repayment of indebtedness and payment of all related fees and expenses. In addition, each of Carlyle and GTCR has executed a limited guarantee in favor of the Company to guarantee, subject to the limitations described therein, the payment of the Parent Termination Fee and certain other expense obligations of the Acquiring Parties under the Merger Agreement.

Note 15 — Subsequent Events

On July 17, 2017, a third purported stockholder of AMRI filed a separate class action complaint in the U.S. District Court for the District of Delaware against the Company, the Board, Carlyle, GTCR, Parent and Merger Sub, Frodyma v. Albany Molecular Research, Inc., et. al., No. 1:17-cv-00971. This complaint also alleges the same claims and seeks similar relief, including that the preliminary proxy statements omits material information regarding the Company’s financial projections, potential conflicts of interest by the Company’s officers, directors and Credit Suisse, and certain background of the proposed transaction. This complaint further alleges that the Board breached their fiduciary duties by failing to maximize the value of the Company to shareholders.

On July 13, 2017, another purported stockholder of the Company filed a separate class action complaint in the U.S. District Court for the District of Delaware against the Company, the Board, Carlyle, GTCR, Parent and Merger Sub, Witmer v. Albany Molecular Research Inc., et. al., No. 1:17-cv-00942. This complaint also alleges the same claims and seeks similar relief, including that the preliminary proxy statement omits material information regarding the Company’s financial projections, potential conflicts of interest by the Company’s officers, directors and Credit Suisse, and certain background of the proposed transaction.

On July 11, 2017, a purported stockholder of the Company filed a class action complaint in the U.S. District Court for the District of Delaware against the Company and the Board, Eyre v. Albany Molecular Research Inc., et al., No. 1:17-cv-00932. The complaint alleges violations of Sections 14(a) and 20(a) of the Exchange Act, in connection with the Merger Agreement. The plaintiff alleges that the preliminary proxy statement on Schedule 14A, filed by the Company with the SEC with a filing date of July 3, 2017, omits material information regarding the Company’s financial projections, and seeks, in addition to other relief, an injunction preventing the stockholders’ vote on the merger and preventing the consummation of the merger until such information is disclosed.

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 alleging claims under the Securities Exchange Act of 1934 arising from the Company’s alleged failure to disclose in its August 5, 2014 announcement of its financial results for the second quarter of 2014 that one of the manufacturing facilities experienced a power interruption in July 2014. The amended complaint alleges that the price of the Company’s stock was artificially inflated between August 5, 2014 and November 5, 2014, and seeks unspecified monetary damages and attorneys’ fees and costs. The defendants filed on July 29, 2015 a motion to dismiss lead plaintiffs’ amended complaint, which motion was denied on July 26, 2016. On December 12, 2016, the parties agreed to a settlement in principle of all legal claims, subject to court approval, which will be funded by the Company’s insurance. On June 26, 2017, the court issued an order of preliminary approval of the settlement, and scheduled a final approval hearing for October 12, 2017.

The Company, and the Board, believe that the respective allegations asserted against them in the lawsuits are without merit and intend to defend against the lawsuits vigorously. Similar cases may also be filed in connection with the Merger Agreement.

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

Forward-Looking Statements

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 forward-looking statements may be identified by forward-looking words such as “may,” “could,” “should,” “would,” “will,” “plans,” “intend,” “expect,” “anticipate,” “predicts,” “potential,” “believe,” and “continue” or similar words, although not all forward-looking statements contain these identifying words. Forward-looking statements include, but are not limited to, statements regarding the proposed merger of the Company, our recent acquisitions and the financial impact and expected synergies of each, and statements regarding the impact of pending litigation matters, government regulation, customer spending and business trends, competition, foreign operations, business growth and the expansion of the global market, management’s strategic plans, the potential for future revenue under our collaboration arrangements, research and development projects and expenses, other projected costs, long-lived asset and goodwill impairment, our ability to utilize deferred tax assets, pension and postretirement benefit costs, and tax rates.

Readers should not place undue reliance on these forward-looking statements. Our actual results may differ materially from such forward-looking statements as a result of numerous factors, some of which we may not be able to predict and may not be within our control. Factors that could cause such differences include, but are not limited to, (i) the risk that the proposed acquisition may not be completed in a timely manner, or at all, which may adversely affect our business and the price of our common stock, (ii) the failure to satisfy all of the closing conditions of the proposed merger, including the adoption of the merger agreement by our stockholders and the receipt of certain governmental and regulatory approvals in foreign jurisdictions, (iii) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, (iv) the effect of the announcement or pendency of the proposed merger on our business, operating results, and relationships with customers, suppliers, competitors and others, (v) risks that the proposed merger may disrupt our current plans and business operations, (vi) potential difficulties retaining employees as a result of the proposed merger, (vii) risks related to the diverting of management’s attention from our ongoing business operations, and (viii) the outcome of any legal proceedings that may be instituted against us related to the merger agreement or the proposed merger. In addition, our actual performance and results may differ materially from those currently anticipated due to a number of risks including, without limitation: changes in customers’ spending and demand and the trends in pharmaceutical and biotechnology companies’ outsourcing of manufacturing services and research and development; our ability to provide quality and timely services and to compete with other companies providing similar services; our ability to comply with strict regulatory requirements; our ability to successfully integrate past and future acquisitions and to realize the expected benefits of each; disruptions in our ability to source raw materials; a change in our relationships with our largest customers; our ability to service our indebtedness; our ability to protect our technology and proprietary information and the confidential information of our customers; our ability to develop products of commercial value under our collaboration arrangements; the risk of patent infringement and other litigation, as well as those risks discussed elsewhere in this report and in  Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2017. 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

References to “AMRI,” the “Company,” “we,” “us,” and “our,” refer to Albany Molecular Research, Inc. and its subsidiaries, taken as a whole. The following discussion of our results of operations and financial condition should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the Notes thereto included within this report.

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 manufacture 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 obtains regulatory approval.  

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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 our 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.

On June 5, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with UIC Parent Corporation (“Parent”) and UIC Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Acquiring Parties”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly-owned subsidiary of Parent. Parent and Merger Sub were formed by (i) affiliates of Carlyle Partners VI, L.P. (“Carlyle”) and (ii) GTCR Fund XI/A LP, GTCR Fund XI/C LP and GTCR Co-Invest XI LP, collectively (“GTCR”). The Merger Agreement was unanimously approved by the members of the Board and by a special committee of the Board (the “Special Committee”), and the Board, upon the recommendation of the Special Committee, unanimously resolved to recommend approval of the Merger Agreement to the Company’s stockholders (the “Board Recommendation”).

Subject to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Company common stock issued and outstanding immediately prior to the Effective Time (other than shares owned by the Acquiring Parties or the Company and shares held by stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law) will be automatically cancelled and converted into the right to receive $21.75 in cash, without interest and less any applicable withholding taxes (the “Merger Consideration”). For more information regarding the Merger Agreement, see Note 14 to our Condensed Consolidated Financial Statements (Unaudited) in Item 1 of Part I of this report.

Backlog

Our backlog of open manufacturing orders and accepted service contracts was $322.7 million at June 30, 2017 as compared to $391.2 million and $200.1 million at December 31, 2016 and June 30, 2016, respectively. 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 therefore the timing and amount of revenues recognized from backlog can vary from period to period. Second, our manufacturing and services contracts are of a nature that a customer may, at its option, cancel or delay the timing of delivery, which would change our projections concerning the timing and extent to which revenue may be recognized. In addition, the value of our services contracts that are conducted on a time and materials or full-time equivalent basis are based on estimates, from which actual revenue generated could vary. Finally, there is no assurance that projects included in backlog will not be terminated or delayed at any time by regulatory authorities. We cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion to be filled in the current year.

Results of Operations – Three and Six Months Ended June 30, 2017 Compared to Three and Six Months Ended June 30, 2016

Our total revenue for the three months ended June 30, 2017 was $172.9 million, which included $170.7 million from our contract service business and $2.2 million from royalties on sales of certain products. Our total revenue for the three months ended June 30, 2016 was $120.8 million, which included $116.5 million from our contract service business and $4.4 million from royalties on sales of certain products. Consolidated gross contract margin was 22.8% for the three months ended June 30, 2017 as compared to 29.4% for the three months ended June 30, 2016. Our net loss was $10.3 million during the three months ended June 30, 2017, compared to net loss of $21.3 million during the same period in 2016.

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Our total revenue for the six months ended June 30, 2017 was $336.8 million, which included $331.0 million from our contract service business and $5.8 million from royalties on sales of certain products. Our total revenue for the six months ended June 30, 2016 was $226.4 million, which included $219.3 million from our contract service business and $7.1 million from royalties on sales of certain products. Consolidated gross contract margin was 23.1% for the six months ended June 30, 2017 as compared to 26.3% for the six months ended June 30, 2016. Our net loss was $20.9 million during the six months ended June 30, 2017, compared to net loss of $31.3 million during the same period in 2016.

Operating Segment Data

We organize our operations into the following segments: Discovery and Development Services (“DDS”), Active Pharmaceutical Ingredients (“API”), Drug Product (“DP”) and Fine Chemicals (“FC”). DDS includes activities such as drug lead discovery, optimization, drug development, small scale commercial manufacturing, and analytical and testing services. API includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates. DP includes pre-formulation, formulation and process development through commercial scale production of complex liquid-filled and lyophilized sterile injectable products and ophthalmic formulations. FC includes lab to commercial scale synthesis of reagents and diverse compounds. Corporate activities include sales and marketing and administrative functions, as well as research and development costs that have not been allocated to the operating segments. We began operating our FC business following the Euticals Acquisition in July 2016, and therefore, there is no comparative information available for the first half of 2016.

Revenue

Total contract revenue

Contract revenue consists primarily of fees earned under manufacturing or service contracts with third-party customers. Contract revenue for each of our segments was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)				(in thousands)
API (a)	$	100,448	$	64,706	$	203,810	$	119,076
DDS (a)		30,865		26,561		60,033		50,096
DP		31,853		25,190		54,387		50,123
FC		7,554		-		12,715		-
Total	$	170,720	$	116,457	$	330,945	$	219,295

(a) A portion of the 2016 results were reclassified between API and DDS to better align business activities within our reporting segments and to ensure that prior period results are comparable to current period results.

API contract revenue for the three months ended June 30, 2017 increased $35.7 million from the same period of 2016 primarily due to $42.5 million of incremental revenue from the acquisition of Euticals, slightly offset by lower volume due to timing of shipments at our Spain facility. API contract revenue for the six months ended June 30, 2017 increased $84.7 million from the same period of 2016 primarily due to $85.9 million of incremental revenue from the acquisition of Euticals.

DDS contract revenue for the three months ended June 30, 2017 increased $4.3 million from the same period in 2016, primarily driven by growth across all of our DDS businesses and incremental revenue from the Euticals acquisition. Our Discovery Services business generated $1.1 million of incremental revenue, driven by our Integrated Discovery Center in Buffalo, N.Y. Our Chemical Development business increased by $2.5 million, driven by strong demand and $0.8 million of incremental revenue from the acquisition of Euticals in July 2016. The Analytical Services business increased $0.9 million, due to increased sales volume. DDS contract revenue for the six months ending June 30, 2017 increased $9.9 million from the same period in 2016, driven by growth across all of our DDS businesses and incremental revenue from the Euticals acquisition. Our Discovery Services revenues increased $2.6 million, driven by $2.4 million of revenue growth at our integrated facility in Buffalo, N.Y. Our Chemical Development revenues increased $7.0 million, driven by underlying demand across the portfolio, $2.3 million of additional revenue from our Euticals acquisition and the addition of medium scale capabilities in Grafton, W.I. of $0.8 million.

DP contract revenue for the three months ended June 30, 2017 increased $6.7 million from the same period in 2016 due to additional volume, price and product mix. Approximately $3.8 million of the increase was due to increased volume for our fill and finish services primarily as a result of new customer demand. Additionally, in Glasgow we saw increased revenue of $1.6 million due to higher demand for services as well as customer termination revenue of $0.8 million. DP contract revenue for the six months ended June 30, 2017 increased $4.3 million from the same period in 2016 due primarily to growth in our Spain and Glasgow facilities, partially offset by a decrease in revenue at our Burlington, M.A. facility due to the extended facility shutdown in the first quarter of 2017.

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FC contract revenue for the three and six months ended June 30, 2017 of $7.5 million and $12.7 million, respectively, is entirely attributable to the Euticals acquisition.

Recurring royalty revenue

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)				(in thousands)
$	2,212	$	4,353	$	5,809	$	7,094

We earn recurring royalty revenue pursuant to Development and Supply Agreements with Actavis and Teva for Mixed Amphetamine Salts and under an agreement with a customer in Spain. During the fourth quarter of 2016, we also began earning profit sharing revenue from our first commercialized collaboration arrangement product, Sodium Nitroprusside Injection, which was developed with our partner Namigen, LLC and launched by Sagent Pharmaceuticals, Inc.

Recurring royalties for the three months ended June 30, 2017 decreased $2.1 million compared to the same period of 2016 primarily due to lower royalties received on sales of Mixed Amphetamine Salts. Recurring royalties for the six months ended June 30, 2017 decreased $1.3 million compared to the same period of 2016 primarily due to lower royalties received on sales of Mixed Amphetamine Salts, partially offset by incremental royalties on sales of Sodium Nitroprusside Injection.

Costs and Expenses

Cost of contract revenue

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

Segment	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)						(in thousands)
API (a)	$	86,155		$	45,878		$	166,044		$	86,544
DDS (a)		19,975			18,639			40,949			35,900
DP (a)		20,265			17,697			37,579			39,133
FC		5,320			-			9,921			-
Total	$	131,715		$	82,214		$	254,493		$	161,577
API Gross Contract Margin		14.2	%		29.1	%		18.5	%		27.3	%
DDS Gross Contract Margin		35.3	%		29.8	%		31.8	%		28.3	%
DP Gross Contract Margin		36.4	%		29.7	%		30.9	%		21.9	%
FC Gross Contract Margin		29.6	%		-	%		22.0	%		-	%
Total Gross Contract Margin		22.8	%		29.4	%		23.1	%		26.3	%

(a) A portion of the 2016 results were reclassified between API, DDS, and DP to better align business activities within our reporting segments and to ensure that prior period results are comparable to current period results.

API Cost of Contract Revenue for the three months ended June 30, 2017 increased from the same period of 2016 by $40.3 million. The increase was primarily due to the acquisition of Euticals, which contributed $43.5 million. API Gross Contract Margin decreased by 14.9 points during the three month period ended June 30, 2017 as compared to the same period of 2016. This decrease reflects a 12.3 point decrease resulting from the lower margins of Euticals as compared to our legacy API business. API Cost of Contract Revenue for the six months ended June 30, 2017 increased from the same period of 2016 by $79.5 million. The increase was primarily due to the acquisition of Euticals, which contributed $81.5 million. API Gross Contract Margin decreased by 8.8 points during the six month period ended June 30, 2017 as compared to the same period of 2016. This decrease reflects a 9.8 point decrease resulting from the lower margins of Euticals as compared to our legacy API business. The decrease in Euticals Gross Contract Margin during the three and six month periods ended June 30, 2017 is primarily attributable to certain product and quality related charges resulting from process upgrades at our Italy facilities following a FDA inspection in March 2017.

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DDS Cost of Contract Revenue for the three months ended June 30, 2017 increased from the same period of 2016 by $1.3 million. This was primarily due to increased costs at our facilities which align with revenue growth during the same period. DDS Gross Contract Margin increased by 5.5 points during the three month period ended June 30, 2017 as compared to the same period of 2016. This increase was primarily driven by our Chemical Development business, specifically from revenue growth and expense management, partially offset by a decrease in margins in Analytical Services of 1.4 percentage points based on the mix of services provided to customers during the period. DDS Cost of Contract Revenue for the six months ended June 30, 2017 increased from the same period of 2016 by $5.0 million. Approximately $2.3 million of the increase was attributable to growth at our Albany Chemical Development facility and approximately $2.4 million of the increase was attributable to the acquisition of Euticals. DDS Gross Contract Margin increased by 3.5 points during the six month period ended June 30, 2017 as compared to the same period of 2016. This increase was driven by an increase of 3.0 points in our Discovery Services business, primarily from our execution of the Compound Library Consortium contract, and an increase of 1.6 points in our Chemical Development business due to revenue growth and expense management. These increases were partially offset by a decrease in margin in Analytical Services of 0.7 points.

DP Cost of Contract Revenue for the three months ended June 30, 2017 increased from the same period of 2016 by $2.6 million. Approximately $2.5 million of the increase was attributable to our Albuquerque, N.M. facility, primarily due to higher volume, partially offset by strong operational execution. DP Gross Contract Margin increased by 6.7 points during the three month period ended June 30, 2017 as compared to the same period of 2016. The increase was primarily driven by the strong operational performance at the Albuquerque, N.M. facility. Customer termination revenue also contributed to the increase in DP Gross Contract Margin. DP Cost of Contract Revenue for the six months ended June 30, 2017 decreased from the same period of 2016 by $1.6 million. Approximately $1.3 million of the decrease was attributable to our Albuquerque, N.M. facility, primarily due to lower volume in the first quarter and strong operational execution. DP Gross Contract Margin increased by 9.0 points during the six month period ended June 30, 2017 as compared to the same period of 2016. The increase was primarily driven by the strong operational performance at the Albuquerque, N.M. facility. Collaboration arrangement revenues, one-time customer termination revenue, and increased customer rescheduling fees earned under our contract manufacturing contracts also contributed to the increase in DP Gross Contract Margin.

FC Cost of Contract Revenue for the three and six months ended June 30, 2017 of $5.3 million and $9.9 million, respectively, is entirely attributable to the Euticals acquisition.

Research and development

Research and development (“R&D”) expense consists of compensation and associated fringe 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 and DP segments 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.

Research and development expenses were as follows:

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)
$	3,463	$	3,479	$	6,836	$	6,647

R&D expense for the three months ended June 30, 2017 remained relatively unchanged compared to the same period in 2016. R&D expense for the six months ended June 30, 2017 increased $0.2 million compared to the same period of 2016 primarily due to development efforts on our collaboration arrangements in DP, partially offset by a decrease in our API spend year over year.

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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,
2017		2016		2017		2016
(in thousands)
$	38,645	$	27,924	$	72,075	$	52,525

SG&A expenses for the three months ended June 30, 2017 increased by $10.7 million compared to the same period in 2016 primarily due to incremental SG&A expenses related to Euticals of $9.5 million and costs associated with additional investments made in key supporting functions such as corporate quality and compliance, procurement and finance, as well as in training and developing our personnel of $4.9 millon, partially offset by decreases in business acquisition of $2.2 million and ERP implementation costs of $1.5 million. SG&A expenses for the six months ended June 30, 2017 increased by $19.6 million compared to the same period in 2016 primarily due to incremental SG&A expenses related to Euticals of $18 million and costs associated with additional investments made in key supporting functions such as corporate quality and compliance, procurement and finance, as well as in training and developing our personnel of $6.8 million, partially offset by decreases in business acquisition of $3.1 million and ERP implementation costs of $2.1 million.

Restructuring and other charges

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)
$	153	$	526	$	2,311	$	3,126

Restructuring and other charges for the three and six months ended June 30, 2017 were related to previously announced restructuring initiatives. Restructuring and other charges for the three months ended June 30, 2017 consisted primarily of employee termination costs and costs associated with the transfer of customer projects from our Singapore facility to our other laboratory facilities of $0.4 million, as well as facility costs at our Holywell, U.K. location of $0.1 million. These charges were partially offset by reversals of previously recognized employee termination costs at our European locations of $0.4 million upon the finalization of these matters.

Restructuring and other charges for the six months ended June 30, 2017 consisted primarily of approximately $1.5 million related to lease termination costs associated with a facility located in Italy, employee termination and customer project transfer costs at our Singapore facility of $0.5 million, and facility costs at our Holywell, U.K. location of $0.2 million.

Restructuring and other charges for the three and six months ended June 30, 2016 consisted of employee termination charges and costs associated with the transfer of continuing products from the Holywell, U.K. facility to our other manufacturing locations, as well as employee termination charges, lease termination charges, and accelerated depreciation charges associated with cost optimization activities at our Singapore facility that were initiated in 2015.

Impairment charges

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)
$	512	$	201	$	512	$	201

Impairment charges for the three and six months ended June 30, 2017 are associated with the write-off of in-progress capital project costs at our Italy and Spain locations based on the decision to discontinue these projects prior to their completion.

Impairment charges for the three and six months ended June 30, 2016 are associated with the write-off of a patent asset from our proprietary drug discovery programs due to our licensing partner terminating the license agreement. 

Interest expense, net

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)
$	12,710	$	7,064	$	25,540	$	14,200

Net interest expense for the three months and six months ended June 30, 2017 increased by $5.6 million and $11.3 million, respectively, compared to the same periods in 2016 primarily due to increased levels of outstanding long-term debt used to finance our 2016 acquisition of Euticals, as well as an increase in amortization of deferred financing costs and original issue discounts related to our long-term debt.

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Other expense, net

Three Months Ended June 30,				Six Months Ended June 30,
2017		2016		2017		2016
(in thousands)
$	633	$	5,661	$	1,425	$	6,657

Other expense, net consists primarily of gains and losses on foreign currency transactions. Other expense, net for the three months and six months ended June 30, 2017 decreased from the same periods in 2016 primarily due to recognition of an unrealized loss on a forward contract that the Company entered into for the purpose of hedging the foreign currency exposure related to the euro-denominated purchase price of the Euticals acquisition of approximately $6.4 million during 2016.

Income tax expense

Three Months Ended June 30,					Six Months Ended June 30,
2017			2016		2017			2016
(in thousands)
$	(4,652	)	$	15,008	$	(5,501	)	$	12,791

Income tax expense for the three and six month periods ended June 30, 2017, decreased $19.7 million and $18.3 million, respectively, compared to the same periods in 2016 primarily due to the recognition of a U.S. valuation allowance in the second quarter of 2016 and an increase in estimated tax benefits in certain non-U.S. tax jurisdictions in 2017.

Liquidity and Capital Resources

We have historically funded our business through operating cash flows and proceeds from borrowings. As of June 30, 2017, we had $42.2 million in cash and cash equivalents, and $681.7 million in bank and other debt (at face value). Net working capital, defined as current assets less current liabilities, was ($187.8) million as of June 30, 2017 compared to $217.4 million as of December 31, 2016. The decrease in net working capital at June 30, 2017 compared to December 31, 2016 is primarily attributable to the reclassification of our Term Loans to current installments of long-term debt. Refer to Note 5 to the Condensed Consolidated Financial Statements for further details.

Cash Flows – Six Months Ended June 30, 2017

During the six months ended June 30, 2017, we generated cash of $8.5 million in operating activities primarily due to strong operational execution, cost management and collections from customers during the period, partially offset by the timing of payments attributable to severance, employee compensation and benefits and payments to vendors that were incurred and accrued as of December 31, 2016, as well as payments associated with increased inventory levels during the period. We used cash of $10.6 million in investing activities primarily attributable to $10.5 million in capital expenditures. Capital expenditures were primarily related to the growth, maintenance and upgrading of our facilities, including Euticals. Cash flow used in financing activities was $11.9 million, primarily related to the principal payments of long-term debt of $7.4 million and net repayments on short-term borrowings of $3.4 million.

Net cash provided by operating activities of $8.5 million for the six months ended June 30, 2017 reflected a net loss of $20.9 million, offset by noncash expenses of $46.2 million and cash used by changes in operating assets and liabilities of $16.8 million.

The noncash expenses of $46.2 million recorded in the net loss relate primarily to depreciation and amortization of $34.2 million, accretion of debt discount on long-term debt of $6.4 million, deferred financing costs amortization of $3.9 million, share-based compensation expense of $6.5 million, partially offset by changes in deferred income tax balances of $6.6 million.

Cash used by changes in operating assets and liabilities of $16.8 million was driven from net cash disbursements related to accounts payable and accrued expenses for severance, employee compensation and benefits and payments to vendors of $12.3 million and a net increase in inventory of $11.2 million. Additionally, increases in prepaid expenses and other assets of $2.8 million, a decrease in income taxes payable of $3.9 million, and decreases in other long-term liabilities of $2.1 million contributed to the cash outflow from changes in operating assets and liabilities. These cash outflows were partially offset by net collections from customers related to accounts receivable of $10.2 million and customer advances classified as deferred revenue of $6.2 million.

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Cash Flows - Six Months Ended June 30, 2016

During the six months ended June 30, 2016, we generated cash of $15.2 million from operating activities. We used cash of $25.5 million in investing activities primarily attributable to $25.0 million in capital expenditures. Capital expenditures were primarily related to the growth, maintenance and upgrading of our facilities. Additionally, we used cash of $8.1 million in financing activities, primarily related to $10.8 million of principal payments on long-term debt.

Net cash provided by operating activities of $15.2 million for the six months ended June 30, 2016 reflected a net loss of $31.3 million, offset by adjustments for noncash expenses of $42.9 million and cash provided by changes in operating assets and liabilities of $3.7 million.

The noncash expenses of $42.9 million recorded in the net loss primarily relate to depreciation and amortization of $16.3 million, accretion of debt discount on long-term debt of $3.7 million, $6.4 million related to an unrealized loss on a hedge instrument to hedge the Euticals Euro denominated purchase price, deferred income tax expense of $9.7 million and share-based compensation expense of $4.6 million.

Cash provided by changes in operating assets and liabilities of $3.7 million was driven primarily from net cash collections from customers related to accounts receivable of $9.9 million and an increase in income taxes payable of $4.0 million, partially offset by increases in inventory and prepaid expenses and other assets of $3.2 million and $5.7 million, respectively, and a decrease in deferred revenue of $4.2 million.

Long-Term Debt and Other Obligations

The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” under Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

As disclosed in Note 5 of the unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2017 and as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, 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. Additionally, our cash convertible Senior Notes (the “Senior Notes”) come due in 2018 and our Term Loans are subject to early repayment provisions such that they are payable six months prior to the Senior Notes, and therefore, we may not have sufficient cash on hand to repay these obligations. If we are unable to pay the principal on our Senior Notes, we may need to incur additional debt or issue additional securities to generate funds to cover these payments. In addition, in the event of a default under the Senior Notes, the holders and/or the trustee under the indenture governing the Senior Notes may accelerate the payment obligations thereunder, which could have a material adverse effect on our business, financial condition and results of operations. Moreover, amounts outstanding under our term loan and revolving credit facility could become due and payable on an accelerated basis under certain conditions and in certain circumstances.

We expect that additional future capital expansion and acquisition activities, if any, could be funded with cash on hand, cash from operations, borrowings under our Third Amended and Restated Credit Agreement and/or the issuance of equity or debt securities. There can be no assurance that attractive acquisition opportunities will be available to us or will be available at prices and upon such other terms that are attractive to us. We regularly evaluate potential acquisitions of other businesses, products and product lines and may hold discussions regarding such potential acquisitions. In addition, in order to meet our long-term liquidity needs or consummate future acquisitions, we may incur additional indebtedness or issue additional equity or debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to us or at all. The failure to raise the funds necessary to finance our future cash requirements or consummate future acquisitions could adversely affect our ability to pursue our strategy and could negatively affect our operations in future periods.

As of June 30, 2017, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the Securities and Exchange Commission’s Regulation S-K.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to business combinations, inventories, goodwill and intangibles, other long-lived assets, derivative instruments and hedging activities, pension and postretirement benefit plans, and income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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We refer to the policies and estimates set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes or modifications to the policies since December 31, 2016.

Recently Issued Accounting Pronouncements            

Refer to Note 1 to the unaudited Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes during the three months ended June 30, 2017 with respect to the information on Quantitative and Qualitative Disclosures about Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4. Controls and Procedures

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 Company’s last fiscal quarter our management conducted an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer regarding the effectiveness of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the Company’s last fiscal quarter, our disclosure controls and procedures were effective in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. We intend to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

See Note 15 (Subsequent Events) for updates to the Legal Proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 1A. Risk Factors

In addition to the other information set forth in this report, the risks and uncertainties that we believe are most important for you to consider are discussed in Part II, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the year ended December 31, 2016 other than as set forth below.

We may not complete the Merger within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.

On June 5, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with UIC Parent Corporation, a Delaware corporation (“Parent”), and UIC Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub” and, together with Parent, the “Acquiring Parties”), pursuant to which, subject to the satisfaction or waiver of the conditions therein, Merger Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent (the “Merger”). Parent and Merger Sub were formed by (i) affiliates of Carlyle Partners VI, L.P. (“Carlyle”) and (ii) GTCR Fund XI/A LP, GTCR Fund XI/C LP, and GTCR Co-Invest XI LP collectively (“GTCR”). Completion of the Merger is subject to a number of closing conditions, including obtaining approval of our stockholders and receipt of certain required regulatory approvals. Each party’s obligation to consummate the merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Merger Agreement, including, with respect to us, covenants regarding operation of our business prior to closing. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, a change in the recommendation of our Board or a termination of the Merger Agreement by us to enter into an agreement for a “Superior Proposal,” as defined in the Merger Agreement. As a result, we cannot assure you that the Merger will be completed, even if our stockholders approve the Merger, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.

If the Merger is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. We could be required to reimburse certain expenses of Parent or pay Parent a termination fee if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. The failure to complete the Merger may result in negative publicity and negatively affect our relationship with our stockholders, employees and clients. We may also be required to devote significant time and resources to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.

The Merger Agreement provides us with limited remedies in the event of a breach by Parent that results in termination of the Merger Agreement, including the right to a reverse termination fee payable under certain specified circumstances. We cannot assure you that a remedy will be available to us in the event of such a breach or that the damages we incur in connection with such breach will not exceed the amount of the reverse termination fee.

The announcement and pendency of the Merger could adversely affect our business, financial results and/or operations.

Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending because employees may experience uncertainty about their roles following the Merger. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the Merger and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with clients and potential clients. For example, clients and other counterparties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our revenue, earnings and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

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While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, take certain actions relating to intellectual property, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition.

In certain instances, the Merger Agreement requires us to pay a termination fee to Parent, which could affect the decisions of a third party considering making an alternative acquisition proposal.

Under the terms of the Merger Agreement, we may be required to pay Parent a termination fee of up to $35 million in the event that we were to terminate the Merger Agreement to enter into an agreement for a “Superior Proposal,” as defined in the Merger Agreement. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal, including a proposal that would be more favorable to our stockholders than the Merger.

We have incurred, and will continue to incur, direct and indirect costs as a result of the Merger.

We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the Merger. We must pay substantially all of these costs and expenses whether or not the Merger is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.

Legal proceedings in connection with the Merger, the outcomes of which are uncertain, could delay or prevent the completion of the merger.

Since the announcement of the Merger Agreement, three putative class actions have been filed in the United States District Court for the District of Delaware in connection with the proposed Merger.  One lawsuit was filed against us and the members of our Board and alleges that the proxy statement seeking stockholder adoption of the Merger Agreement omits material information regarding the Company’s financial projections.  The second lawsuit was filed against us, the members of our Board, and other parties to the Merger Agreement and also alleges that the proxy statement omits material information regarding the Company’s financial projections, potential conflicts of interest by the members of our Board, our officers, and Credit Suisse, and certain background of the transaction.  The third lawsuit was filed against us, the members of our Board, and other parties to the Merger Agreement and alleges that the proxy statement omits material information regarding the Company’s financial projects, potential conflicts of interest by our Board, our officers, and Credit Suisse, and certain background of the proposed transaction. It also alleges that our Board breached its fiduciary duty by failing to maximize value for the stockholders. Among other remedies, the plaintiffs in these lawsuits seek to enjoin the stockholders’ vote and the Merger.  These and other potential legal proceedings could delay or prevent the Merger from becoming effective.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table represents share repurchases during the three months ended June 30, 2017:

Issuer Purchases of Equity Securities

					(c)		(d)
					Total Number		Approximate
					of Shares		Dollar Value of
					Purchased as		Shares that
	(a)		(b)		Part of Publicly		May Yet Be
	Total Number		Average Price		Announced		Purchased
	of Shares		Paid Per		Plans or		Under the Plans or
Period	Purchased (1)		Share		Programs		Programs
April 1, 2017 - April 30, 2017		1	$	15.39		N/A		N/A
May 1, 2017 - May 31, 2017		1		18.05		N/A		N/A
June 1, 2017 - June 30, 2017		2		21.60		N/A		N/A
Total		4	$	18.94		N/A		N/A

(1) Consists of shares repurchased by the Company to satisfy minimum tax withholding obligations that arose on the vesting of restricted stock held by employees. Amounts are in thousands.

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Item 6.    Exhibits

Exhibit
Number	Description
2.1	Agreement and Plan of Merger, dated June 5, 2017, by and among Albany Molecular Research, Inc., UIC Parent Corporation and UIC Merger Sub, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 6, 2017, File No. 001-35622)
3.1	Amendment to Amended and Restated By-laws (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 6, 2017, File No. 001-35622).
10.1	Albany Molecular Research, Inc.’s Fifth Amended 2008 Stock Option and Incentive Plan*
10.2	Albany Molecular Research, Inc.’s Fourth Amended 1998 Employee Stock Purchase Plan*
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.*
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101	XBRL (eXtensible Business Reporting Language).  The following materials from Albany Molecular Research, Inc.’s Quarterly Report on Form 10-Q for the six months ended June 30, 2017, 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 Cash Flows and (v) notes to consolidated financial statements.*

* Filed herewith.

** 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 Securities Exchange Act.

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SIGNATURES

Pursuant to the requirements 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.

	ALBANY MOLECULAR RESEARCH, INC.
Date: August 9, 2017	By:	/s/ Felicia I. Ladin
		Felicia I. Ladin
		On behalf of the Registrant as Senior Vice President, Chief Financial Officer and Treasurer (and also as Principal Financial Officer)

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