UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 |
FORM 10-Q
|
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934 |
For quarter ended
March 31, 2007 | Commission file number 1-8593 |
Alpharma Inc.
(Exact name of registrant as specified in its charter) |
Delaware
(State of Incorporation) | 22-2095212
(I.R.S. Employer Identification No.) |
440 Route 22 East, Bridgewater NJ 08807
(Address of principal executive offices) Zip Code |
(908) 566-3800
(Registrant's Telephone Number Including Area Code) |
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 requirements for the past 90 days. |
YES X | NO ____ |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |
YES X | NO ____ |
Indicate the number of shares outstanding of each of the Registrant's classes of common stock as of April 24, 2007: |
Class A Common Stock, $.20 par value - 43,355,204 shares
|
ALPHARMA INC.
INDEX
| | | Page No. |
PART I | FINANCIAL INFORMATION | |
Item 1 | Financial Statements (unaudited) | |
| | Consolidated Balance Sheets as of March 31,
2007 and December 31, 2006 | 3 |
| | Consolidated Statements of Income for the Three
Months Ended March 31, 2007 and 2006 | 4 |
| | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 | 5 |
| | Notes to Consolidated Financial Statements | 6-16 |
Item 2 | Management's Discussion and Analysis of Financial
Condition and Results of Operations | 17-21 |
Item 3 | Quantitative and Qualitative Disclosures about
Market Risk | 21 |
Item 4 | Controls and Procedures | 21 |
PART II.
Item 1 | OTHER INFORMATION
Legal Proceedings |
22
|
Item 6 | Exhibits | 22 |
| | Signatures | 23 |
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| | March 31,
2007 | December 31,
2006 |
ASSETS | | |
Current assets: | | |
Cash and cash equivalents | $399,941 | $113,163 |
Accounts receivable, net | 106,930 | 107,847 |
Inventories | 118,445 | 106,958 |
Prepaid expenses and other current assets | 29,134 | 25,573 |
Total current assets | 654,450 | 353,541 |
| | | |
Property, plant and equipment, net | 237,245 | 233,447 |
Goodwill | 117,704 | 117,655 |
Intangible assets, net | 158,187 | 160,922 |
Other assets and deferred charges | 65,036 | 61,674 |
| | | |
Total assets | $1,232,622 | $927,239 |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | |
Current liabilities: | | |
Accounts payable | $44,942 | $50,180 |
Accrued expenses | 90,042 | 96,303 |
Accrued and deferred income taxes | 10,521 | 9,090 |
Total current liabilities | 145,505 | 155,573 |
| | | |
Long-term debt | 300,000 | -- |
Deferred income taxes | 23,035 | 27,885 |
Other non-current liabilities | 26,251 | 19,782 |
Total non-current liabilities | 349,286 | 47,667 |
| | | |
Commitments and contingencies (see Note 15) | | |
| | | |
Stockholders' equity: | | |
Class A Common Stock | 8,735 | 8,685 |
Class B Common Stock | 2,375 | 2,375 |
Additional paid-in capital | 1,121,381 | 1,117,717 |
Accumulated deficit | (140,714) | (147,977) |
Accumulated other comprehensive income | 61,095 | 58,240 |
Treasury stock, at cost | (315,041) | (315,041) |
Total stockholders' equity | 737,831 | 723,999 |
Total liabilities and stockholders' equity | $1,232,622 | $927,239 |
See notes to the consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
| | Three Months Ended
March 31, |
| | 2007 | 2006 |
| | | |
Total revenue | $168,081 | $158,980 |
Cost of sales | 71,609 | 62,797 |
Gross profit | 96,472 | 96,183 |
Selling, general and administrative expenses | 63,192 | 61,204 |
Research and development | 18,391 | 7,993 |
Asset impairments and other (income) expense | (2,070) | -- |
Operating income | 16,959 | 26,986 |
Interest income (expense), net | 1,387 | 2,827 |
(Loss) on extinguishment of debt | -- | (19,415) |
Other income (expense), net | 76 | 656 |
Income from continuing operations, before income taxes | 18,422 | 11,054 |
Provision for income taxes | 6,447 | 3,869 |
Income from continuing operations | 11,975 | 7,185 |
| | | |
Discontinued operations, net of taxes | | |
Income from discontinued operations | -- | 1,531 |
Gain from disposals | -- | 24,718 |
Income from discontinued operations | -- | 26,249 |
| | | |
Net income | $11,975 | $33,434 |
| | | |
Earnings per common share: | | |
Basic | | |
Income from continuing operations | $0.28 | $0.13 |
Income from discontinued operations | -- | $0.49 |
| $0.28 | $0.62 |
Diluted | | |
Income from continuing operations | $0.28 | $0.13 |
Income from discontinued operations | -- | $0.49 |
| $0.28 | $0.62 |
| | | |
Dividends per common share | $-- | $0.045 |
See notes to the consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
| | Three Months Ended
March 31, |
| | 2007 | | 2006 | |
Operating Activities: | | | | |
Net income | $11,975 | | $33,434 | |
Adjustments to reconcile net income to net cash used in
operating activities: | | | | |
Depreciation and amortization | 11,636 | | 10,984 | |
Amortization of loan costs | 81 | | 105 | |
Interest accretion on convertible debt | -- | | 754 | |
Amortization of restricted stock and stock options | 1,025 | | 1,497 | |
Loss on extinguishment of debt | -- | | 19,415 | |
Gain on disposal of discontinued operations | -- | | (24,718) | |
Other non-cash items | 27 | | 273 | |
Changes in assets and liabilities: | | | | |
Decrease (increase) in accounts receivable | 1,462 | | (8,251) | |
(Increase) decrease in inventories | (10,598) | | (4,172) | |
(Increase) in prepaid expenses | (3,487) | | (3,482) | |
(Decrease) in accounts payable and accrued expenses | (13,215) | | (37,525) | |
Increase (decrease) in taxes payable | 1,445 | | (28,088) | |
Other, net | (3,320) | | 1,773 | |
Net cash (used in) operating activities | (2,969) | | (38,001) | |
| | | | | |
Investing Activities: | | | | |
Capital expenditures | (7,868) | | (7,267) | |
Purchase of intangible assets | (718) | | (778) | |
Proceeds from sale of business | -- | | 40,100 | |
Net cash (used in) provided by investing activities | (8,586) | | 32,055 | |
| | | | | |
Financing Activities: | | | | |
Dividends paid | -- | | (2,461) | |
Proceeds from the issuance convertible senior notes | 292,772 | | -- | |
Reduction of senior long-term debt | -- | | (381,702) | |
Net repayments under lines of credit | -- | | (35,715) | |
Payment of call premium | -- | | (18,894) | |
Proceeds from issuance of common stock | 2,092 | | 13,406 | |
Increase (decrease) in book overdraft | 3,551 | | (922) | |
Net cash provided by (used in) financing activities | 298,415 | | (426,288) | |
| | | | | |
Net cash flows from exchange rate changes | (82) | | (1,559) | |
| | | | | |
Increase (decrease) in cash | 286,778 | | (433,793) | |
Cash and cash equivalents at beginning of year | 113,163 | | 800,198* | |
Cash and cash equivalents at end of period | $399,941 | | $366,405 | |
* Includes cash of $188 included within Assets of Discontinued Operations at December 31, 2005.
See notes to the consolidated financial statements.
1. General
The accompanying consolidated financial statements include all adjustments which are, in the opinion of management, considered necessary for a fair presentation of the results of operations and financial position for the periods presented. These financial statements should be read in conjunction with the consolidated financial statements of Alpharma Inc. and Subsidiaries included in the Company's 2006 Annual Report on Form 10-K. The reported results for the three month period ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year. Certain amounts have been reclassified to conform with current presentations.
Basis of Presentation:
The Consolidated Balance Sheets and Consolidated Statements of Income have been presented for all periods to classify as Discontinued Operations, ParMed Pharmaceuticals, Inc. ("ParMed", which the Company sold on March 31, 2006). See Note 2. Consistent with Statement of Financial Accounting Standards ("SFAS") No. 95, "Statement of Cash Flows", the Consolidated Statements of Cash Flows have not been reclassified for activities of the discontinued operations.
2. Discontinued Operations
Sale of the Generics Business- On December 19, 2005, the Company sold its world-wide human generic pharmaceutical business to Actavis Group hf ("Actavis") on a debt-free and cash-free basis, for $810,000.
Sale of the ParMed Business- On March 31, 2006, the Company sold its generic pharmaceutical telemarketing distribution business, ParMed Pharmaceuticals Inc. for $40,100 in cash. The net after-tax gain on the sale, $25,814, is reported in the first quarter of 2006 results from discontinued operations in the Consolidated Statement of Income, along with adjustments related to the disposal of the Generics Business which was sold in December 2005.
The following table details selected financial information for ParMed, which is classified as a discontinued operation:
Statement of Operations | Three Months Ended March 31, 2006 |
| |
Total revenues | $17,142 |
Cost of sales | 12,030 |
Gross profit | 5,112 |
| |
Operating expenses | 2,756 |
| |
Operating income | 2,356 |
Other income (expense), net | -- |
Income from discontinued operations, before
income taxes |
2,356
|
Provision for income taxes | 825 |
| |
Net income from discontinued operations | $1,531 |
3. Liquidity and Capital Resources
At March 31, 2007, the Company had $399,941 in cash and cash equivalents. Interest income earned on cash investments during the quarter ended March 31, 2007 was $1,879 and is classified as a component of Interest income (expense), net in the Consolidated Statement of Income. Subsequent to the repurchase of Class B shares in the fourth quarter of 2006, the Company ceased making dividend payments.
In March 2007, the Company issued $300,000 of Convertible Senior Notes ("Notes"), due March 15, 2027. The net proceeds from the issuance of $292,772, after deducting expenses, will be used to fund future business development transactions and for general corporate purposes. Deferred loan costs in the amount of $7,228 will be amortized over seven years.
On January 23, 2006, the Company paid the balance due on both the 8.625% Senior Notes and 3% Convertible Notes, including principal and accrued interest of $386,251 and call premium in the amount of $18,894. The call premium is included in "Loss on extinguishment of debt" within the Consolidated Statement of Income. In January 2006, the Company repaid all short-term debt outstanding at December 31, 2005, in the amount of $35,713.
4. Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123R ("SFAS 123R"), "Share-Based Payments,"effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in net earnings. Stock-based compensation consists primarily of incentive stock options and restricted stock. Effective in March 2007, the Compensation Committee of the Board of Directors approved the award of equity-related incentives under the Company's 2003 Omnibus Incentive Compensation Plan, which included a new performance-based incentive; called the "Performance Based Restricted Class A Common Stock" ("Performance Based Restricted Stock") awards. The performance-based restricted stock units awarded in March 2007, vest on the date the Company files its Form 10-K for the year ending December 31, 2009. The final amount of the award will be determined based upon certain financial performance conditions. Executives holding p erformance based restricted stock units will receive between zero and 200% of the target award level based on achieving EBITDA target levels over a three-year performance period through December 31, 2009. The fair value of the performance-based restricted stock will be amortized to expense over the requisite service period based on achieving 100% of the targeted performance level. Anticipated changes in achieving targeted performance levels will result in changes in estimates of final award levels, and the adjusted fair value of the Performance-based restricted stock will be recognized over the remaining service period.
Stock Options
Stock options are granted to employees at exercise prices equal to the fair market value of the Company's stock at the dates of grant. Generally, stock options granted to employees vest in 25% increments each year and are fully vested four years from the grant date and have a term of 10 years. The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, which generally equals the vesting period.The Company recognized stock-based compensation expense for incentive stock options for the three months ended March 31, 2007 and 2006 in the amounts of $367 and $658, respectively.
The Company estimated the fair value, as of the date of grant, of stock options using the Black-Scholes option pricing model with the following assumptions:
| | 2007 | 2006 |
| | | |
Expected life (years) | 3.3 | 3.2 |
Expected future dividend yield (average) | N/A | 0.60% |
Expected volatility | 50% | 61% |
The risk-free interest rates for 2007 and 2006 were based upon U.S. Treasury instrument rates with maturity approximating the expected term. The weighted average interest rate in 2007 amounted to 4.5%. The weighted average fair value of options granted during the quarter ended March 31, 2007 with exercise prices equal to fair market value on the date of grant was $10.59.
| | Options
Outstanding |
Balance at
December 31, 2006 |
1,344,282
|
Granted in Q1 2007 | 378,660 |
Forfeited in Q1 2007 | (182,405) |
Exercised in Q1 2007 | (87,887) |
Balance at
March 31, 2007 |
1,452,650
|
Stock options outstanding at March 31, 2007 had an aggregate intrinsic value of $4,225, a weighted average exercise price of $23.94 and a weighted average remaining contractual term of 7.14 years. The number of stock options exercisable at March 31, 2007, was approximately 710,835 shares with an aggregate intrinsic value of $3,163, a weighted average exercise price of $23.79 and a weighted average remaining contractual term of 4.87 years. The total intrinsic value of stock options exercised during the first quarter of 2007 and 2006 was $834
and $6,175, respectively.
As of March 31, 2007, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, amounted to approximately $7,329. The weighted average remaining requisite service period of the non-vested stock options was approximately 36 months.
Restricted Stock and Performance Based Restricted Stock
Compensation for restricted stock is recorded based on the market value of the stock on the grant date. The fair value of restricted stock is recognized in expense over the requisite service period. The expense related to restricted stock amounted to $658 and $839 in the three month periods ended March 31, 2007 and 2006, respectively.
Effective March 28, 2007, the Company granted Performance Based Restricted Stock awards to certain key executives.
Performance Units
The Company's 2003 Omnibus Incentive Compensation Plan also provided for the issuance of performance units that were valued based on the Company's Total Shareholder Return as compared to a market index of peer companies and the satisfaction of a free cash flow threshold. Each performance unit had a potential value between zero and $200. In conjunction with the sale of the Generics Business, which made the peer group comparison no longer relevant, the Company, terminated the performance unit plan effective December 18, 2005. The Company fixed the final payout for each outstanding performance unit at $100 per unit. The total value of performance units outstanding is $2,472. This amount, net of forfeitures, will be paid out at the end of the plan's original three year vesting period: December 31, 2007. This cost is being recognized in expense over the remaining service period. The Company recognized expense, net of forfeitures, related to performance units for the three months ended March 31, 2007 in the amount of $227, and at March 31, 2007 had $1,560 accrued.
5. Inventories
Inventories consist of the following:
| | March 31, | December 31, |
| | 2007 | 2006 |
| | |
Finished product | $64,486 | $53,283 |
Work-in-process | 38,571 | 37,847 |
Raw materials | 15,388 | 15,828 |
| | $118,445 | $106,958 |
6. Long-Term Debt
In March 2007, the Company issued $300,000 of Convertible Senior Notes, due March 15, 2027, with interest payable semi-annually, in arrears, on March 15 and September 15, at a rate of 2.125% per annum. The Notes are unsecured obligations and rank subordinate to all future secured debt and to the indebtedness and other liabilities of our subsidiaries. The Notes are convertible into shares of the Company's Class A Common Stock at an initial conversion rate of 30.6725 shares per $1,000 principal amount of the Notes, subject to adjustment. The conversion rate is based on an initial conversion price of $32.60 per share. The maximum number of shares a note-holder may receive as a result of such adjustments is 41.40. The Company may redeem the Notes at its option commencing on or after March 15, 2014. The holders have one day put rights on March 15, 2014, 2017 and 2022, to require the Company to repurchase the Notes at 100% of the principal amount, plus accrued and unpaid int erest. Beginning with the period commencing on March 20, 2014 and during any six-month interest period thereafter, the Company will pay contingent interest if the average trading price of the Notes is above a specified level. The net proceeds from the issuance were $292,772 after deducting expenses, and will be used to fund future business development transactions and for general corporate purposes. Deferred loan costs in the amount of $7,228 will be amortized over seven years.
On October 26, 2005, the Company entered into a five-year, Senior Secured Credit Facility with Bank of America N.A. consisting of a $175,000 asset-based, revolving loan facility and a $35,000 term loan. The Company used $119,122 of this facility to repay and retire the 2001 U.S. Bank Credit Facility in October 2005. The Senior Secured Credit Facility was subsequently fully paid down in December 2005 with the proceeds from the sale of the Generics business. In March 2006, the asset-based, revolving loan availability was reduced to $75,000 and the term loan was cancelled.
The Senior Secured Credit Facility, which was amended and restated on March 10, 2006 to reflect the sale of the Generics Business, is secured by the accounts receivable, inventory and certain fixed assets of the U.S. subsidiaries of the Company. The amount that is available to the Company to be borrowed is determined monthly based upon the calculation of a Borrowing Base. As of March 31, 2007, there were no amounts outstanding under this Facility. The interest rate that the Company would pay on outstanding amounts is based upon a spread over LIBOR or Base Rate. The spread ranges between 1.25% to 2.00% over LIBOR and 0% to 0.50% over the Base Rate. The determination of the spread is based upon the amount of availability under the facility with a lower spread payable based upon greater availability. As long as the Company does not have average availability less than $15,000 over a consecutive 10 day period, there are no financial covenants. In the event that th e Company were to breach the availability threshold, the Company would be subject to a minimum Fixed Charge Coverage Ratio of 1:1.
7. Earnings Per Share
Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share reflect the dilutive effect of stock options and convertible debt, when appropriate.
A reconciliation of weighted average shares outstanding from basic to diluted is, as follows:
(Shares in thousands) | Three Months Ended |
| | March 31, |
| | 2007 | 2006 |
Average shares outstanding basic | 42,291 | 53,520 |
Stock options | 554 | 583 |
Average shares outstanding diluted | 42,845 | 54,103 |
The amount of dilution attributable to stock options, determined by the treasury stock method, depends on the average market price of the Company's common stock for each period. For the three months ended March 31, 2007 and 2006, stock options to purchase 425,000 and 759,000 shares, respectively, were not included in the diluted EPS calculation because the option price was greater than the average market price of the Class A common shares.
The numerator for the calculation of basic and diluted EPS is net income (loss) for all periods.
On December 28, 2006, the Company repurchased all of the outstanding Class B shares (11,872,897 shares).
8. Intangible Assets and Goodwill
Intangible assets consist principally of product rights, including regulatory and/or marketing approvals by relevant government authorities. All intangible assets are subject to amortization. Annual amortization expense based on current intangibles for the years 2007 through 2011 is currently estimated to be approximately $18,800, $18,600, $18,500, $18,500 and $18,300, respectively.
Intangible assets and accumulated amortization are summarized as follows:
| |
Net balance, December 31, 2006 | $160,922 |
| | |
Additions | 1,764 |
Amortization | (4,771) |
Translation adjustment | 272 |
| | |
Net balance, March 31, 2007 | $158,187 |
| | |
Accumulated amortization, March 31, 2007 | $157,377 |
The changes in the carrying amount of goodwill attributable to the Company's reportable segments for the quarter ended March 31, 2007 are, as follows:
| Pharmaceuticals | API | Total |
Balance December 31, 2006 | $113,973 | $3,682 | $117,655 |
Translation adjustment | -- | 49 | 49 |
Balance March 31, 2007 | $113,973 | $3,731 | $117,704 |
| | | | |
9. Reorganization, Refocus and other Actions
In connection with the reorganization and refocus of the Company to improve future operations, severance charges associated with workforce reductions and other facility closure and exit costs have been recorded. Severance charges not related to specific programs are not segregated from normal operations. The following table presents activity in the severance and closure and exit costs related accruals:
| |
Severance
| | Other Closure andExit Costs |
| | | | |
Balance, December 31, 2006 | $568 | | $3,974 |
| | | | |
Charges | -- | | -- |
Adjustments | -- | | (2,049) |
Payments | (89) | | (33) |
| | | | |
Translation adjustments | 9 | | 5 |
| | | | |
Balance, March 31, 2007 | $488 | | $1,897 |
The liabilities for accrued severance as of March 31, 2007 are reflected in accrued expenses.
The remaining balances for other closure and exit costs as of March 31, 2007 are included in accrued expenses and primarily relate to contractually required demolition costs, lease obligations and other contractually committed costs associated with facility closures. The Company expects to settle these liabilities in the near future.
10. Pension Plans and Postretirement Benefits:
U.S.:
The U.S. pension plan was frozen effective December 31, 2006.
The net periodic benefit costs for the Company's pension plans and other postretirement plans are as follows:
| |
Pension Benefits
For the Three Months
Ended March 31,
| Postretirement
Benefits
For the Three Months
Ended March 31, |
| | 2007 | 2006 | 2007 | 2006 |
Service cost | $-- | $496 | $32 | $24 |
Interest cost | 713 | 766 | 104 | 60 |
Expected return on plan assets | (856) | (776) | -- | -- |
Amortization of prior service cost | 2 | (8) | (34) | (35) |
Recognized net actuarial loss | 3 | 95 | 79 | 38 |
Net periodic benefit cost (income) | $(138) | $573 | $181 | $87 |
The Company does not expect to make any contributions to the U.S. pension plans in 2007.
Europe:
The Norwegian pension plan was substantially frozen effective December 31, 2006.
The net periodic benefit costs for the Company's Norwegian pension plan are, as follows:
| | For the Three Months
Ended March 31, |
| | 2007 | 2006 |
Service cost | $64 | $441 |
Interest cost | 102 | 436 |
Expected return on plan assets | (37) | (349) |
Amortization of transition obligation | -- | 9 |
Amortization of prior service cost | 18 | 26 |
Net periodic benefit cost | $147 | $563 |
The Company does not expect to make any contributions to the Norwegian pension plan in 2007.
11. Supplemental Data
| Three Months Ended |
| March 31, |
| | 2007 | 2006 |
| | | |
Interest income (expense), net: | | |
Interest income | $1,879 | $4,876 |
Interest expense | (411) | (1,944) |
Amortization of debt issuance costs | (81) | (105) |
| | $1.387 | $2,827 |
Loss on early extinguishment of debt: | | |
Call premium | $-- | $(18,894) |
Write off deferred loan costs | -- | (521) |
| | $-- | $(19,415) |
| | | |
Other income (expense), net | | |
Foreign exchange gains (losses), net | $165 | $475 |
Other, net | (89) | 181 |
| | $76 | $656 |
| | | |
Supplemental cash flow information: | | |
| | | |
Cash paid for interest | $311 | $5,097 |
Cash paid (refunded) for income taxes, net | $(934) | $36,658 |
| | | |
12. Reporting Comprehensive Income
SFAS 130, "Reporting Comprehensive Income" requires foreign currency translation adjustments and certain other items, which were reported separately in stockholders' equity, to be included in Accumulated Other Comprehensive Income (Loss). Included within Accumulated Other Comprehensive Income (Loss) as of March 31, 2007 are foreign currency translation adjustments and previously unrecognized actuarial gains and losses as a result of implementing SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and other Postretirement Plans".
The components of comprehensive income and accumulated other comprehensive income include:
| | Three Months Ended
March 31, |
Other Comprehensive Income: | 2007 | 2006 |
Net Income | $11,975 | $33,434 |
Change in Foreign Currency Translation | 2,723 | 1,031 |
Change in unrealized gain (loss) on pension, net | 132 | -- |
| | $14,830 | $34,465 |
| | | |
| | | |
| | March 31,
2007 | December 31, 2006 |
Accumulated Other Comprehensive Income: | | |
Cumulative translation adjustment | $63,528 | $60,805 |
Prior service not yet recognized in cost | 209 | 159 |
Actuarial loss not yet recognized in cost, net | (2,642) | (2,724) |
| | $61,095 | $58,240 |
13. Business Segment Information
The Company's businesses are organized in three reportable segments as follows:Pharmaceuticals ("Pharmaceuticals"), Active Pharmaceutical Ingredients ("API"), and Animal Health ("AH"). Each business has a segment president who reports to the CEO.
The operations of each segment are evaluated based on earnings before interest and taxes (operating income). Unallocated costs include corporate expenses for administration, finance, legal and certain unallocated expenses primarily related to stock-based compensation and other long-term incentive compensation, as well as certain costs related to the implementation of a company-wide enterprise resource planning system. Segment data includes immaterial inter-segment revenues which are eliminated in the consolidated accounts.
| | Three Months Ended March 31, |
| | 2007 | 2006 | 2007 | 2006 |
| | Revenues | Operating Income |
| | | | | |
Pharmaceuticals | $34,503 | $32,580 | $(2,117) | $7,735 |
API | 49,760 | 45,236 | 12,751 | 16,541 |
AH | 83,818 | 81,715 | 17,125 | 16,966 |
Unallocated and eliminations | -- | (551) | (10,800) | (14,256) |
| $168,081 | $158,980 | $16,959 | $26,986 |
14. Income Taxes
The Company's effective tax rate ("ETR") is dependent on many factors including: a.) the impact of enacted tax laws in jurisdictions in which the Company operates; b.) the amount of earnings by jurisdiction, due to varying tax rates in each country; and c.) the Company's ability to utilize various tax credits.
Based on the Company's assessment of the above factors, the tax rate for the full year 2007 is expected to approximate 35%. The ETR for continuing operations for the three months ended March 31, 2007 was 35%.
Effective January 1, 2007, the Company adopted, as required, FASB Interpretation No. 48, ("FIN 48"), "Accounting for Uncertainty in Income Taxes." As a result of implementing FIN 48, the Company recognized an increase in non-current liabilities of approximately $4,712 for uncertain tax positions which was accounted for as a reduction of beginning Retained Earnings. The Company does not expect a significant change in the liabilities recorded for uncertain tax positions in the next twelve months.
The Company recognizes both interest expense and penalties as part of the related income tax liability. During the quarter ended March 31, 2007, the amount of accrued interest and penalties was not material. At March 31, 2007, the Company had $465 of accrued interest and penalties included in non-current liabilities.
15.Contingent Liabilities and Litigation
The Company is involved in various legal proceedings, of a nature considered normal to its business. It is the Company's policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount is reasonably estimable.
In the opinion of the Company, although the outcome of any legal proceedings cannot be predicted with certainty, the ultimate liability of the Company in connection with the following legal proceedings will not have a material adverse effect on the Company's financial position but could be material to the results of operations or cash flows in any one accounting period.
Chicken Litter Litigation
The Company is one of multiple defendants that have been named in several lawsuits which allege that one of its AH products causes chickens to produce manure that contains an arsenical compound which, when used as agricultural fertilizer by chicken farmers, degrades into inorganic arsenic and causes a variety of diseases in the plaintiffs (who allegedly live in close proximity to such farm fields). The Company has provided notice to its insurance carriers and its primary insurance carriers have responded by accepting their obligations to defend or pay the Company's defense costs, subject to reservation of rights to later reject coverage for these lawsuits. In addition, one of the Company's carriers has filed a Declaratory Judgment action in state court in which it has sought a ruling concerning the allocation of its coverage obligations to the Company among the Company's several insurance carriers and, to the extent the Company does not have full insurance c overage, to the Company. In addition, this Declaratory Judgment action requests that the Court rule that certain of the carrier's policies provide no coverage because certain policy exclusions allegedly operate to limit its coverage obligations under said policies.
In addition to the potential for personal injury damages to the approximately 175 plaintiffs, the plaintiffs are asking for punitive damages and requesting that the Company be enjoined from the future sale of the product at issue. In September 2006, in the first trial, which was brought by two plaintiffs, the Circuit Court of Washington County, Arkansas, Second Division, entered a jury verdict in favor of the Company. The plaintiffs are appealing the verdict. The court has ruled that future trials are on hold pending the outcome of the appeal. While the Company can give no assurance of the outcome of these matters, it believes that it will be able to continue to present credible scientific evidence that its product is not the cause of any injuries the plaintiffs may have suffered. There is also the possibility of an adverse customer reaction to the allegations in these lawsuits, as well as additional lawsuits in other jurisdictions where the product has b een sold. Worldwide sales of this product were approximately $23,000 in 2005, $22,200 in 2006 and $5,160 in the first quarter of 2007.
Brazilian Tax Claims
The Company is the subject of tax claims by the Brazilian authorities relating to sales and import taxes which aggregate approximately $10,000. The claims relate to the operations of the Company's AH business in Brazil since 1999. The Company believes it has meritorious defenses and intends to vigorously defend its position against these claims.
European Environmental Regulations
During 2005, the environmental authorities having jurisdiction over the Copenhagen API manufacturing facility gave the Company notice of revised waste discharge levels. The Company believes it has taken the actions necessary to comply with the requirements, including certain plant alterations and modifications at a cost not material to the Company. The environmental authorities have not yet confirmed whether the Company's actions are in compliance with the requirements outlined in the notice.
Additionally, in 2006 a criminal fine was levied against the Company's Oslo API facility based on allegations that certain of the discharge activities at the facility were in breach of applicable regulations. The Company is in discussions with the local authorities regarding this fine. The failure or inability to comply with applicable regulations could result in further criminal or civil actions affecting production at these facilities which could be materially adverse to the Company. As of March 31, 2007, the Company had accrued the amount expected to be paid.
Information Request
On February 28, 2007, the Company received a subpoena from the U.S. Department of Justice requesting certain documents relating to the marketing of KADIAN. The subpoena did not disclose any allegations underlying this request. The Company is fully cooperating with the Department.
Other Commercial Disputes
The Company is engaged in disputes with several suppliers, customers and distributors regarding certain obligations with respect to contracts under which the Company obtains raw materials and under which the Company supplies finished products. Given the fact that these disputes will most probably be resolved over more than one year, management does not believe that the disputes in the aggregate will be material to the Company's financial position. However, they could be material to the Company's results of operations or cash flows in the period in which resolution occurs.
Any further responsibility for substantially all of the material contingent liabilities related to the Generics Business have has been transferred to Actavis or entities owned by Actavis, subject to certain representations or warranties made by the Company to Actavis as a part of the transaction to the extent such representations and warranties were incorrect. The Company has retained certain specified liabilities which it believes are not material to the Company and, it is possible that the Company may be held responsible for certain liabilities of the Generics Business transferred to Actavis in the event Actavis fails or is unable to satisfy such liabilities.
Other Litigation
The Company and its subsidiaries are, from time to time, involved in other litigation arising out of the ordinary course of business. It is the view of management, after consultation with counsel, that the ultimate resolution of all other pending suits on an individual basis should not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(In millions, except per share data)
Overview
The Company is a global specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products for humans and animals. Alpharma's businesses are organized in three business segments. The Company markets one branded human pharmaceutical prescription product that is contract manufactured by a third party, an extended release morphine sulfate pain medication sold under the trademark KADIAN, in the U.S. The Company manufactures and markets a line of fermentation-based active pharmaceutical ingredients ("APIs") that are used primarily by third parties in the manufacturing of generic and branded pharmaceutical products. It also manufactures and markets animal health products in various formulations and dosage forms.
On December 19, 2005, the Company sold its world-wide human generic pharmaceutical business (the "Generics Business") to Actavis Group hf ("Actavis") for $810 million in cash. On March 31, 2006, the Company completed the sale of its generic telemarketing distribution business, ParMed Pharmaceuticals, Inc. ("ParMed") for $40.1 million in cash. Both the Generics Business and ParMed are classified as discontinued operations in the Consolidated Financial Statements (see note 2 to the Consolidated Financial Statements).
Results of Continuing Operations - Three months ended March 31, 2007
Alpharma's business segments are defined, as follows:
Pharmaceuticals | | Pharmaceuticals |
API | | Active Pharmaceutical Ingredients |
AH | | Animal Health |
Total revenues increased 5.7% for the quarter ended March 31, 2007 compared to the first quarter of 2006. Operating income was $17.0 million in 2007 compared to $27.0 million in 2006. Diluted earnings (loss) per share was $0.28 in 2007 compared to $0.13 in 2006.
The following summarizes revenues and operating income by segment:
Three Months Ended March 31, | Revenues | | Operating Income |
| 2007 | 2006 | % | 2007 | 2006 | % |
Pharmaceuticals | $34.5 | $32.6 | 5.8% | $(2.1) | $7.7 | (127.3)% |
API | 49.8 | 45.2 | 10.2% | 12.8 | 16.5 | (22.4)% |
AH | 83.8 | 81.7 | 2.6% | 17.1 | 17.0 | 0.6% |
Unallocated and Eliminations | -- | (0.5) | N/M | (10.8) | (14.2) | (23.9)% |
Total | $168.1 | $159.0 | 5.7% | $17.0 | $27.0 | (37.0)% |
N/M - Not meaningful
Revenues:
Pharmaceuticals revenues increased $1.9 million, or 5.8%, to $34.5 million in the first quarter of 2007, compared to $32.6 million in the first quarter of 2006. The revenue growth was principally attributable to higher year-over-year price realization.
Revenues in API increased $4.6 million, or 10.2%, to $49.8 million compared to $45.2 million in the first quarter of 2006. A small portion of API revenues are denominated in currencies other than the U.S. dollar. Translation of these revenues into the U.S. dollar increased API revenues by approximately $1.1 million in comparison to the first quarter of 2006. The remainder of the revenue increase was attributable to increased volumes, principally related to vancomycin.
AH revenues increased $2.1 million, or 2.6%, to $83.8 million compared to $81.7 in the first quarter of 2006. Translation of revenues into the U.S. dollar increased AH revenues by approximately $1.2 million in comparison to the first quarter of 2006. The increase in revenues was due primarily to higher sales in U.S. poultry and Latin American markets, partially offset by year-over-year sales declines in the Asia Pacific region.
Gross Profit:
On a Company-wide basis gross profit increased $0.3 million in 2007 compared to the first quarter of 2006. As a percentage of sales, overall gross profit margin was 57.4% in 2007, versus 60.5% in 2006, with the decline principally attributable to the unfavorable effects of currency and product mix in API and higher production costs in API and AH.
Operating Expenses:
On a consolidated basis, selling, general and administrative ("SG&A") expenses increased $2.0 million in 2007 as compared to the first quarter of 2006. As a percentage of revenues, SG&A expense declined from 38.5% in the first quarter of 2006 to 37.6% in 2007. Foreign exchange had an unfavorable impact of $1.3 million in the year-over-year change in SG&A expenses. The remainder of the increase principally relates to additional operational infrastructure to support growth initiatives in all three businesses, partially offset by lower corporate and unallocated expenses.
Research and development expenses increased $10.4 million in the first quarter of 2007 in comparison to 2006, due primarily to spending related to clinical trials related to abuse-deterrent opioid product development programs in Pharmaceuticals. Also included in first quarter 2007 research and development expenses is the initial $1.5 million payment under an exclusive licensing agreement with Tris Pharma, Inc., whereby the Company will gain access to a proprietary drug delivery platform. If all milestones under this agreement are achieved, the aggregate of such payments would be approximately $15 million including estimated costs to be incurred by the Company during the development and registration process.
Asset impairments and other (income) expense amounted to income of $2.1 million in the first quarter of 2007 and pertained to facility exit cost adjustments and asset sales related to previously closed AH facilities.
Operating Income:
Operating income (OI) decreased by $10.0 million. The change in operating income is summarized as follows:
|
Pharmaceuticals
|
API
|
AH
| Corporate/
Unallocated |
Total
|
2006 as reported | $7.7 | $16.5 | $17.0 | $(14.2) | $27.0 |
Research and development | (9.5) | (0.7) | (0.2) | -- | (10.4) |
Senior management retention and transition, and performance unit expense | -- | -- | -- | 1.6 | 1.6 |
Facility exit cost adjustments and asset sales | -- | -- | 2.1 | -- | 2.1 |
Net OI improvement (decrease) due to volume, price, new products, foreign exchange and expenses | (0.3) | (3.0) | (1.8) | 1.8 | (3.3) |
2007 as reported | $(2.1) | $12.8 | $17.1 | $(10.8) | $17.0 |
Interest Income (Expense), net:
The Company reported net interest income of $1.4 million for the first quarter of 2007 compared to net interest income of $2.8 million in last year's first quarter. The change reflects lower average cash levels during the first quarter of 2007 as a result of the repurchase of the Class B shares at the end of 2006, at a cost of $307.4 million. Interest expense in the first quarter of 2007 includes interest (2.125%) on the $300 million Convertible Senior Notes issued on March 15, 2007. An analysis of the components of interest income (expense), net is, as follows:
| Three Months Ended March 31, |
| 2007 | 2006 |
| | | |
Interest income | $1.9 | $4.8 |
Interest expense | (0.4) | (1.9) |
Amortization of debt issuance costs | (0.1) | (0.1) |
| | $1.4 | $2.8 |
Loss on Extinguishment of Debt:
First quarter 2006 results include the payment of a call premium of $18.9 million and write-offs of deferred loan costs of $0.5 million associated with the repayment of the Company's outstanding long-term debt in January 2006.
Other Income (Expense), net:
A detail of Other income (expense), net follows:
| Three Months Ended March 31, |
| 2007 | 2006 |
| | | |
Foreign exchange gains (losses), net | $0.2 | $0.5 |
Other, net | (0.1) | 0.2 |
| | $0.1 | $0.7 |
Tax Provision
The Company's effective tax rate ("ETR") is dependent on many factors including: a.) the impact of enacted tax laws in jurisdictions in which the Company operates; b.) the amount of earnings by jurisdiction, due to varying tax rates in each country; and c.) the Company's ability to utilize various tax credits.
Based on the Company's assessment of the above factors, the tax rate for the year ending December 31, 2007, is expected to approximate 35%. The ETR for continuing operations for the three months ended March 31, 2007 and 2006 was 35%.
In July 2006, the Financial Accounting Standards Board issued FIN 48,Accounting for Uncertainty in Income Taxes which became effective for the Company, January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The impact of the Company's reassessment of its tax positions in accordance with FIN 48 did not have a material impact on the results of operations, financial condition or liquidity.
Liquidity and Capital Resources
At March 31, 2007, the Company had $399.9 million in cash and cash equivalents. Quarterly interest income earned on investments was $1.9 million for the three months ended March 31, 2007, and is classified as a component of Interest income (expense), net in the Consolidated Statements of Income.
In March 2007, the Company issued $300 million of Convertible Senior Notes, due March 15, 2027. The net proceeds from the issuance, after deducting expenses, were $292.8 million. The net proceeds will be used to fund future business development transactions and for general corporate purposes.
Cash flow from operations in the first quarter of 2007 was a use of $3.0 million, compared to a use of $38.0 million in the first quarter of 2006. During the first quarter of 2007, the Company was refunded cash taxes of $0.9 million versus $36.7 million paid for cash taxes in the first quarter of 2006.
Cash flow used in investing activities for the first quarter of 2007 included capital expenditures of $7.9 million and the acquisition of intangibles in API for $0.7 million. Cash flow provided by investing activities for the first quarter of 2006 included the proceeds from the sale of ParMed of $40.1 million.
The cash flow provided by financing activities in the first quarter of 2007 was $298.4 million compared with a use of $426.3 million last year. Cash flow from financing activities in the first quarter of 2007 includes the net proceeds ($292.8 million) from the issuance of $300 million in Convertible Senior Notes. The use of funds in 2006 included $436.3 million related to the repayment of debt, including a call premium of $18.9 million.
Working capital at March 31, 2007, was $508.9 million compared to $198.0 million at December 31, 2006. Working capital is defined as current assets less current liabilities. The increase in working capital is primarily related to the $292.8 million of cash received in conjunction with the issuance of Convertible Senior Notes in March of 2007. Increases in inventory levels are due to expected market demand and contributed to the increase in working capital by ($10.6 million). Decreases in accounts payable and accrued expenses ($12.2 million) also contributed to the increase in working capital.
Stockholders' equity at March 31, 2007 was $737.8 million compared to $724.0 million at December 31, 2006. The increase in Stockholders' Equity in 2007 resulted primarily from the first quarter net earnings. The accumulated deficit was increased by $4.7 million as a result of implementing FIN 48 (see footnote 14). At March 31, 2007, due primarily to the cumulative weakening of the U.S. dollar against many other currencies, the Company reported Accumulated Other Comprehensive Income of $61.1 million compared to $58.2 million at December 31, 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosure - This information is included in Item 7a of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company has implemented and maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's President and Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") as appropriate to allow timely decisions regarding disclosure. The disclosure controls and procedures involve participation by various individuals in the Company having access to material information relating to the operations of the Company. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assum ptions about the likelihood of future events.
The Company's CEO and CFO completed an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Rule 13a-15 as of March 31, 2007. Based on this evaluation, they concluded that the Company's disclosure controls and procedures were effective as of March 31, 2007.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the three-month period ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
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Statements made in this Form 10-Q, are forward-looking statements made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. Information on other significant potential risks and uncertainties not discussed herein may be found in the Company's filings with the Securities and Exchange Commission including its Form 10-K for the year ended December 31, 2006.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 15 to the Company's Consolidated Condensed Financial Statement included in Part 1 of this Report for a discussion of material developments in the Company's legal proceedings.
Item 6. Exhibits
(a) Exhibits
10.1 | Form of Performance Based Restricted Stock Unit Award Agreement, effective March 28, 2007, is filed as an Exhibit to this Report. |
| | |
10.2 | Form of revised Restricted Stock Award Agreement, effective March 28, 2007, is filed as an Exhibit to this Report. |
| | |
10.3 | Form of revised Restricted Stock Unit Award Agreement, effective March 28, 2007, is filed as an Exhibit to this Report. |
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10.4 | Form of Non-Qualified Stock Option Award Agreement, effective March 28, 2007, is filed as an Exhibit to this Report. |
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10.5 | Development and License Agreement between Tris Pharma, Inc. and Alpharma Branded Products Division Inc., dated March 28, 2007, is filed as an Exhibit to this Report.* |
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31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is filed as an Exhibit to this Report. |
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31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is filed as an Exhibit to this Report. |
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32.0 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are filed as an Exhibit to this Report. |
* Portions of this Exhibit have been omitted pursuant to a request for confidential treatment.
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.
| | |
| | Alpharma Inc.
(Registrant) |
| | |
Date: May 1, 2007
| /s/Jeffrey S. Campbell Jeffrey S. Campbell
Executive Vice President and
Chief Financial Officer
|
| | |
Date: May 1, 2007 | /s/John F. Konzelmann John F. Konzelmann Vice President, Controller and Principal Accounting Officer |
