ALBANY MOLECULAR RESEARCH INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

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

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

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

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

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

29 Our total revenue for 2012 was $226.7 million, including $189.9 million from our contract service business and $36.0 million from royalties on sales of Allegra/Telfast and certain products sold by Actavis, Inc ("Actavis"). We generated $15.3 million in cash from operations, and we used $9.9 million for capital expenditures on our facilities and equipment, primarily related to maintaining and upgrading our U.S. facilities. We recorded a net loss of $3.8 million in 2012, largely the result of $8.3 million of long-lived asset impairment charges and $4.6 million of restructuring charges. As of December 31, 2012, we had $28.5 million in cash, cash equivalents and restricted cash and $8.0 million in bank and other related debt.

Results of Operations Operating Segment Data We have organized our sales, marketing and production activities into the Discovery, Drug Development and Small Scale Manufacturing ("DDS") and Large Scale Manufacturing ("LSM") segments based on the criteria set forth in ASC 280, ''Disclosures about Segments of an Enterprise and Related Information.'' We rely on an internal management accounting system to report results of these segments.

The accounting system includes revenue and cost information by segment. We make financial decisions and allocate resources based on the information we receive from this internal system. The DDS segment includes activities such as drug lead discovery, optimization, drug development and small scale commercial manufacturing. The LSM segment includes pilot to commercial scale manufacturing of active pharmaceutical ingredients and intermediates, sterile syringe and vial filling, and high potency and controlled substance manufacturing.

Contract Revenue Contract revenue consists primarily of fees earned under contracts with third-party customers. Our contract revenues for our DDS and LSM segments were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) DDS $ 73,458 $ 74,032 $ 83,308 LSM 116,400 95,579 79,920 Total $ 189,858 $ 169,611 $ 163,228 DDS contract revenues for the year ended December 31, 2012 remained consistent with amounts recognized in the same period in 2011 including lower contract revenue for our biology discovery services and development and small-scale manufacturing services, offset in part by an increase in our U.S. chemistry discovery services.

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

chemistry services, offset in part by a decrease in our biology services.

DDS contract revenues decreased for the year ended December 31, 2011 from the same period in 2010 primarily due to lower contract revenue from our discovery services of $10.7 million, offset in part by an increase in our development and small-scale manufacturing services of $1.5 million. The decrease in discovery services contract revenue was primarily due to lower demand for our U.S.

medicinal chemistry services, partially offset by higher demand for our discovery services at our Asia locations. The increases in contract revenue from development and small-scale manufacturing services were attributable to higher demand for our chemistry development services.

LSM contract revenue significantly increased for the year ended December 31, 2012 from the same period in 2011 as a result of higher commercial manufacturing services at our Rensselaer, NY facility, as well as continued improvement at our UK facility.

We currently expect continued growth in LSM contract revenue for full year 2013 due to strong demand for our commercial manufacturing services.

LSM contract revenue increased for the year ended December 31, 2011 from the same period in 2010 as a result of higher commercial and API development manufacturing shipments from our Rensselaer, NY facility, as well as increased intermediate manufacturing in our Aurangabad, India facility as compared tothe same period in 2010.

30 Recurring royalty revenue Year Ended December 31, 2012 2011 2010 (in thousands) $ 35,988 $ 35,034 $ 34,838 The largest portion of our recurring royalties are based on the worldwide sales of Allegra/Telfast, as well as on sales of Sanofi over-the-counter ("OTC") product and authorized generics. Additionally, beginning in the third quarter of 2012 we earned recurring royalty revenue in conjunction with a Development and Supply Agreement with Actavis at the Company's Rensselaer, NY manufacturing facility.

Recurring royalties increased during the year ended December 31, 2012 from the same period in 2011 due to the receipt of Actavis royalties of $4.7 million.

This increase was offset in part by a $3.7 million decrease in royalties recognized from the sales of prescription Allegra which was primarily due to decreased sales in Japan in the first quarter of 2012 as a result of a less severe allergy season.

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

Recurring royalties slightly increased for the year ended December 31, 2011 as compared to the same period in 2010 primarily due to a significant increase in sales of prescription Allegra in Japan, partially offset by a decrease in royalties recognized from the sale of Allegra products in the U.S.

The recurring royalties we receive on the sales of Allegra/Telfast have historically provided a material portion of our revenues, earnings and operating cash flows. We continue to develop our business in an effort to supplement the revenues, earnings and operating cash flows that have historically been provided by Allegra/Telfast royalties.

Milestone revenue Milestone revenue is earned for achieving milestones included in licensing and research agreements with certain of our partners. Milestone revenues were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) $ 840 $ 3,000 $ - Milestone revenue received during the year ended December 31, 2012 was recognized primarily in conjunction with the Company's license and research agreement with BMS for advancing a fourth compound into preclinical development.

Milestone revenue of $3.0 million received during the year ended December 31, 2011 was recognized in conjunction with the Company's license and research agreement with BMS and was specifically based on meeting a Phase II clinical trial milestone of an AMRI compound licensed exclusively to BMS.

No milestone revenue was recorded during the year ended December 31, 2010.

31 Cost of Contract Revenue Cost of contract revenue consists of compensation and associated fringe benefits for employees, chemicals, depreciation and other indirect project related costs.

Cost of contract revenue for our DDS and LSM segments were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) DDS $ 70,366 $ 72,758 $ 72,903 LSM 97,698 95,712 79,770 Total $ 168,064 $ 168,470 $ 152,673 DDS Gross Contract Margin 4.2 % 1.7 % 12.5 %LSM Gross Contract Margin 16.0 % (0.1 )% 0.2 % Total Gross Contract Margin 11.5 % 0.7 % 6.5 % DDS contract revenue gross margin percentages increased for the year ended December 31, 2012 compared to the same period in 2011. These increases are primarily due to cost savings initiatives taken in our U.S chemistry operations in 2011, as well as the impact of the closure of our Hungarian operations in 2012, offset in part by lower demand for our U.S. biology and development services in relation to our fixed costs.

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

LSM's contract revenue gross margin percentages improved for the year ended December 31, 2012 compared to the same period in 2011. This increase is primarily due to an increase in sales of higher margin products for our U.S.

manufacturing services, as well as an increase in capacity utilization at our large-scale manufacturing facilities worldwide.

We currently expect continued improvement in LSM contract margins for 2013 driven by an increase in capacity utilization in relation to our fixed costs.

DDS contract revenue gross margin percentages decreased for the year ended December 31, 2011 compared to the same period in 2010. This resulted from lower demand for our discovery services in relation to our fixed costs.

LSM's contract revenue gross margin slightly decreased for the year ended December 31, 2011 compared to the same period in 2010. This decrease was primarily due to levels of fixed cost base at our Burlington, MA facility as compared to its revenues due to the disruption at the facility resulting from the FDA warning letter received in August 2010, along with unutilized capacity at our AMRI UK facility. These decreases were partially offset by an increase in margins for our U.S. API manufacturing services.

Technology Incentive Award We maintain a Technology Development Incentive Plan, the purpose of which is to stimulate and encourage novel innovative technology developments by our employees. This plan allows eligible participants to share in a percentage of the net revenue earned by us relating to patented technology with respect to which the eligible participant is named as an inventor or made a significant intellectual contribution. To date, the royalties from Allegra are the main driver of the awards. Accordingly, as the creator of the technology, the award is currently payable primarily to Dr. Thomas D'Ambra, the Chief Executive Officer and President of the Company. The incentive awards were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) $ 3,143 $ 3,557 $ 3,484 We expect technology incentive award expense to generally fluctuate directionally and proportionately with fluctuations in Allegra royalties in future periods. Technology incentive award expense decreased for the year ended December 31, 2012 as compared to the same period in 2011 due to the decrease in Allegra recurring royalty revenue as discussed above.

32 Technology incentive award expense for the year ended December 31, 2011 remained consistent as compared to 2010 which reflected the relative consistency in Allegra royalty revenue.

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

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

Research and development expenses were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) $ 906 $ 7,939 $ 11,090 R&D expense for the year ended December 31, 2012 decreased to $0.9 million as a result of our strategic decision during the fourth quarter of 2011 to cease R&D operations related to our internal discovery research and development programs, excluding our generics program. R&D expenditures incurred during 2012 related primarily to developing new niche generic products and improving process efficiencies in our manufacturing plants.

Based on our strategic decision to cease R&D operations, we currently expect 2013 R&D expense to be consistent with amounts recognized in 2012.

Research and development expenses for the year ended December 31, 2011 decreased 28% from the year ended December 31, 2010. This decrease was primarily due to an overall decrease in internal operating costs as we strategically managed our R&D investments and continued to narrow the focus of R&D spending on those programs with the highest licensing potential, as well as a decrease in clinical trial costs related to our oncology and obesity programs.

Selling, General and Administrative Selling, general and administrative ("SG&A") expenses consist of compensation and related fringe benefits for sales, marketing, operational and administrative employees, professional service fees, marketing costs and costs related to facilities and information services. SG&A expenses were as follows: Year Ended December 31, 2012 2011 2010 (in thousands) $ 40,904 $ 41,071 $ 42,234 Selling, general and administrative expenses for the year ended December 31, 2012 remained relatively flat as compared to the same period in 2011. Decreases in SG&A resulting from ongoing actions related to cost savings were offset by non-recurring executive transition costs.

We currently expect SG&A expenses for 2013 to decrease from amounts recognized in 2012 due to on-going cost saving actions partially offset by inflation.

Selling, general and administrative expenses for the year ended December 31, 2011 decreased from the same period in 2010. This decrease was primarily attributable to nonrecurring acquisition costs and reductions in AMRI Burlington remediation costs compared to the levels incurred in 2010.

33 Goodwill Impairment Year Ended December 31, 2012 2011 2010 (in thousands) $ - $ 15,812 $ 36,844 During the fourth quarter of 2011, we recorded a goodwill impairment charge of $15.8 million in our DDS operating segment due to a change in the implied fair value of the segment's goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to significantly lower than forecasted demand for contract services in 2011, which resulted in a decrease in management's long-term estimates of operating results and cash flows for the segment.

During the fourth quarter of 2010, we recorded a goodwill impairment charge of $36.8 million in our LSM operating segment due to a change in the implied fair value of the segment's goodwill to below its carrying value. The change in the fair value of the segment was primarily attributable to the fact that in the fourth quarter of 2010 several events occurred in the LSM segment that significantly impacted our expected future performance for this segment. Our AMRI UK facility was notified of an unplanned significant reduction in demand for a key commercial product, which had historically represented a significant amount of annual revenues at the site. In addition, the FDA warning letter issued to our AMRI Burlington facility was expected to have both continued negative short-term financial impact during the remediation process, as well as delaying the planned integration of the AMRI Burlington business into our overall LSM platform and the forecasted resulting growth in the long term.Property and Equipment Impairment Year Ended December 31, 2012 2011 2010 (in thousands) $ 8,334 $ 4,674 $ 10,848 During 2012, we recorded long-lived asset impairment charges of $8.3 million in our DDS segment in order to further optimize the Company's location footprint and cease operations at our Budapest, Hungary and Bothell, Washington facilities.

In the fourth quarter of 2011, we recorded long-lived asset impairment charges of $4.7 million in our DDS segment associated with the Company's decision to terminate its lease and exit one of its U.S. facilities as part of the overall initiative to reduce the Company's workforce, right size capacity, and reduce operating costs.

In 2010, we recorded long-lived asset impairment charges of $4.8 million in our DDS segment. As a result of realigning some of the AMRI U.S. operating activities, the Company evaluated the future economic benefit expected to be generated from the revised operating activities in this facility against the carrying value of the facility's property and equipment and determined that these assets were impaired. Additionally, we recorded a long-lived asset impairment charge of $6.0 million in our LSM segment upon determining that the carrying value of certain assets at our AMRI India location used in the manufacturing of generic products was not recoverable based on projections of future revenues and cash flows expected to be derived from the use of theseassets.

Intangible Impairment Year Ended December 31, 2012 2011 2010 (in thousands) $ - $ 856 $ - In the fourth quarter of 2011, we identified patent assets relating to technologies that we no longer expect to derive value from as a result of the Company's decision to cease internal R&D activities. We recorded an intangible impairment charge of $0.9 million in our DDS segment in conjunction with this review of our patent portfolio.

34 Restructuring Charges Year Ended December 31, 2012 2011 2010 (in thousands) $ 4,632 $ 1,271 $ 3,090 During 2012, we approved restructuring plans to cease all operations at our Budapest, Hungary, and Bothell, WA facilities. The goal of these restructuring activities is to advance our continued strategy of increasing global competitiveness and to remain diligent in managing costs by improving efficiency and customer service and by realigning resources to meet shifting customer demand and market preferences. Additionally, we intend to expand and better integrate our in vitro biology services with the total drug discovery service platform and to further optimize the Company's location footprint. In connection with these actions, we recorded restructuring charges of $4.6 million in 2012.

We exited the Budapest, Hungary facility in the third quarter of 2012 and are in the process of resolving the termination of the lease.

In December 2011, we initiated a restructuring plan at one of our U.S. locations which included actions to reduce our workforce, right size capacity, and reduce operating costs. These actions were implemented to better align the business to current and expected market conditions and are expected to improve our overall cost competitiveness and increase cash flow generation. The workforce reduction primarily affected certain positions associated with our elimination of internal R&D activities. As a result of the workforce reduction, we have terminated the lease of one of our U.S. facilities which will result in a reduction in annual operating expenses related to this facility. As a result of this restructuring, we recorded a restructuring charge in the DDS operating segment of $0.3 million in the fourth quarter of 2011 and $0.3 million in 2012.

In May 2010, we initiated a restructuring of our AMRI U.S. locations. As part of our strategy to increase global competitiveness and continue to be diligent in managing costs, we implemented cost reduction activities at our operations in the U.S. These cost reduction activities included a reduction in the U.S.

workforce, as well as the suspension of operations at one of our research laboratory facilities in Rensselaer, New York. Employees and equipment from this facility were consolidated into other nearby Company operations. We recorded a restructuring charge of $3.2 million in 2010. This charge included lease termination charges of $2.2 million (net of estimated sublease income), termination benefits and personnel realignment costs of $0.8 million and facility and other costs of $0.2 million.

Anticipated cash outflow related to the restructuring activities for 2013 is approximately $2.1 million.

Arbitration charge Year Ended December 31, 2012 2011 2010 (in thousands) $ - $ 127 $ 9,798 On August 19, 2009, AMRI Rensselaer notified one of its suppliers that it was cancelling a purchase agreement between the parties pursuant to a hardship clause of the agreement. Our supplier commenced arbitration in September 2009 with International Centre for Dispute Resolution ("ICDR") seeking damages for AMRI Rensselaer's alleged wrongful repudiation of the agreement.

On October 13, 2010 the ICDR issued an arbitration award in favor of our supplier against AMRI Rensselaer and awarded damages of $8.7 million plus interest at the rate of 9% starting from August 19, 2009. AMRI accrued $9.8 million for the award and related interest expense in the year ended December 31, 2010.

On March 2, 2011, AMRI Rensselaer and our supplier entered into a Settlement and Supply Agreement ("Agreement") which served to settle the arbitral award and other legal proceedings related to the arbitral award that were pending. The Agreement required AMRI Rensselaer to pay $4.8 million to our supplier and provide a letter of credit to secure the remainder of the arbitral award plus accrued interest. The letter of credit will reduce quarterly based on certain volume purchase milestones. The Agreement also re-establishes the supply relationship between AMRI and our supplier through 2018 with mutually beneficial terms.

35 As the letter of credit is reduced, the Company reverses the allocated portion of the accrued charge through a reduction in the carrying cost of the associated inventory. The maximum amount to be reversed is $5.5 million through 2014. As of December 31, 2012, the remaining arbitration reserve is $2.7 million.

Arbitration charges of $0.1 million in 2011 represented accrued interest expense related to the award prior to the arbitration settlement.

Interest (expense) income, net Year Ended December 31, (in thousands) 2012 2011 2010 Interest expense $ (463 ) $ (714 ) $ (292 ) Interest income 9 131 452Interest (expense) income, net $ (454 ) $ (583 ) $ 160 Interest expense decreased for the year ended December 31, 2012 as compared with the same period in the prior year primarily due to lower borrowing costs under the Company's April 2012 credit agreement. Interest expense increased for the year ended December 31, 2011 as compared with the same period in 2010 primarily due to borrowing costs associated with the renegotiation of the Company's credit agreement entered into in 2011.

Interest income decreased for the year ended December 31, 2012 as compared with the same period in 2011 due to a decrease in the amount of interest bearing assets. Interest income decreased for the year ended December 31, 2011 as compared with the same period in 2010 primarily due to the decrease in the average balances of interest bearing cash and investments held during the year.

Other (expense) income, net Year Ended December 31, 2012 2011 2010 (in thousands) $ (130 ) $ 77 $ (1,007 ) Other expense increased for the year ended December 31, 2012 from income for the same period in 2011 primarily due to rates associated with foreign currency transactions, as well as costs associated with transitioning our financing to a new creditor during 2012. These amounts were partially offset by income from the settlement of contingencies associated with our 2010 AMRI UK and AMRI Burlington acquisitions, along with income from insurance claims related to the remediation of the FDA warning letter at our Burlington facility.

Other income for the year ended December 31, 2011 included income of $0.3 million related to settlement of contingencies associated with the 2010 AMRI UK and AMRI Burlington acquisitions and income related to the fluctuation in exchange rates associated with foreign currency translations. These amounts were offset in part by deferred financing amortization expense.

Income tax expense (benefit) Year Ended December 31, 2012 2011 2010 (in thousands) $ 3,896 $ (4,342 ) $ (9,971 ) Income tax expense for the year ended December 31, 2012 was $3.9 million as compared to income tax benefit of $4.3 million for the same period in 2011 due primarily to improved pre-tax income at the Company's U.S. locations and the composition of pre-tax income or losses in relation to the applicable tax rates at our various locations worldwide.

Income tax benefit for the year ended December 31, 2011 was $4.3 million as compared to income tax benefit of $10.0 million for the same period in 2010.

This decrease in income tax benefit is due to a decrease in pre-tax loss, as well as the composition of pre-tax losses in relation to the applicable tax rates at our various locations worldwide.

36 Liquidity and Capital Resources We have historically funded our business through operating cash flows and proceeds from borrowings. During 2012, we generated cash of $15.3 million from operating activities.

During 2012, cash used in investing activities was $9.8 million, primarily for the acquisition and installation of equipment. Additionally, we used $2.5 million for financing activities, relating primarily to pledging $5.0 million of cash to collateralize our revolving line of credit issued in conjunction with our credit facility executed in April 2012 along with principal payments of long-term debt, partially offset by net proceeds from the term loan issuedunder this agreement.

Working capital, defined as current assets less current liabilities, was $77.4 million as of December 31, 2012, compared to $62.6 million as of December 31, 2011. This is primarily due to an increase in both accounts receivable and inventories as a result of the growth in our business in 2012.

Total capital expenditures for the year ended December 31, 2012 were $9.9 million as compared to $10.8 million for the year ended December 31, 2011.

Capital expenditures in 2012 were primarily related to growth, maintenance and upgrading our existing facilities.

For 2013, we expect to incur $12.0 to $14.0 million in capital expenditures primarily relating to the growth and maintenance of our existing facilities.

In April 2012, the Company entered into a $20.0 million credit facility consisting of a 4-year, $5.0 million term loan and a $15.0 million revolving line of credit. The Company used a portion of the initial proceeds from borrowings against the term loan to repay all amounts due under its prior credit agreement. As of December 31, 2012, the Company had no amounts outstanding under the line of credit and $8.5 million of outstanding letters of credit secured by this line of credit. The amount available to be borrowed under the revolving line of credit at December 31, 2012 was $6.5 million.

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

Borrowings under this agreement bear interest at a fluctuating rate equal to: (i) in the case of the term loan, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 3.25%; and (ii) in the case of advances under the revolving line of credit, the sum of (a) an interest rate equal to daily three month LIBOR, plus (b) 2.75%. As of December 31, 2012, the interest rate on the outstanding term loan was 3.625%.

The credit facility contains financial covenants, including certain net cash flow requirements for 2012, a minimum fixed charge coverage ratio commencing in 2013 and extending for the remaining term of the agreement, maximum quarterly and year-to-date capital expenditures, minimum monthly domestic unrestricted cash and maximum average monthly cash reserves held at international locations.

As of December 31, 2012, the Company was in compliance with its current financial covenants.

Working capital, defined as current assets less current liabilities, was $62.6 million as of December 31, 2011, compared to $79.4 million as of December 31, 2010. This decrease includes a payment of $4.8 million associated with the Company's settlement of the 2010 arbitration matter with a supplier and $10.8 million used for capital expenditures.

Total capital expenditures for the year ended December 31, 2011 were $10.8 million as compared to $11.6 million for the year ended December 31, 2010.

Capital expenditures in 2011 were primarily related to maintenance and expansion of our existing facilities.

During 2011, we used cash of $1.5 million for operating activities and cash provided by investing activities was $4.0 million, resulting primarily from net proceeds from the sale or maturities of marketable securities of $15.2 million offset in part by the use of $10.8 million for the acquisition of property and equipment. During 2011, we used $7.0 million for financing activities, relating primarily to payments made on our credit facilities.

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 credit facility 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. As a general rule, we will publicly announce such acquisitions only after a definitive agreement has been signed. 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.

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

Contractual Obligations The following table sets forth our long-term contractual obligations and commitments as of December 31, 2012: Payments Due by Period (in thousands) Total Under 1 Year 1-3 Years 4-5 Years After 5 YearsLong-Term Debt (principal) $ 8,003 $ 776 $ 2,053 $ 3,745 $ 1,429 Operating Leases 18,291 4,837 7,424 1,495 3,435 Purchase Commitments 3,099 3,099 - - - Restructuring liabilities 2,261 2,126 135 - - Pension Plan Contributions (1) 1,712 414 649 649 (1) Pension and other postretirement benefits include estimated payments made from Company assets. No estimate of payments after five years has been provided due to many uncertainties.

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

"Financial Statements and Supplementary Data" of this report, which discusses the significant accounting policies that we have selected from acceptable alternatives.

Inventory Inventory consists primarily of commercially available fine chemicals used as raw materials, work-in-process and finished goods in our large-scale manufacturing plants. Large-scale manufacturing inventories are valued on a first-in, first-out ("FIFO") basis. Inventories are valued at the lower of cost or market. We regularly review inventories on hand and record a charge for slow-moving and obsolete inventory, inventory not meeting quality standards and inventory subject to expiration. The charge for slow-moving and obsolete inventory is based on current estimates of future product demand, market conditions and related management judgment. Any significant unanticipated changes in future product demand or market conditions that vary from current expectations could have an impact on the value of inventories. Total inventories recorded on our consolidated balance sheet at December 31, 2012 and 2011 were $28.2 million and $26.0 million, respectively. We recorded charges to reduce obsolete inventory balances of $0, $0.9 million and $1.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Income Taxes Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate.

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

38 Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carry-forwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings with focus on our U.S. operations and available tax planning strategies. These sources of income inherently rely heavily on estimates. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. We use our historical experience and our short and long-range business forecasts to provide insight.

Amounts recorded for deferred tax assets, net of valuation allowances, were $18.0 million and $22.1 million at December 31, 2012 and 2011, respectively.

Such 2012 year-end amounts are expected to be fully recoverable within the applicable statutory expiration periods.

Long-Lived Assets We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.

Factors we consider important that could trigger an impairment review include, among others, the following: · A significant change in the extent or manner in which a long-lived asset group is being used; · A significant change in the business climate that could affect the value of a long-lived asset group; and · A significant decrease in the market value of assets.

Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset group, the useful life over which cash flows will occur, their amount, and the asset group's residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available.

We derive the required undiscounted cash flow estimates from our historical experience, internal business plans and our understanding of current marketplace valuation estimates. To determine fair value, we use our internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available and independent appraisals, as appropriate.

During 2012, we recorded long-lived asset impairment charges of $8.3 million in our DDS segment in order to further optimize the Company's location footprint and cease operations at our Budapest, Hungary and Bothell, Washington facilities.

Pension and Postretirement Benefit Plans We utilize actuarial models to measure pension and postretirement benefit obligations and related effects on operations. Three assumptions - discount rate, expected return on assets, and trends in healthcare costs- are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually. We periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

Accumulated and projected benefit obligations are expressed as the present value of future cash payments. We discount those cash payments using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values; higher discount rates decrease present values.

Our discount rates for our pension plan at December 31, 2012, 2011 and 2010 were 3.50%, 4.00% and 5.10%, respectively, reflecting market interest rates.

To determine the expected long-term rate of return on pension plan assets, we consider current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for our pension plan's assets, we evaluate general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads across a number of potential scenarios. In 2012 and 2011, assets in our pension plan earned 11.3% and 4.9%, respectively. Based on our analysis of future expectations of asset performance, past return results, and our current and expected asset allocations, we have assumed an 8.0% long-term expected return on those assets.

39 Healthcare cost trend rates have a significant effect on the amounts reported for our postretirement welfare plan. Due to the fact that no retirees are currently covered by the Postretirement Welfare Plan, survey data is reviewed for industry averages. Based on this review, a trend of a 7.25% annual cost increase grading to an ultimate rate of 5% is within industry norms.

Recent Accounting Pronouncements In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU adds new disclosure requirement for items reclassified out of accumulated other comprehensive income ("AOCI"). The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012 and must be applied prospectively. The Company is evaluating the impact of the standard on its consolidated financial statements and related disclosures.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Assets for Impairment". This ASU allows an entity to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets. An organization that elects to perform a qualitative assessment is required to perform the quantitative impairment test for an indefinite-lived intangible asset if it is more likely than not that the asset is impaired. This ASU is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect a material impact on its financial statements and related disclosures as a result of adoption of this ASU.

In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities". ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and will be applied retrospectively. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

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