UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
| | | | | | | | | | | | | | |
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
For the quarterly period ended September 30, 20202021
or
| | | | | | | | | | | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | |
001-36587
(Commission File Number)
_____________________________
Catalent, Inc.
(Exact name of registrant as specified in its charter)
_____________________________
| | | | | | | | | | | | | | | | | |
| Delaware | | | 20-8737688 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
| | | | |
| 14 Schoolhouse Road, | Somerset, | NJ | | | 08873 |
| (Address of principal executive offices) | | | (Zip code) |
(732) 537-6200
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 filing requirements for the past 90 days. ☒ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ¨ | ¨ |
| Non-accelerated filer | ¨ | | Smaller reporting company | ¨ |
| | | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbols(s) | Name of each exchange on which registered |
| Common Stock | CTLT | New York Stock Exchange |
On October 29, 2020,26, 2021, there were 164,697,598171,188,042 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.
CATALENT, INC. and Subsidiaries
INDEX TO FORMIndex to Form 10-Q
For the Three Months Ended September 30, 20202021
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| Part I. | | |
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| Item 1. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Part II. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | | |
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Special Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.
These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statement is subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.
Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include, but are not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 20202021 (the “Fiscal 20202021 10-K”) and others, which are summarized below:
Risks Relating to Our Business and the following:Industry in Which We Operate
•Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the novelpandemic resulting from the SARS-Co-V-2 strain of coronavirus and its variants (“COVID-19”) pandemic..
•The continually evolving nature of the COVID-19 pandemic and the resulting public health response, including the changing demand for various COVID-19 vaccines and treatments from both patients and governments around the world, may affect sales of the COVID-19 products we manufacture.
•We participate in a highly competitive market, and increased competition may adversely affect our business.
•The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition, and results of operations may be harmed if our customers spend less on, or are less successful in, these activities. In addition, customer spending may be affected by, among other things, the COVID-19 pandemic or recessionary economic conditions caused in whole or in part by the pandemic.
•We are subject to product and other liability risks that could exceed our anticipated costs or adversely affect our results of operations, financial condition, liquidity, and cash flows.
•FailureWe are a part of the highly regulated healthcare industry, subject to complystringent regulatory standards and other applicable laws and regulations, which can change unexpectedly and may adversely impact our business.
•Any failure to implement fully, monitor, and improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability and adverse publicity.
•If we cannot keep pace with existingrapid technological advances, our services may become uncompetitive or obsolete.
•Any failure to protect or maintain our intellectual property may adversely affect our competitive edge and future regulatory requirements could adversely affectresult in loss of revenue and reputation.
•Future price fluctuations, material shortages of raw materials, or changes in healthcare policies may have an adverse effect on our results of operations and financial condition or result in claims from customers.conditions.
•FailureOur ability to provide quality offerings touse our customers could have an adverse effect on our businessnet operating loss carryforwards and subject us to regulatory actions or costly litigation.certain other tax attributes may be limited.
•The servicesWe may be unable to attract or retain key personnel.
•We may be unsuccessful in integrating our acquisitions, and offerings we provide are highly exactingmay expend substantial amounts of cash and complex, and, if we encounter problems providing the services or support required, our business could suffer.incur debt in making acquisitions.
•Our global operations are subject to economic, and political and regulatory risks, including the risks of changing regulatory standards or changing interpretations of existing standards, thatwhich could affect the profitability of our operations or require costly changes to our procedures. In addition, changes to our procedures, or additional procedures, implemented to comply with public health orders or best practice guidelines as a result of the COVID-19 pandemic may increase our costs or reduce our productivity and thereby affect our business, financial condition, or results of operations.
•The exit of the United Kingdom (the “U.K.”) from the European Union, particularly after the end of the current transitional period, could have future adverse effects on our operations, revenues, and costs, and therefore our profitability.
•If we do not enhance our existing or introduce new technology or service offerings in a timely manner, our offerings may become obsolete over time, customers may not buy our offerings or buy less of them, and our revenue and profitability may decline.
•We and our customers depend on patents, copyrights, trademarks, know-how, trade secrets, and other forms of intellectual property protections, but these protections may not be adequate.
•Our offering or our customers’ products may infringe on the intellectual property rights of third parties.
•Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials. In addition, the COVID-19 pandemic may interfere with the
operations of certain of our direct or indirect suppliers or with international trade for these supplies, which may either raise our costs or reduce the productivity or slow the timing of our operations.
•Changes in market access or healthcare reimbursement for our customers’ products in the United States (“U.S.”) or other countries, including possible changes to the U.S. Affordable Care Act, could adversely affect our results of operations and financial condition by affecting demand for our offerings or the financial health of our customers.
•As a global enterprise, fluctuations in the exchange rate of the United States ("U.S.") dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.
•Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.
•Our ability to use our net operating loss carryforwards, foreign tax credit carryforwards, and certain other tax attributes may be limited.
•Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net deferred tax assets.
•We depend on key personnel whose continued employment and engagement at current levels cannot be assured.
•We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counter-parties, and the risks generally associated with information and communications systems could adversely affect our results of operations.We are
continuously working to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cyber-securitycyber security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises of data security.
•We engage from time to time in acquisitions and other transactions that may complement or expand our business or divest of non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significant risks, including risks relating to our ability to successfully and efficiently integrate acquisitions or execute on dispositions and realize anticipated benefits therefrom. The failure to execute or realize the full benefits from any such transaction could have a negative effect on our operations.
•Cell and gene therapies are relatively new and still-developing modes of treatment dependent on cutting-edge technologies, and our customers’ cell or gene therapies may be perceived as unsafe or may result in unforeseen adverse events. Negativesubject to changing public opinion, continuing research, orand increased regulatory scrutiny, each of cell or gene therapies and their financial costwhich may damage public perception of the safety, utility, or efficacy of cell or gene therapies and harmaffect our customers’customers' ability to conduct their business, or obtain regulatory approvals for their cell or gene therapy products,therapies, and thereby have an indirect, adverse effect onadversely affect our cell or gene therapy offerings.
•
We are subject
Risks Relating to environmental, health, and safety laws and regulations, which could increase our costs and restrict our operations in the future.Our Indebtedness
•We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
•Certain of our pension plans are underfunded, and additional cash contributions we may make to increase the funding level will reduce the cash available for our business, such as the payment of our interest expense.
•Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to reactoperate our business and to changes in the economyfinance future operations or inacquisitions that would enhance our industry, expose us to interest-rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
•Despite our high indebtedness level, we and our subsidiaries are still capable of incurring significant additional debt, which could further exacerbate the risks associated with our substantial indebtedness.growth.
•Our debt agreements contain restrictions that may limit our flexibility in operating our business.
•Despite the limitations in our debt agreements, we retain the ability to takeconducting certain actions that may interfere with our ability timely to pay our substantial indebtedness.current and future operations.
•We are currently usingmay not be able to pay our indebtedness when it becomes due.
•Our current and may in thepotential future use of derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and any such instrument may expose us to risks relatedeconomic losses in the event of price or currency fluctuations.
Risks Relating to counterparty credit worthinessOur Series A Preferred Stock
•The outstanding shares of our Series A Convertible Preferred Stock, par value $0.01 ("Series A Preferred Stock") reduce the relative voting power of holders of our common stock, par value $0.01 (the “Common Stock”), dilute the ownership of those holders, and may adversely affect the market price of our Common Stock.
•The holders of our Series A Preferred Stock have special rights to exercise influence over us and our board of directors.
Risks Relating to Ownership of Our Common Stock
•Our stock price has historically been and may continue to be volatile.
•Because we have no plan to pay cash dividends on our Common Stock for the foreseeable future, receiving a return on an investment in our Common Stock may require a sale for a net price greater than was paid for it.
•Provisions in our organizational documents could delay or non-performanceprevent a change of these instruments.control.
We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We use our website (www.catalent.com), our corporate Facebook page (https://www.facebook.com/CatalentPharmaSolutions), and our corporate Twitter account (@catalentpharma) as channels for the distribution of information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
PART I. FINANCIAL INFORMATION
ItemITEM 1. FINANCIAL STATEMENTS
Catalent, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited; dollars in millions, except per share data)
| | | Three Months Ended
September 30, | | | Three Months Ended
September 30, | |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| Net revenue | Net revenue | $ | 845.7 | | | $ | 664.7 | | | Net revenue | $ | 1,025 | | | $ | 846 | | |
| Cost of sales | Cost of sales | 596.8 | | | 487.0 | | | Cost of sales | 701 | | | 597 | | |
| Gross margin | Gross margin | 248.9 | | | 177.7 | | | Gross margin | 324 | | | 249 | | |
| Selling, general, and administrative expenses | Selling, general, and administrative expenses | 164.7 | | | 142.8 | | | Selling, general, and administrative expenses | 183 | | | 165 | | |
| Impairment charges and (gain)/loss on sale of assets | 1.8 | | | (0.2) | | | |
| Restructuring and other | 0.9 | | | 0.7 | | | |
| | Gain on sale of subsidiary | | Gain on sale of subsidiary | (1) | | | — | | |
| Other operating expense | | Other operating expense | 4 | | | 2 | | |
| Operating earnings | Operating earnings | 81.5 | | | 34.4 | | | Operating earnings | 138 | | | 82 | | |
| Interest expense, net | Interest expense, net | 25.3 | | | 36.3 | | | Interest expense, net | 26 | | | 26 | | |
| Other (income)/expense, net | (11.2) | | | 4.9 | | | |
| Earnings/(loss) before income taxes | 67.4 | | | (6.8) | | | |
| Income tax benefit | (15.0) | | | (6.9) | | | |
| Other expense (income), net | | Other expense (income), net | 9 | | | (11) | | |
| Earnings before income taxes | | Earnings before income taxes | 103 | | | 67 | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 10 | | | (15) | | |
| | Net earnings | Net earnings | 82.4 | | | 0.1 | | | Net earnings | 93 | | | 82 | | |
| | Less: Net earnings attributable to preferred shareholders | Less: Net earnings attributable to preferred shareholders | (13.6) | | | (8.1) | | | Less: Net earnings attributable to preferred shareholders | (9) | | | (13) | | |
| Net earnings/(loss) attributable to common shareholders | $ | 68.8 | | | $ | (8.0) | | | |
| Net earnings attributable to common shareholders | | Net earnings attributable to common shareholders | $ | 84 | | | $ | 69 | | |
| | | Earnings (loss) per share: | | | |
| Earnings per share: | | Earnings per share: | | |
| Basic | Basic | | | Basic | | |
| | Net earnings/(loss) | $ | 0.42 | | | $ | (0.05) | | | |
| Net earnings | | Net earnings | $ | 0.49 | | | $ | 0.42 | | |
| Diluted | Diluted | | | Diluted | | |
| | Net earnings/(loss) | $ | 0.41 | | | $ | (0.05) | | | |
| Net earnings | | Net earnings | $ | 0.49 | | | $ | 0.41 | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)Income
(Unaudited; dollars in millions)
| | | Three Months Ended
September 30, | | | Three Months Ended
September 30, | |
| | 2020 | | 2019 | | | 2021 | | 2020 | |
| Net earnings | Net earnings | $ | 82.4 | | | $ | 0.1 | | | Net earnings | $ | 93 | | | $ | 82 | | |
| Other comprehensive income/(loss), net of tax | | | |
| Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 15.9 | | | (21.8) | | | Foreign currency translation adjustments | (14) | | | 16 | | |
| Pension and other post-retirement adjustments | Pension and other post-retirement adjustments | 0.5 | | | (0.3) | | | Pension and other post-retirement adjustments | 1 | | | — | | |
| | Derivatives and hedges | Derivatives and hedges | (0.1) | | | 0 | | | Derivatives and hedges | 1 | | | — | | |
| Other comprehensive income/(loss), net of tax | 16.3 | | | (22.1) | | | |
| Comprehensive income/(loss) | $ | 98.7 | | | $ | (22.0) | | | |
| Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | (12) | | | 16 | | |
| Comprehensive income | | Comprehensive income | $ | 81 | | | $ | 98 | | |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited; in millions, except share and per share data)
| | | | | | | | | | | |
| September 30,
2021 | | June 30,
2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,969 | | | $ | 896 | |
| Trade receivables, net of allowance for credit losses of $15 and $12, respectively | 831 | | | 1,012 | |
| Inventories | 622 | | | 563 | |
| Prepaid expenses and other | 459 | | | 376 | |
| Marketable securities | 50 | | | 71 | |
| Total current assets | 3,931 | | | 2,918 | |
| Property, plant, and equipment, net of accumulated depreciation of $1,215 and $1,179, respectively | 2,581 | | | 2,524 | |
| Other assets: | | | |
| Goodwill | 2,531 | | | 2,519 | |
| Other intangibles, net | 793 | | | 817 | |
| Deferred income taxes | 70 | | | 66 | |
| Other long-term assets | 277 | | | 268 | |
| Total assets | $ | 10,183 | | | $ | 9,112 | |
| | | |
| LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY |
| Current liabilities: | | | |
| Current portion of long-term obligations and other short-term borrowings | $ | 79 | | | $ | 75 | |
| Accounts payable | 363 | | | 385 | |
| Other accrued liabilities | 654 | | | 736 | |
| Total current liabilities | 1,096 | | | 1,196 | |
| Long-term obligations, less current portion | 4,225 | | | 3,166 | |
| Pension liability | 133 | | | 137 | |
| Deferred income taxes | 171 | | | 164 | |
| Other liabilities | 178 | | | 175 | |
| Commitment and contingencies (see Note 15) | | | |
| | | |
| Total liabilities | 5,803 | | | 4,838 | |
| Redeemable preferred stock, $0.01 par value; 1.0 million shares authorized at September 30 and June 30, 2021; 384,777 shares issued and outstanding at September 30 and June 30, 2021 | 359 | | | 359 | |
| Shareholders' equity: | | | |
| Common stock, $0.01 par value; 1.0 billion shares authorized at September 30 and June 30, 2021; 171.0 million and 170.5 million issued and outstanding at September 30 and June 30, 2021, respectively | 2 | | | 2 | |
| Preferred stock, $0.01 par value; 99 million authorized at September 30 and June 30, 2021; 0 issued and outstanding at September 30 and June 30, 2021 | — | | | — | |
| | | |
| Additional paid in capital | 4,234 | | | 4,205 | |
| Retained earnings | 114 | | | 25 | |
| Accumulated other comprehensive loss | (329) | | | (317) | |
| | | |
| | | |
| Total shareholders' equity | 4,021 | | | 3,915 | |
| Total liabilities, redeemable preferred stock, and shareholders' equity | $ | 10,183 | | | $ | 9,112 | |
| | | | | | | | | | | |
| September 30,
2020 | | June 30,
2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,007.0 | | | $ | 953.2 | |
| Trade receivables, net | 700.9 | | | 838.1 | |
| Inventories | 384.3 | | | 323.8 | |
| Prepaid expenses and other | 263.9 | | | 177.9 | |
| Total current assets | 2,356.1 | | | 2,293.0 | |
| Property, plant, and equipment, net | 2,035.5 | | | 1,900.8 | |
| Other assets: | | | |
| Goodwill | 2,490.4 | | | 2,470.6 | |
| Other intangibles, net | 870.3 | | | 888.7 | |
| Deferred income taxes | 57.1 | | | 49.4 | |
| Other | 174.8 | | | 174.0 | |
| Total assets | $ | 7,984.2 | | | $ | 7,776.5 | |
| | | |
| LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY |
| Current liabilities: | | | |
| Current portion of long-term obligations and other short-term borrowings | $ | 73.4 | | | $ | 72.9 | |
| Accounts payable | 329.4 | | | 321.0 | |
| Other accrued liabilities | 516.9 | | | 499.3 | |
| Total current liabilities | 919.7 | | | 893.2 | |
| Long-term obligations, less current portion | 2,985.3 | | | 2,945.1 | |
| Pension liability | 135.5 | | | 135.2 | |
| Deferred income taxes | 83.6 | | | 94.0 | |
| Other liabilities | 181.4 | | | 203.6 | |
| Commitment and contingencies (see Note 15) | 0 | | | 0 | |
| | | |
| Total liabilities | 4,305.5 | | | 4,271.1 | |
| Redeemable preferred stock, $0.01 par value; 1.0 million shares authorized at September 30 and June 30, 2020; 650,000 shares issued and outstanding at September 30 and June 30, 2020 | 606.6 | | | 606.6 | |
| Shareholders' equity: | | | |
| Common stock, $0.01 par value; 1.0 billion shares authorized at September 30 and June 30, 2020; 164.6 million and 162.8 million issued and outstanding at September 30 and June 30, 2020, respectively | 1.6 | | | 1.6 | |
| Preferred stock, $0.01 par value; 99 million authorized at September 30 and June 30, 2020; 0 issued and outstanding at September 30 and June 30, 2020 | 0 | | | 0 | |
| | | |
| Additional paid in capital | 3,901.4 | | | 3,818.7 | |
| Accumulated deficit | (460.9) | | | (535.2) | |
| Accumulated other comprehensive loss | (370.0) | | | (386.3) | |
| | | |
| | | |
| Total shareholders' equity | 3,072.1 | | | 2,898.8 | |
| Total liabilities, redeemable preferred stock, and shareholders' equity | $ | 7,984.2 | | | $ | 7,776.5 | |
Catalent, Inc.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)
Three Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Retained Earnings | | Accumulated Other Comprehensive Loss | | | | Total Shareholders' Equity | | Redeemable Preferred Stock |
| Balance at June 30, 2021 | 170,549 | | | $ | 2 | | | $ | 4,205 | | | | | $ | 25 | | | $ | (317) | | | | | $ | 3,915 | | | $ | 359 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Share issuances related to stock- based compensation | 484 | | | — | | | — | | | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 21 | | | | | — | | | — | | | | | 21 | | | — | |
Cash paid, in lieu of equity, for
tax withholding | — | | | — | | | (4) | | | | | — | | | — | | | | | (4) | | | — | |
| Exercise of stock options | — | | | — | | | 8 | | | | | — | | | — | | | | | 8 | | | — | |
| Employee stock purchase plan | — | | | — | | | 4 | | | | | — | | | — | | | | | 4 | | | — | |
| | | | | | | | | | | | | | | | | |
Preferred dividend ($12.50 per
share of redeemable preferred
stock) | — | | | — | | | — | | | | | (4) | | | — | | | | | (4) | | | — | |
| Net earnings | — | | | — | | | — | | | | | 93 | | | — | | | | | 93 | | | — | |
Other comprehensive loss, net
of tax | — | | | — | | | — | | | | | — | | | (12) | | | | | (12) | | | — | |
| Balance at September 30, 2021 | 171,033 | | | $ | 2 | | | $ | 4,234 | | | | | $ | 114 | | | $ | (329) | | | | | $ | 4,021 | | | $ | 359 | |
Three Months Ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Columns may not foot due to rounding | Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | | | Total Shareholders' Equity | | Redeemable Preferred Stock |
| Balance at June 30, 2020 | 162,788 | | | $ | 2 | | | $ | 3,819 | | | | | $ | (535) | | | $ | (386) | | | | | $ | 2,900 | | | $ | 607 | |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Equity offering, sale of common stock | 1,162 | | | — | | | 82 | | | | | — | | | — | | | | | 82 | | | — | |
Share issuances related to stock- based compensation | 617 | | | — | | | — | | | | | — | | | — | | | | | — | | | — | |
| Stock-based compensation | — | | | — | | | 19 | | | | | — | | | — | | | | | 19 | | | — | |
Cash paid, in lieu of equity, for
tax withholding | — | | | — | | | (20) | | | | | — | | | — | | | | | (20) | | | — | |
| | | | | | | | | | | | | | | | | |
| Employee stock purchase plan | | | | | 1 | | | | | | | | | | 1 | | | |
| Preferred dividend | — | | | — | | | — | | | | | (8) | | | — | | | | | (8) | | | — | |
| Net earnings | — | | | — | | | — | | | | | 82 | | | — | | | | | 82 | | | — | |
Other comprehensive income, net of tax | — | | | — | | | — | | | | | — | | | 16 | | | | | 16 | | | — | |
| Balance at September 30, 2020 | 164,567 | | | $ | 2 | | | $ | 3,901 | | | | | $ | (461) | | | $ | (370) | | | | | $ | 3,072 | | | $ | 607 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)
Three Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional
Paid in
Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/(Deficit) | |
| Balance at June 30, 2020 | 162,788.0 | | | $ | 1.6 | | | $ | 3,818.7 | | | | | $ | (535.2) | | | $ | (386.3) | | | | | $ | 2,898.8 | | |
| | | | | | | | | | | | | | | | |
| Equity offering, sale of common stock | 1,162.5 | | | 0 | | | 81.8 | | | | | | | | | | | 81.8 | | |
| | | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 616.6 | | | 0 | | | | | | | | | | | | | 0 | | |
| Stock-based compensation | | | | | 18.7 | | | | | | | | | | | 18.7 | | |
Cash paid, in lieu of equity, for tax withholding | | | | | (19.6) | | | | | | | | | | | (19.6) | | |
| | | | | | | | | | | | | | | | |
| Employee stock purchase plan | | | | | 1.8 | | | | | | | | | | 1.8 | | |
| Preferred dividend | | | | | | | | | (8.1) | | | | | | | (8.1) | | |
| Net earnings | | | | | | | | | 82.4 | | | | | | | 82.4 | | |
| Other comprehensive income, net of tax | | | | | | | | | | | 16.3 | | | | | 16.3 | | |
| Balance at September 30, 2020 | 164,567.1 | | | $ | 1.6 | | | $ | 3,901.4 | | | | | $ | (460.9) | | | $ | (370.0) | | | | | $ | 3,072.1 | | |
Three Months Ended September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at June 30, 2019 | 145,738.3 | | | $ | 1.5 | | | $ | 2,757.4 | | | | | $ | (723.4) | | | $ | (353.9) | | | | | $ | 1,681.6 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 497.4 | | | 0 | | | | | | | | | | | | | 0 | |
| Stock-based compensation | | | | | 16.6 | | | | | | | | | | | 16.6 | |
Cash paid, in lieu of equity, for tax
withholding | | | | | (18.1) | | | | | | | | | | | (18.1) | |
| Non-Qualified Stock | | | | | (0.7) | | | | | | | | | | | (0.7) | |
| | | | | | | | | | | | | | | |
| Preferred dividend | | | | | | | | | (8.1) | | | | | | | (8.1) | |
| Net earnings | | | | | | | | | 0.1 | | | | | | | 0.1 | |
| Other comprehensive loss, net of tax | | | | | | | | | | | (22.1) | | | | | (22.1) | |
| Balance at September 30, 2019 | 146,235.7 | | | $ | 1.5 | | | $ | 2,755.2 | | | | | $ | (731.4) | | | $ | (376.0) | | | | | $ | 1,649.3 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; dollars in millions)
| | | Three Months Ended
September 30, | | Three Months Ended September 30, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net earnings | Net earnings | $ | 82.4 | | | $ | 0.1 | | Net earnings | $ | 93 | | | $ | 82 | |
| | Adjustments to reconcile earnings from operations to net cash from operations: | | |
| Adjustments to reconcile net earnings to net cash from operations: | | Adjustments to reconcile net earnings to net cash from operations: | |
| Depreciation and amortization | Depreciation and amortization | 69.1 | | | 60.6 | | Depreciation and amortization | 81 | | | 69 | |
| Non-cash foreign currency transaction loss (gain), net | (3.8) | | | (0.1) | | |
| Amortization and write-off of debt financing costs | 1.7 | | | 1.5 | | |
| Asset impairments charges and /loss on sale of assets | 1.8 | | | (0.2) | | |
| | (Gain) / loss on derivative instrument | (9.0) | | | 8.9 | | |
| Equity compensation | 18.7 | | | 16.6 | | |
| Non-cash foreign currency transaction (gain) loss, net | | Non-cash foreign currency transaction (gain) loss, net | 9 | | | (4) | |
| Amortization of debt issuance costs | | Amortization of debt issuance costs | 2 | | | 2 | |
| Impairments charges and (gain) loss on sale of assets | | Impairments charges and (gain) loss on sale of assets | 3 | | | 2 | |
| Gain on sale of subsidiary | | Gain on sale of subsidiary | (1) | | | — | |
| Financing-related charges | | Financing-related charges | 4 | | | — | |
| Gain on derivative instrument | | Gain on derivative instrument | (2) | | | (9) | |
| Stock-based compensation | | Stock-based compensation | 21 | | | 19 | |
| Benefit for deferred income taxes | Benefit for deferred income taxes | (10.6) | | | (0.6) | | Benefit for deferred income taxes | (8) | | | (11) | |
| Provision for bad debts and inventory | Provision for bad debts and inventory | 7.9 | | | 4.1 | | Provision for bad debts and inventory | 10 | | | 8 | |
| Change in operating assets and liabilities: | Change in operating assets and liabilities: | | Change in operating assets and liabilities: | |
| Decrease in trade receivables | Decrease in trade receivables | 143.7 | | | 34.1 | | Decrease in trade receivables | 185 | | | 144 | |
| (Increase)/decrease in inventories | (65.4) | | | 0.2 | | |
| Increase/(decrease) in accounts payable | 6.6 | | | (47.3) | | |
| Increase in inventories | | Increase in inventories | (63) | | | (66) | |
| (Decrease) increase in accounts payable | | (Decrease) increase in accounts payable | (6) | | | 7 | |
| Other assets/accrued liabilities, net—current and non-current | Other assets/accrued liabilities, net—current and non-current | (93.4) | | | (52.7) | | Other assets/accrued liabilities, net—current and non-current | (165) | | | (93) | |
| | Net cash provided by operating activities | Net cash provided by operating activities | 149.7 | | | 25.2 | | Net cash provided by operating activities | 163 | | | 150 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| CASH FLOWS USED IN INVESTING ACTIVITIES: | | CASH FLOWS USED IN INVESTING ACTIVITIES: | | | |
| Acquisition of property, equipment, and other productive assets | Acquisition of property, equipment, and other productive assets | (149.6) | | | (73.5) | | Acquisition of property, equipment, and other productive assets | (154) | | | (150) | |
| Proceeds from maturity of marketable securities | | Proceeds from maturity of marketable securities | 20 | | | — | |
| | Settlement on sale of subsidiaries, net | | Settlement on sale of subsidiaries, net | (3) | | | — | |
| | Payment for acquisitions, net of cash acquired | Payment for acquisitions, net of cash acquired | 0 | | | (10.7) | | Payment for acquisitions, net of cash acquired | (26) | | | — | |
| Payment made for investments | Payment made for investments | (1.6) | | | (0.7) | | Payment made for investments | (4) | | | (1) | |
| | Net cash used in investing activities | Net cash used in investing activities | (151.2) | | | (84.9) | | Net cash used in investing activities | (167) | | | (151) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Net change in other borrowings | Net change in other borrowings | (3.9) | | | (2.5) | | Net change in other borrowings | — | | | (4) | |
| | Proceeds from borrowing, net | | Proceeds from borrowing, net | 1,096 | | | — | |
| Payments related to long-term obligations | Payments related to long-term obligations | (2.4) | | | (3.3) | | Payments related to long-term obligations | (3) | | | (2) | |
| | Financing fees paid | | Financing fees paid | (15) | | | — | |
| | Dividends paid | Dividends paid | (8.1) | | | (11.9) | | Dividends paid | (4) | | | (8) | |
| Proceeds from sale of common stock, net | Proceeds from sale of common stock, net | 83.6 | | | 0 | | Proceeds from sale of common stock, net | — | | | 82 | |
| Cash paid, in lieu of equity, for tax-withholding obligations | Cash paid, in lieu of equity, for tax-withholding obligations | (19.6) | | | (18.1) | | Cash paid, in lieu of equity, for tax-withholding obligations | (4) | | | (20) | |
| Exercise of stock options | | Exercise of stock options | 8 | | | — | |
| Other financing activities | | Other financing activities | 4 | | | 2 | |
| | Net cash provided by/(used in) financing activities | 49.6 | | | (35.8) | | |
| Effect of foreign currency exchange on cash | 5.7 | | | (6.5) | | |
| NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS | 53.8 | | | (102.0) | | |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD | 953.2 | | | 345.4 | | |
| CASH AND EQUIVALENTS AT END OF PERIOD | $ | 1,007.0 | | | $ | 243.4 | | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 1,082 | | | 50 | |
| Effect of foreign currency exchange on cash and cash equivalents | | Effect of foreign currency exchange on cash and cash equivalents | (5) | | | 5 | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,073 | | | 54 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 896 | | | 953 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,969 | | | $ | 1,007 | |
| SUPPLEMENTARY CASH FLOW INFORMATION: | SUPPLEMENTARY CASH FLOW INFORMATION: | | | | SUPPLEMENTARY CASH FLOW INFORMATION: | | | |
| Interest paid | Interest paid | $ | 43.4 | | | $ | 24.8 | | Interest paid | $ | 40 | | | $ | 43 | |
| Income taxes paid, net | Income taxes paid, net | $ | 8.8 | | | $ | 12.7 | | Income taxes paid, net | $ | 15 | | | $ | 9 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. (“Catalent” or the “Company”) directly and wholly owns PTS Intermediate Holdings LLC (“Intermediate Holdings”). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. (“Operating Company”). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending June 30, 2021.2022. The consolidated balance sheet at June 30, 20202021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 20202021 filed with the Securities and Exchange Commission (the “SEC”“SEC”).
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current period presentation. These reclassifications did not have a material impact on the consolidated statements of operations, consolidated balance sheets, consolidated statements of cash flows, or notes to the consolidated financial statements.
Foreign Currency Translation
The financial statements of the Company’s operations are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of operations outside the U.S. into U.S. dollars are accumulated as a component of other comprehensive income/(loss)income utilizing period-end exchange rates. Since July 1, 2018, the Company has accounted for its Argentine operations as highly inflationary.
Depreciation Expense
Depreciation expense was $58 million and $46 million, for the three months ended September 30, 2021 and 2020, respectively. Depreciation expense includes amortization of assets related to finance leases. The Company charges repairs and maintenance costs to expense as incurred.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development costs amounted to $6.4$6 million and $4.6 million for both the three months ended September 30, 20202021 and 2019, respectively.2020.
Marketable Securities
The Company classifies its marketable securities as available-for-sale, because it may sell certain of its marketable securities prior to the stated maturity for various reasons, including management of liquidity, credit risk, duration, relative return, and asset allocation. The Company determines the fair value of each marketable security in its portfolio at each period end and recognizes gains and losses in the portfolio in other comprehensive income. As of September 30, 2021, the amortized cost basis of marketable securities approximates fair value and all outstanding marketable securities mature within one year.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In August 2018,December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-15, 2019-12Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), Income Taxes (Topic 740): Customer'sSimplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ContractIncome Taxes, which alignseliminates certain exceptions related to the requirementsincremental approach for capitalizing implementation costs incurredintra-period allocation, deferred tax recognition requirement for changes in a hosting arrangement that is a service contract withequity method investments and non U.S. subsidiaries, and methodology for calculating income taxes in an interim period. The guidance also simplifies certain aspects of the requirementsaccounting for capitalizing implementation costs incurred to developfranchise taxes, the accounting for step-up in the tax basis of goodwill, and accounting for the change in the enacted change in tax laws or obtain internal-use software.rates. The Company adopted the guidance on July 1, 2020.2021. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820)2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure RequirementRequirements for Fair Value Measurement,Defined Benefit Plan, which changesremoves certain disclosures and added additional disclosures around weighted-average interest crediting rates for cash balance plans and explanation for significant gains and losses related to change in the disclosure requirements on fair value measurements in Accounting Standards Codification (“ASC”) 820 Fair Value Measurement. The guidance eliminates certain disclosure requirements that are no longer considered cost beneficial and adds new disclosure requirementsbenefit obligation for Level 3 fair value measurements.the period. The Company adopted the guidance on July 1, 2020.2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial condition or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new accounting model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses on financial assets, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for financial assets at the time they are originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current U.S. GAAP,
which generally require that a loss be incurred before it is recognized. The new standard applies to receivables arising from revenue transactions such as contract assets and accounts receivables. The Company adopted the amended guidance using a modified retrospective approach on July 1, 2020. The amended guidance did not have a material impact on the Company’s financial condition or results of operations.statements.
New Accounting Standards Not Adopted as of September 30, 20202021
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. The expedients and exceptions provided by the guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the incremental approach for intra-period allocation, deferred tax recognition requirement for changes in equity method investments and foreign subsidiaries, and methodology for calculating income taxes in an interim period. The guidance also simplifies certain aspects of the accounting for franchise taxes, the accounting for step-up in the tax basis of goodwill, and accounting for the change in the enacted change in tax laws or rates. The ASU will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The Company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.
The following tables allocate revenue, for the three months ended September 30, 20202021 and September 30, 2019,2020, by type of activity and reporting segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | Biologics | | Softgel & Oral Technologies | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | $ | 89.9 | | | $ | 190.6 | | | $ | 103.5 | | | $ | 0 | | | $ | 384.0 | |
| Development services | 287.2 | | | 30.5 | | | 54.8 | | | 0 | | | 372.5 | |
| Clinical supply services | 0 | | | 0 | | | 0 | | | 92.7 | | | 92.7 | |
| Total | $ | 377.1 | | | $ | 221.1 | | | $ | 158.3 | | | $ | 92.7 | | | $ | 849.2 | |
| | | Inter-segment revenue elimination | | (3.5) | |
| | | | | Combined net revenue | | $ | 845.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | Biologics | | Softgel & Oral Technologies | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | $ | 64.4 | | | $ | 242.0 | | | $ | 76.0 | | | $ | 0 | | | $ | 382.4 | |
| Development services | 124.2 | | | 21.7 | | | 56.6 | | | 0 | | | 202.5 | |
| Clinical supply services | 0 | | | 0 | | | 0 | | | 84.6 | | | 84.6 | |
| Total | $ | 188.6 | | | $ | 263.7 | | | $ | 132.6 | | | $ | 84.6 | | | $ | 669.5 | |
| | | Inter-segment revenue elimination | | (4.8) | |
| | | | | Combined net revenue | | $ | 664.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 | Biologics | | Softgel and Oral Technologies | | Oral and Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | $ | 134 | | | $ | 207 | | | $ | 88 | | | $ | — | | | $ | 429 | |
| Development services | 412 | | | 36 | | | 58 | | | — | | | 506 | |
| Clinical supply services | — | | | — | | | — | | | 96 | | | 96 | |
| Total | $ | 546 | | | $ | 243 | | | $ | 146 | | | $ | 96 | | | $ | 1,031 | |
| | | Inter-segment revenue elimination | | (6) | |
| | | | | Combined net revenue | | $ | 1,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | Biologics | | Softgel and Oral Technologies | | Oral and Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | $ | 90 | | | $ | 190 | | | $ | 104 | | | $ | — | | | $ | 384 | |
| Development services | 287 | | | 31 | | | 55 | | | — | | | 373 | |
| Clinical supply services | — | | | — | | | — | | | 93 | | | 93 | |
| Total | $ | 377 | | | $ | 221 | | | $ | 159 | | | $ | 93 | | | $ | 850 | |
| | | Inter-segment revenue elimination | | (4) | |
| | | | | Combined net revenue | | $ | 846 | |
The following table allocates revenue by the location where the goods were made or the service performed:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| (Dollars in millions) | | 2020 | | 2019 | | | | |
| | | | | | | | |
| United States | | $ | 516.9 | | | $ | 362.3 | | | | | |
| Europe | | 281.4 | | | 210.1 | | | | | |
| International Other | | 68.8 | | | 110.9 | | | | | |
| Elimination of revenue attributable to multiple locations | | (21.4) | | | (18.6) | | | | | |
| Total | | $ | 845.7 | | | $ | 664.7 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | |
| (Dollars in millions) | | 2021 | | 2020 | | | | |
| | | | | | | | |
| United States | | $ | 630 | | | $ | 517 | | | | | |
| Europe | | 351 | | 281 | | | | |
| Other | | 72 | | 69 | | | | |
| Elimination of revenue attributable to multiple locations | | (28) | | (21) | | | | |
| Total | | $ | 1,025 | | | $ | 846 | | | | | |
Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. The contract liabilities balance (current and non-current) as of September 30, 20202021 and June 30, 20202021 are as follows:
| | | | | | | | |
| (Dollars in millions) | | |
| | |
Balance at June 30, 20202021 | | $ | 218.4321 | |
| | |
| | |
| | |
| | |
Balance at September 30, 20202021 | | $ | 243.9299 | |
Revenue recognized in the period from July 1 through September 30, 2020: | | |
Amountsamounts included in contractcontracts liability at the beginning of the periodperiod: | | $ | 48.282 | |
Contract liabilities that will be recognized within 12 months of September 30, 2021 are accounted for in Other accrued liabilities and those that will be recognized longer than 12 months after September 30, 2021 are accounted for within Other liabilities.
Contract Assets
ContractContract assets primarily relate to the Company's conditional right to receive consideration for services that have been performed for thea customer as of September 30, 20202021 relating to itsthe Company's development services but had not yet been invoiced as of September 30, 2020.2021. Contract assets are transferred to trade receivables, net when the Company’s right to receive the consideration becomes unconditional. Contract assets totaled $116.2$224 million and $61.4181 million as of September 30, 20202021 and June 30, 2020,2021, respectively. Contract assets are included in Prepaidprepaid expenses and other as they are expected to be transferred to trade receivables within 12 months of September 30, 2020.
Receivables and Allowance for Doubtful Accounts
Trade receivables are primarily comprised of amounts owed toin the Company through its operating activities and are presented net of an allowance for doubtful accounts that includes an assessment of expected credit losses. The Company determines its allowance methodology by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the specific customer’s ability to pay its obligation to the Company including a review of the current status of customers' trade receivables, and the current and future condition of the general economy and the customer’s industry.
3. BUSINESS COMBINATIONS AND DIVESTITURES
Novavax TransactionSkeletal Cell Therapy Support SA Acquisition
In July 2019,November 2020, the Company acquired from Novavax Inc.100% of the equity interest in Skeletal Cell Therapy Support SA (“Novavax”Skeletal”) certain property, plant and equipment, rights to two facilities under leases in southern Maryland, certain raw material inventory, and the right to assume the employment of more than 100 Novavax employees located at those facilities in the areas of operations, quality, and product development, among other things. The Company made a cash payment of $18.3for $15 million, in connectionas well as related supply agreements with the acquisition.seller. Skeletal operates a cell therapy manufacturing facility in Gosselies, Belgium. The Company considers the transaction to be a business combination under ASC 805, Business Combinations and accounted for it using the acquisition method of accounting. The Company estimated fair values at the acquisition date for the allocation of considerationoperations were assigned to the acquired items.
Company’s Biologics segment, expanding the Company’s cell therapy capacity for clinical and commercial supply. The aggregate purchase consideration was fundedacquisition, when combined with cash on hand. As a resultthe Company's other European-based facilities and capabilities in cell therapy, has created an integrated European center of the fair value allocations, the Company recognized property, plant, and equipment of $15.6 million and $0.3 million for inventory. The remainder of the fair value, $2.4 million, was preliminarily allocated to goodwill, primarily the value of the existing organized and trained work force.excellence in cell therapy.
During the measurement period that ended in July 2020, the Company finalized the fair values of the net assets acquired, which was not materially different from the preliminary estimates.
The Novavax transaction expanded the Company’s gene therapy early-development capabilities and supplemented its pool of experienced biologics operatives to support growth in its Biologics segment.
Anagni Acquisition
In January 2020, the Company acquired an oral solid, biologics, and sterile product manufacturing and packaging facility in Anagni, Italy (“Anagni”) from a unit of Bristol-Myers Squibb Company (“BMS”).The Company paid to BMS $55.3 million in cash as part of the purchase consideration and as considerationaccounted for the provision of certain services to facilitateSkeletal acquisition using the transition from BMS to Company ownership. At the closing of this acquisition BMS also entered into a five-year agreement for continuing supply by the Company of certain products formerly produced by BMS at the Anagni facility. Due to the variety of activities performed at Anagni, the results of the Anagni facility are allocated between the Oral and Specialty Delivery and Biologics segments.
The total cash consideration was allocated between the facility purchase and the transitional services arrangement,method in accordance with $52.2 million assigned to the purchase consideration and the balance to transitional services.ASC 805. The Company funded the entire amountpurchase price with cash on hand and hasallocated the purchase price among the acquired assets, recognizing goodwill of $9 million. The Company allocated the remainder of the purchase price to trade receivables, property, plant, and equipment, and other current and non-current assets and liabilities assumed in the acquisition. Results for the three months ended September 30, 2021 were not material to the Company’s statement of operations, financial position, or cash flows.
Acorda Therapeutics, Inc. Acquisition
In February 2021, the Company acquired the manufacturing and packaging operations of Acorda Therapeutics, Inc.'s (“Acorda”) dry powder inhaler and spray dry manufacturing business, including its manufacturing facility located near Boston, Massachusetts, for $83 million, subject to customary adjustments. In connection with the purchase, Acorda and the Company entered into a long-term supply agreement, under which the Company will continue the manufacture and packaging of an Acorda product at the facility. The facility and operations became part of the Company’s Oral and Specialty Delivery segment. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the three months ended September 30, 2021.
The Company accounted for the Acorda transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and preliminarily allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $34.2$79 million, inventory of $6.5$2 million, and prepaid expenses and othergoodwill of $12.2$2 million. The remainder of the valuepurchase price was preliminarily allocated to deferred taxother current and non-current assets and certain employee-related liabilities assumed in the acquisition.
The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to goodwill and inventory are preliminary and subject to finalization. The Company expects to finalize its allocation over the next several months, but, in any event, within one year from the closing.
Masthercell Global Inc.Delphi Genetics SA Acquisition
In February 2020,2021, the Company acquired 100% of the equity interest in Masthercell Global Inc.Delphi Genetics SA (“MaSTherCell”Delphi”) for an aggregate purchase price of $323.3$50 million, subject to adjustment, which was funded with the net proceeds of the Company’s February 2020 public offering (the “February 2020 Equity Offering”) of its common stock, par value $0.01 (“Common Stock”). See Note 13, Equitycustomary adjustments. Delphi is a plasmid DNA (pDNA) cell and Accumulated Other Comprehensive Income/(Loss). MaSTherCell is agene therapy contract development and manufacturing organization focused onbased in Gosselies, Belgium. The facility and operations acquired became part of the development and manufactureCompany’s Biologics segment. Results of autologous and allogeneic cell therapiesthe business acquired were not material to the Company's statement of operations, financial position, or cash flows for third parties, as well as a variety of related analytical services.
The Company accounted for the MaSTherCell acquisitionDelphi transaction using the acquisition method in accordance with ASC 805. The operating results of MaSTherCell have been included inCompany funded the Company’s consolidated financial statements forentire purchase price with cash on hand and preliminarily allocated the period following the acquisition date.
The Company preliminarily estimated fair values at the date of acquisition for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed as part of the MaSTherCell acquisition. The Company recognized,purchase price recognizing property, plant, and equipment of $25.5$4 million, $51.0 million for identifiable intangible assets $2.0of $7 million, for other netcurrent assets of $3 million, assumed debt of $6 million, other current liabilities of $1 million and $7.7 million for deferred income tax liabilities. goodwill of $43 million.
The remainder ofCompany has not completed its analysis regarding the fair value, $252.5 million, was preliminarily allocated to goodwill. Goodwill is mainly comprised of the growth from an expected increase in capacity utilization, potential new customers, and advanced cell therapy development and manufacturing capabilities.
During the measurement period ending no later than one year after the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired which may differ materially from theseand liabilities assumed. Therefore, the allocation to property, plant, and equipment, intangible assets, goodwill, and income taxes are preliminary estimates. The amountsand subject to finalization include working capital and income taxes. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined.finalization. The Company expects to finalize its allocation over the next several months, but, in any event, within one year from the closing.acquisition date.
Hepatic Cell Therapy Support SA Asset Acquisition
In April 2021, the Company acquired 100% of the equity interest in Hepatic Cell Therapy Support SA (“Hepatic”) for approximately $15 million, net of cash acquired and debt assumed. Hepatic operates a manufacturing facility at the same location where Skeletal operates a cell therapy manufacturing facility in Gosselies, Belgium. The facility acquired expands the Company’s cell therapy capacity for clinical and commercial supply in its Biologics segment.
The Company accounted for the Hepatic transaction as an asset acquisition in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and allocated the purchase price to the assets acquired and liabilities assumed recognizing property, plant, and equipment of $13 million, other current and non-current assets of $3 million, and assumed debt of $1 million.
RheinCell Therapeutics GmbH Acquisition
In August 2021, the Company acquired 100% of the equity interest in RheinCell Therapeutics GmbH (“RheinCell”) for approximately $26 million, net of cash acquired. RheinCell is a developer and manufacturer of cGMP-grade induced
pluripotent stem cells (“iPSCs”) based in Lagenfeld, Germany. The operations acquired became part of the Company’s Biologics segment and builds upon Catalent’s existing custom cell therapy process development and manufacturing capabilities with proprietary cGMP cell lines for iPSC-based therapies.
The Company accounted for the RheinCell transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and preliminarily allocated the purchase price recognizing $3 million of other assets, $4 million of other current liabilities and goodwill of $27 million. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the three months ended September 30, 2021.
The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to property, plant, and equipment, intangible assets, goodwill, and income taxes are preliminary and subject to finalization. The Company expects to finalize its allocation over the next several months, but, in any event, within one year from the acquisition date.
Bettera Holdings, LLC Acquisition
In August 2021, the Company entered into an agreement to acquire Bettera Holdings, LLC (“Bettera”) for approximately $1.00 billion, subject to customary adjustments. Bettera is a manufacturer of nutraceuticals and nutritional supplements in gummy, soft chew, and lozenge delivery formats. On October 1, 2021, the Company completed the acquisition. For further details, see Note 18, Subsequent Events.
Blow-Fill-Seal Divestiture
In March 2021, the Company sold 100% of the shares of Catalent USA Woodstock, Inc. and certain related assets (collectively, the “Blow-Fill-Seal Business”) to a subsidiary of SK Capital Partners, LP for $300 million cash, a $50 million note receivable (estimated fair value of $47 million) as well as potential additional contingent consideration (up to $50 million) dependent upon the performance of aspects of the Blow-Fill-Seal Business. The Blow-Fill-Seal Business was part of the Oral and Specialty Delivery segment. The carrying value of the net assets sold was $149 million, which included goodwill of $54 million. As a result of the sale, the Company realized a gain from sale of subsidiary of $182 million, net of transaction costs, for the fiscal year ended June 30, 2021.
During three months ended September 30, 2021, the Company settled a post-closing purchase price adjustment, which resulted in a gain on sale of subsidiary of $1 million.
All consideration received was measured at its divestiture date fair value. The Company valued the total consideration received from divestiture of the Blow-Fill-Seal Business as follows:
| | | | | |
| (Dollars in millions) | Fair value of consideration received |
| Cash, gross | $ | 300 | |
Note receivable (1) | 47 | |
Contingent consideration (2) | — | |
Other (3) | (16) | |
| Total | $ | 331 | |
(1) The note receivable, which provides for interest at a rate of 5.0% paid in kind, had an estimated fair value of $47 million, which is the $50 million aggregate principal amount less a $3 million discount determined using a discounted cash flow model with the market interest rate as a significant input.
(2) The Company determined that the estimated fair value of the contingent consideration from the sale of the Blow-Fill-Seal Business at September 30, 2021 is zero, and therefore, no contingent consideration was recorded as a result of the divestiture of the Blow-Fill-Seal Business. If any contingent consideration is subsequently received, it will be recorded in the period in which it is received. The Company has elected an accounting policy to recognize increases in the carrying amount of the contingent consideration asset using the gain contingency guidance in ASC 450, Contingencies.
(3) Other includes $8 million of transaction expenses, a working capital adjustment of $6 million, and a $2 million assumption of liabilities to create cumulative net cash proceeds of $284 million.
4. GOODWILL
The following table summarizes the changes between June 30, 20202021 and September 30, 20202021 in the carrying amount of goodwill in total and by reporting segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Biologics | | Softgel & Oral Technologies | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Balance at June 30, 2020 | $ | 1,462.2 | | | $ | 505.5 | | | $ | 354.7 | | | $ | 148.2 | | | $ | 2,470.6 | |
| | | | | | | | | |
| | | | | | | | | |
| Other | (0.4) | | | 0 | | | 0 | | | 0 | | | (0.4) | |
| | | | | | | | | |
| Foreign currency translation adjustments | 8.6 | | | 6.1 | | | 3.1 | | | 2.4 | | | 20.2 | |
| Balance at September 30, 2020 | $ | 1,470.4 | | | $ | 511.6 | | | $ | 357.8 | | | $ | 150.6 | | | $ | 2,490.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Biologics | | Softgel and Oral Technologies | | Oral and Specialty Delivery | | Clinical Supply Services | | Total |
| Balance at June 30, 2021 | $ | 1,531 | | | $ | 516 | | | $ | 316 | | | $ | 156 | | | $ | 2,519 | |
Additions(1) | 25 | | | — | | | — | | | — | | | 25 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Foreign currency translation adjustments | (6) | | | (4) | | | (2) | | | (1) | | | (13) | |
| Balance at September 30, 2021 | $ | 1,550 | | | $ | 512 | | | $ | 314 | | | $ | 155 | | | $ | 2,531 | |
(1) The addition to goodwill in the Biologics segment relates to the RheinCell acquisition and the Delphi acquisition. For further details, see Note 3, Business Combinations and Divestitures.
The Company recorded no impairment charge to goodwill in the current period.
5. DEFINITE-LIVED LONG-LIVED ASSETS
The Company’s definite-lived long-lived assets include property, plant, and equipment as well as intangible assets with definite lives. Refer to Note 17, OTHER INTANGIBLES, NETSupplemental Balance Sheet Information for details related to property, plant, and equipment.
The details of other intangibles net as of September 30, 20202021 and June 30, 20202021 are as follows:
| | (Dollars in millions) | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| September 30, 2020 | | | | | | | | |
| September 30, 2021 | | September 30, 2021 | | | | | | | |
| Amortized intangibles: | Amortized intangibles: | | Amortized intangibles: | |
| Core technology | Core technology | 19 years | | $ | 136.9 | | | $ | (86.4) | | | $ | 50.5 | | Core technology | 19 years | | $ | 139 | | | $ | (95) | | | $ | 44 | |
| Customer relationships | Customer relationships | 14 years | | 1,027.4 | | | (268.4) | | | 759.0 | | Customer relationships | 13 years | | 1,018 | | | (321) | | | 697 | |
| Product relationships | Product relationships | 11 years | | 273.8 | | | (223.1) | | | 50.7 | | Product relationships | 8 years | | 252 | | | (210) | | | 42 | |
| Other | Other | 5 years | | 15.6 | | | (5.5) | | | 10.1 | | Other | 5 years | | 19 | | | (9) | | | 10 | |
| Total intangible assets | | $ | 1,453.7 | | | $ | (583.4) | | | $ | 870.3 | | |
| | Total other intangibles | | Total other intangibles | | $ | 1,428 | | | $ | (635) | | | $ | 793 | |
| | (Dollars in millions) | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| June 30, 2020 | | | | | | | | |
| June 30, 2021 | | June 30, 2021 | | | | | | | |
| Amortized intangibles: | Amortized intangibles: | | Amortized intangibles: | |
| Core technology | Core technology | 19 years | | $ | 134.5 | | | $ | (83.0) | | | $ | 51.5 | | Core technology | 19 years | | $ | 140 | | | $ | (94) | | | $ | 46 | |
| Customer relationships | Customer relationships | 14 years | | 1,021.3 | | | (248.0) | | | 773.3 | | Customer relationships | 14 years | | 1,024 | | | (306) | | | 718 | |
| Product relationships | Product relationships | 11 years | | 270.4 | | | (217.5) | | | 52.9 | | Product relationships | 11 years | | 281 | | | (237) | | | 44 | |
| Other | Other | 5 years | | 15.5 | | | (4.5) | | | 11.0 | | Other | 5 years | | 17 | | | (8) | | | 9 | |
| Total intangible assets | | | $ | 1,441.7 | | | $ | (553.0) | | | $ | 888.7 | | |
| Total other intangibles | | Total other intangibles | | | $ | 1,462 | | | $ | (645) | | | $ | 817 | |
Amortization expense related to definite-lived long-livedother intangible assets was $23.0$23 million and $21.5 million for both the three months ended September 30, 20202021 and September 30, 2019, respectively.2020.
Future amortization expense related to definite-lived long-livedother intangible assets for the next five fiscal years is estimated to be:
| | (Dollars in millions) | (Dollars in millions) | Remainder
Fiscal 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | (Dollars in millions) | Remainder
Fiscal 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| Amortization expense | Amortization expense | $ | 68.6 | | | $ | 90.7 | | | $ | 90.1 | | | $ | 89.5 | | | $ | 88.5 | | | $ | 81.4 | | Amortization expense | $ | 69 | | | $ | 92 | | | $ | 91 | | | $ | 90 | | | $ | 82 | | | $ | 69 | |
6. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consisted of the following at September 30, 20202021 and June 30, 2020:2021:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Maturity as of September 30, 2020 | | September 30, 2020 | | June 30, 2020 |
| Senior secured credit facilities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| U.S. dollar-denominated term loan facility | May 2026 | | $ | 926.5 | | | $ | 928.5 | |
| | | | | |
| | | | | |
| | | | | |
| U.S. dollar-denominated 4.875% senior notes due 2026 | January 2026 | | 445.6 | | | 445.4 | |
| | | | | |
| U.S. dollar-denominated 5.00% senior notes due 2027 | July 2027 | | 493.3 | | | 493.1 | |
| Euro-denominated 2.375% senior notes due 2028 | March 2028 | | 944.6 | | | 909.9 | |
| Deferred purchase consideration | October 2021 | | 98.2 | | | 97.5 | |
| Finance lease obligations | 2020 to 2044 | | 149.5 | | | 142.2 | |
| Other obligations | 2020 to 2024 | | 1.0 | | | 1.4 | |
| Total | | | $ | 3,058.7 | | | $ | 3,018.0 | |
Less: current portion of long-term obligations and other short-term
borrowings | | | 73.4 | | | 72.9 | |
| Long-term obligations, less current portion | | | $ | 2,985.3 | | | $ | 2,945.1 | |
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Maturity | | September 30, 2021 | | June 30,
2021 |
| Senior secured credit facilities | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Term loan facility B-3 | February 2028 | | $ | 1,444 | | | $ | 997 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| 5.000% senior notes due 2027 | July 2027 | | 500 | | | 500 | |
2.375% Euro senior notes due 2028(1) | March 2028 | | 965 | | | 984 | |
| 3.125% senior notes due 2029 | February 2029 | | 550 | | | 550 | |
| 3.500% senior notes due 2030 | April 2030 | | 650 | | | — | |
| Deferred purchase consideration | October 2021 | | 50 | | | 50 | |
| Financing lease obligations | 2021 to 2038 | | 188 | | | 193 | |
| Other obligations | 2021 to 2028 | | 3 | | | 3 | |
| Unamortized discount and debt issuance costs | | | (46) | | | (36) | |
| Total debt | | | $ | 4,304 | | | $ | 3,241 | |
Less: current portion of long-term obligations and other short-term
borrowings | | | 79 | | | 75 | |
| Long-term obligations, less current portion | | | $ | 4,225 | | | $ | 3,166 | |
Senior Secured Credit Facilities and Sixth Amendment to the Credit Agreement
In September 2021, Operating Company entered into Amendment No. 6 (the "Sixth Amendment") to its Amended and Restated Credit Agreement, dated May 20, 2014 (as subsequently amended, the "Credit Agreement"). Pursuant to the Sixth Amendment, Operating Company incurred an additional $450 million aggregate principal amount of U.S. dollar-denominated term loans (the "Incremental Term B-3 Loans") and amended the quarterly amortization from 0.25% to 0.2506% for the Incremental Term B-3 Loans and all of the remaining U.S. dollar-denominated term loans outstanding (together with the Incremental Term B-3 Loans, the “Term B-3 Loans”). The Incremental Term B-3 Loans otherwise feature the same principal terms as the existing Term B-3 Loans, with an interest rate of one-month LIBOR (subject to a floor of 0.50%) plus 2.00% per annum and a maturity date of February 2028. The proceeds of the Incremental Term B-3 Loans, after payment of the offering fees and expenses, were used in part to fund a portion of the consideration paid at the closing of the Bettera acquisition.
3.500% Senior Notes due 2030
In September 2021, Operating Company completed a private offering of $650 million aggregate principal amount of 3.500% Senior Notes due 2030 (the "2030 Notes"). The 2030 Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The 2030 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2030 Notes will mature on April 1, 2030 and bear interest at the rate of 3.500% per annum payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The proceeds of the 2030 Notes, after payment of the offering fees and expenses, were used to fund a portion of the consideration paid at the closing of the Bettera acquisition.
Deferred Purchase Consideration
In connection with the acquisition of Catalent Indiana, LLC in October 2017, $200.0$200 million of the $950.0$950 million aggregate nominal purchase price iswas payable in $50.0$50 million installments on each of the first four anniversaries of the closing date. The Company made installment payments in October 2018, in October 2019, and followingOctober 2020 and paid the end of the first quarter of fiscal 2021,final installment in October 2020. The balance2021.
Measurement of the Estimated Fair Value of Debt
The measurement of the estimated fair value of the Company’s senior secured credit facilities and other senior indebtedness is classified as a Level 2 determination (see Note 11, Fair Value Measurements, for a description of the method by which fair value classifications are determined) in the fair-value hierarchy and is calculated by using a discounted cash flow model with thea market interest rate as a significant input. The carrying amounts and the estimated fair values of the Company’s principal categories of debt as of September 30, 20202021 and June 30, 20202021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | June 30, 2020 |
| (Dollars in millions) | Fair Value Measurement | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| | | | | | | | |
| U.S. dollar-denominated 4.875% senior notes due 2026 | Level 2 | 445.6 | | | 463.4 | | | 445.4 | | | 463.6 | |
U.S. dollar-denominated 5.00% senior notes
due 2027 | Level 2 | 493.3 | | | 533.7 | | | 493.1 | | | 537.9 | |
| Euro-denominated 2.375% senior notes due 2028 | Level 2 | 944.6 | | | 894.9 | | | 909.9 | | | 844.1 | |
| Senior secured credit facilities & other | Level 2 | 1,175.2 | | | 1,177.8 | | | 1,169.6 | | | 1,160.1 | |
| Total | | $ | 3,058.7 | | | $ | 3,069.8 | | | $ | 3,018.0 | | | $ | 3,005.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2021 | | June 30, 2021 |
| (Dollars in millions) | Fair Value Measurement | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| | | | | | | | | |
| | | | | | | | | |
| 5.000% senior notes due 2027 | Level 2 | | $ | 500 | | | $ | 527 | | | $ | 500 | | | $ | 539 | |
| 2.375% Euro senior notes due 2028 | Level 2 | | 965 | | | 982 | | | 984 | | | 993 | |
| 3.125% senior notes due 2029 | Level 2 | | 550 | | | 531 | | | 550 | | | 524 | |
| 3.500% senior notes due 2030 | Level 2 | | 650 | | | 642 | | | — | | | — | |
| Senior secured credit facilities & other | Level 2 | | $ | 1,685 | | | $ | 1,638 | | | $ | 1,243 | | | $ | 1,209 | |
| Subtotal | | | $ | 4,350 | | | $ | 4,320 | | | $ | 3,277 | | | $ | 3,265 | |
| Unamortized discount and debt issuance costs | | | (46) | | | — | | | (36) | | | — | |
| Total debt | | | $ | 4,304 | | | $ | 4,320 | | | $ | 3,241 | | | $ | 3,265 | |
7. EARNINGS PER SHARE
The Company computes earnings per share of the Company’s Common Stockcommon stock, par value $0.01 (the “Common Stock”) using the two-class method required due to the participating nature of the Series A Preferred Stock (as defined and discussed in Note 14, Equity, Redeemable Preferred Stock—Series A PreferredStock and Accumulated Other Comprehensive Loss)). Diluted net incomeearnings per share is computed using the weighted average number of shares of Common Stock outstanding plus the weighted average number of shares of Common Stock that would be issued assuming exercise or conversion of all potentially dilutive instruments. Dilutive securities having an anti-dilutive effect on diluted net incomeearnings per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company’s equity incentive plans are reflected in diluted earnings per share by application of the treasury stock method. The Company applies the if-converted method to compute the potentially dilutive effect of the Series A Preferred Stock. The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the three months ended September 30, 2020 and 2019, respectively, are as follows (in millions, except share and per share data):
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
| | | | | | | |
| | | | | | | |
| Net earnings | $ | 82.4 | | | $ | 0.1 | | | | | |
| Less: Net earnings attributable to preferred shareholders | (13.6) | | | (8.1) | | | | | |
| Net earnings/(loss) attributable to common shareholders | $ | 68.8 | | | $ | (8.0) | | | | | |
| | | | | | | |
| Weighted average shares outstanding | 164,088,003 | | | 145,663,115 | | | | | |
| Weighted average dilutive securities issuable-stock plans | 2,441,035 | | | 0 | | | | | |
| Total weighted average diluted shares outstanding | 166,529,038 | | | 145,663,115 | | | | | |
| | | | | | | |
| Earnings (loss) per share: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Basic | $ | 0.42 | | | $ | (0.05) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted | $ | 0.41 | | | $ | (0.05) | | | | | |
The computation of diluted earnings per share for the three months ended September 30, 2021 and 2020, excludesrespectively, are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (In millions except per share data) | 2021 | | 2020 | | | | |
| | | | | | | |
| | | | | | | |
| Net earnings | $ | 93 | | | $ | 82 | | | | | |
| Less: Net earnings attributable to preferred shareholders | (9) | | | (13) | | | | | |
| Net earnings attributable to common shareholders | $ | 84 | | | $ | 69 | | | | | |
| | | | | | | |
| Weighted average shares outstanding - basic | 171 | | | 164 | | | | | |
| Weighted average dilutive securities issuable - stock plans | 1 | | | 2 | | | | | |
| Weighted average shares outstanding - diluted | 172 | | | 166 | | | | | |
| | | | | | | |
| Earnings per share: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Basic | $ | 0.49 | | | $ | 0.42 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted | $ | 0.49 | | | $ | 0.41 | | | | | |
The Company's Series A Preferred Stock is deemed a participating security, meaning that it has the effect of approximately 13.1 million “if-converted” shares ofright to participate in undistributed earnings with the Company's Common Stock potentially issuable on the conversionStock. On November 23, 2020 (the “Partial Conversion Date”), holders of Series A Preferred Stock converted 265,223 shares and $2 million of unpaid accrued dividends into shares of Common Stock (the “Partial Conversion”). The holders received 20.33 shares of Common Stock for each converted preferred share, resulting in
the issuance of 5,392,280 shares of Common Stock. See Note 14, Equity, Redeemable Preferred Stock and Accumulated Other Comprehensive Loss for further details.
The diluted weighted average number of shares outstanding as those shares would be anti-dilutive. The computation of diluted earnings per share for the three months ended September 30, 2019 also excludes2021 and 2020, respectively, did not include the effectshares of these shares, as well asCommon Stock associated with the effect of the assumed exercise of stock options, as all such shares would be anti-dilutive in a period with a net loss attributableSeries A Preferred Stock due to common shareholders.their antidilutive effect:
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (share counts in millions) | 2021 | | 2020 | | | | |
| Stock options | — | | | — | | | | | |
| Time-based restricted stock units | — | | | — | | | | | |
| Performance-based restricted stock units | — | | | — | | | | | |
| Series A Preferred Stock | 8 | | | 13 | | | | | |
8. OTHER EXPENSE (INCOME)/EXPENSE,, NET
The components of other expense (income)/expense,, net for the three months ended September 30, 20202021 and 20192020 are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
| Other (income)/expense, net | | | | | | | |
| Debt refinancing costs | $ | — | | | $ | 0.1 | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency gains (1) | (0.6) | | | (3.1) | | | | | |
Other (2) | (10.6) | | | 7.9 | | | | | |
| Total other (income)/expense, net | $ | (11.2) | | | $ | 4.9 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2021 | | 2020 | | | | |
| Other expense (income), net | | | | | | | |
| | | | | | | |
Debt financing costs (1) | $ | 4 | | | $ | — | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency losses (gains)(2) | 9 | | | (1) | | | | | |
Other (3) | (4) | | | (10) | | | | | |
| Total other expense (income), net | $ | 9 | | | $ | (11) | | | | | |
(1) Debt financing costs for the three months ended September 30, 2021 includes $4 million of financing charges related to the Company’s Incremental Term B-3 Loans.
(2) Foreign currency remeasurement gainslosses (gains) include both cash and non-cash transactions.
(2) Included within(3) Other, for the three months ended September 30, 2021 and 2020 and 2019 is anincludes unrealized gaingains of $9.0$2 million and an unrealized loss of $8.9 $9 million, respectively, each related to the fair value of the derivative liability associated with the Series A Preferred Stock.
9. RESTRUCTURING AND OTHER COSTS
From time to time, the Company has implemented plans to restructure certain operations, both domestically and internationally. The restructuring plans focused on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount and aligning operations in a strategic and more cost-efficient structure. In addition, the Company may incur restructuring charges in the future in cases where a material change in the scope of operation with its business occurs. Employee-related costs consist primarily of severance costs and also include outplacement services provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods. Facility exit and other costs consist of accelerated depreciation, equipment relocation costs and costs associated with planned facility expansions and closures to streamline Company operations. The
During the fiscal year ended June 30, 2021, the Company adopted a plan to reduce costs and optimize its infrastructure in Europe by closing its Clinical Supply Services facility in Bolton, U.K. In connection with this restructuring costs forplan, the Company reduced its headcount by approximately 170 employees and incurred cumulative charges of $8 million, primarily associated with employee severance benefits. For the three months ended September 30, 20202021, restructuring charges associated with the Bolton facility closure were $1 million.
Total restructuring charges were $1 million for both the three months ended September 30, 2021 and 2019 were $0.9 million and $0.7 million, respectively.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the currency exchange rates on its applicable exchange rate onto its investments in operations outside the U.S. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated its exposure from its investments in its European operations by denominating a portion of its debt in euros. At September 30, 2020,2021, the Company had euro-denominated debt outstanding of $944.6$965 million (U.S. dollar equivalent), that is designated and qualifies as a hedge of a net investment in foreignEuropean operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of translation gains or losses are reported in accumulated other comprehensive income/(loss)loss as part of the cumulative translation adjustment. The non-hedge portions of the euro-denominated debt translation gains or losses are reported in the consolidated statement of operations. The following table includes net investment hedge activity during the three months ended September 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
Unrealized foreign exchange gain/(loss) within other comprehensive income | $ | (32.4) | | | $ | 20.3 | | | | | |
Unrealized foreign exchange gain/(loss) within statement of operations | $ | (1.9) | | | $ | 9.7 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2021 | | 2020 | | | | |
| Unrealized foreign exchange gain (loss) within other comprehensive income | $ | 22 | | | $ | (32) | | | | | |
| Unrealized foreign exchange loss within statement of operations | $ | (3) | | | $ | (2) | | | | | |
The net accumulated lossgain on the instrument designated as a hedge as of September 30, 20202021 within other comprehensive income/(loss)loss was approximately $30.1$28 million. Amounts are reclassified out of accumulated other comprehensive income/(loss)loss into earnings when the entity to which the gains and losses relate is either sold or substantially liquidated.
Preferred Stock Derivative Liability
As discussed in Note 14, Equity,Redeemable Preferred Stock—Series A Preferred,Stock, and Accumulated Other Comprehensive Loss, in May 2019, the Company issued shares of Series A Preferred Stock in exchange for net proceeds of $646.3$646 million after taking into account the $3.7$4 million issuance cost.
The dividend rate used to determine the amount of the quarterly dividend payable on shares of the Series A Preferred Stock is subject to adjustment so as to provide holders of shares of Series A Preferred Stock with certain protections against a decline in the trading price of shares of Common Stock. The Company determined that this feature should be accounted for as a derivative liability, since the feature fluctuates inversely to changes in the trading price and is also linked to the performance of the S&P 500 stock index. Accordingly, the Company bifurcated the adjustable dividend feature from the remainder of the Series A Preferred Stock and accounted for this feature as a derivative liability at fair value.
The Company will recognize changesrecorded a total gain of $2 million and $9 million on the change in the estimated fair value of the derivative liability for the three months ended September 30, 2021 and 2020, respectively, which is reflected as other expense (income), net in the consolidated statements of operationsoperations.
A portion of the derivative liability was settled on the Partial Conversion Date due to the Partial Conversion. The fair value of the derivative liability as of the Partial Conversion Date was $9 million, of which $4 million was related to the converted portion of the outstanding shares of Series A Preferred Stock. See Note 14, Equity, Redeemable Preferred Stock, and Accumulated Other Comprehensive Loss for details of the Partial Conversion.
Interest-Rate Swap
Pursuant to its interest rate and risk management strategy, in April 2020, the Company entered into an interest-rate swap agreement with Bank of America N.A. as a hedge against the economic effect of a portion of the variable interest obligation associated with its U.S. dollar-denominated term loans under its senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on future interest expense.
In February 2021, in connection with an amendment to the Credit Agreement, the Company settled the interest-rate swap agreement with Bank of America N.A. The Company paid $2 million in cash to Bank of America N.A to settle the interest-rate swap agreement. This loss is deferred in stockholders’ equity, net of income taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the original term of the formerly outstanding term loans. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net within the next twelve months is not material.
In February 2021, the Company entered into a new interest-rate swap agreement with Bank of America N.A. as a hedge against the economic effect of a portion of the variable interest obligation associated with its Term B-3 Loans, so that the interest payable on that portion of the Term B-3 Loans becomes fixed at a certain rate, thereby reducing the impact of future
interest rate changes on future interest expense. As a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500 million of the Term B-3 Loans is now effectively fixed at 0.9985%.
The new interest-rate swap agreement qualifies for and is designated as a cash-flow hedge. The Company evaluates hedge effectiveness at the inception of the hedge and on an ongoing basis. The cash flows associated with the interest-rate swap are reported in net cash provided by operating activities in the consolidated statements of cash flows. The unrealized gain or loss from the mark-to-market of the interest rate swap valuations during the three months ended September 30, 2021 and the fiscal year ended June 30, 2021 was immaterial in each period.
A summary of the estimated fair value of the interest-rate swap reported in the consolidated balance sheets is stated in the table below: | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | June 30, 2021 |
| (Dollars in millions) | Balance Sheet Classification | | Estimated Fair Value | | Balance Sheet Classification | | Estimated Fair Value |
| Interest-rate swap | Other long-term assets | | $ | 3 | | | Other long-term assets | | $ | 2 | |
11. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement, defines fair value as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which Level 1 and Level 2 are considered observable and Level 3 is considered unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses of the Company approximate fair value based on the short maturities of these instruments.
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification as of the end of each reporting period. The following table sets forth the Company’s financial assets and liabilities that were measured at fair value wason a recurring basis and the fair value measurement for such assets and liabilities at September 30, 2021 and June 30, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Basis of Fair Value Measurement |
| September 30, 2021 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Marketable securities | | $ | 50 | | | $ | 50 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| Interest-rate swap | | 3 | | | — | | | 3 | | | — | |
| Trading securities | | 1 | | | 1 | | | — | | | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Series A Preferred Stock derivative liability | | 1 | | | — | | | — | | | 1 | |
| | | | | | | | |
| June 30, 2021 | | | | | | | | |
| Assets: | | | | | | | | |
| | | | | | | | |
| Marketable securities | | $ | 71 | | | $ | 71 | | | $ | — | | | $ | — | |
| Interest-rate swap | | 2 | | | — | | | 2 | | | — | |
| Trading securities | | 1 | | | 1 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Series A Preferred Stock derivative liability | | 3 | | | — | | | — | | | 3 | |
| | | | | | | | |
The fair value of the interest-rate swap agreement is determined at the end of each reporting period based on valuation models that use interest rate yield curves and discount rates as inputs. The discount rates are based on U.S. deposit or U.S. Treasury rates. The significant inputs used in the valuation models are readily available in public markets or can be derived from observable market transactions, and the valuation is therefore classified as Level 2 in the fair-value hierarchy.
The estimated fair value of the Series A Preferred Stock derivative is determined using an option pricing methodology, specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporates the terms and conditions of the preferred stock arrangement, historical stock price volatility, the risk-free interest rate, a credit spread based on the yield indexes of high-yield bonds, and the trading price of shares of the Common Stock. The calculation of the estimated fair value of the derivative liability is highly sensitive to changes in unobservable inputs, such as the expected volatility and the Company’s specific credit spread.
The Company recorded a gain of $9.0 million on the change in the estimated fair value of the Series A Preferred Stock derivative liability from June 30, 2020 through September 30, 2020, primarily related to volatility in the price of the Company’s Common Stock that is used to estimate the fair value, which is reflected as a non-operating expense in the consolidated statements of operations. The fair value of the derivative liability as of September 30, 2020 was $14.6 million.
The fair value is classified as Level 3 in the fair-value hierarchy due to the significant management judgment required forto make the assumptions underlying the calculation of value.
The following table sets forth a summary of changes in the estimated fair value of the Series A Preferred Stock derivative liability:liability from June 30, 2021 to September 30, 2021:
| | | | | | | | | |
(Dollars in millions) | | Fair Value Measurements of
Series A Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3) | |
Balance at June 30, 20202021 | | $ | 23.63 | | |
| Change in estimated fair value of Series A Preferred Stock derivative liability | | (9.0)(2) | | |
| | | |
Balance at September 30, 20202021 | | $ | 14.61 | | |
Interest-Rate SwapAssets and Liabilities Measured at Fair Value on a Non-Recurring Basis
PursuantLong-lived assets, goodwill, and other intangible assets are subject to its interest rate and risk management strategy, in April 2020, Operating Company entered into an interest-rate swap agreement with Bank of America N.A. as a hedge against the economic effect of a portion of the variable interest obligation associated with its U.S dollar-denominated term loans under its senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on future interest expense. As a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500.0 million of the term loans is now effectively fixed at 1.26%, for a total fixed rate of 3.51%.
The interest-rate swap agreement qualifies for and is designated as a cash-flow hedge. The Company evaluates hedge effectiveness at the inception of the hedge and on an ongoing basis.
Thenon-recurring fair value measurement for the evaluation of potential impairment. Other than the interest-rate swap agreement is determined at the end of each reporting period based on valuation models that use interest rate yield curves and discount rates as inputs. The discount rates are based on U.S. deposit or U.S. Treasury rates. The significant inputs used in the valuation models are readily available in public markets or can be derived from observable market transactions, and, therefore, the valuation has been classified as a Level 2 in the fair-value hierarchy. The estimated fair value of the interest rate swap as of September 30, 2020estimates disclosed in Note 3, Business Combinations and as of June 30, 2020Divestitures, there was reported as a derivative liability of $3.8 million and $3.7 million, respectively, within other liabilities in the consolidated balance sheets. The cash flows associated with the interest-rate swap are reported in net cash provided by operating activities in the consolidated statements of cash flows. The unrealized loss or unrealized gain from the mark-to-market of the interest rate swap valuationno non-recurring fair value measurement during the three months ended September 30, 20202021 and the fiscal year ended June 30, 2020 was immaterial in each period.2020.
11.12. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Generally, fluctuations in the effective tax rate are primarily due to changes in relative amounts of U.S. and non-U.S. pretax income, resulting from the Company’s business mix and changes in the tax impact of special items, and other discrete tax items, which may have unique tax implications depending on the nature of the item. Such discreteitems. Discrete items include, but are not limited to, changes in foreignnon-U.S. statutory tax rates, the amortization of certain assets, the tax impact of changes in the Company’s unrecognizedreserve for uncertain tax benefit reservespositions, and the tax impact of certain equity compensation.
In the normal course of business, the Company is subject to examination by taxing authorities around the world, including such major jurisdictions as the United States, Germany, and the United Kingdom. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal year 2009. The Company is presently under audit in select jurisdictions in the United States and in Europe, but no material impact is expected to the financial results once these audits are completed.
ASC 740 includes guidance on the accounting for uncertainty inuncertain income taxestax positions recognized in the financial statements.Company's tax filings. This standard provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeal or litigation process, based on the technical merits. As of both September 30, 20202021 and June 30, 2020,2021, the Company had an aggregate of $4.5 million and $5.6 million, respectively, ofCompany's reserve against uncertain income tax positions (including accrued interest and penalties). As of these dates, $3.2 million and $4.4 million, respectively, represent the amount of unrecognized tax benefits, which, if recognized, would favorably affect the effective income tax rate. The reduction to unrecognized tax benefits is primarily driven by a settlement of Italian income taxes that occurred in the current period.remained substantially unchanged at approximately $5 million. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
The Company recorded a provision for income taxes for the three months ended September 30, 2021 of $10 million relative to earnings before income taxes of $103 million. The Company recorded a benefit for income taxes for the three months ended September 30, 2020 of $15.0$15 million relative to earnings before income taxes of $67.4$67 million. The Company recordedincreased income tax provision for the current period was largely the result of an increase in the amount and relative mix of pretax income across several jurisdictions. This was partially offset by discrete tax benefits recognized in the quarter relating to equity compensation deductions and to a lesser extent non U.S. tax credits claimed on an amended U.S. federal income tax return filing. The prior-year quarter income tax benefit was largely driven by the recognition of additional non U.S. tax credits claimed on an amended U.S. federal income tax filing. The provision/benefit for income taxes forin each of these periods was also impacted by the three
months ended September 30, 2019relative amount and mix of $6.9 million relative to a loss before income taxes of $6.8 million. Thepermanent tax adjustments included in the income tax benefit for the current period is not comparable to the same period of the prior year due to changes in pretax income over many jurisdictions and the impact of discrete items, including a $22.2 million benefit for U.S. foreign tax credits resulting from amending a prior year return. Generally, fluctuations in the effective tax rate are primarily due to changes in the geographic distribution of our pretax income resulting from our business mix and changes in the tax impact of permanent differences, special items, certain equity related compensation,computation and other discrete tax items which may have unique tax implications depending onrecognized in the nature of the item.
12.13. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of the Company’s net periodic benefit costs are as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
| Components of net periodic benefit cost: | | | | | | | |
| Selling, general, and administrative expenses: | | | | | | | |
| Service cost | $ | 1.0 | | | $ | 0.6 | | | | | |
| Other (income)/expense, net: | | | | | | | |
| Interest cost | 1.0 | | | 1.7 | | | | | |
| Expected return on plan assets | (2.4) | | | (2.7) | | | | | |
Amortization (1) | 0.7 | | | 0.8 | | | | | |
| Net amount recognized | $ | 0.3 | | | $ | 0.4 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2021 | | 2020 | | | | |
| Components of net periodic benefit cost: | | | | | | | |
| Selling, general, and administrative expenses: | | | | | | | |
| Service cost | $ | 1 | | | $ | 1 | | | | | |
| Other expense (income), net: | | | | | | | |
| Interest cost | 1 | | | 1 | | | | | |
| Expected return on plan assets | (2) | | | (2) | | | | | |
Amortization (1) | 1 | | | — | | | | | |
| Net amount recognized | $ | 1 | | | $ | — | | | | | |
(1) Amount represents the amortization of unrecognized actuarial gains/(losses).losses.
As previously disclosed, the Company notified the trustees of a multi-employer pension plan of its withdrawal from participation in such plan in fiscal 2012. The actuarial review process administered by the plan trustees ended in fiscal 2015. The liability reported reflects the present value of the Company’s expected future long-term obligations. The estimated discounted value of the projected contributions related to such plans was $38.6$38 million as of September 30, 20202021 and June 30, 2020,2021, and is included within pension liability on the consolidated balance sheets. The annual cash impact associated with the Company’s obligations in such plan is approximately $1.7$2 million per year.
14. EQUITY, REDEEMABLE PREFERRED STOCK AND ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)LOSS
Description of Capital Stock
The Company is authorized to issue 1,000,000,000 shares of its Common Stock and 100,000,000 shares of preferred stock, par value $0.01 per share. In accordance with the Company’s amended and restated certificate of incorporation, each share of Common Stock has one vote, and the Common Stock votes together as a single class.
Recent Public Offerings of its CommonRedeemable Preferred Stock
On June 15, 2020, the Company completed a public offering of its Common Stock (the “June 2020 Equity Offering”), in which the Company sold 7.7 million shares of Common Stock at a price of $70.72 per share, net of underwriting discounts and commissions. The Company obtained total net proceeds from the June 2020 Equity Offering of $547.5 million after the payment of associated offering expenses. The net proceeds of the June 2020 Equity Offering were used to repay $200.0 million of precautionary borrowings from the third quarter of fiscal 2020 under Operating Company's revolving credit facility, with the remainder available for general corporate purposes. On July 10, 2020, the underwriter for the June 2020 Equity Offering exercised its over-allotment option on 1.2 million additional shares, resulting in supplemental net proceeds of $81.8 million from the June 2020 Equity Offering, which was recorded in the current period.
On February 6, 2020, the Company completed the February 2020 Equity Offering, in which the Company sold 8.4 million shares of Common Stock at a price of $58.58 per share, net of underwriting discounts and commissions. The Company obtained total net proceeds from the February 2020 Equity Offering of $494.2 million. The net proceeds of the February 2020 Equity Offering were used to repay $100.0 million of borrowings earlier in the quarter under Operating Company's revolving
credit facility and pay the consideration for the MaSTherCell acquisition due at its closing, with the remainder available for general corporate purposes.
Effect of Restricted Stock
Shares of Common Stock outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.2 million shares as of September 30, 2020. Shares of unvested restricted stock are excluded from the calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding, except when the effect would be anti-dilutive.
Accumulated Other Comprehensive Loss
The components of the changes in the cumulative translation adjustment, derivatives and hedges, and minimum pension liability for the three months ended September 30, 2020 and 2019 are presented below.
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
| Foreign currency translation adjustments: | | | | | | | |
| Net investment hedge | $ | (32.4) | | | $ | 20.3 | | | | | |
| Long-term intercompany loans | 6.3 | | | (6.5) | | | | | |
| Translation adjustments | 35.4 | | | (32.3) | | | | | |
| Total foreign currency translation adjustment, pretax | 9.3 | | | (18.5) | | | | | |
| Tax expense/(benefit) | (6.6) | | | 3.3 | | | | | |
| Total foreign currency translation adjustment, net of tax | $ | 15.9 | | | $ | (21.8) | | | | | |
| | | | | | | |
| Net change in derivatives and hedges: | | | | | | | |
| Net loss recognized during the period | $ | (0.1) | | | $ | 0 | | | | | |
| Total derivatives and hedges, pretax | (0.1) | | | 0 | | | | | |
| Tax expense/(benefit) | 0 | | | 0 | | | | | |
| Net change in derivatives and hedges, net of tax | $ | (0.1) | | | $ | 0 | | | | | |
| | | | | | | |
| Net change in minimum pension liability | | | | | | | |
| | | | | | | |
| Net gain/(loss) recognized during the period | $ | 0.7 | | | $ | (0.6) | | | | | |
| | | | | | | |
| Total pension liability, pretax | 0.7 | | | (0.6) | | | | | |
| Tax expense/(benefit) | 0.2 | | | (0.3) | | | | | |
| Net change in minimum pension liability, net of tax | $ | 0.5 | | | $ | (0.3) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the three months ended September 30, 2020, the changes in accumulated other comprehensive loss, net of tax by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Exchange Translation Adjustments | | Pension and Liability Adjustments | | Derivatives and Hedges | | | | | Other | | Total |
| Balance at June 30, 2020 | $ | (335.1) | | | $ | (47.5) | | | $ | (2.6) | | | | | | $ | (1.1) | | | $ | (386.3) | |
Other comprehensive income before
reclassifications | 15.9 | | | 0 | | | (0.1) | | | | | | 0 | | | 15.8 | |
Amounts reclassified from accumulated other
comprehensive income | 0 | | | 0.5 | | | 0 | | | | | | 0 | | | 0.5 | |
| Net current period other comprehensive income | 15.9 | | | 0.5 | | | (0.1) | | | | | | 0 | | | 16.3 | |
| Balance at September 30, 2020 | $ | (319.2) | | | $ | (47.0) | | | $ | (2.7) | | | | | | $ | (1.1) | | | $ | (370.0) | |
14. REDEEMABLE PREFERRED STOCK — SERIES A PREFERRED
In May 2019, the Company designated 1,000,000 shares of its preferred stock, par value $0.01, as its Series A Convertible Preferred Stock (the “Series A Preferred Stock”), pursuant to a certificate of designation of preferences, rights, and limitations (as amended, the “Certificate of Designation”) filed with the Delaware Secretary of State, and issued and sold 650,000 shares of the Series A Preferred Stock for an aggregate purchase price of $650.0$650 million,, to affiliates of Leonard Green & Partners, L.P., each share having an initial stated value of $1,000 (as such value may be adjusted in accordance with the terms of the Certificate of Designation). The Series A Preferred Stock ranks senior to the Company’s Common Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company.
Proceeds from the offering of the Series A Preferred Stock, net of stock issuance costs, were $646.3$646 million,. Of the net proceeds, $39.7 $40 million of which was allocated to the dividend-adjustment feature at its issuance and separately accounted for as a derivative liability, as disclosed in Note 10, Derivative Instruments and Hedging Activities; thus, the proceeds of the issuance were allocated as follows:
| | | | | |
(Dollars in millions) | |
| |
Issuance of Series A Preferred Stock | $ | 650.0 | |
Stock issuance costs | (3.7) | |
Net of stock issuance costs | 646.3 | |
Derivative liability (portion of preferred stock allocated to dividend-adjustment feature at inception - see Note 10) | (39.7) | |
Net proceeds from Series A Preferred Stock issuance | $ | 606.6 | |
liability. Any change in the fair value of derivative liability during a fiscal quarter is recorded as a non-operating expensesexpense in the consolidated statement of operations for that quarter.operations. See Note 10, Derivative Instruments and Hedging Activities, for detail concerning the change in fair value during the three months ended September 30, 20202021.
As described in Note 7, .Earnings Per Share, on the Partial Conversion Date, holders of Series A Preferred Stock converted 265,223 shares (approximately 41% of their holdings) and $2 million of unpaid accrued dividends into shares of Common Stock. The holders received 20.33 shares of Common Stock for each converted preferred share, resulting in the issuance of 5,392,280 shares of Common Stock. There was no gain or loss recognized upon the Partial Conversion as it occurred in accordance with the terms of the Certificate of Designation. The Company has 384,777 shares of Series A Preferred Stock that remain outstanding at September 30, 2021.
As a result of the Partial Conversion, additional paid in capital increased $253 million, which includes $4 million related to the fair value of the portion of the derivative liability that was settled upon the Partial Conversion and $2 million related to an unpaid accrued dividend. See Note 10, Derivative Instruments and Hedging Activities, for detail concerning the change in fair value during the three months ended September 30, 2021.
Accumulated Other Comprehensive Loss
The components of the changes in the cumulative translation adjustment, derivatives and hedges, minimum pension liability, and marketable securities for the three months ended September 30, 2021 and 2020 are presented below.
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2021 | | 2020 | | | | |
| Foreign currency translation adjustments: | | | | | | | |
| Net investment hedge | $ | 22 | | | $ | (32) | | | | | |
| Long-term intercompany loans | (3) | | | 6 | | | | | |
| Translation adjustments | (28) | | | 35 | | | | | |
| Total foreign currency translation adjustment, pretax | (9) | | | 9 | | | | | |
| Tax expense (benefit) | 5 | | | (7) | | | | | |
| Total foreign currency translation adjustment, net of tax | $ | (14) | | | $ | 16 | | | | | |
| | | | | | | |
| Net change in derivatives and hedges: | | | | | | | |
| Net gain recognized during the period | $ | 1 | | | $ | — | | | | | |
| Total derivatives and hedges, pretax | 1 | | | — | | | | | |
| Tax expense | — | | | — | | | | | |
| Net change in derivatives and hedges, net of tax | $ | 1 | | | $ | — | | | | | |
| | | | | | | |
| Net change in minimum pension liability: | | | | | | | |
| | | | | | | |
| Net gain recognized during the period | $ | 1 | | | $ | — | | | | | |
| | | | | | | |
| Total pension liability, pretax | 1 | | | — | | | | | |
| Tax expense | — | | | — | | | | | |
| Net change in minimum pension liability, net of tax | $ | 1 | | | $ | — | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the three months ended September 30, 2021, the changes in accumulated other comprehensive loss, net of tax by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Exchange Translation Adjustments | | Pension and Liability Adjustments | | Derivatives and Hedges | | | | | Marketable Securities | | Other | | Total |
| Balance at June 30, 2021 | $ | (268) | | | $ | (47) | | | $ | — | | | | | | $ | (1) | | | $ | (1) | | | $ | (317) | |
Other comprehensive (loss) income before
reclassifications | (14) | | | — | | | 1 | | | | | | — | | | — | | | (13) | |
Amounts reclassified from accumulated other
comprehensive loss | — | | | 1 | | | — | | | | | | — | | | — | | | 1 | |
Net current period other comprehensive (loss) income | (14) | | | 1 | | | 1 | | | | | | — | | | — | | | (12) | |
| Balance at September 30, 2021 | $ | (282) | | | $ | (46) | | | $ | 1 | | | | | | $ | (1) | | | $ | (1) | | | $ | (329) | |
15. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s consolidated financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, the Company receives subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. The Company expects to incur costs in future periods in connection with future requests.
16. SEGMENT INFORMATION
The Company now conducts its business within the following operating segments: Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services. The Company evaluates the performance of its segments based on segment earnings before other (expense)/income, impairments, restructuring costs, interest expense, income tax expense/expense (benefit), and depreciation and amortization (“(“Segment EBITDA”EBITDA”).“EBITDA from operations” is consolidated earnings from operations before interest expense, income tax expense/(benefit), and depreciation and amortization.
Segment EBITDA is subject to important limitations. These consolidated financial statements include information concerning Segment EBITDA (a) because Segment EBITDA is an operational measure used by management in the assessment of the operating segments, the allocation of resources to the segments, and EBITDA from operations are not definedthe setting of strategic goals and annual goals for the segments, and (b) in U.S. GAAP andorder to provide supplemental information that the Company considers relevant for the readers of the consolidated financial statements. The Company’s presentation of Segment EBITDA may not be comparable to similarly titled measures used by other companies.
The following tables include net revenue and Segment EBITDA for each of the Company's current reporting segments during the three months ended September 30, 20202021 and 2019:2020:
| | (Dollars in millions) | (Dollars in millions) | Three Months Ended
September 30, | | (Dollars in millions) | Three Months Ended
September 30, | |
| 2020 | | 2019 | | (Dollars in millions) | 2021 | | 2020 | |
| Net revenue: | Net revenue: | | | | | | | | |
| Biologics | Biologics | $ | 377.1 | | | $ | 188.6 | | | Biologics | $ | 546 | | | $ | 377 | | |
| Softgel and Oral Technologies | Softgel and Oral Technologies | 221.1 | | | 263.7 | | | Softgel and Oral Technologies | 243 | | | 221 | | |
| Oral and Specialty Delivery | Oral and Specialty Delivery | 158.3 | | | 132.6 | | | Oral and Specialty Delivery | 146 | | | 159 | | |
| Clinical Supply Services | Clinical Supply Services | 92.7 | | | 84.6 | | | Clinical Supply Services | 96 | | | 93 | | |
| Inter-segment revenue elimination | Inter-segment revenue elimination | (3.5) | | | (4.8) | | | Inter-segment revenue elimination | (6) | | | (4) | | |
| Net revenue | $ | 845.7 | | | $ | 664.7 | | | |
| Total net revenue | | Total net revenue | $ | 1,025 | | | $ | 846 | | |
| | (Dollars in millions) | (Dollars in millions) | Three Months Ended
September 30, | | (Dollars in millions) | Three Months Ended
September 30, | |
| 2020 | | 2019 | | (Dollars in millions) | 2021 | | 2020 | |
| Segment EBITDA reconciled to net earnings: | Segment EBITDA reconciled to net earnings: | | | | | | | | |
| Biologics | Biologics | $ | 106.5 | | | $ | 35.8 | | | Biologics | $ | 166 | | | $ | 107 | | |
| Softgel and Oral Technologies | Softgel and Oral Technologies | 37.8 | | | 46.4 | | | Softgel and Oral Technologies | 41 | | | 38 | | |
| Oral and Specialty Delivery | Oral and Specialty Delivery | 21.4 | | | 27.7 | | | Oral and Specialty Delivery | 33 | | | 21 | | |
| Clinical Supply Services | Clinical Supply Services | 25.0 | | | 21.6 | | | Clinical Supply Services | 26 | | | 25 | | |
| Sub-Total | Sub-Total | $ | 190.7 | | | $ | 131.5 | | | Sub-Total | $ | 266 | | | $ | 191 | | |
| Reconciling items to net earnings | Reconciling items to net earnings | | | Reconciling items to net earnings | | |
Unallocated costs (1) | Unallocated costs (1) | (28.9) | | | (41.4) | | | Unallocated costs (1) | (56) | | | (29) | | |
| Depreciation and amortization | Depreciation and amortization | (69.1) | | | (60.6) | | | Depreciation and amortization | (81) | | | (69) | | |
| Interest expense, net | Interest expense, net | (25.3) | | | (36.3) | | | Interest expense, net | (26) | | | (26) | | |
| Income tax expense/(benefit) | 15.0 | | | 6.9 | | | |
| Income tax (expense) benefit | | Income tax (expense) benefit | (10) | | | 15 | | |
| | Net earnings | Net earnings | $ | 82.4 | | | $ | 0.1 | | | Net earnings | $ | 93 | | | $ | 82 | | |
(1) Unallocated costs include restructuring and special items, equity-basedstock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | | | |
| Impairment charges and gain/(loss) on sale of assets | $ | (1.8) | | | $ | 0.2 | | | | | |
| Stock-based compensation | (18.7) | | | (16.6) | | | | | |
Restructuring and other special items (a) | (4.9) | | | (11.8) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other income/(expense), net (b) | 11.2 | | | (4.9) | | | | | |
| Unallocated corporate costs, net | (14.7) | | | (8.3) | | | | | |
| Total unallocated costs | $ | (28.9) | | | $ | (41.4) | | | | | |
| | | | | | | | | | | | | | | |
| (Dollars in millions) | Three Months Ended September 30, | | |
| 2021 | | 2020 | | | | |
| Impairment charges and gain (loss) on sale of assets | $ | (3) | | | $ | (2) | | | | | |
| Stock-based compensation | (21) | | | (19) | | | | | |
Restructuring and other special items (a) | (8) | | | (5) | | | | | |
Gain on sale of subsidiary (b) | 1 | | | — | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other (expense) income, net (c) | (9) | | | 11 | | | | | |
| Unallocated corporate costs, net | (16) | | | (14) | | | | | |
| Total unallocated costs | $ | (56) | | | $ | (29) | | | | | |
(a) Restructuring and other special items during the three months ended September 30, 2021 include (i) transaction and integration costs associated with the Delphi, Hepatic, and RheinCell acquisitions (ii) transaction costs associated with the Bettera acquisition, and (iii) restructuring costs associated with the closure of the Company's Clinical Supply Services facility in Bolton, U.K. Restructuring and other special items during the three months ended September 30, 2020 include transaction and integration costs associated with the Anagniacquisitions of facilities in Italy and MaSTherCell acquisitions,Belgium, the disposal of a site in Australia, and other restructuring initiatives across the Company’sCompany's network of sites. Restructuring and other special items during
(b) Gain on sale of subsidiary for the three months ended September 30, 2019 include transaction and integration costs associated2021 is affiliated with the Company’s cell and gene therapy acquisitions.sale of the Blow-Fill-Seal Business.
(b)(c) Refer to Note 8, Other (income)/expense, net,Expense (Income), Net for details of financing charges and foreign currency translation adjustments recorded within other income/(expense)expense (income), net.
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated financial statements.
| | (Dollars in millions) | (Dollars in millions) | September 30,
2020 | | June 30,
2020 | (Dollars in millions) | September 30,
2021 | | June 30,
2021 |
| Assets: | Assets: | | Assets: | |
| Biologics | Biologics | $ | 3,995.1 | | | $ | 3,775.0 | | Biologics | $ | 5,027 | | | $ | 4,973 | |
| Softgel and Oral Technologies | Softgel and Oral Technologies | 1,527.8 | | | 1,501.8 | | Softgel and Oral Technologies | 1,577 | | | 1,604 | |
| Oral and Specialty Delivery | Oral and Specialty Delivery | 1,228.3 | | | 1,247.4 | | Oral and Specialty Delivery | 1,241 | | | 1,269 | |
| Clinical Supply Services | Clinical Supply Services | 460.6 | | | 451.2 | | Clinical Supply Services | 482 | | | 483 | |
| Corporate and eliminations | Corporate and eliminations | 772.4 | | | 801.1 | | Corporate and eliminations | 1,856 | | | 783 | |
| Total assets | Total assets | $ | 7,984.2 | | | $ | 7,776.5 | | Total assets | $ | 10,183 | | | $ | 9,112 | |
17. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at September 30, 20202021 and June 30, 20202021 is detailed in the following tables.
Inventories
Work-in-process and inventories include raw materials, labor, and overhead. Total inventories consist of the following:
| | (Dollars in millions) | (Dollars in millions) | September 30,
2020 | | June 30,
2020 | (Dollars in millions) | September 30,
2021 | | June 30,
2021 |
| Raw materials and supplies | Raw materials and supplies | $ | 278.8 | | | $ | 222.6 | | Raw materials and supplies | $ | 482 | | | $ | 469 | |
| Work-in-process | Work-in-process | 135.0 | | | 123.2 | | Work-in-process | 203 | | | 151 | |
| | Total inventories, gross | Total inventories, gross | 413.8 | | | 345.8 | | Total inventories, gross | 685 | | | 620 | |
| Inventory cost adjustment | Inventory cost adjustment | (29.5) | | | (22.0) | | Inventory cost adjustment | (63) | | | (57) | |
| Inventories | $ | 384.3 | | | $ | 323.8 | | |
| Total inventories | | Total inventories | $ | 622 | | | $ | 563 | |
Prepaid expenses and other
Prepaid expenses and other consist of the following:
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2020 | | June 30,
2020 |
| Prepaid expenses | $ | 49.9 | | | $ | 28.6 | |
| | | |
| Contract assets | 116.2 | | | 61.4 | |
| | | |
| Spare parts supplies | 22.4 | | | 23.1 | |
| Prepaid income tax | 18.1 | | | 15.0 | |
| | | |
| Non-U.S. value-added tax | 23.5 | | | 19.0 | |
| | | |
| | | |
| | | |
| Other current assets | 33.8 | | | 30.8 | |
| Prepaid expenses and other | $ | 263.9 | | | $ | 177.9 | |
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2021 | | June 30,
2021 |
| Prepaid expenses | $ | 64 | | | $ | 46 | |
| | | |
| Contract assets | 224 | | | 181 | |
| | | |
| Spare parts supplies | 31 | | | 30 | |
| Prepaid income tax | 23 | | | 22 | |
| | | |
| Non-U.S. value-added tax | 64 | | | 50 | |
| | | |
| | | |
| | | |
| Other current assets | 53 | | | 47 | |
| Total prepaid expenses and other | $ | 459 | | | $ | 376 | |
Property, plant, and equipment, netOther accrued liabilities
Property, plant, and equipment, netOther accrued liabilities consist of the following: | | | | | | | | | | | |
| (Dollars in millions) | September 30,
2021 | | June 30,
2021 |
| Accrued employee-related expenses | $ | 155 | | | $ | 184 | |
| Operating lease liabilities | 14 | | | 16 | |
| Restructuring accrual | 2 | | | 4 | |
| | | |
| Accrued interest | 11 | | | 27 | |
| | | |
| Contract liabilities | 283 | | | 305 | |
| Accrued income tax | 25 | | | 30 | |
| | | |
| Other | 164 | | | 170 | |
| Total other accrued liabilities | $ | 654 | | | $ | 736 | |
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2020 | | June 30,
2020 |
| Land, buildings, and improvements | $ | 1,277.1 | | | $ | 1,250.9 | |
| Machinery and equipment | 1,290.6 | | | 1,233.6 | |
| Furniture and fixtures | 22.6 | | | 20.9 | |
| Construction in progress | 546.4 | | | 440.0 | |
| Property, plant, and equipment, at cost | 3,136.7 | | | 2,945.4 | |
| Accumulated depreciation | (1,101.2) | | | (1,044.6) | |
| Property, plant, and equipment, net | $ | 2,035.5 | | | $ | 1,900.8 | |
18. SUBSEQUENT EVENTS
Bettera Holdings, LLC Acquisition
In October 2021, the Company acquired Bettera for approximately $1.00 billion in cash, subject to customary adjustments. The Company funded this acquisition through a combination of additional borrowings under its senior secured credit facilities and the net proceeds of the 2030 Notes. For further detail on the Company’s additional borrowings and 2030 Notes, see Note 6, Long-Term Obligations and Short-Term Borrowings.
Depreciation expense was $46.1 million for the three months ended September 30, 2020, and $39.1 million for the three months ended September 30, 2019. Depreciation expense includes amortization of assets related to finance leases. The Company charges repairs and maintenance costs to expense as incurred. The Company capitalized interest cost of $6.2 million for the three months ended September 30, 2020.
Other accrued liabilities
Other accrued liabilities consist of the following:
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2020 | | June 30,
2020 |
| Accrued employee-related expenses | $ | 140.3 | | | $ | 140.8 | |
| Restructuring accrual | 2.4 | | | 2.8 | |
| | | |
| Accrued interest | 12.2 | | | 29.1 | |
| | | |
| Contract liability | 229.4 | | | 191.0 | |
| Accrued income tax | 0 | | | 4.5 | |
| | | |
| Other accrued liabilities and expenses | 132.6 | | | 131.1 | |
| Other accrued liabilities | $ | 516.9 | | | $ | 499.3 | |
18. SUBSEQUENT EVENTS
On October 28, 2020, the Company entered into an agreement to acquire all of the shares of Skeletal Cell Therapy Support SA (“Skeletal”) from Bone Therapeutics SA (“Bone”) for €12.0 million, subject to customary adjustments, as well as related supply agreements with Bone. Skeletal leases and operates a cell therapy manufacturing facility in Gosselies, Belgium. Upon closing, the facility and operations willacquired have become part of the Company’s Biologics business unit, expandingSoftgel and Oral Technologies segment. The initial accounting for this acquisition is pending. Significant, relevant information needed to complete the Company’s cell therapy capacity for clinicalinitial accounting analysis is not yet available because the valuation of the assets acquired and commercial supply. The agreementliabilities assumed is subjectnot complete. As a result, determining these values is not practicable and the Company is unable to customary closing conditions and is expected to close during the second quarter of fiscal 2021.
disclose these values or provide other related disclosures at this time.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
We are the leading global provider of advanced delivery technologies,provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products at over fifty facilities across four continents under rigorous quality and operational standards. Our oral, injectable, and respiratory delivery technologies, along with our state-of-the-art protein nucleic acid,and cell and gene therapy biologics,manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical and consumer health products. Our oral, injectable, cell and gene therapy, and respiratory delivery technologies address the full diversity of the pharmaceutical industry, including small molecules; protein, cell, and gene therapy biologics; and consumer health products.industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial supply, we can help our customers take products to market faster, including nearly half of new drug products approved by the U.S. Food and Drug Administration (the “FDA”) in the last decade. Our advanced delivery technologydevelopment and manufacturing platforms, which include those in our Biologics, Softgel and Oral Technologies, Biologics, and Oral and Specialty Delivery segments, our proven formulation, manufacturing,supply, and regulatory expertise, and our broad and deep intellectual propertydevelopment and manufacturing know-how enable our customers to developadvance and then bring to market more products and better treatments for patients and consumers. Across both development and delivery, ourOur commitment to reliably supply our customers’ and their patients'patients’ needs is the foundation for the value we provide; annually, we produce approximately 74more than 70 billion of doses for nearly 7,000 customer products, or approximately 1 in every 2024 doses of such productproducts taken each year by patients and consumers around the world. We believe that through our investments in growth-enablingstate-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and capabilities,other attractive market segments, our ongoing focus oncontinuous improvement activities devoted to operational and quality excellence, the sales of existing and introduction of new customer products, and, in some cases, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated marginsattract premium opportunities and realize the growth potential from these areas.
We currently operate in four operating segments, which also constitute our four reporting segments: Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services.
The COVID-19 Pandemic
Our response to COVID-19
The
Since the start of the COVID-19 pandemic, has spread across the globe and is affecting economic activity worldwide, including in the countries in which we our customers, our suppliers, and our other business partners conduct business. Governments in affected regions have implemented, and may continue to implement, measures to protect public health, including quarantines, travel restrictions, business closures, cancellations of public gatherings, and measures that affect the flow of goods, services, and people between different regions. We have taken and continue to take steps to avoid or reduce infection or contamination and otherwise protect our employees, ensure the integrity and quality of our products and services, and to maintain business in line with guidelines issued bycontinuity for our customers and their patients who depend on us to manufacture and supply critical products to the U.S. Centers for Disease Control and Prevention (CDC), the World Health Organization (WHO), and local authorities where we operate, to re-emphasize good hygiene practices, severely restrict non-employee access to our sites, reorganize our workflows where permitted to maximize social distancing, limit our employees to only business-critical travel (where permitted by local law), facilitate safer alternatives to travel to and from work, and employ remote-working strategies. In addition, tomarket. To address the multiple dimensions of the pandemic, senior, multi-disciplinary teams reporting directly to our Chief Executive Officer have been continuously monitoring the global situation, executing mitigation activities whenever and wherever required, and planning forimplementing a phased and structured return to our facilities as circumstances will permithave permitted for those employees who have been remote-working.working remotely.
Among other things, we implemented measures to avoid or reduce infection or contamination in line with guidelines issued by the U.S. Centers for Disease Control and Prevention, the World Health Organization, and local authorities where we operate, re-emphasized good hygiene practices, restricted non-employee access to our sites, reorganized our workflows where permitted to maximize physical distancing, limited employee travel, facilitated safer alternatives to travel to and from work, and employed remote-working strategies. We have reviewed and will continue to analyze our supply chain to identify any risk, delay, or concern that may have an impact on our ability to deliver our services and products. To date, we have not identified any significant risk, delay, or concern that would have a substantial effect on such delivery. We have adopted various procedures to minimize and manage any future disruption to our ongoing operations. These include procuring expanded safety stocksoperations, including the creation and activation of raw materialsnew and personal protective equipment across our network, as well as ongoing monitoring of our suppliers’ stock levels to assure future deliveries.existing business continuity plans when needed. Our existing procedures, which are consistent with cGMPcurrent good manufacturing practices and other regulatory standards, are intended to assure the integrity of our supply including against any contamination. We have a detailed response plan to manage any impact of the virus on employee health, site operations, and product supply, including immediate assessment of the health of employees reporting symptoms, comprehensive risk assessment of any impact to quality, additional cleaning protocols, and alternative shift patterns to compensate should fewer employees be available.
The
Impact of COVID-19 pandemic has not had a material adverseon Our Business and Results of Operations
We continue to assess any impact on our business, financial condition, or results of operations to date, but, at this point, the extent to which the COVID-19 pandemic may affect our future financial condition or results of operations remains uncertain and will depend on future developments that are highly uncertain, including the duration of the pandemic, new information that may emerge concerning the severity of the virus, and the actions governments, the pharmaceutical industry, competitors, suppliers, customers, patients, and others may take to contain or address its direct and indirect effects. The COVID-19 pandemic and associated mitigation measures may also have an adverse impact on healthcare systems, global economic conditions, or economic conditions in one or more regions where we, our suppliers, or our customers operate, which could have an adverse effect on our business and financial condition.results of operations. We have observed some increases in customer delays and cancellations, occasional increases in absenteeism of production employees in our facilities in certain affected regions, and a small percentage of our customers expecting a reduction inseen increased demand and a larger percentage expecting an increase in demand, in each case due to circumstances relating to the COVID-19 pandemic and the responsive measures. We have also seensignificant revenue increases and the potential for further revenue increases relatedfrom COVID-19-related products, particularly in our Biologics segment. As part of our response to projects seeking to address the
COVID-19 pandemic, or its effects. Future financial periods may reflect greater effects of the pandemic on the resultswe accelerated and enhanced certain of our operations.
Seecapital improvement plans to expand capacity for manufacturing drug substance and drug product for protein-based biologics and cell and gene therapies, particularly at our drug product facilities in Bloomington, Indiana, Anagni, Italy, and our commercial-scale viral vector manufacturing facility in Maryland. We have also “Risk Factors — Risks Relatedimplemented various strategies to Our Business and Industry — Our business,protect our financial condition and results of operations should we experience a reduction in demand for COVID-19 related products, such as ensuring contractual take-or-pay and minimum volume requirements for the manufacture of certain COVID-19 related products. However, the extent and duration of revenue associated with COVID-19-related products is uncertain and dependent, in important respects, on factors outside our control.
The COVID-19-vaccines we manufacture are still pending approval from the FDA and other non-U.S. regulatory authorities and may be adversely affected by global health epidemics, includingnot receive approval. The future duration and extent of the COVID-19 pandemic”pandemic and the future demand for COVID-19 vaccines and therapies is unknown. Public opinion of certain COVID-19 vaccines and therapies and the product owners and manufacturers can change quickly and affect the demand for certain products and services, although they should not affect any required minimum payment for a COVID-19 related product subject to a “take-or-pay” provision. In addition, any concentration of revenue from certain COVID-19 vaccine products enhances our operational risk with respect to quality, security, regulatory inspections and business disruption resulting from any unforeseen event that affects any of the facilities and communities in which we manufacture COVID-19 vaccines. Because some of our Fiscal 2020 10-K.work on COVID-19 vaccines is performed under subcontracts to U.S. government contracts, new regulations affecting U.S. federal government prime and subcontractors may affect our operations, efficiency, and ability to deliver on our obligations to customers for COVID-19 vaccines, COVID-19 related products, and other unrelated products and services. We have implemented various mechanisms to protect our customers, their material and product, and our business continuity, such as enhanced security measures at certain facilities and heightened cybersecurity controls.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Management made certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the consolidated financial statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the consolidated financial statements than others.
There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 20202021 10-K, other than recently adopted accounting principles disclosed in Note 1,Basis of Presentation and Summary of Significant Accounting Policies to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Consolidated Financial Statements”), which adoptions had no material impact on net earnings.our financial condition or results of operations.
Non-GAAP Metrics
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense/expense (benefit) for income taxes, and depreciation and amortization, adjusted for the income or loss attributable to non-controlling interests (“EBITDA from operations”). EBITDA from operations is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that
we consider relevant for the readers of our Consolidated Financial Statements, and such information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from operations defined under U.S. GAAP is net earnings/(loss).earnings. Included in this Management’s Discussion and Analysis is a reconciliation of net earnings/(loss)earnings to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before non-controlling interests, other (income)/expense, impairments, restructuring costs, interest expense, income tax expense/expense (benefit), and depreciation and amortization (“Segment EBITDA”).
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations and include revenue from licensing related activities entered into within the year.operations. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency exchange, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance with U.S. GAAP. These measures, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Three Months Ended September 30, 20202021 Compared to the Three Months Ended September 30, 20192020
The below tables summarize several financial metrics we use to measure performance for the three months ended September 30, 20202021 and three months ended September 30, 2019.2020. Refer to the discussions below regarding performance and use of key financial metrics.
Results for the three months ended September 30, 20202021 compared to the three months ended September 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | FX Impact | | Constant Currency Increase/(Decrease) |
| (Dollars in Millions) | 2020 | | 2019 | | | | Change $ | | Change % |
| Net revenue | $ | 845.7 | | | $ | 664.7 | | | $ | 9.7 | | | $ | 171.3 | | | 26 | % |
| Cost of sales | 596.8 | | | 487.0 | | | 5.8 | | | 104.0 | | | 21 | % |
| Gross margin | 248.9 | | | 177.7 | | | 3.9 | | | 67.3 | | | 38 | % |
| Selling, general, and administrative expenses | 164.7 | | | 142.8 | | | 0.9 | | | 21.0 | | | 15 | % |
| Impairment charges and (gain)/loss on sale of assets | 1.8 | | | (0.2) | | | — | | | 2.0 | | | (1,000) | % |
| Restructuring and other | 0.9 | | | 0.7 | | | 0.1 | | | 0.1 | | | 14 | % |
| | | | | | | | | |
| Operating earnings | 81.5 | | | 34.4 | | | 2.9 | | | 44.2 | | | 128 | % |
| Interest expense, net | 25.3 | | | 36.3 | | | 0.2 | | | (11.2) | | | (31) | % |
| Other (income)/expense, net | (11.2) | | | 4.9 | | | 1.5 | | | (17.6) | | | (359) | % |
| Earnings/(loss) before income taxes | 67.4 | | | (6.8) | | | 1.2 | | | 73.0 | | | (1,074) | % |
| Income tax benefit | (15.0) | | | (6.9) | | | (0.1) | | | (8.0) | | | 116 | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 82.4 | | | $ | 0.1 | | | $ | 1.3 | | | $ | 81.0 | | | 81,000 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | FX Impact | | Constant Currency Increase (Decrease) |
| (Dollars in millions) | 2021 | | 2020 | | | | Change $ | | Change % |
| Net revenue | $ | 1,025 | | | $ | 846 | | | $ | 7 | | | $ | 172 | | | 20 | % |
| Cost of sales | 701 | | | 597 | | | 4 | | | 100 | | | 17 | % |
| Gross margin | 324 | | | 249 | | | 3 | | | 72 | | | 29 | % |
| Selling, general, and administrative expenses | 183 | | | 165 | | | 1 | | | 17 | | | 11 | % |
| Gain on sale of subsidiary | (1) | | | — | | | — | | | (1) | | | * |
| Other operating expense | 4 | | | 2 | | | 1 | | | 1 | | | 19 | % |
| | | | | | | | | |
| Operating earnings | 138 | | | 82 | | | 1 | | | 55 | | | 67 | % |
| Interest expense, net | 26 | | | 26 | | | 1 | | | (1) | | | * |
| Other expense (income), net | 9 | | | (11) | | | — | | | 20 | | | (171) | % |
| Earnings before income taxes | 103 | | | 67 | | | — | | | 36 | | | 52 | % |
| Income tax expense (benefit) | 10 | | | (15) | | | — | | | 25 | | | (168) | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 93 | | | $ | 82 | | | $ | — | | | $ | 11 | | | 12 | % |
Net Revenue
| | | | | | | |
| 20202021 vs. 20192020 | | |
Factors Contributing to Year-Over-Year Change | Three Months Ended September 30, | | |
| Net Revenue | | |
Net revenue without acquisitions/divestituresOrganic | 2023 | % | | |
| Impact of acquisitions | 8— | % | | |
| Impact of divestitures | (2)(3) | % | | |
| Constant currency change | 2620 | % | | |
| Foreign currency translation impact on reporting | 1 | % | | |
| Total % change | 2721 | % | | |
Net revenue increased $171.3$172 million, or 26%20%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019.2020. Net revenue decreased 3% due to the sale of Catalent USA Woodstock, Inc. (the “Blow-Fill-Seal Business”) in March 2021. Net revenue increased 8% as a result of acquisitions, which was partially offset by a 2% decrease in net revenue due to divestitures. We acquired a facility in Anagni, Italy (“Anagni”) in January 2020, and Masthercell Global Inc. (“MaSTherCell”) in February 2020 and divested a manufacturing site in Australia in October 2019. Net revenue increased 20% without the impact of acquisitions and divestitures23% organically on a constant-currency basis, primarily due to (i) robust end-market demand across allfor our drug product and drug substance offerings for COVID-19-related programs in our Biologics offerings, offsetsegment, and (ii) increased demand for our customers' prescription products, a return to growth in part due to reduced demandour consumer health products, particularly in thecough, cold, and over-the-counter pain relief products, and growth in development services in our Softgel and Oral Technologies Segment for certain prescription products in North America, as well as decreased demand for our consumer health products.segment.
Gross Margin
Gross margin increased $67.3$72 million, or 38%29%, compared to the three months ended September 30, 2019,2020, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for allour drug product and drug substance offerings for COVID-19 related programs in our Biologics segment, offerings, offset by decreased demand for our prescription and consumer health productsa decline in the Softgel and Oral Technologies segment and chargescosts in the Oral and Specialty Delivery segment associated with the voluntary U.S. recall of a recently launched product within our respiratory specialty platform, and ophthalmic specialty platform.increased demand for our prescription products and development growth in our Softgel and Oral Technologies segment, partially offset by an $10 million increase in depreciation and amortization expense. On a constant-currency basis, gross margin, as a percentage of revenue, increased 260210 basis points to 29.3%31.5% in the three months ended September 30, 2020,2021, compared to 26.7%29.4% in the prior-year period, primarily due to the factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $21.0$17 million, or 15%11%, compared to the three months ended September 30, 2019,2020, excluding the impact of foreign exchange, due towhich includes $1 million in net incremental expenses from acquired companies of $5.6 million, which includes $1.1 million of incremental depreciation and amortization expense, $1.8 million of employee-related costs and $1.3 million related to various transitional services. Selling,divested companies. The year-over-year increase in selling, general, and administrative expenses further increased by $2.0 millionwas primarily due to non-cash equity-based compensation and $7.7a $10 million forincrease in employee-related costs primarilyprincipally incurred for wages and bonuses, $3 million in increases in information technology expenses associated with additional cyber security initiatives, $3 million in transaction costs associated with our Bettera acquisition, and a $2 million increase in stock-based compensation, which was partially offset by $6 million in cost savings in travelassociated with our health and entertainment expenses.welfare benefit programs.
Other Operating Expense
Other operating expense for the three months ended September 30, 2021 remained consistent compared to the three months ended September 30, 2020 when excluding the impact of foreign exchange.
Interest Expense, net
Interest expense, net of $25.3$26 million for the three months ended September 30, 2020 decreased by $11.2 million, or 31%,2021 was unchanged compared to the three months ended September 30, 2019,2020, excluding the impact of foreign exchange, driven byexchange. The savings from repayment of Operating Company’sour formerly outstanding euro-denominated term loan, euro-denominated 4.75%loans and 4.875% senior notes due 2024 and favorable interest rate movement on the U.S. dollar-denominated term loan, partially2026 were offset by interest expenses on Operating Company's euro-denominated 2.375%our new tranche of term loans and our newly outstanding 3.500% senior notes due 20282030 (the “Euro 2028“2030 Notes”). The savingsyear-over-year change also includes $6.2a $4 million ofreduction in capitalized interest costs for the three months ended September 30, 2020.2021.
For additional information concerning our debt and financing arrangements, including the changing mix of debt and equity in our capital structure, see “—“Liquidity and Capital Resources”Resources” and Note 6,Long-Term Obligations and Short-Term Borrowings to our Consolidated Financial Statements.
Other (Income)/Expense (Income), net
Other expense, net of $9 million for the three months ended September 30, 2021 was primarily driven by $9 million of non-cash foreign currency translation losses and $4 million of financing charges related to our outstanding term loans, partially offset by a $2 million gain related to the change in fair value of the derivative liability arising from the dividend-adjustment mechanism of our Series A Preferred Stock.
Other income, net of $11.2$11 million for the three months ended September 30, 2020 was primarily driven by a gain of $9.0$9 million related to the change in the fair value of the derivative liability arising from the dividend-adjustment mechanism of our series A convertible preferred stock, par value $0.01 (the “Series A Preferred Stock”). See Notes 10 and 14 to our Consolidated Financial Statements for more details on the Series A Preferred Stock dividend-adjustment mechanism.Stock.
Other expense, net of $4.9 millionOur provision for income taxes for the three months ended September 30, 20192021 was primarily driven by a loss$10 million relative to earnings before income taxes of $8.9 million related to the change in the fair value of the derivative liability arising from the dividend-adjustment mechanism of the Series A Preferred Stock. The loss was partially offset by non-cash foreign currency translation gains.
Income Tax Expense (Benefit)
$103 million. Our benefit for income taxes for the three months ended September 30, 2020 was $15.0$15 million relative to earnings before income taxes of $67.4 million. Our benefit for income taxes for the three months ended September 30, 2019 was $6.9 million relative to a loss before income taxes of $6.8$67 million. The increased income tax benefitprovision for the current period is not comparable towas largely the same periodresult of an increase in the prior year due to changes inamount and relative mix of pretax income over many jurisdictionsacross several jurisdictions. This was partially offset by discrete tax benefits recognized in the quarter relating to equity compensation deductions and the impact of discrete items, includingto a $22.2 million benefit for U.S. foreignlesser extent non-U.S. tax credits resulting from amending a prior year return. Generally, fluctuationsclaimed on an amended U.S. federal income tax return filing. The prior-year quarter income tax benefit was largely driven by the recognition of additional non-U.S. tax credits claimed on an amended U.S. federal income tax filing. The provision (benefit) for income taxes in each of these periods was also impacted by the relative amount and mix of permanent tax adjustments included in the effectiveincome tax rate are primarily due to changes in the geographic distribution of our pretax income resulting from our business mix and changes in the tax impact of permanent differences, special items, certain equity related compensation,computation and other discrete tax items which may have unique tax implications depending onrecognized in the nature of the item.periods.
Segment Review
The following charts depict the percentages of net revenue from each of our four reporting segments for the three months ended September 30, 20202021 compared to the three months ended September 30, 2019.2020. Refer below for discussions regarding each segment’s net revenue and EBITDA performance and to “—Non-GAAP Metrics” for a discussion of our use of Segment EBITDA, a measure that is not defined under U.S. GAAP.
Our results on a segment basis for the three months ended September 30, 20202021 compared to the three months ended September 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | FX Impact | | Constant Currency Increase/(Decrease) |
| (Dollars in Millions) | 2020 | | 2019 | | | | Change $ | | Change % |
| Biologics | | | | | | | | | |
| Net revenue | $ | 377.1 | | | $ | 188.6 | | | $ | 3.4 | | | $ | 185.1 | | | 98 | % |
| Segment EBITDA | $ | 106.5 | | | $ | 35.8 | | | $ | 1.2 | | | $ | 69.5 | | | 194 | % |
| Softgel and Oral Technologies | | | | | | | | | |
| Net revenue | 221.1 | | | 263.7 | | | 2.0 | | | (44.6) | | | (17) | % |
| Segment EBITDA | 37.8 | | | 46.4 | | | 0.8 | | | (9.4) | | | (20) | % |
| Oral and Specialty Delivery | | | | | | | | | |
| Net revenue | 158.3 | | | 132.6 | | | 2.9 | | | 22.8 | | | 17 | % |
| Segment EBITDA | 21.4 | | | 27.7 | | | 1.0 | | | (7.3) | | | (26) | % |
| Clinical Supply Services | | | | | | | | | |
| Net revenue | 92.7 | | | 84.6 | | | 1.5 | | | 6.6 | | | 8 | % |
| Segment EBITDA | 25.0 | | | 21.6 | | | 0.7 | | | 2.7 | | | 13 | % |
| Inter-segment revenue elimination | (3.5) | | | (4.8) | | | (0.1) | | | 1.4 | | | 29 | % |
Unallocated Costs (1) | (28.9) | | | (41.4) | | | (1.7) | | | 14.2 | | | 34 | % |
| Combined totals | | | | | | | | | |
| Net revenue | $ | 845.7 | | | $ | 664.7 | | | $ | 9.7 | | | $ | 171.3 | | | 26 | % |
| | | | | | | | | |
| EBITDA from operations | $ | 161.8 | | | $ | 90.1 | | | $ | 2.0 | | | $ | 69.7 | | | 77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | FX Impact | | Constant Currency Increase (Decrease) |
| (Dollars in millions) | 2021 | | 2020 | | | | Change $ | | Change % |
| Biologics | | | | | | | | | |
| Net revenue | $ | 546 | | | $ | 377 | | | $ | 1 | | | $ | 168 | | | 44 | % |
| Segment EBITDA | 166 | | | 107 | | | 1 | | | 58 | | | 55 | % |
| Softgel and Oral Technologies | | | | | | | | | |
| Net revenue | 243 | | | 221 | | | 1 | | | 21 | | | 9 | % |
| Segment EBITDA | 41 | | | 38 | | | — | | | 3 | | | 9 | % |
| Oral and Specialty Delivery | | | | | | | | | |
| Net revenue | 146 | | | 159 | | | 3 | | | (16) | | | (10) | % |
| Segment EBITDA | 33 | | | 21 | | | 1 | | | 11 | | | 48 | % |
| Clinical Supply Services | | | | | | | | | |
| Net revenue | 96 | | | 93 | | | 2 | | | 1 | | | 2 | % |
| Segment EBITDA | 26 | | | 25 | | | 1 | | | — | | | — | % |
| Inter-segment revenue elimination | (6) | | | (4) | | | — | | | (2) | | | (60) | % |
Unallocated Costs (1) | (56) | | | (29) | | | (1) | | | (26) | | | (90) | % |
| Combined totals | | | | | | | | | |
| Net revenue | $ | 1,025 | | | $ | 846 | | | $ | 7 | | | $ | 172 | | | 20 | % |
| | | | | | | | | |
| EBITDA from operations | $ | 210 | | | $ | 162 | | | $ | 2 | | | $ | 46 | | | 29 | % |
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| | Three Months Ended
September 30, |
| (Dollars in millions) | 2020 | | 2019 |
| Impairment charges and gain/(loss) on sale of assets | $ | (1.8) | | | $ | 0.2 | |
| Stock-based compensation | (18.7) | | | (16.6) | |
Restructuring and other special items (a) | (4.9) | | | (11.8) | |
| | | |
| | | |
| | | |
Other income/(expense), net (b) | 11.2 | | | (4.9) | |
| Unallocated corporate costs, net | (14.7) | | | (8.3) | |
| Total unallocated costs | $ | (28.9) | | | $ | (41.4) | |
| | | | | | | | | | | |
| | Three Months Ended
September 30, |
| (Dollars in millions) | 2021 | | 2020 |
| Impairment charges and gain (loss) on sale of assets | $ | (3) | | | $ | (2) | |
| Stock-based compensation | (21) | | | (19) | |
Restructuring and other special items (a) | (8) | | | (5) | |
Gain on sale of subsidiary (b) | 1 | | | — | |
| | | |
| | | |
Other (expense) income, net (c) | (9) | | | 11 | |
| Unallocated corporate costs, net | (16) | | | (14) | |
| Total unallocated costs | $ | (56) | | | $ | (29) | |
(a) Restructuring and other special items during the three months ended September 30, 2021 include (i) transaction and integration costs associated with the acquisitions of Delphi, Hepatic, and RheinCell, (ii) transaction costs relating to the Bettera acquisition, and (iii) restructuring costs associated with the closure of our Clinical Supply Services facility in Bolton, U.K. Restructuring and other special items during the three months ended September 30, 2020 include transaction and integration costs associated with our Anagniacquisitions of facilities in Italy and MaSTherCell acquisitions,Belgium, the disposal of a site in Australia, and other restructuring initiatives across our network of sites. Restructuring and other special items during
(b) For the three months ended September 30, 2019 include transaction and integration costs associated2021, gain on sale of subsidiary is affiliated with our cell and gene therapy acquisitions.divestiture of the Blow-Fill-Seal Business.
(b)(c) Refer to Note 8, Other (income)/expense, net,Expense (Income), Net for details of financing charges and foreign currency translation adjustments recorded within other income/(expense)expense (income), net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
| | | | Three Months Ended
September 30, | | Three Months Ended
September 30, |
| (Dollars in millions) | (Dollars in millions) | 2020 | | 2019 | (Dollars in millions) | 2021 | | 2020 |
| Net earnings | Net earnings | $ | 82.4 | | | $ | 0.1 | | Net earnings | $ | 93 | | | $ | 82 | |
| Depreciation and amortization | Depreciation and amortization | 69.1 | | | 60.6 | | Depreciation and amortization | 81 | | | 69 | |
| Interest expense, net | Interest expense, net | 25.3 | | | 36.3 | | Interest expense, net | 26 | | | 26 | |
| Income tax benefit | (15.0) | | | (6.9) | | |
| Income tax expense (benefit) | | Income tax expense (benefit) | 10 | | | (15) | |
| | EBITDA from operations | EBITDA from operations | $ | 161.8 | | | $ | 90.1 | | EBITDA from operations | $ | 210 | | | $ | 162 | |
Biologics segment
| | | | | | | | | | | |
| 2020 vs. 2019 |
| Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Net revenue/Segment EBITDA without acquisitions | 83 | % | | 179 | % |
| Impact of acquisitions | 15 | % | | 15 | % |
| Constant currency change | 98 | % | | 194 | % |
| Foreign exchange fluctuation | 2 | % | | 3 | % |
| Total % change | 100 | % | | 197 | % |
| | | | | | | | | | | |
| 2021 vs. 2020 |
| Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 44 | % | | 56 | % |
| Impact of acquisitions | — | % | | (1) | % |
| Constant currency change | 44 | % | | 55 | % |
| Foreign exchange fluctuation | 1 | % | | — | % |
| Total % change | 45 | % | | 55 | % |
Biologics net revenue increased by $185.1$168 million, or 98%44%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue increased 83%, compared to the three months ended September 30, 2019, excluding the impact of acquisitions.2020. The increase was driven across all segment offerings withby robust end-market demand for theour global drug product, and drug substance and cell and gene therapy offerings, in partprimarily related to demand for COVID-19 related programs.
Biologics Segment EBITDA increased by $69.5$58 million, or 194%55%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Segment EBITDA increased 179%, compared to the three months ended September 30, 2019, excluding the impact of acquisitions.2020. The increase was driven across all segment offerings withby robust end-market demand for theour global drug product, and drug substance and cell and gene therapy offerings, in partprimarily related to demand for COVID-19 related programs.
Since September 30, 2019, we have acquired Anagni, part of which operates within the Biologics segment, and MaSTherCell, which together increased net revenue and Segment EBITDA on an inorganic basis in our Biologics segment by 15% and 15%, respectively, in the three months ended September 30, 2020 compared to the corresponding prior-year period.
Softgel and Oral Technologies segment | | | | | | | | | | | |
| 2021 vs. 2020 |
| Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 9 | % | | 9 | % |
| | | |
| Constant currency change | 9 | % | | 9 | % |
| Foreign currency translation impact on reporting | 1 | % | | — | % |
| Total % change | 10 | % | | 9 | % |
| | | | | | | | | | | |
| 2020 vs. 2019 |
| Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Net revenue/Segment EBITDA without divestitures | (12) | % | | (21) | % |
| Impact of divestitures | (5) | % | | 1 | % |
| Constant currency change | (17) | % | | (20) | % |
| Foreign currency translation impact on reporting | 1 | % | | 2 | % |
| Total % change | (16) | % | | (18) | % |
Softgel and Oral Technologies net revenue decreasedincreased by $44.6$21 million, or 17%9%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Net revenue decreased 12%, compared to the three months ended September 30, 2019, excluding the impact of divestitures.2020. The decrease primarily relates to reducedincrease was driven by strong end-market demand for prescription products, within North America, as well as lower demanda return to growth in our consumer health products, particularly in cough, cold, and over-the-counter pain relief products.products, and growth in development services within North America.
Softgel and Oral Technologies Segment EBITDA decreased $9.4increased $3 million, or 20%9%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. Segment EBITDA decreased 21%, compared to the three months ended September 30, 2019, excluding the impact of divestitures.2020. The decrease,increase, similar to that of net revenue, is primarilywas driven by a decrease in demand in both the prescription and consumer health portfolio of products.
In October 2019, we divested a manufacturing site in Australia in order to better streamline our global operations. The site divestiture resulted in a decrease in net revenue of 5% and an increase in Segment EBITDA of 1%,end-market demand in the three months ended September 30, 2020 comparedprescription products, a return to the three months ended September 30, 2019.growth in our consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and strong development growth.
Oral and Specialty Delivery segment
| | | 2020 vs. 2019 | | 2021 vs. 2020 |
| Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, | |
| Year-Over-Year Change | | Year-Over-Year Change | Three Months Ended
September 30, |
| | Net Revenue | | Segment EBITDA | | Net Revenue | | Segment EBITDA |
| Net revenue/Segment EBITDA without acquisitions | (1) | % | | (61) | % | |
| Organic | | Organic | 3 | % | | 104 | % |
| Impact of acquisitions | Impact of acquisitions | 18 | % | | 35 | % | Impact of acquisitions | 1 | % | | (22) | % |
| | Impact of divestitures | | Impact of divestitures | (14) | % | | (34) | % |
| Constant currency change | Constant currency change | 17 | % | | (26) | % | Constant currency change | (10) | % | | 48 | % |
| Foreign currency translation impact on reporting | Foreign currency translation impact on reporting | 2 | % | | 3 | % | Foreign currency translation impact on reporting | 2 | % | | 7 | % |
| Total % change | Total % change | 19 | % | | (23) | % | Total % change | (8) | % | | 55 | % |
Oral and Specialty Delivery net revenue increaseddecreased by $22.8$16 million, or 17%10%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019.2020. Net revenue decreased 1%increased 3%, compared to the three months ended September 30, 2019,2020, excluding the impact of acquisitions. Increasedacquisitions and divestitures, primarily driven by demand for orally delivered commercial products was more than offset by decreased demand for the segment’s early-phase development programs.
Oral and Specialty Delivery Segment EBITDA decreasedincreased by $7.3$11 million, or 26%48%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019.2020. Segment EBITDA decreased 61%increased 104%, compared to the three months ended September 30, 2019,2020, excluding the impact of acquisitions.acquisitions and divestitures. The decreaseincrease from the prior-year period was primarily driven by the decrease in voluntary U.S. recall ofcosts from a recentlypreviously launched product in our respiratory and ophthalmic specialty platform inclusive of one-time charges totaling $12 million, associated with the recall. Strong end-marketand increased demand for orally delivered commercial products within Europe and favorable manufacturing efficiencies within our respiratory and ophthalmic specialty platform partially offsetearly-phase development programs.
We completed the charges associated with this product recall.
On January 1, 2020, we acquired Anagni, and the portion of this facility allocated to our Oral and Specialty Delivery segmentAcorda acquisition in February 2021, which increased net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 18%1% and 35%22%, respectively, in the three months ended September 30, 2020,2021, compared to the corresponding prior-year period.
We completed the Blow-Fill-Seal divestiture in March 2021, which decreased net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 14% and 34%, respectively, in the three months ended September 30, 2021, compared to the corresponding prior-year period.
Clinical Supply Services segment
| | | | | | | | | | | |
| 2020 vs. 2019 |
| Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Net revenue/Segment EBITDA | 8 | % | | 13 | % |
| | | |
| Constant currency change | 8 | % | | 13 | % |
| Foreign currency translation impact on reporting | 2 | % | | 3 | % |
| Total % change | 10 | % | | 16 | % |
| | | | | | | | | | | |
| 2021 vs. 2020 |
| Year-Over-Year Change | Three Months Ended
September 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 2 | % | | — | % |
| | | |
| Constant currency change | 2 | % | | — | % |
| Foreign currency translation impact on reporting | 1 | % | | 3 | % |
| Total % change | 3 | % | | 3 | % |
Clinical Supply Services net revenue increased by $6.6$1 million, or 8%2%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2019.2020. The increase was driven by strong demandgrowth in our manufacturing and packaging and storage and distribution offerings across all regions, offset in part by a decrease in demand for our manufacturing and packaging business within North America.
Clinical Supply Services Segment EBITDA increased by $2.7 million, or 13%,was unchanged when excluding the impact of foreign exchange, compared to the three months ended September 30, 2019. The increase was driven by strong2020. Strong demand in our manufacturing and packaging and storage and distribution offerings across all regions,in North America was partially offset by initialization costs at new facilities in part, by a decrease in demand for our manufacturingNorth America and packaging business within North America.Asia.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have been cash flows generated from operations and occasional capital market activities. The principal uses of cash are to fund operating and capital expenditures, business or asset acquisitions, interest payments on debt, the payment of the last portion of deferred purchase consideration from the Cook Pharmica LLC (now named Catalent Indiana, LLC (“Catalent Indiana”)) acquisition, which we paid in October 2021, the payment of the quarterly dividend on the Series A Preferred Stock, and any mandatory or discretionary principal payment on our debt. At the current stated value of the Series A Preferred Stock outstanding as of September 30, 2020,2021, the aggregate amount of each regular quarterly dividend, if paid in cash, is $8.1approximately $5 million. As of September 30, 2020,2021, Catalent Pharma Solutions, Inc., our principal operating subsidiary (“Operating Company”), following the Operating CompanySeptember 2021 execution of Amendment No. 6 to the amended and restated credit agreement, dated as of May 20, 2014, governing our senior secured credit facilities (as amended, the “Credit Agreement”), had available a $550$725 million revolving credit facility that matures in May 2024, the capacity of which was reduced by $6.7$5 million in letters of credit outstanding as of September 30, 2020.2021. The revolving credit facility includes borrowing capacity available for lettersletters of credit and for short-term borrowings, referred to as swing-line borrowings.
On October 1, 2021, we acquired Bettera Holdings, LLC ("Bettera") and paid approximately $1.00 billion in cash. Bettera is a manufacturer of nutraceuticals specializing in gummy, soft chew, and lozenge delivery systems. We funded this acquisition through a combination of additional borrowings under our senior secured credit facilities and the net proceeds of the 2030 Notes.
We believe that our cash on hand, cash from operations, and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months, including our quarterly regular dividend on the Series A Preferred Stock, if paid in cash, as well as the amounts expected to become due with respect to our pending capital projects. We have no significant maturity under any of our bank or note debt until the U.S. dollar-denominated 4.875%July 2027 maturity of our 5.000% senior notes due 20262027 (the “USD 2026"2027 Notes”) mature in January 2026.. As of September 30, 2020,2021, we had only twoone remaining paymentspayment of $50.0$50 million, each, duewhich was paid in October 2020 and 2021, on the deferred purchase consideration for the acquisition of Catalent Indiana, and oneLLC.
Cash Flows
The following table summarizes our consolidated statements of cash flows:
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| | Three Months Ended
September 30, | | |
| (Dollars in millions) | 2020 | | 2019 | | $ Change |
| Net cash provided by/(used in): | | | | | |
| Operating activities | $ | 149.7 | | | $ | 25.2 | | | $ | 124.5 | |
| Investing activities | $ | (151.2) | | | $ | (84.9) | | | $ | (66.3) | |
| Financing activities | $ | 49.6 | | | $ | (35.8) | | | $ | 85.4 | |
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| | Three Months Ended
September 30, | | |
| (Dollars in millions) | 2021 | | 2020 | | $ Change |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 163 | | | $ | 150 | | | $ | 13 | |
| Investing activities | $ | (167) | | | $ | (151) | | | $ | (16) | |
| Financing activities | $ | 1,082 | | | $ | 50 | | | $ | 1,032 | |
Operating Activities
For the three months ended September 30, 2020,2021, cash provided by operating activities was $149.7$163 million, compared to $25.2$150 million for the corresponding prior-year period. CashThe increase in cash flow from operating activities for the three months ended September 30, 2020 increased2021 is primarily due to an increase in operating earnings, which increased from $34.4$82 million in the corresponding prior-year period to $81.5$138 million for the three months ended September 30, 2020.2021 and a favorable impact from the timing of collection of trade receivables, which was partially offset by an unfavorable impact from the increase in contract assets.
Investing Activities
For the three months ended September 30, 2020,2021, cash used in investing activities was $151.2$167 million, compared to $84.9$151 million for the three months ended September 30, 2019.2020. The higher level of cash use was primarily driven by an increase in cash used in theinvesting activities was primarily driven by a $26 million increase in cash used for business acquisition activities and a $4 million increase in cash used for purchases of property, plant, and equipment, which totaled $149.6partially offset by $20 million in proceeds from the three months ended September 30, 2020 compared to $73.5 million for the three months ended September 30, 2019.maturity of marketable securities.
Financing Activities
For the three months ended September 30, 2020,2021, cash provided by financing activities was $49.6 million,$1.08 billion, compared to cash used in financing activities of $35.8$50 million for the three months ended September 30, 2019.2020. The increase in cash fromprovided by financing activities iswas primarily driven by a $1.1 billion increase net cash received from the issuance of the 2030 Notes and incurrence of our new tranche of term loans. Cash provided by financing activities for the three months ended September 30, 2020 was primarily driven by the July 2020 exercise of an over-allotment option on 1.2 million additional shares by the underwriter for the equity offering in June 2020 Equity Offering on July 10, 2020, resulting in net proceeds of $81.8 million for the three months ended September 30, 2020.$82 million.
Guarantees and Security
The Senior Notes
All obligations under Operating Company's Euro 20282027 Notes, USD 2026 Notes, and U.S. dollar-denominated 5.00%2.375% euro-denominated senior notes due 20272028, 3.125% senior notes due 2029, and 2030 Notes (collectively, the "Senior Notes") are general, unsecured, and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all of Operating Company'sour wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by either PTS Intermediate Holdings LLC or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The credit agreement governing Operating Company’s senior secured credit facilities (as amended, the “Credit Agreement”)Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, Operating Company’sour (and Operating Company’sour restricted subsidiaries’) ability to incur additional indebtedness or issue certain preferred shares; create liens on assets; engage in mergers and consolidations; sell assets; pay dividends and distributions or repurchase capital stock; repay subordinated indebtedness; engage in certain transactions with affiliates; make investments, loans, or advances; make certain acquisitions; enter into sale and leaseback transactions; amend material agreements governing Operating Company’sour subordinated indebtedness; and change Operating Company’sour lines of business.
The Credit Agreement also contains change-of-control provisions and certain customary affirmative covenants and events of default. The revolving credit facility requires compliance with a net leverage covenant when there is a 30% or more draw outstanding at a period end. As of September 30, 2020, Operating Company was2021, we were in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Companyus and itsour restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company'sour non-U.S. subsidiaries or itsour Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating Company'sour ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and paying certain dividends is tied to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA”“Consolidated EBITDA” in the Credit Agreement). Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under U.S. GAAP, and is subject to important limitations.
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any
such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, or in related adverse tax consequences to us.
The Senior Notes
The several indentures governing each series of the Senior Notes (collectively, the “Indentures”“Indentures”) contain certain covenants that, among other things, limit theour ability of Operating Company and its restricted subsidiaries to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding series of Senior Notes, or the applicable Trustee under the Indentures, may declare the applicable Senior Notes immediately due and payable; or in certain circumstances, the applicable Senior Notes will become automatically immediately due and payable. As of September 30, 2020,2021, Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As of September 30, 20202021 and June 30, 2020,2021, our non-U.S. subsidiaries held cash and cash equivalents of $287.4$311 million and $228.0$351 million, respectively, out of the total consolidated cash and cash equivalents of $1,007.0 million$1.97 billion and $953.2$896 million, respectively. These balances are dispersed across many locations around the world.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate fluctuations. We may use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed- and floating-rate assets and liabilities. In April 2020,February 2021, we entered into anreplaced one interest-rate swap agreement with Bank of America N.A. with another, and each acts or acted as a hedge against the economic effect of a portion of the variable-interest obligation associated with our U.SU.S. dollar-denominated term loans under our senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on future interest expense. The applicable rate for the U.S. dollar-denominated term loan isunder the Credit Agreement was LIBOR (subject to a floor of 1.00%0.50%) plus 2.25%;2.00% as of September 30, 2021; however, as a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500.0$500 million of the term loan is nowwas effectively fixed at 1.26% for a total fixed rate0.9985% as of 3.51%.September 30, 2021.
Currency Risk Management
We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our investments in our foreign operations in Europe. While we do not actively hedge against changes in foreign currency, we have mitigated the exposure of our investments in our European operations by denominating a portion of our debt in euros. At September 30, 2020,2021, we had $944.6$965 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in foreignEuropean operations. Refer to Note 10,Derivative Instruments and Hedging Activities, to our Consolidated Financial Statements for further discussion of net investment hedge activity in the periodperiod.
From time to time, we may use forward foreign currency exchange contracts to manage our exposure to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs. In addition, we may use such contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use any forward foreign currency exchange contracts. We expect to continue to evaluate hedging opportunities for foreign currency in the future.
Contractual Obligations
There has been no significant change to our contractual obligations since our Fiscal 2020 10-K. Refer to Note 6 to our Consolidated Financial Statements for a further discussion regarding our long-term obligations.
Off-Balance Sheet Arrangements
Other than short-term operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangement as of September 30, 2020.2021.
ItemITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to changes in interest rates associated with our long-term debt obligations and foreign exchange rate changes.
Interest Rate Risk
We have historically used interest-rate swaps to manage the economic effect of variable-rate interest obligations associated with our floating-rate term loans so that the interest payable on the term loans effectively becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on our future interest expense.
In April 2020,February 2021, we entered into anreplaced one interest-rate swap agreement with Bank of America N.A. with another, and each acts or acted as a hedge against the economic effect of a portion of the variable-interest obligation associated with our U.S dollar-denominated term loans under our senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on future interest expense. The applicable rate for the U.S. dollar-denominated term loan isunder our Credit Agreement was LIBOR (subject to a floor of 1.00%0.50%) plus 2.25%;2.00% as of September 30, 2021; however, as a result of entering into the interest-rate swap agreement, the floating portion of the applicable rate on $500.0$500 million of the term loan is nowwas effectively fixed at 1.26%, for a total fixed rate0.9985% as of 3.51%.September 30, 2021.
Foreign Currency Exchange Risk
By the nature of our global operations, we are exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation. These exposures are transactional and translational in nature. Since we manufacture and sell our products throughout the world, our foreign-currency risk is diversified. Principal drivers of this diversified foreign-exchange exposure include the European euro, British pound, Argentinean peso, and Brazilian real. Our transactional exposure arises from the purchase and sale of goods and services in currencies other than the functional currency of our operational units. We also have exposure related to the translation of financial statements of our foreignnon-U.S. subsidiaries into U.S. dollars, our functional currency. The financial statements of our operations outside the U.S. are measured using the local currency as the functional currency, except in Argentina. Adjustments to translate the assets and liabilities of these foreignnon U.S. operations in U.S. dollars are accumulated as a component of accumulated other comprehensive income/income (loss) utilizing period-end exchange rates. Foreign-currency transaction gains and losses calculated by utilizing weighted average exchange rates for the period are included in the statements of operations in other expense (income)/expense,, net. Such foreign-currency transaction gains and losses include inter-company loans denominated in non-U.S. dollar currencies.
ItemITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act 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 our management, including our Chief Executive Officer and our Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any control or procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of September 30, 2020,2021, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the first quarterthree months ended September 30, 2020,2021, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II. OTHER INFORMATION
ItemITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. We intend to vigorously defend ourselves against any such litigation and do not currently believe that the outcome of any such litigation will have a material adverse effect on our consolidated financial statements. In addition, the healthcare industry is highly regulated, and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, we receive subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. We generally respond to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. We expect to incur costs in future periods in connection with future requests.
ItemITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled “Risk Factors”“Risk Factors” in our Fiscal 20202021 10-K, which could materially affect our business, financial condition, or future results. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
Other than what was disclosed in the Special Note Regarding Forward-Looking Statements, there has been no material change to the risk factors disclosed in our Fiscal 20202021 10-K.
ItemITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Purchase of Equity Securities
None.
ItemITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ItemITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ItemITEM 5. OTHER INFORMATION
Not applicable.
ItemITEM 6. EXHIBITS
Exhibits:
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| | Membership Interest Purchase Agreement, dated August 29, 2021, by and among Catalent Pharma Solutions, Inc., Bettera Holdings, LLC, the members of Bettera Holdings, LLC, and Highlander Partners Candy, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 30, 2021). |
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| | Indenture, dated September 29, 2021, by and among Catalent Pharma Solutions, Inc., the subsidiary guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 29, 2021). |
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| | Form of 3.500% Senior Notes due 2030 (included as part of Exhibit 4.1 above). |
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| | Amendment No. 6 to Amended and Restated Credit Agreement, dated as of September 29, 2021, by and among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, JP Morgan Chase Bank, N.A., as the administrative agent, collateral agent, swing line lender, and letter of credit issuer, and the lenders and other parties thereto, which amends that certain Amended and Restated Credit Agreement, dated as of May 20, 2014 (as amended), by and among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, JP Morgan Chase Bank, N.A., as the successor administrative agent, collateral agent, swing line lender, and letter of credit issuer, and the lenders and other parties thereto (incorporated by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 29, 2021). |
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| | Form of Management Incentive Plan for the fiscal year ending June 30, 2021.2022. † * | |
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| | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
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| | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
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| | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
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| | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
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101.1 101 | | | The following financial information from Catalent, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 20202021 formatted in inline XBRL: (i) Consolidated Statements of Operations for the Three Months Ended September 30, 20202021 and 2019;2020; (ii) Consolidated Statements of Comprehensive Income/(Loss)Income for the Three Months Ended September 30, 20202021 and 20192020 (iii) Consolidated Balance Sheets as of September 30, 20202021 and June 30, 2020;2021; (iv) Consolidated Statement of Changes in Shareholders’ Equity/(Deficit)Equity as of September 30, 20202021 and 2019;2020; (v) Consolidated Statements of Cash Flows for the Three Months Ended September 30, 20202021 and 2019;2020; and (vi) Notes to Unaudited Consolidated Financial Statements. |
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| 104 | | The cover page of this Quarterly Report on Form 10-Q, formatted as Inline XBRL and contained in Exhibit 101. |
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| * | | Filed herewith |
| ** | | Furnished herewith |
| † | | Represents a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate. |
* | | Filed herewith |
** | | Furnished herewith |
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.
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| | CATALENT, INC. (Registrant) |
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| Date: | November 3, 20202, 2021 | By: | | /s/ John R. ChiminskiRICKY HOPSON |
| | | | John R. ChiminskiRicky Hopson |
| | | | Chief Executive Officer |
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Date: | November 3, 2020 | By: | | /s/ Wetteny Joseph |
| | | | Wetteny Joseph |
| | | | Senior Vice President, & Chief FinancialAccounting Officer |
