UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Amendment No.1)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2022
or | | | | | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36587
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| CATALENT, INC. | |
| (Exact name of registrant as specified in its charter) |
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| Delaware | | 20-8737688 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 14 Schoolhouse Road | 08873 |
| Somerset, | New Jersey |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (732) 537-6200
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | CTLT | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ☒
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 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, 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 | ý | | 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes ☒ No
As of December 31, 2021, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates was $21.84 billion. On August 25, 2022, there were 179,895,677 shares of the Registrant’s Common Stock, par value $0.01 per share, issued and outstanding.
EXPLANATORY NOTE
Catalent, Inc. (“Catalent,” the “Company,” “we,” “us,” and “our”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment") to our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on August 29, 2022 (the “Original Form 10-K”) to make certain changes, as described below.
In preparing the consolidated financial statements as of and for the three and nine months ended March 31, 2023, we identified an error related to the accounting treatment of a modification to a customer arrangement accounted for under ASC 606, Revenue from Contracts with Customers in our consolidated financial statements issued with respect to the fiscal year ended June 30, 2022. We evaluated the materiality of the error and concluded that it does not result in a material misstatement of our previously issued consolidated financial statements.
However, due to the discovery of this error, we re-evaluated the effectiveness of our internal control over financial reporting (“ICFR”) as of June 30, 2022 and identified a material weakness in our ICFR related to the accounting modifications of customer agreements at our Bloomington, Indiana facility as of that date. For a more detailed description of this material weakness, refer to Part II, Item 9A,“Controls and Procedures.” This Amendment therefore restates our assessment of our ICFR and our disclosure controls and procedures to indicate that they were not effective as of June 30, 2022 because of this material weakness. Our independent registered public accounting firm, Ernst & Young LLP, has also restated its opinion on our ICFR as of June 30, 2022.
In conjunction with filing this Amendment, we determined to revise our consolidated financial statements for the fiscal year ended June 30, 2022 (as revised, the “Consolidated Financial Statements”) to reflect the impact of the error in the periods impacted. In addition, effective July 1, 2022, we changed our operating structure from four operating and reporting segments to two segments: (i) Biologics, and (ii) Pharma and Consumer Health. The revised consolidated financial statements for the years ended June 30, 2022, 2021 and 2020 contained in this Amendment have been recast retrospectively to reflect the new reporting structure. For additional information and a detailed discussion of the revision and recast, refer to Part II, Item 8, Notes to Consolidated Financial Statements, Note 1, Revisions of Previously Issued Financial Statements andNote 19, Segment and Geographic Information.
“Special Note Regarding Forward-Looking Statements” and Item 1A, “Risk Factors,” of Part I of the Original Form 10-K, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” Item 8, “Financial Statements and Supplementary Data,” and Item 9A, “Controls and Procedures,” of Part II of the Original Form 10-K are hereby deleted in their entireties and replaced with “Special Note Regarding Forward-Looking Statements,” Item 1A, Item 7, Item 8, and Item 9A included herein, Item 15, “Exhibits and Financial Statement Schedules,” of Part IV of the Original Form 10-K also has been amended to include a new consent of Ernst & Young LLP and, as required by Rule 12b-15 under the Securities Act of 1934, as amended, to provide new currently dated certifications by our Chief Executive Officer and interim Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The new consent is attached to this Amendment as Exhibit 23.1 and the new certifications are attached to this Amendment as Exhibits 31.1, 31.2, 32.1, and 32.2.
The only changes to the Original Form 10-K are those related to the matters described above. Except as described above, this Amendment does not amend, update, or change any other item or disclosure in the Original Form 10-K and does not purport to reflect any information or event subsequent to the filing thereof. As such, this Amendment speaks only as of the date the Original Form 10-K was filed, and the Company has not undertaken herein to amend, update, or change any information contained in the Original Form 10-K to give effect to any subsequent event, other than as expressly indicated in this Amendment. Accordingly, this Amendment should be read in conjunction with the Original Form 10-K and any subsequent filing with the SEC.
CATALENT, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
For the Fiscal Year Ended June 30, 2022
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| Item | | Page |
| PART I | |
| Item 1A. | | |
| PART II | |
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| Item 7. | | |
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| Item 8. | | |
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| Item 9A. | | |
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| PART IV | |
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| Item 15. | | |
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PART I
Special Note Regarding Forward-Looking Statements
In addition to historical information, this Amendment of the Company contains “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 Annual Report 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,”“predicts,”“intends,”“plans,”“estimates,”“anticipates,”“future,”“forward,”“sustain” 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 this Annual Report, which are summarized below:
Summary of Principal Risk Factors
Any investment, including an investment in our common stock, par value $0.01 (the “Common Stock”), involves risk. The following summary highlights certain risks that an investor in our Common Stock should consider. The following should be read in conjunction with the fuller discussion of risk factors we face set forth in "Item 1A. Risk Factors."
Risks Relating to Our Business and the Industry in Which We Operate
•Our business, financial condition, and operations may be adversely affected by global health epidemics, including the pandemic resulting from the SARS-Co-V-2 strain of coronavirus and its variants (“COVID-19”).
•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.
•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.
•We are a part of the highly regulated healthcare industry, subject to stringent 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 rapid 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 result 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 conditions.
•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
•We may be unable to attract or retain key personnel.
•We may be unsuccessful in integrating our acquisitions, and we may expend substantial amounts of cash and incur debt in making acquisitions.
•Our global operations are subject to economic and political risks that could affect the profitability of our operations or require costly changes to our procedures.
•As a global enterprise, fluctuations in the exchange rates 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.
•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 continuously work to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cybersecurity risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises affecting data security or the operability of such systems.
•We provide services incorporating various advanced modalities, including protein and plasmid production and cell and gene therapies, and these modalities relate to relatively new modes of treatment that may be subject to changing public opinion, continuing research, and increased regulatory scrutiny, each of which may affect our customers' ability to conduct their businesses, or obtain regulatory approvals for their therapies, and thereby adversely affect these offerings.
Risks Relating to Our Indebtedness
•The size of our indebtedness and the obligations associated with it could limit our ability to operate our business and to finance future operations or acquisitions that would enhance our growth.
•Our debt agreements contain restrictions that may limit our flexibility in conducting certain current and future operations.
•We may not be able to pay our indebtedness when it becomes due.
•Our current and potential future use of derivative financial instruments may expose us to economic losses in the event of price or currency fluctuations.
Risks Relating to Ownership of Our Common Stock
•We have identified a material weakness in our internal control over financial reporting. Failure to remediate the material weakness or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements or cause us to fail to meet our periodic reporting obligations.
•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 prevent a change of 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.
We file annual, quarterly, and current reports and other information with and furnish additional information to the U.S. Securities and Exchange Commission (the “SEC”). Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov. Those filings are also available to the public on, or accessible through, our website (catalent.com) for free via the “Investors” section as soon as reasonably practicable after we file such material, or furnish it to, the SEC. We also use our website, Facebook page (facebook.com/CatalentPharmaSolutions), LinkedIn page (linkedin.com/company/catalent-pharma-solutions/) and Twitter account (@catalentpharma) as channels of distribution of information concerning our activities, our offerings, our various businesses, and other related matters. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information we file with or furnish to the SEC (other than the information set forth or incorporated in this Annual Report) or contained on or accessible through our website, our social media channels, or any other website that we may maintain is not a part of this Annual Report.
ITEM 1A. RISK FACTORS
If any of the following risks actually occur, our business, financial condition, operating results, or cash flow could be materially and adversely affected. Additional risks or uncertainties not presently known to us, or that we currently believe are immaterial, may also impair our business operations.
Risks Relating to Our Business and the Industry in Which We Operate
Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic.
Any public health epidemic, including the COVID-19 pandemic, may affect our operations and those of third parties on which we rely, including our customers and suppliers. Our business, financial condition, and results of operations may be affected by: disruptions in our customers’ abilities to fund, develop, or bring to market products as anticipated; delays in or disruptions to the conduct of clinical trials; cancellations of contracts or confirmed orders from our customers; decreased demand for categories of products in certain affected regions; and inability, difficulty, or additional cost or delays in obtaining key raw materials, components, and other supplies from our existing supply chain; among other factors caused by a public health epidemic, including the COVID-19 pandemic.
While the COVID-19 pandemic has not had a material negative effect on our overall business, financial condition or results of operations to date, our customers and suppliers have in some cases experienced negative impacts due to disruptions in supply chains and disruptions to the operations of the FDA and other drug regulatory authorities, which resulted in, among other things, delays of inspections, reviews, and approvals of our customers’ products, as well as the volume and timing of orders from these customers. Such impacts may affect our business in the future. Governmental restrictions related to the COVID-19 pandemic, which continue to evolve, including travel restrictions, quarantines, shelter-in-place orders, business closures, new safety requirements or regulations, or restrictions on the import or export of certain materials, or other operational issues related to the COVID-19 pandemic may have an adverse effect on our business and results of operations.
We continue to monitor developments related to the COVID-19 pandemic and its effects on our business, operations, and financial condition. For purposes of our operational and financial planning, we have made, and update when appropriate, certain assumptions regarding the duration, severity, and global economic impact of the pandemic in different regions, and the need for continued manufacture and supply of COVID-19 vaccines and treatments, each of which remains uncertain. However, despite careful planning, our assumptions may not be accurate, as the extent to which COVID-19 may affect our future results will depend on future developments that are uncertain, including: the duration of the pandemic; emerging information concerning the severity and incidence of the virus and its variants; the emergence of additional virus variants; regional resurgences of the virus globally; the safety, efficacy, and availability of vaccines and treatments for COVID-19 (including its variants); the rate at which the population globally becomes vaccinated against COVID-19; the global economic impact of the pandemic; the actions of governments and regulatory authorities to contain the pandemic or control the supply of vaccines and treatments; and the actions the pharmaceutical industry, competitors, suppliers, customers, patients, and others may take to contain or address the pandemic’s direct and indirect effects.
Our Biologics segment, in particular, has reported substantial revenue from the testing, manufacturing, and packaging of COVID-19-related products for our customers. While this positive impact is expected to continue through at least the remainder of calendar 2022 and into calendar 2023, the duration and extent of future revenues from such testing, manufacturing, and packaging of COVID-19-related products is uncertain and dependent upon customer demand. See also "—Risks Related to Our Business and the Industry in Which We Operate—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."
In addition, the impact of the COVID-19 pandemic or any other public health epidemic could exacerbate other risks we face, including those described elsewhere in "Risk Factors."
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 manufacture or provide services for a variety of products intended for the prevention or treatment of COVID-19 and its symptoms and effects, including both vaccines and treatments. No single one of these products is material to our business. Certain of these products are subject to “take-or-pay” provisions that require the customer to either purchase a minimum
amount of product or pay any shortfall resulting from purchases not made. Such provisions should mitigate risks relating to any future uncertainty in the demand for these products.
The COVID-19-related products we develop and manufacture have not yet received full marketing approval from certain regulatory authorities around the world for certain patient populations, although some of these are being marketed and sold to such populations pursuant to an emergency use authorization (EUA) from the FDA or the equivalent authorization from non-U.S. regulatory authorities. Should any of these COVID-19-related products be denied any necessary regulatory approval, the demand for such product could decrease significantly and therefore decrease customer orders for additional development, manufacturing, or packaging of those products, although the financial effect on us may be mitigated by any take-or-pay provision in place with respect to that product. Additionally, the need for continued manufacture and supply of vaccines (including “booster” doses) and therapies to address the COVID-19 pandemic, including new and developing variants of COVID-19, is highly uncertain and subject to various political, economic, and regulatory factors that are outside of our control. Should the U.S. or other major regions worldwide determine that additional manufacture of COVID-19 vaccines, boosters, or therapies is no longer necessary, it could adversely affect our revenue and financial condition. In addition, highly-public political and social debate relating to the need for, efficacy of, or side effects related to one or more specific COVID-19 vaccines could contribute to changes in public perception of one or more COVID-19 vaccines manufactured by us, which could decrease demand for a COVID-19 related product we develop, manufacture, or package.
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, the Ukrainian-Russian war, or the rise in inflation worldwide.
Our customers are engaged in research, development, production, and marketing of pharmaceutical, biotechnology, and consumer health products. The amount of customer spending on research, development, production, and marketing, as well as the outcomes of such research, development, and marketing activities, have a large impact on our sales and profitability, particularly the amount our customers choose to spend on our offerings. Available resources, including funding for our biotechnology and other customers, the need to develop new products, and consolidation in the industries in which our customers operate may have an impact on such spending. Our customers and potential customers finance their research and development spending from private and public sources. A reduction in available financing for and spending by our customers, for these reasons or because of the direct or indirect effects of the COVID-19 pandemic, inflation, and the Ukrainian-Russian war or other regional or global conflicts, could have a material adverse effect on our business, financial condition, and results of operations. If our customers are not successful in attaining or retaining product sales due to market conditions, reimbursement issues, or other factors, our results of operations may be materially adversely affected.
We participate in a highly competitive market, and increased competition may adversely affect our business.
We operate in a market that is highly competitive. We compete with multiple companies as to each of our offerings and in every region of the globe in which we operate, including competing with other companies that offer advanced delivery technologies, outsourced dose form or biologics manufacturing, clinical trials support services, or development services to pharmaceutical, biotechnology, and consumer health companies globally. We also compete in some cases with the internal operations of those pharmaceutical, biotechnology, and consumer health customers that also have manufacturing capabilities and choose to source these services internally.
We face substantial competition in each of our markets. Competition is driven by proprietary technologies and know-how, capabilities, consistency of operational performance, quality, price, value, responsiveness, and speed. Some competitors have greater financial, research and development, operational, and marketing resources than we do. Competition may also increase as additional companies enter our markets or use their existing resources to compete directly with ours. Expanded competition from companies in low-cost jurisdictions, such as India and China, may in the future adversely affect our results of operations or limit our growth. Greater financial, research and development, operational, and marketing resources may allow our competitors to respond more quickly with strategic acquisitions, or with new, alternative, or emerging technologies. Changes in the nature or extent of our customers’ requirements may render our offerings obsolete or non-competitive and could adversely affect our results of operations and financial condition.
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.
We are subject to potentially significant product liability and other liability risks that are inherent in the design, development, manufacture, and marketing of our offerings. We may be named as a defendant in product liability lawsuits, which may allege that our offerings have resulted or could result in an unsafe condition or injury to consumers. Such lawsuits,
even those without merit, could be costly to defend and could result in reduced sales, significant liabilities, adverse publicity, and diversion of management’s time, attention, and resources.
Furthermore, product liability claims and lawsuits, regardless of their ultimate outcome, could have a material adverse effect on our business operations, financial condition, and reputation and on our ability to attract and retain customers. The availability of product liability insurance for companies in the pharmaceutical industry is generally more limited than insurance available to companies in other industries. We maintain product liability insurance with annual aggregate limits in excess of $25 million. There can be no assurance that a successful product liability or other claim would be adequately covered by our applicable insurance policies or by any applicable contractual indemnity or liability limitations.
Failure to comply with existing and future regulatory requirements, including changing regulatory standards or changing interpretations of existing standards, could adversely affect our results of operations and financial condition or result in claims from customers. 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 healthcare industry is highly regulated. We, and our customers, are subject to various local, state, federal, national, and transnational laws and regulations, which include the operating, quality, and security standards of the FDA, the DEA, various state boards of pharmacy, state health departments, the DHHS, similar bodies of the U.K., the E.U. and its member states, and other comparable agencies around the world, and, in the future, any change to such laws and regulations or the interpretation or application thereof could adversely affect us. Among other rules affecting us, we are subject to laws and regulations concerning cGMP and drug safety. As a result of the COVID-19 pandemic or other public health activity, new public health orders or best practice guidelines may increase our costs to operate or reduce our productivity, thereby affecting our business, financial condition, or results of operations.
Failure by us or by our customers to comply with the requirements of applicable laws and regulations or requests from regulatory authorities could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture or distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of existing or denial of pending approvals, permits, or registrations, including those relating to products or facilities. In addition, any such failure relating to the products or services we provide could expose us to contractual or product liability claims as well as claims from our customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, which cost could be significant.
In addition, any new offering or product classified as a pharmaceutical or medical device must undergo lengthy and rigorous clinical testing and other extensive, costly, and time-consuming procedures mandated by the FDA, the EMA, and other equivalent local, state, federal, national, and transnational regulatory authorities in the jurisdictions that regulate our offerings and products.
Although we believe that we comply in all material respects with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of our operations with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses, or other regulatory approvals or obtain, without significant delay, future permits, licenses, or other approvals needed for the operation of our businesses. Any noncompliance by us or our customers with applicable law or regulation or the failure to maintain, renew, or obtain necessary permits and licenses could have an adverse effect on our results of operations and financial condition. Furthermore, loss of a permit, license, or other approval in any one portion of our business may have indirect consequences in another portion of our business if regulators or customers adjust their reviews of such other portion as a result or customers cease business with such other portion due to fears that such loss is a sign of broader concerns about our ability to deliver products or services of sufficient quality.
Failure to provide quality offerings to our customers could have an adverse effect on our business, and the market price of our Common Stock and may subject us to regulatory action or costly litigation.
Our results depend on our ability to execute and improve when necessary our quality management strategy and systems, and effectively train and maintain our workforce with respect to quality management. Quality management plays an essential role in determining and meeting customer requirements, preventing defects, and improving our offerings, and, despite our network of quality systems, a quality or safety issue, including with respect to a high-revenue product such as a COVID-19 vaccine or therapy, could have an adverse effect on our business, financial condition, stock price, or results of operations and may subject us to regulatory action, including a product recall, product seizure, injunction to halt manufacture or distribution, or restriction on our operations; monetary fines; or other civil or criminal sanctions. In addition, such an issue could subject us to
adverse publicity and costly litigation, including claims from our customers for reimbursement for the cost of lost or damaged active pharmaceutical ingredients or other related losses, the cost of which could be significant.
The services and offerings we provide are highly exacting and complex, and, if we encounter problems providing the services or support required, our business could suffer.
The offerings we provide are highly exacting and complex, due in part to complex and exacting manufacturing processes and strict regulatory requirements. From time to time, problems may arise in connection with facility operations or during preparation or provision of an offering, in both cases for a variety of reasons including, but not limited to, equipment malfunction, sterility variances or failures, failure to follow specific protocols and procedures, problems with raw materials, environmental factors, and damage to, or loss of, manufacturing operations due to fire, flood, or similar causes. Such problems could affect production of a particular batch or series of batches, require the destruction of or otherwise result in the loss of product or materials used in the production of product, or could halt facility production altogether. This could, among other things, lead to increased costs, lost revenue, damage to customer relations, reimbursement to customers for lost active pharmaceutical ingredients or other related losses, time and expense spent investigating the cause, lost production time, and, depending on the cause, similar losses with respect to other batches or products. Production problems in our biologic manufacturing operations could be particularly significant because the cost of raw materials is often appreciably higher than in our other businesses. If problems are not discovered before the product is released to the market, recall and product liability costs may also be incurred. In addition, such risks may be greater at facilities that are new or going through significant expansion or renovation. The risks associated with running a highly complex facility doing exacting work with substantial regulatory oversight are enhanced for our larger sites, like our Bloomington, Indiana, Harmans, Maryland, St. Petersburg, Florida, or Swindon U.K. sites, which generally generate much more revenue.
If we cannot keep pace with rapid technological advances, our services may become uncompetitive or obsolete, and our revenue and profitability may decline.
The healthcare industry is characterized by rapid technological change. Demand for our offerings may change in ways we may not anticipate because of evolving industry standards as well as a result of evolving customer needs that are increasingly sophisticated and varied and the introduction by others of new offerings and technologies that provide alternatives to our offerings. Several of our higher margin offerings are based on proprietary technologies. To the extent that such technologies are protected by patents, their related offerings may become subject to competition as the patents expire. Without the timely introduction of enhanced or new offerings and technologies, our offerings may become obsolete or uncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our pharmaceutical customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial investment before we can determine their commercial viability, and we may not obtain access to the innovations or have financial resources sufficient to fund all desired innovations.
Even if we succeed in creating or acquiring enhanced or new offerings from these innovations, they may still fail to result in commercially successful offerings or may not produce revenue in excess of the costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice, the need for regulatory clearance, and uncertainty over market access or government or third-party reimbursement.
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.
We rely on a combination of know-how, trade secrets, patents, copyrights, trademarks, and other intellectual property laws, nondisclosure and other contractual provisions, and technical measures to protect many of our offerings and intangible assets. These proprietary rights are important to our ongoing operations. There can be no assurance that these protections will provide uniqueness or meaningful competitive differentiation in our offerings or otherwise be commercially valuable or that we will be successful in obtaining additional intellectual property or enforcing our intellectual property rights against unauthorized users. Our exclusive rights under certain of our offerings are protected by patents, some of which will expire in the near term. When patents covering an offering expire, loss of exclusivity may occur, which may force us to compete with third parties, thereby negatively affecting our revenue and profitability.
Our proprietary rights may be invalidated, circumvented, or challenged. We may in the future be subject to proceedings seeking to oppose or limit the scope of our patent applications or issued patents. In addition, in the future, we may need to take legal actions to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity or scope of the proprietary rights of others. Legal proceedings are inherently uncertain, and the outcome of such proceedings may be unfavorable to us. Any legal action regardless of outcome might result in substantial costs and diversion of resources and management attention.
There can be no assurance that our confidentiality agreements will not be breached, our trade secrets will not otherwise become known by competitors, or that we will have adequate remedies in the event of unauthorized use or disclosure of proprietary information. Even if the validity and enforceability of our intellectual property is upheld, an adjudicator might construe our intellectual property not to cover the alleged infringement. In addition, intellectual property enforcement may be unavailable or practically ineffective in some countries. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or that third parties will not design around our intellectual property claims to produce competitive offerings. The use of our technology or similar technology by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales, or otherwise harm our business.
While we continue to apply in the U.S. and certain other countries for registration of a number of trademarks, service marks, and patents, and also claim common law rights in various trademarks and service marks, there can be no assurance that third parties will not oppose our applications in the future. In addition, it is possible that in some cases we may be unable to obtain the registrations for trademarks, service marks, and patents for which we have applied, and a failure to obtain trademark and patent registrations in the U.S. or other countries could limit our ability to protect our trademarks and proprietary technologies and impede our marketing efforts in those jurisdictions.
License agreements with third parties control our rights to use certain patents, software, and information technology systems and proprietary technologies owned by third parties, some of which are important to our business. Termination of these license agreements for any reason could result in the loss of our rights to this intellectual property, causing an adverse change in our operations or the inability to commercialize certain offerings.
In addition, many of our branded pharmaceutical customers rely on patents to protect their products from generic competition. Because incentives exist in some countries, including the U.S., for generic pharmaceutical companies to challenge these patents, pharmaceutical and biotechnology companies are under the ongoing threat of challenges to their patents. If the patents on which our customers rely were successfully challenged and, as a result, the affected products become subject to generic competition, the market for our customers’ products could be significantly adversely affected, which could have an adverse effect on our results of operations and financial condition. We attempt to mitigate these risks by making our offerings available to generic as well as branded manufacturers and distributors, but there can be no assurance that we will be successful in marketing these offerings.
Our offerings or our customers’ products may infringe on the intellectual property rights of third parties.
From time to time, third parties have asserted intellectual property infringement claims against us and our customers, and there can be no assurance that third parties will not assert infringement claims against either us or our customers in the future. While we believe that our offerings do not infringe in any material respect upon proprietary rights of other parties, and that meritorious defenses would exist with respect to any assertion to the contrary, there can be no assurance that we could successfully avoid being found to infringe on the proprietary rights of others. Patent applications in the United States and certain other countries are generally not publicly disclosed until the patent is issued or published, and we and our customers may not be aware of currently filed patent applications that relate to our or their products, offerings, or processes. If patents later issue on these applications, we or they may be found liable for subsequent infringement. There has been substantial litigation in the pharmaceutical and biotechnology industries with respect to the manufacture, use, and sale of products that are the subject of conflicting patent rights.
Any claim that our offerings or processes infringe third-party intellectual property rights (including claims arising through our contractual indemnification of our customers), regardless of the claim’s merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail against any such claim given the complex technical issues and inherent uncertainties in intellectual property matters. If any such claim results in an adverse outcome, we could, among other things, be required to: pay substantial damages (potentially including treble damages in the U.S.); cease the manufacture, use, or sale of the infringing offerings or processes; discontinue the use of the infringing technology; expend significant resources to develop non-infringing technology; license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms or at all; and lose the opportunity
to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured or they have to discontinue the use of the infringing technology.
Any of the foregoing could affect our ability to compete or have a material adverse effect on our business, financial condition, and results of operations.
Events that diminish, tarnish, or otherwise damage our brand may have an adverse effect on our future financial condition and results of operations.
We have built a strong brand in “Catalent,” with high overall and generally favorable awareness of the brand in our established markets and with target customers. Our brand identity is a competitive advantage for us in sales and marketing, which is evidenced by our customer mix among top branded drug, generics, biologics, and consumer health marketers. We have spent and continue to spend substantial time, money, and other resources to establish both our brand awareness and a favorable perception of our brand in relevant markets. Among other strategies, we participate in major international trade shows in our established markets and ensure visibility into our offerings through a comprehensive print and on-line advertising and publicity program. It is possible that a single event, or aggregation of several events, may diminish, tarnish, or otherwise damage our brand and adversely affect our future financial condition and results of operations.
For example, meaningful interruptions to our ability to reliably supply one or more customers with products on time, whether as a result of supply chain disruptions or manufacturing delays or defects, may diminish our customers’ confidence in our ability to timely meet our commitments, thereby damaging our brand. In addition, we are subject to various local, state, federal, national, and transnational laws and regulations, including the operating, quality, and security standards of the FDA, the DEA, and similar bodies of the U.K., the E.U., and other comparable agencies around the world. Highly public or significant negative reports or findings from a regulatory agency with respect to one or more manufacturing or quality defects in our operations, inspections of our facilities, or other routine reviews could cause negative public perception of our operations, negatively impacting our brand, and adversely affecting our financial condition and results of operations. In addition, many of the other risks we face, including those described elsewhere in "Risk Factors" could diminish, tarnish, or otherwise damage our brand.
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 and the ongoing supply-chain disruptions triggered by a combination of the pandemic and the Ukrainian-Russian war 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.
We depend on various active pharmaceutical ingredients, components, compounds, raw materials, and energy supplied primarily by third parties for our offerings. Our customers also frequently provide to us their active pharmaceutical or biologic ingredient for formulation or incorporation in the finished product and may supply other raw materials as well. It is possible that any of our or our customers’ supplier relationships could be interrupted due to changing regulatory requirements, import or export restrictions, natural disasters, international supply disruptions, including those caused by public health emergencies such as the COVID-19 pandemic, and the ongoing Ukrainian-Russian war, geopolitical issues, operational or quality issues at the suppliers’ facilities, and other events, or could be terminated in the future.
For example, gelatin, a critical component for manufacturing many of our softgel formats is only available from a limited number of sources. In addition, much of the gelatin we use is bovine-derived. Past concerns of contamination from bovine spongiform encephalopathy, or BSE, have narrowed the number of possible sources of particular types of gelatin. If there were a future disruption in the supply of gelatin, we may not be able to obtain an adequate alternative supply. If future restrictions were to emerge on the use of bovine-derived gelatin, any such restriction could hinder our ability to timely supply our customers with products and the use of alternative material could be subject to lengthy and uncertain formulation, testing, and regulatory approval.
In addition, certain of our inputs are currently sole-sourced, so any disruption related to such a supplier is more likely to have an impact on our operations. Replacing a sole-source supplier of a production input to a medicine requiring marketing approval may be impossible or time-consuming, due to the rigorous standards we are obliged to apply to any new supplier.
Any sustained interruption in our receipt of adequate supplies could have an adverse effect on our business and results of operations. In addition, while we have processes intended to reduce volatility in component and material pricing, we may not be able to successfully manage price fluctuations, and future price fluctuations or shortages may have an adverse effect on our results of operations.
Changes in market access or healthcare reimbursement for, or public sentiment towards our customers’ products in the United States or internationally, or other changes in applicable policies regarding the healthcare industry, could adversely affect our results of operations and financial condition by affecting demand for our offerings.
The healthcare industry has changed significantly over time, and we expect the industry to continue to evolve. Some of these changes, such as ongoing healthcare reform, including with respect to reforming drug pricing, adverse changes in governmental or private funding of healthcare products and services, legislation or regulations governing patient access to care and privacy, or the delivery, pricing, or reimbursement approval of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to change the amount of our offerings that they purchase or the price they are willing to pay for these offerings. In particular, it is possible that future legislation in the U.S. may affect or put a cap on future pricing of pharmaceutical and biotechnology products. While we are unable to predict the likelihood of changes to U.S. and other international laws affecting pharmaceutical and biotechnology products, any substantial revision of applicable healthcare legislation could have a material adverse effect on the demand for our customers’ products, which in turn could have a negative impact on our results of operations, financial condition, or business. Changes in the healthcare industry’s pricing, selling, inventory, distribution, or supply policies or practices, or in public or government sentiment for the industry as a whole, could also significantly reduce our revenue and results of operations. In particular, volatility in individual product demand may result from changes in public or private payer reimbursement or coverage.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We generated net operating losses (“NOLs”) in the past that have been, and continue to be, used to reduce taxable income. Utilization of our NOL carryforwards may be subject to a substantial limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and comparable provisions of state, local, and foreign tax laws due to changes in ownership of our company that may occur in the future. Under Section 382 of the Internal Revenue Code and comparable provisions of state, local, and foreign tax laws, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change by value in its equity ownership over a three-year period, the corporation’s ability to carry forward its pre-change NOLs to reduce its post-change income may be limited. In addition, we acquired companies that generated pre-acquisition NOLs for tax purposes that will also be subject to limitation under Section 382 and comparable provisions of state, local, and foreign tax laws. We may experience ownership changes in the future as a result of future changes in our stock ownership. As a result, our ability to use our pre-change NOL carryforwards to reduce U.S. federal, state, local, and foreign taxable income we produce in the future years may be subject to limitations, which could result in increased future tax liability to us.
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 have deferred tax assets for NOL carryforwards and other temporary differences. We currently maintain a valuation allowance for a portion of our U.S. net deferred tax assets and certain foreign net deferred tax assets. It is possible we may experience a decline in U.S. taxable income resulting from a decline in profitability of our U.S. operations, an increased level of debt in the U.S., or other factors. In assessing our ability to realize our deferred tax assets, we may conclude that it is more likely than not that some additional portion or all our deferred tax assets will not be realized. As a result, we may be required to record an additional valuation allowance against our deferred tax assets, which could adversely affect our effective income tax rate and therefore our financial results.
We depend on key personnel.
We depend on our executive officers and other key personnel, including our technical personnel, to operate and grow our business and to develop new and enhanced offerings and technologies. The loss of any of these officers or other key personnel or a failure to attract and retain suitably skilled technical personnel could adversely affect our operations.
In addition to our executive officers, we rely on 190 senior employees to lead and direct our business. Our senior leadership team is comprised of our subsidiaries’ executive officers and other vice presidents and directors who hold critical positions and possess specialized talents and capabilities that give us a competitive advantage in the market.
We employ more than 3,000 scientists and technicians whose areas of expertise and specialization cover subjects such as advanced delivery, biologics and gene and cell therapy formulation and manufacturing. Many of our sites and laboratories are located in competitive labor markets; therefore, global and regional competitors and, in some cases, customers and suppliers compete for the same skills and talent as we do.
We may acquire businesses and offerings that complement or expand our business or divest non-strategic businesses or assets. We may not be able to complete desired 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 and profitability.
Our future success may depend in part on opportunities to buy or otherwise acquire rights to other businesses or technologies, enter into joint ventures or otherwise enter into strategic arrangements with business partners that could complement, enhance, or expand our current business or offerings and services or that might otherwise offer us growth opportunities, or divest assets or an ongoing business. We face competition from other companies in pursuing acquisitions and similar transactions in the pharmaceutical and biotechnology industry. Our ability to complete transactions may also be limited by applicable antitrust and trade laws and regulations in the U.S. and other jurisdictions in which we or the operations or assets we seek to acquire carry on business. To the extent that we are successful in making acquisitions, we expend substantial amounts of cash, incur debt, or assume loss-making divisions as consideration. We or the purchaser of a divested asset or business may not be able to complete a desired transaction for any number of reasons, including a failure to secure financing.
Any acquisition that we are able to identify and complete may involve a number of risks, including, but not limited to, the diversion of management’s attention to integrate the acquired businesses or joint ventures, the possible adverse effects on our operating results during the integration process, the potential loss of customers or employees in connection with the acquisition, delays or reduction in realizing expected synergies, unexpected liabilities, and our potential inability to achieve our intended objectives for the transaction. In addition, we may be unable to maintain uniform standards, controls, procedures, and policies, which may lead to operational inefficiencies.
To the extent that we are not successful in completing desired divestitures, we may have to expend cash, incur debt, or continue to absorb the costs of loss-making or under-performing divisions. Any divestiture, whether we complete it or not, may involve numerous risks, including diversion of management’s attention, a negative impact on our customer relationships, costs associated with maintaining its business during the disposition process, and the costs of closing and disposing of the affected business or transferring remaining portions of the operations of the business to other facilities.
We provide services incorporating various advanced modalities, including protein and plasmid production and cell and gene therapies, and these modalities relate to relatively new modes of treatment that may be subject to changing public opinion, continuing research, and increased regulatory scrutiny, each of which may affect our customers’ abilities to conduct their businesses or obtain regulatory approvals for their therapies, and thereby adversely affect these offerings.
Cell and gene therapy, with or without the use of iPSCs or plasmids, remain relatively new means for treating disease and other medical conditions, with only a few cell and gene therapies approved to date in the U.S., the E.U., or elsewhere. Public perception may be influenced by claims that cell or gene therapies are unsafe, and cell or gene therapy may not gain the acceptance of the public or the medical community. In addition, ethical, social, legal, and cost-benefit concerns about cell or gene therapy, genetic testing, genetic research, and the use of stem cells or materials derived from viruses could result in additional regulations or limitations or even outright prohibitions on certain cell or gene therapies or related products. Various regulatory and legislative bodies have expressed an interest in, or have taken steps towards, further regulation of various biotechnologies, including cell and gene therapies. More restrictive regulations or claims that certain cell or gene therapies are unsafe or pose a hazard could reduce our customers’ use of our services. We can provide no assurance whether legislative changes will be enacted, regulations, policies, or guidance changed, or interpretations of existing strictures by agencies or courts changed, or what the impact of such changes, if any, may be.
We are subject to environmental, health, and safety laws and regulations, which could increase our costs or restrict our operations in the future.
Our operations are subject to a variety of environmental, health, and safety laws and regulations, including those of the EPA, OSHA, and equivalent local, state, and national regulatory agencies in the jurisdictions in which we operate. Any failure by us to comply with environmental, health, and safety requirements could result in the limitation or suspension of production or subject us to monetary fines, civil or criminal sanctions, or other future liabilities in excess of our reserves. In particular, we are subject to laws and regulations governing the destruction and disposal of raw materials, byproducts of our manufacturing
operations, and non-compliant products, the handling of regulated material included in our offerings, and the disposal of our products or their components at the end of their useful lives. In addition, compliance with environmental, health, and safety requirements could restrict our ability to expand our facilities or require us to acquire costly environmental or safety control equipment, incur other significant expenses, or modify our manufacturing processes. Our manufacturing facilities may use, in varying degrees, hazardous substances in their processes. These substances include, among others, chlorinated solvents, and in the past chlorinated solvents were used at one or more of our facilities, including a number we no longer own or operate. As at our current facilities, contamination at such formerly owned or operated properties can result and has resulted in liability to us. In the event of the discovery of new or previously unknown contamination either at our facilities, facilities we acquire in the future, or at third-party locations, including facilities we formerly owned or operated, the issuance of additional requirements with respect to existing contamination, or the imposition of other cleanup obligations for which we are responsible, we may be required to take additional, unplanned remedial measures for which we have not recorded reserves. We are conducting monitoring and cleanup of contamination at certain facilities currently or formerly owned or operated by us, and such activities may result in unanticipated costs or management distraction.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
We have nearly 19,000 individuals providing services for us worldwide, including approximately 11,700 service providers in North America, 5,700 in Europe, 1,000 in South America, and 600 in the Asia-Pacific region. Certain employees at one of our North American facilities are represented by a labor organization, and national works councils or labor organizations are active at our European facilities and certain of our other facilities consistent with local labor environments and laws. Our management believes that our employee relations are satisfactory. However, further organizing activities, collective bargaining, or changes in the regulatory framework for employment may increase our employment-related costs or may result in work stoppages or other labor disruptions. Moreover, as employers are subject to various employment-related claims, such as individual and class actions relating to alleged employment discrimination and wage-hour and labor standards issues, such actions, if brought against us and successful in whole or in part, may affect our ability to compete or have a material adverse effect on our business, financial condition, and results of operations.
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.
Certain of our current and former employees in the U.S., the U.K., Germany, France, Japan, Belgium, and Switzerland are participants in defined benefit pension plans that we sponsor. As of June 30, 2022, the underfunded amount of our pension plans on a worldwide basis was $28 million, primarily related to our pension plans in the U.K. and Germany. In addition, we have an estimated obligation of $38 million, as of June 30, 2022, related to our withdrawal from a multiemployer pension plan in which we formerly participated. In general, the amount of future contributions to the underfunded plans will depend upon asset returns, applicable actuarial assumptions, prevailing and expected interest rates, and other factors, and, as a result, the amount we may be required to contribute in the future to fund the obligations associated with such plans may vary. Such cash contributions to the plans will reduce the cash available for our business, including the funds available to pursue strategic growth initiatives or the payment of interest expense on our indebtedness.
Our global operations are subject to economic and political risks, that could affect the profitability of our operations or require costly changes to our procedures.
We conduct our operations in various regions of the world, including North America, South America, Europe, and the Asia-Pacific region. Global and regional economic and political developments affect businesses such as ours in many ways. Our operations are subject to the effects of global and regional competition. Our global operations are also affected by local economic environments, including inflation and recession. Political changes, some of which may be disruptive, and related hostilities can interfere with our supply chain, our customers, and some or all of our activities in a particular location. While some of these risks can be hedged using derivatives or other financial instruments and some are insurable, such mitigating measures may be unavailable, costly, or unsuccessful.
Beginning in fiscal 2022, much of the world, including the U.S. and the E.U., began to experience inflation levels not seen in more than 30 years. As a result, prices for many of our inputs have risen, in some cases dramatically. If inflation stays at elevated levels or increases, we may not be able to mitigate the impact of the increased costs we will bear through corresponding price increases to our customers, which could have an impact on our results of operations and financial condition.
As a global enterprise, fluctuations in the exchange rates of the U.S. dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.
As a company with significant operations outside of the U.S., certain revenues, costs, assets, and liabilities, including our euro-denominated 2.375% Senior Notes due 2028 (the “2028 Notes”), are denominated in currencies other than the U.S. dollar, which is the currency that we use to report our financial results. As a result, changes in the exchange rates of these or any other applicable currency to the U.S. dollar will affect our revenues, earnings, and cash flows. There has been, and may continue to be, volatility in currency exchange rates affecting the various currencies in which we do business. Such volatility and other changes in exchange rates could result in unrealized and realized exchange losses, despite any effort we may undertake to manage or mitigate our exposure to fluctuations in the values of various currencies.
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.
We are a large multinational enterprise with operations in the U.S. and more than a dozen other countries across North and South America, Europe, and the Asia-Pacific region, and we do business with suppliers and customers in many additional regions. As such, we are subject to the tax laws and regulations of the U.S. federal, state, and local governments and of many jurisdictions outside of the U.S. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions, and existing legislation may be subject to additional regulatory changes or new interpretations. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these initiatives.
In addition, U.S. federal, state, local, and foreign tax laws and regulations are extremely complex and subject to varying interpretations. We are subject to regular examination of our income tax returns by various tax authorities. Examinations or changes in laws, rules, regulations, or interpretations by taxing authorities could result in adverse impacts to tax years open under statute or to our operating structures currently in place. It is possible that the outcomes from these examinations or changes in laws, rules, regulations, or interpretations by taxing authorities will have a material adverse effect on our financial condition or results of operations.
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 continuously work to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cyber security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises affecting data security or the operability of such systems.
We rely on information systems in our business to obtain, process, analyze, and manage data to:
•facilitate the manufacture and distribution of thousands of inventory items in, to, and from our facilities;
•receive, process, and ship orders on a timely basis;
•manage the accurate billing and collections for more than one thousand customers;
•create, compile, and retain testing and other product-, manufacturing-, or facility-related data necessary for meeting our and our customers’ regulatory obligations.
•manage the accurate accounting and payment for thousands of vendors and our employees;
•schedule and operate our global network of development, manufacturing, and packaging facilities;
•document various aspects of our activities, including the agreements we make with suppliers and customers;
•compile financial and other operational data into reports necessary to manage our business and comply with various regulatory or contractual obligations, including obligations under our bank loans and other indebtedness, the federal securities laws, the Internal Revenue Code, and other applicable state, local, and ex-U.S. tax laws; and communicate among our nearly 19,000 workers spread across dozens of facilities over four continents.
We face various security threats on a regular basis, including ongoing cyber security threats to and attacks on our information technology infrastructure. We deploy defenses against such threats and attacks and work to secure the integrity of our data systems using techniques, hardware, and software typical of companies of our size and scope. Despite our security measures, however, our information technology and infrastructure may be vulnerable to attacks by increasingly sophisticated intruders or others who try to cause harm to or interfere with our normal use of our systems. They are also susceptible to breach due to employee error, malfeasance, or other disruptions. Our suppliers, contractors, service providers, and other third parties with whom we do business also experience cyber threats and attacks that are similar in frequency and sophistication. In many cases, we have to rely on the controls and safeguards put in place by our suppliers, contractors, service providers, and other third parties to defend against, respond to, and report these attacks. We cannot know the potential impact of future cyber incidents, which vary widely in severity and scale. There can be no assurance that the various procedures and controls we utilize to mitigate these threats will be sufficient to prevent disruptions to our systems, in part because (i) cyber-attack techniques change frequently and, at times, new techniques are not recognized until launched, and (ii) cyber-attacks can
originate from a wide variety of sources. Our results of operations could be adversely affected if these systems are interrupted or damaged or fail for any extended period.
Risks Relating to Our Indebtedness
The size of our indebtedness and the obligations associated with it could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry or to deploy capital to grow our business, expose us to interest-rate risk to the extent of our variable-rate debt, or 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.
As of June 30, 2022, we had $4.20 billion (U.S. dollar equivalent) of total indebtedness outstanding, consisting of $1.43 billion of secured indebtedness under our senior secured credit facilities and $2.77 billion of senior unsecured indebtedness, including $500 million aggregate principal amount of 5.000% U.S. dollar-denominated Senior Notes due 2027 (the “2027 Notes”), €825 million aggregate principal amount of the 2028 Notes, $550 million aggregate principal amount of U.S. dollar-denominated 3.125% Senior Notes due 2029 (the “2029 Notes”), and $650 million aggregate principal amount of U.S. dollar-denominated 3.500% Senior Notes due 2030 (the “2030 Notes” and, together with the 2027 Notes, the 2028 Notes, and the 2029 Notes, the “Senior Notes”). As of June 30, 2022, we also held $234 million in finance lease obligations. In addition, we had $721 million of unutilized capacity under our $725 million secured revolving credit commitments due to $4 million of outstanding letters of credit, which is part of our senior secured credit facilities (the “Revolving Credit Facility”).
The multi-billion-dollar size of our indebtedness could have important consequences for us, including:
•increasing our vulnerability to adverse economic, industry, or competitive developments;
•exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our senior secured credit facilities, are at variable rates of interest;
•exposing us to the risk of fluctuations in exchange rates because of our euro-denominated notes;
•making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in one or more events of default under the agreements governing such indebtedness or, through cross-defaults, in agreements governing other indebtedness;
•restricting us from making strategic acquisitions or capital investments or causing us to make non-strategic divestitures;
•limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
•limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who have less indebtedness relative to their size and who, therefore, may be able to take advantage of opportunities that our higher level of indebtedness prevents us from exploiting.
Our total interest expense, net was $123 million, $110 million, and $126 million for fiscal 2022, 2021, and 2020, respectively. After taking into consideration our ratio of fixed-to-floating-rate debt, including as a result of our February 2021 interest-rate swap agreement with Bank of America N.A., and assuming that our Revolving Credit Facility is undrawn and LIBOR is above any applicable minimum floor, each change of 100 basis points in interest rates would result in a change of approximately $9 million in annual interest expense on the indebtedness under our senior secured credit facilities.
Our interest expense may continue to increase as policymakers combat the inflation that has taken hold since fiscal 2022 through interest-rate increases on benchmark financial products that can affect the interest rates on our variable-rate debt.
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.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and, under certain circumstances, the amount of indebtedness that we may incur while remaining in compliance with these restrictions could be substantial. In addition, as of June 30, 2022, we had approximately $721 million available to us for borrowing, subject to certain conditions, under our Revolving Credit Facility. If new debt is added to our subsidiaries’ existing debt levels, the risks associated with debt we currently face would increase.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The agreements governing our outstanding indebtedness contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of Operating Company and those of its subsidiaries to which these covenants apply (which Operating Company’s Amended and Restated Credit Agreement, dated as of May 20, 2014 (as amended, the “Credit Agreement”) calls “restricted subsidiaries”) to, among other things:
•incur additional indebtedness and issue certain preferred stock;
•pay certain dividends on, repurchase, or make distributions in respect of capital stock or make other restricted payments;
•pay distributions from restricted subsidiaries;
•issue or sell capital stock of restricted subsidiaries;
•guarantee certain indebtedness;
•make certain investments;
•sell or exchange certain assets;
•enter into transactions with affiliates;
•create certain liens; and
•consolidate, merge, or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross-default provisions, and, in the case of our Revolving Credit Facility, permit the lenders to cease making loans to us.
Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability to timely pay our substantial indebtedness.
The covenants in the Credit Agreement and in the several indentures governing our Senior Notes (collectively, the "Indentures") contain various exceptions to the limitations they otherwise impose on our ability and the ability of our restricted subsidiaries to take the various actions described in the prior risk factor. For example, if the Senior Notes have investment-grade ratings and we are not in default under these agreements, certain of these covenants will not apply, including the covenants restricting certain dividends and other payments, the covenants concerning the incurrence of indebtedness, and the covenants limiting guarantees of indebtedness by our restricted subsidiaries. In addition, the covenants restricting dividends and other distributions by us, purchases or redemption of certain equity securities, and prepayment, redemption, or repurchase of any subordinated indebtedness are subject to various exceptions.
We are currently using and may in the future use 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 related to counterparty credit worthiness or non-performance of these instruments.
We have executed and may enter into additional or new interest-rate swap agreements, currency swap agreements, or other hedging transactions in an attempt to limit our exposure to adverse changes in variable interest rates and currency exchange rates. Such instruments may result in economic losses if, for example, prevailing interest rates decline to a point lower than any applicable fixed-rate commitment. Any such swap will expose us to credit-related risks that, if realized, could adversely affect our results of operations or financial condition.
Risks Relating to Ownership of Our Common Stock
We have identified a material weakness in our internal control over financial reporting and determined that our disclosure controls and procedures were ineffective as of June 30, 2022. Failure to remediate the material weakness or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements and in our consolidated financial statements, and could cause us to fail to meet our periodic reporting obligations.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to determine the adequacy of our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation if a deficiency is identified. Annually, we perform activities that include reviewing, documenting, and testing our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to achieve and maintain an effective internal control environment could result in materially misstated consolidated financial statements and a failure to meet our reporting obligations, which would likely cause
investors to lose confidence in our reported financial information. This could result in significant expenses to remediate any internal control deficiency and lead to a decline in our stock price.
In preparing the consolidated financial statements as of and for the three and nine months ended March 31, 2023, we identified an error related to the recognition of net revenue from our Bloomington, Indiana facility in our consolidated financial statements previously issued with respect to the fiscal year ended June 30, 2022. We evaluated the materiality of the error and concluded that it does not result in a material misstatement of our previously issued consolidated financial statements.
Due to the discovery of this error, we reevaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting and identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. For further discussion of the material weakness, see Part II, Item 9A, “Controls and Procedures.” In conjunction with filing this Amendment, we determined to revise our consolidated financial statements for the fiscal year ended June 30, 2022 to reflect the impact of the error in the periods impacted. For additional information and a detailed discussion of the revision, refer to Note 1, Revisions of Previously Issued Financial Statements, and Note 2, Basis of Presentation and Summary of Significant Accounting Policies, which are part of the Notes to Consolidated Financial Statements section of Part II, Item 8, “Financial Statements and Supplementary Data.”
Management is actively engaged in the planning for, and implementation of, remediation efforts to address our material weakness, which was caused by our failure to maintain effective controls to the accounting modifications of customer agreements at our Bloomington, Indiana facility as of that date. However, we may not be successful in promptly remediating the material weaknesses identified by management or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future. Our management may also be unable to conclude in future periods that our disclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weaknesses in internal control over financial reporting. If not remediated, any failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and our consolidated financial statements, and could cause us to fail to meet our reporting and financial obligations, each of which could have a material adverse effect on our stockholders’ confidence in our financial reporting, which could harm our business, our financial condition, and the trading price of our common stock.
Our stock price has historically been and may continue to be volatile, and a holder of shares of our Common Stock may not be able to resell such shares at or above the price such stockholder paid, or at all, and could lose all or part of such investment as a result.
The trading price of our Common Stock has been and continues to be volatile. For the three years ended June 30, 2022, our Common Stock price as quoted on the NYSE ranged from $36.95 to $142.35. The trading price of our Common Stock may be adversely affected by any one or more of several factors, such as those listed above in “—Risks Relating to Our Business and Industry in Which We Operate” and the following:
•results of operations that vary from the expectations of securities analysts or investors;
•results of operations that vary from those of our competitors;
•changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts or investors;
•declines in the market prices of stocks generally, or those of pharmaceutical or other healthcare companies;
•strategic actions by us or our competitors;
•announcements by us or our competitors of significant contracts, new products, acquisitions, joint marketing relationships, joint ventures, other strategic relationships, or capital commitments;
•changes in general economic or market conditions or trends in our industry or markets, such as increased inflation;
•changes in business or regulatory conditions or regulatory actions taken with respect to our business or the business of any of our competitors or customers;
•future sales of our Common Stock or other securities we may issue in the future;
•investor perceptions of the investment opportunity associated with our Common Stock relative to other investment alternatives;
•any decision by securities analysts to not publish research or reports about our business or to downgrade our stock or our sector;
•the public response to press releases or other public announcements by us or third parties, including our filings with or information furnished to the SEC;
•announcements relating to or developments in litigation;
•guidance, if any, that we provide to the public, any change in this guidance, or any failure to meet this guidance;
•the availability of an active trading market for our Common Stock;
•public response to changes in the COVID-19 pandemic and public perceptions as to the need for manufacture of certain COVID-19-related products and our role in the successful manufacture of such products;
•changes in the accounting principles we use to record our results or our application of these principles to our business; and
•other events or factors, including those resulting from natural disasters, hostilities, acts of terrorism, geopolitical activity, public health crises, including pandemics, or responses to these events.
Broad market and industry fluctuations may adversely affect the market price of our Common Stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float or trading volume of our Common Stock is low, and the amount of public float on any given day can vary depending on the individual actions of our stockholders.
Following periods of market volatility, stockholders have been known to institute securities class action litigation in order to recover their resulting losses. If we become involved in securities litigation, it could have a substantial cost and divert resources and the attention of senior management from our business regardless of the outcome of such litigation.
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 what was paid for it.
We currently intend to retain future earnings, if any, for future operations, expansion, and debt repayment and have no current plan to pay any cash dividend on our Common Stock for the foreseeable future. Any future decision to pay a dividend in respect of our Common Stock, and the amount and timing of any such dividend, will be at the sole discretion of our board of directors. Our board of directors may take into account, when deciding whether or how to pay a dividend, such factors as they may deem relevant, including general economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, possible future alternative deployments of our cash, our future capital requirements, and contractual, legal, tax, and regulatory restrictions and implications on the payment of dividends by us to our holders of shares of our Common Stock or by our subsidiaries to us. In addition, our ability to pay dividends is limited by covenants in the agreements governing our outstanding indebtedness and may be limited by covenants of any future indebtedness we or our subsidiaries incur. As a result, a holder of a share of our Common Stock may not receive any return on such investment unless it is sold for a price greater than that which was paid for it, taking into account any applicable commission or other costs of acquisition or sale.
Future sales, or the perception of future sales, of our Common Stock, by us or our existing stockholders could cause the market price for our Common Stock to decline.
The sale of shares of our Common Stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The market price of shares of our Common Stock could drop significantly if the holders of our Common Stock sell their shares or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of shares of our equity securities that we wish to issue. In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our Common Stock issued or issuable in connection with an investment or acquisition could constitute a material portion of then-outstanding shares of our Common Stock, subject to limitations on issuance of new shares without stockholder approval imposed by the NYSE or to restrictions set forth in the agreements governing our indebtedness, or the Stockholders’ Agreement between the Company and holders of our formerly outstanding Series A convertible preferred stock, par value $0.01 (the “Series A Preferred Stock”). Any issuance of additional securities in connection with investments, acquisitions, or otherwise may result in dilution to the holders of shares of our Common Stock.
Anti-takeover provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our current certificate of incorporation and bylaws may have an anti-takeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that may otherwise be in the best interests of our stockholders, including transactions that might otherwise result in the payment of a premium over the market price for the shares held by our stockholders.
These provisions provide for, among other things:
•the ability of our board of directors to issue one or more series of preferred stock;
•advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings (though our board of directors has implemented shareholder proxy access); and
•certain limitations on convening special stockholder meetings.
Provisions such as those just described, to the extent that they remain in effect, could make it more difficult for a third party to acquire us, even if the third-party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes, which appear elsewhere in this Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Annual Report. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in “Item 1A. Risk Factors.”
The Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth below gives effect to the revision of our previously issued consolidated financial statements for the fiscal year ended June 30 2022 to reflect the impact of an error in the periods impacted. In addition, effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, the Company changed its operating structure and reorganized its executive leadership team accordingly. This new organizational structure includes a shift from the four operating and reportable segments the Company disclosed during fiscal 2022 to two segments: (i) Biologics and (ii) Pharma and Consumer Health. The discussion below also gives effect to the recast of our revised consolidated financial statements as of June 30, 2022 and 2021 and for the years ended June 30, 2022, 2021, and 2020 included in this Annual Report to reflect the new reporting structure. For additional information and a detailed discussion of the revision and recast, refer to Note 1, Revisions of Previously Issued Financial Statements, and Note 2, Basis of Presentation and Summary of Significant Accounting Policies, included in the Notes to Financial Statements section of Part II, Item 8, “Financial Statements and Supplementary Data.”
Overview
We provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, 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 and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical and consumer health industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial and commercial supply, we can help our customers take products to market faster, including nearly half of new drug products approved by the FDA in the last decade. Our development and manufacturing platforms, our proven formulation, supply, and regulatory expertise, and our broad and deep development and manufacturing know-how enable our customers to advance and then bring to market more products and better treatments for patients and consumers. Our commitment to reliably supply our customers’ and their patients’ needs is the foundation for the value we provide; annually, we produce nearly 80 billion doses for nearly 8,000 customer products, or approximately 1 in every 23 doses of such products taken each year by patients and consumers around the world. We believe that through our investments in state-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and other attractive market segments our continuous 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, we will continue to attract premium opportunities and realize the growth potential from these areas.
In fiscal 2022, we operated in four segments, which also constitute the four reporting segments further described in "Business—Our Reporting Segments" contained elsewhere in this Annual Report: Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services. Immediately following the end of fiscal 2022, we adopted a new operating structure with two operating segments: (1) Biologics and (2) Pharma and Consumer Health (discussed further in Note 21, Subsequent Events to our Consolidated Financial Statements). The discussion below also gives effect to the recast of our revised consolidated financial statements as of June 30, 2022 and 2021 and for the years ended June 30, 2022, 2021, and 2020 included in this Annual Report to reflect the new reporting structure.
The COVID-19 Pandemic
Our response to COVID-19
Since the start of the COVID-19 pandemic, we have taken steps to protect our employees, ensure the integrity and quality of our products and services, and maintain business continuity for our customers and their patients who depend on us to manufacture and supply critical products to the market. To address the multiple dimensions of the pandemic, a senior, multi-disciplinary team regularly monitors the global situation, executing mitigation activities as required.
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, reorganized our workflows where permitted to maximize physical distancing, required supervisor approval for employee travel, facilitated safer alternatives to travel to and from work, and employed in some cases remote-working strategies. We also frequently monitor our supply chain to identify risks, delays, and concerns that may affect our ability to deliver our services and products. During fiscal 2022, we did not identify any significant risk, delay, or concern that had a substantial effect on such delivery, in part because of our adoption of various procedures to minimize and manage supply disruptions to our ongoing operations, including through business continuity plans and careful attention to inventory levels to assure supply of needed inputs. Our existing procedures, which are consistent with cGMP and other regulatory standards, are intended to assure the integrity of our supply against any contamination. We have a detailed response plan to manage impacts 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.
Continuing effects of the pandemic, combined with the Ukrainian-Russian war, are likely to result in further or more severe supply-chain disruptions in fiscal 2023 and potentially beyond. We continue to execute our mitigation strategies, but there can be no assurance of the continued effectiveness of these strategies.
Impact of COVID-19 on Our Business and Results of Operations
Throughout the pandemic, we have observed occasional customer delays and cancellations, increases in absenteeism of production employees in our facilities in certain affected regions, disruptions in certain clinical trials supported by our Pharma and Consumer Health segment, and delays in inspections and product approvals by the FDA and regulatory authorities globally.
We have also seen substantial demand and related revenue from COVID-19-related products, particularly in our Biologics segment. In part to meet this demand, we accelerated and enhanced certain of our capital 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 Harmans, Maryland and hired thousands of new employees. We also implemented various strategies to protect our financial condition and results of operations should we experience a reduction in demand for COVID-19 related products, such as inserting take-or-pay and minimum volume requirements in the contracts we executed 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 future duration and extent of the COVID-19 pandemic and the future demand for COVID-19 vaccines and therapies is unknown. Public opinion regarding certain COVID-19 vaccines and therapies and the product owners and manufacturers continues to change and has affected the demand for certain products and services. In addition, the 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 or communities in which we manufacture COVID-19 vaccines. We have implemented various mechanisms to protect our customers, their material and product, and our business continuity, including enhanced security measures at certain facilities and heightened cybersecurity controls.
See also “Risk Factors — Risks Related to Our Business and the Industry in Which We Operate — Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic” and “Risk Factors — Risks Related to Our Business and the Industry in Which We Operate — 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” elsewhere in this Annual Report.
Critical Accounting Policies and Recent Accounting Pronouncements
The following disclosure supplements the descriptions of our accounting policies contained in Note 2 to our Consolidated Financial Statements regarding significant areas of judgment. 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.
Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of our board of directors. A discussion of some of our more significant accounting policies and estimates follows.
Revenue Recognition
We sell products and services directly to our pharmaceutical, biopharmaceutical, and consumer health customers. The majority of our business is conducted through manufacturing and commercial product supply, development services, and clinical supply services.
Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. For our manufacturing and commercial product supply revenue, the contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of our business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. For our development services and clinical supply services revenue, our performance obligations vary per contract and are accounted for as separate performance obligations. If a contract contains a single performance obligation, we allocate the entire transaction price to the single performance obligation. If a contract contains multiple performance obligations, we allocate consideration to each performance obligation using the “relative standalone selling price” as defined under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Generally, we utilize observable standalone selling prices in our allocations of consideration. If observable standalone selling prices are not available, we estimate the applicable standalone selling price using an adjusted market assessment approach, representing the amount that we believe the market is willing to pay for the applicable service. Revenue is recognized over time using an appropriate method of measuring progress towards fulfilling our performance obligation for the respective arrangement. Determining the measure of progress that consistently depicts our satisfaction of performance obligations within each of our revenue streams across similar arrangements requires judgment.
Our customer contracts generally include provisions entitling us to a termination penalty when the customer terminates prior to the contract’s nominal end date. The termination penalties in these customer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and obligations throughout the stated duration of the contract. We account for a contract termination as a contract modification in the period in which the customer gives notice of termination. The determination of the contract termination penalty is based on the terms stated in the relevant customer agreement. As of the modification date, we update our estimate of the transaction price using the expected value method, subject to constraints, and recognize the amount over the remaining performance period under the contract. In the event of a contract termination, revenues are recognized to the extent that it is probable that a significant reversal will not occur when any uncertainty is subsequently resolved.
Long-lived and Other Definite-Lived Intangible Assets
We allocate the cost of an acquired company to the tangible and identifiable intangible assets and liabilities acquired, with the remaining cost recorded as goodwill. Intangible assets primarily include customer relationships, technology and trademarks. Valuing the identifiable intangible assets requires judgment. For example, we applied a multi-period, excess-earnings method to measure the core technology acquired in the Bettera Wellness acquisition, which included certain assumptions, such as (i) the estimated annual net cash flows (including application of an appropriate margin for forecasted revenue, revenue obsolescence rate, selling and marketing costs, return on working capital, contributory asset charges, and other factors), (ii) the discount rate that appropriately reflects the risk inherent in each future cash flow stream, and (iii) an assessment of the asset’s life cycle, (iv) as well as other factors. Intangible assets are generally amortized on a straight-line basis, reflecting the pattern in which the economic benefits are consumed, and are amortized over their estimated useful lives.
We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying values of the assets may not be recoverable. Factors that could trigger an impairment review include the following:
•significant under-performance relative to historical or projected future operating results;
•significant changes in the manner of use of the acquired assets or the strategy of the overall business;
•significant negative industry or economic trends; and
•recognition of goodwill impairment charges.
If we determine that the carrying value of identifiable intangibles and/or long-lived assets may not be recoverable based on the existence of one or more of the above indicators of impairment, we measure recoverability of assets by comparing the respective carrying value of the assets to the current and expected future cash flows, on an un-discounted basis, to be generated
from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, we measure an impairment based on the amount in which the net carrying amount of the assets exceeds the fair values of the assets. See Notes 4, Business Combinations and Divestitures and 6, Other Intangibles, net to the Consolidated Financial Statements.
Goodwill and Indefinite-Lived Intangible Assets
We account for purchased goodwill and intangible assets with indefinite lives in accordance with ASC 350, Intangibles - Goodwill and Other. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. We perform an impairment evaluation of goodwill annually during the fourth quarter of our fiscal year or when circumstances otherwise indicate an evaluation should be performed. The evaluation may begin with a qualitative assessment for each reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment does not generate a positive response, or if no qualitative assessment is performed, a quantitative assessment, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates, and economic and market conditions. In fiscal 2022 and 2020, we proceeded immediately to the quantitative assessment, but in fiscal 2021 we began with the qualitative assessment. Accordingly, no sensitivity analysis was performed for fiscal 2021. The evaluations performed in fiscal 2020, 2021, and 2022 resulted in no impairment charge.
See Notes 5, Goodwill and 6, Other Intangibles, net to the Consolidated Financial Statements.
Income Taxes
In accordance with ASC 740, Income Taxes, we account for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and the corresponding financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. Deferred taxes are not provided on the undistributed earnings of subsidiaries outside of the U.S. when it is expected that these earnings will be permanently reinvested. In fiscal 2018, we recorded a provision for U.S. income taxes and foreign withholding taxes in relation to expected repatriations as a result of the 2017 U.S. Tax Cuts and Jobs Act (the ”2017 Tax Act”), but we have not made any provision for U.S. income taxes on the remaining undistributed earnings of foreign subsidiaries as those earnings are considered permanently reinvested in the operations of those foreign subsidiaries in the years after 2018.
The 2017 Tax Act imposed taxes on so-called “global intangible low-taxed income” (“GILTI”) earned by certain foreign subsidiaries of a U.S. company. In accordance with ASC 740, we made an accounting policy election to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred.
We assess the realizability of deferred tax assets by considering all available evidence, both positive and negative. We evaluate four possible sources of taxable income when assessing the realizability of deferred tax assets:
•carrybacks of existing NOLs (if and to the extent permitted by tax law);
•future reversals of existing taxable temporary differences;
•tax planning strategies; and
•future taxable income exclusive of reversing temporary differences and carryforwards.
We consider the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that we would realize those deferred tax assets as a result of future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law.
Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. To the extent we prevail in matters for which liabilities have been established or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially affected. An unfavorable income tax settlement may require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution.
Our accounting for income taxes involves the application of complex tax regulations in the U.S. and in each of the non-U.S. jurisdictions in which we operate, particularly European tax jurisdictions. The determination of income subject to taxation in each tax-paying jurisdiction requires us to review reported book income and the events occurring during the year in each
jurisdiction in which we operate. In addition, the application of deferred tax assets and liabilities will have an effect on the tax expense in each jurisdiction. For those entities engaging in transactions with affiliates, we apply transfer-pricing guidelines relevant in many jurisdictions in which we operate and make certain informed and reasonable assumptions and estimates about the relative value of contributions by affiliates when assessing the allocation of income and deductions between consolidated entities in different jurisdictions. The estimates and assumptions used in these allocations can result in uncertainty in the measured tax benefit.
Factors Affecting our Performance
Fluctuations in Operating Results
Our annual financial reporting period ends on June 30. Excluding the impact from COVID-19, our revenue and net earnings are generally higher in the third and fourth quarters of each fiscal year, with our first fiscal quarter typically generating our lowest revenue of any quarter, and our last fiscal quarter typically generating our highest revenue. These fluctuations are primarily the result of the timing of our, and our customers’, annual operational maintenance periods at locations in Europe and the U.S., the seasonality associated with pharmaceutical and biotechnology budgetary spending decisions, clinical trial and research and development schedules, the timing of new product launches and length of time needed to obtain full market penetration, and, to a lesser extent, the time of the year some of our customers’ products are in higher demand.
Acquisition and Related Integration Efforts
Our growth and profitability are affected by the acquisitions we complete and the speed at which we integrate those acquisitions into our existing operating platforms. In fiscal 2020, we completed the acquisition of and integrated additional gene and cell therapy assets in the U.S. and Belgium. We also completed the acquisition of and integrated the Anagni facility in Italy. In fiscal 2021, we expanded our capacity and capabilities through five acquisitions for our Biologics segment and through the acquisition of a dry powder inhaler and spray dry manufacturing business from Acorda Therapeutics, Inc. (“Acorda”). In fiscal 2022, we acquired each of Bettera Wellness, a manufacturer of a consumer-preferred gummy and other formats for consumer health products, a commercial-scale cell therapy manufacturing facility in Princeton, New Jersey, and a manufacturing facility for biologic therapies and vaccines near Oxford, U.K.
Foreign Exchange Rates
Our operating network is global, and, as a result, we have substantial revenues and operating expenses that are denominated in currencies other than the U.S. dollar, the currency in which we report our financial results, and are therefore influenced by changes in currency exchange rates. In fiscal 2022, approximately 36% of our net revenue was generated from our operations outside the U.S. Foreign currencies for our operations include the British pound, European euro, Brazilian real, Argentine peso, Japanese yen, and the Canadian dollar.
Inflation
In fiscal 2022, we began to experience the effects of inflation, which increased to levels not seen in more than 30 years. In response, we began to implement various mitigation strategies, including in some cases increasing prices to customers or reducing other costs of operation, including through price renegotiations with suppliers. The effects of inflation, after accounting for these mitigation strategies, was immaterial to our financial results in fiscal 2022, but inflation is likely to continue for most or all of fiscal 2023, at least, and there can be no assurance that our mitigating strategies will continue to enjoy the same degree of success.
Trends Affecting Our Business
Industry
We participate in nearly every sector of the global pharmaceutical and biotechnology industry, which has been estimated to generate more than $1 trillion in annual revenue, including, but not limited to, the prescription drug and biologic sectors as well as consumer health, which includes the over-the-counter and vitamins and nutritional supplement sectors. Innovative pharmaceuticals, and biologics in particular, continue to play a critical role in the global market, while the share of revenue due to generic drugs and biosimilars is increasing in both developed and developing markets. Sustained developed market demand and rapid growth in emerging economies is driving consumer health product growth. Payors, both public and private, have sought to limit the economic impact of pharmaceutical and biologics product demand through greater use of generic and biosimilar drugs, access and spending controls, and health technology assessment techniques, favoring products that deliver truly differentiated outcomes.
New Molecule Development and R&D Sourcing
Continued strengthening in early-stage development pipelines for drugs and biologics, compounded by increasing clinical trial breadth and complexity, support our belief in the attractive growth prospects for development solutions. Large companies are in many cases reconfiguring their R&D resources, increasingly involving the use of strategic partners for important outsourced functions and new treatment modalities. Additionally, an increasing portion of compounds in development are from companies that do not have a full research and development infrastructure, and thus are more likely to need strategic development solutions partners.
Demographics
Aging population demographics in developed countries, combined with the global COVID-19 pandemic and health care reforms in many global markets that are expanding access to treatments to a greater proportion of the global population, will continue to drive increases in demand for pharmaceuticals, biologics, and consumer health products. Increasing economic affluence in developing regions will further increase demand for healthcare treatments, and we are taking active steps to allow us to participate effectively in these growth regions and product categories.
Finally, we believe the market access and payor pressures our customers face, global supply chain complexity, and the increasing demand for improved and new modality treatments will continue to escalate the need for advanced formulation and manufacturing, product differentiation, improved outcomes, and treatment cost reduction, all of which can often be addressed using our advanced delivery technologies.
Non-GAAP Metrics
As described in this section, management uses various financial metrics, including certain metrics that are not based on concepts defined in U.S. GAAP, to measure and assess the performance of our business, to make critical business decisions, and to assess our compliance with certain financial obligations. We therefore believe that presentation of certain of these non-GAAP metrics in this Annual Report will aid investors in understanding our business.
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense for income taxes, and depreciation and amortization, adjusted for the income 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 across periods 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 disclosing EBITDA from operations provides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, service debt, and undertake capital expenditures without consideration of non-cash depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for readers of the 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. Included in this Management’s Discussion and Analysis is a reconciliation of net earnings to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before non-controlling interest, other (income) expense, impairments, restructuring costs, interest expense, income tax expense, stock-based compensation, gain (loss) on sale of subsidiary, and depreciation and amortization (“Segment EBITDA”).
Adjusted EBITDA
Under the Credit Agreement and in the Indentures, the ability of Operating Company 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” in the Credit Agreement and “EBITDA” in the Indentures). Adjusted EBITDA is a covenant compliance measure in our Credit Agreement and Indentures, particularly those covenants governing debt incurrence and restricted payments. Adjusted EBITDA is based on the definitions in the Credit Agreement, 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. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
In addition, we use Adjusted EBITDA as a performance metric that guides management in its operation of and planning for the future of the business and drives certain management compensation programs. Management believes that Adjusted EBITDA provides a useful measure of our operating performance from period to period by excluding certain items that are not representative of our core business, including interest expense and non-cash charges like depreciation and amortization.
The measure under U.S. GAAP most directly comparable to Adjusted EBITDA is net earnings. In calculating Adjusted EBITDA, we add back certain non-cash, non-recurring, and other items that are deducted when calculating EBITDA from operations and net earnings, consistent with the requirements of the Credit Agreement. Adjusted EBITDA, among other things:
•does not include non-cash stock-based employee compensation expense and certain other non-cash charges;
•does not include cash and non-cash restructuring, severance, and relocation costs incurred to realize future cost savings and enhance operations;
•adds back any non-controlling interest expense, which represents minority investors’ ownership of non-wholly owned consolidated subsidiaries and is, therefore, not available; and
•includes estimated cost savings that have not yet been fully reflected in our results.
Adjusted Net Income and Adjusted Net Income per Share
We use Adjusted Net Income and Adjusted Net Income per share (which we sometimes refer to as “Adjusted EPS”) as performance metrics. Adjusted Net Income 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 providing information concerning Adjusted Net Income and Adjusted Net Income per share enhances an investor’s understanding of our financial performance. We believe that these measures are useful financial metrics to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business, and we use these measures for business planning and executive compensation purposes. We define Adjusted Net Income as net earnings adjusted for (1) earnings or loss from discontinued operations, net of tax, (2) amortization attributable to purchase accounting, and (3) income or loss from non-controlling interest in majority-owned operations. We also make adjustments for other cash and non-cash items (as shown above, in “—Adjusted EBITDA”), partially offset by our estimate of the tax effect of such cash and non-cash items. Our definition of Adjusted Net Income may not be the same as similarly titled measures used by other companies. Adjusted Net Income per share is computed by dividing Adjusted Net Income by the weighted average diluted shares outstanding.
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 Annual Report, we calculate 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 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.
Summary Two-Year Key Financial Performance Metrics
The below tables summarize our results in fiscal 2022 and 2021 with respect to several financial metrics we use to measure performance. Refer to the discussions below regarding performance and the use of key financial metrics and “—Non-GAAP Metrics—Use of Constant Currency” concerning the measurement of revenue at “constant currency.”
Fiscal Year Ended June 30, 2022 compared to the Fiscal Year Ended June 30, 2021
Results for the fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended
June 30, | | FX Impact | | Constant Currency
Increase (Decrease) |
| 2022 | | 2021 | | | | Change $ | | Change % * |
| Net revenue | $ | 4,802 | | | $ | 3,998 | | | $ | (84) | | | $ | 888 | | | 22 | % |
| Cost of sales | 3,188 | | | 2,646 | | | (49) | | | 591 | | | 22 | % |
| Gross margin | 1,614 | | | 1,352 | | (35) | | | 297 | | | 22 | % |
| Selling, general, and administrative expenses | 844 | | | 687 | | | (6) | | | 163 | | | 24 | % |
| Gain on sale of subsidiary | (1) | | | (182) | | | — | | | 181 | | | (99) | % |
| Other operating expense | 41 | | | 19 | | | (1) | | | 23 | | | 110 | % |
| Operating earnings | 730 | | | 828 | | | (28) | | | (70) | | | (8) | % |
| Interest expense, net | 123 | | | 110 | | | (1) | | | 14 | | | 12 | % |
| Other expense, net | 28 | | | 3 | | | (7) | | | 32 | | | 1,227 | % |
| Earnings before income taxes | 579 | | | 715 | | | (20) | | | (116) | | | (16) | % |
| Income tax expense | 80 | | | 130 | | | (5) | | | (45) | | | (35) | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 499 | | | $ | 585 | | | $ | (15) | | | $ | (71) | | | (12) | % |
| | | | | | | | | |
| | | | | | | | | |
* Change % calculations are based on amounts prior to rounding.
Net Revenue
| | | | | | | | | | | | | | | |
| | 2022 vs. 2021 | |
| Year-Over-Year Change | | Fiscal Year Ended
June 30, | |
| | Net Revenue | |
| Organic | | 20 | % | |
| Impact of acquisitions | | 4 | % | |
| Impact of divestitures | | (2) | % | |
| Constant currency change | | 22 | % | |
| Foreign currency translation impact on reporting | | (2) | % | |
| Total % change | | 20 | % | |
| | | | | |
Net revenue increased by $888 million, or 22%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2021. Net revenue increased 20% organically on a constant-currency basis, primarily related to (i) broad-based strength across our Biologics offerings, in particular demand for our drug product and drug substance offerings for COVID-19 related programs, (ii) increased demand for our customers' prescription products, and (iii) a continued rebound in our consumer health products, particularly in cough, cold, and over-the-counter pain relief products.
Net revenue increased 4% inorganically as a result of acquisitions, which was partially offset by a 2% decrease in net revenue due to the sale of Catalent USA Woodstock, Inc. and related assets (collectively, the “Blow-Fill-Seal Business”) in fiscal 2021. Inorganic net revenue resulted from our acquisitions of Skeletal Cell Therapy Support SA (“Skeletal”), Delphi Genetics SA (“Delphi”) and the manufacturing and packaging assets of Acorda in fiscal 2021, as well as RheinCell Therapeutics GmbH (“RheinCell”), Bettera Wellness and a cell therapy commercial manufacturing facility and its operations in Princeton, New Jersey (“Princeton”) from Erytech Pharma S.A. (“Erytech”) in fiscal 2022.
Gross Margin
Gross margin increased by $297 million, or 22%, in fiscal 2022 compared to fiscal 2021, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for all Biologics segment offerings, including demand across our drug product and drug substance offerings for COVID-19 related programs. Additional factors for such growth included increased demand for prescription products, a continued rebound in demand for consumer health products in our Pharma and Consumer Health segment, and a favorable impact from prior-year recall charges in our Pharma and Consumer Health segment. Margin growth was offset in part by a $47 million increase in depreciation expense, a one-time non-cash $7 million fair value inventory adjustment associated with our Bettera Wellness acquisition and an unfavorable impact from remediation activities at our Brussels facility.
On a constant-currency basis, gross margin, as a percentage of net revenue, decreased 20 basis points to 33.6% in the fiscal year ended June 30, 2022, compared to 33.8% in the prior year.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by $163 million, or 24%, in fiscal 2022 compared to fiscal 2021, excluding the impact of foreign exchange, which includes $46 million in net incremental expenses from acquired and divested companies. The year-over-year increase in selling, general, and administrative expenses was primarily due to a $19 million increase in employee health and welfare costs, a $15 million increase in information technology spend, $14 million in employee-related costs primarily incurred for wages and bonuses, a $13 million increase in amortization and depreciation, $10 million of incremental bad debt expense, an $8 million increase in travel and entertainment, and a $5 million increase in integration costs associated with acquisitions.
Other Operating Expense
Other operating expense for the fiscal years ended June 30, 2022 and 2021 was $41 million and $19 million, respectively. The year-over-year increase was due to a $22 million increase in fixed asset impairment charges primarily associated with dedicated equipment for a product that we no longer manufacture in our respiratory and specialty platform and certain obsolete equipment in our Biologics segment.
Interest Expense, net
Interest expense, net, of $123 million in fiscal 2022 increased by $14 million, or 12%, compared to fiscal 2021, excluding the impact of foreign exchange. The savings from repayment of our formerly outstanding term loans and early redemption of our U.S. dollar-denominated 4.875% Senior Notes due 2026 (the “2026 Notes”) in fiscal 2021 were fully offset by increases in interest expense from our most recent tranche of term loans, the 2029 Notes, and the 2030 Notes.
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—Debt and Financing Arrangements” and Note 8, Long-Term Obligations and Short-Term Borrowings to the Consolidated Financial Statements.
Other Expense, net
Other expense, net of $28 million for fiscal 2022 was primarily driven by $33 million of foreign currency 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 formerly outstanding Series A Preferred Stock.
Other expense, net of $3 million for fiscal 2021 was primarily driven by an $11 million premium on early redemption of the 2026 Notes, a write-off of $4 million of previously capitalized financing charges related to our repayment of term loans and our redeemed 2026 Notes, $3 million of financing charges related to our outstanding term loans, and a net foreign currency translation loss of $5 million. Those losses were partially offset by a gain of $17 million related to the fair value of the derivative liability associated with our previously outstanding Series A Preferred Stock.
Provision for Income Taxes
Our provision for income taxes for the fiscal year ended June 30, 2022 was $80 million relative to earnings before income taxes of $579 million. Our provision for income taxes for the fiscal year ended June 30, 2021 was $130 million relative to earnings before income taxes of $715 million. The decreased income tax provision for the current-year period over the prior-year period was largely the result of a decrease in pretax income, a $69 million income tax benefit for U.S. foreign tax credits resulting from an amendment to prior-year returns, and the tax benefit associated with the establishment of a net deferred tax asset expected to arise as a result of recently enacted tax reform in Switzerland and related transition rules (collectively, “Swiss Tax Reform”). This decrease was partially offset by certain deemed income inclusion in the U.S., a $26 million income tax charge for establishing a valuation allowance against the net deferred tax assets of certain Belgian operations, and a $62 million valuation allowance against the aforementioned tax benefit related to Swiss Tax Reform. The provision for income taxes in each of fiscal 2022 and 2021 was also affected by the geographic distribution of our pretax income, the tax impact of permanent differences, restructuring, special items, and other discrete tax items that may have unique tax implications depending on the nature of the item.
Segment Review
The below charts depict the percentage of net revenue from each of our two reportable segments for the previous two years. Refer below for discussions regarding the segments’ 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 fiscal year ended June 30, 2022 compared to the fiscal year ended June 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended
June 30, | | FX Impact | | Constant Currency
Increase (Decrease) |
| 2022 | | 2021 | | | | Change $ | | Change % (1) |
| Biologics | | | | | | | | | |
| Net revenue | $ | 2,534 | | | $ | 1,938 | | | $ | (35) | | | $ | 631 | | | 33 | % |
| Segment EBITDA | 777 | | | 615 | | | (14) | | | 176 | | | 28 | % |
| Pharma and Consumer Health | | | | | | | | | |
| Net revenue | 2,271 | | | 2,063 | | | (50) | | | 258 | | | 12 | % |
| Segment EBITDA | 589 | | | 498 | | | (17) | | | 108 | | | 22 | % |
| Inter-segment revenue elimination | (3) | | | (3) | | | 1 | | | (1) | | | * |
Unallocated Costs(2) | (286) | | | 1 | | | 5 | | | (292) | | | * |
| Combined totals | | | | | | | | | |
| Net revenue | $ | 4,802 | | | $ | 3,998 | | | $ | (84) | | | $ | 888 | | | 22 | % |
| | | | | | | | | |
| EBITDA from operations | $ | 1,080 | | | $ | 1,114 | | | $ | (26) | | | $ | (8) | | | — | % |
(1) Change % calculations are based on amounts prior to rounding.
* Not meaningful
(2) Unallocated costs include restructuring and special items, stock-based compensation, gain (loss) on sale of subsidiary, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| | Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 |
Impairment charges and gain/loss on sale of assets(a) | $ | (31) | | | $ | (9) | |
| Stock-based compensation | (54) | | | (51) | |
Restructuring and other special items (b) | (55) | | | (31) | |
| | | |
| | | |
| | | |
Gain on sale of subsidiary (c) | 1 | | | 182 | |
| Other expense, net | (28) | | | (3) | |
| Non-allocated corporate costs, net | (119) | | | (87) | |
| Total unallocated costs | $ | (286) | | | $ | 1 | |
(a) For the fiscal year ended June 30, 2022, impairment charges are primarily due to fixed asset impairment charges associated with dedicated equipment for a product that we no longer manufacture in our respiratory and specialty platform in our Pharma and Consumer Health segment and obsolete equipment in our Biologics segment.
(b) Restructuring and other special items for the fiscal year ended June 30, 2022 include (i) transaction and integration costs primarily associated with the Princeton acquisition, and the Bettera Wellness, Delphi, Hepatic Cell Therapy Support SA (“Hepatic”), Acorda and RheinCell transactions and (ii) unrealized losses on venture capital investments. Restructuring and other special items during the fiscal year ended June 30, 2021 include (1) transaction costs for the sale of our Blow-Fill-Seal Business, (2) transaction and integration costs associated with the acquisition of our facility in Anagni, Italy, the Acorda, Masthercell Global Inc. (“MaSTherCell”), Delphi, Hepatic, and Skeletal transactions and the acquisition of Société d’infrastructures, de services et d’énergies SA, and (3) restructuring costs associated with the closure of our Pharma and Consumer Health facility in Bolton, U.K. Refer to Note 4, Business Combinations and Divestitures for further details on the transactions listed above.
(c) For the fiscal years ended June 30, 2022 and 2021, gain on sale of subsidiary is due to the divestiture of our Blow-Fill-Seal Business, which was formerly part of our Pharma and Consumer Health segment. Refer to Note 4, Business Combinations and Divestitures for further details on the sale of the Blow-Fill-Seal Business.
(d) Refer to Note 16, Other Expense, net for details of financing charges and foreign currency adjustments recorded within Other Expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
| | | | | | | | | | | |
| | Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 |
| Net earnings | $ | 499 | | | $ | 585 | |
| Depreciation and amortization | 378 | | | 289 | |
| Interest expense, net | 123 | | | 110 | |
| Income tax expense | 80 | | | 130 | |
| | | |
| EBITDA from operations | $ | 1,080 | | | $ | 1,114 | |
Biologics segment | | | | | | | | | | | |
| 2022 vs. 2021 |
| Year-Over-Year Change | Fiscal Year Ended
June 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 33 | % | | 29 | % |
| Impact of acquisitions | — | % | | (1) | % |
| | | |
| Constant currency change | 33 | % | | 28 | % |
| Foreign exchange translation impact on reporting | (2) | % | | (2) | % |
| Total % change | 31 | % | | 26 | % |
Net revenue in our Biologics segment increased by $631 million, or 33%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2021. The increase was driven across all segment offerings by strong end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $176 million, or 28%, excluding the impacts of foreign exchange and acquisitions, compared to the fiscal year ended June 30, 2021, Excluding the impact of acquisitions, Segment EBITDA increased 29%, compared to the fiscal year end June 30, 2021. The increase was driven across all segment offerings by strong end-market demand for our drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs, and partially offset by an unfavorable impact from remediation activities at our Brussels facility.
We completed the acquisition of RheinCell in August 2021. In April 2022, we completed the acquisition of Princeton. For the fiscal year ended June 30, 2022, these acquisitions had an immaterial impact on our net revenue and decreased Segment EBITDA on an inorganic basis by 1% compared to the corresponding prior-year period.
Pharma and Consumer Health Segment
| | | | | | | | | | | |
| 2022 vs. 2021 |
| Year-Over-Year Change | Fiscal Year Ended
June 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 7 | % | | 21 | % |
| Impact of acquisitions | 8 | % | | 5 | % |
| Impact of divestitures | (3) | % | | (4) | % |
| Constant currency change | 12 | % | | 22 | % |
| Foreign exchange translation impact on reporting | (2) | % | | (4) | % |
| Total % change | 10 | % | | 18 | % |
Net revenue in our Pharma and Consumer Health segment increased by $258 million, or 12%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2021. Net revenue increased 7% organically, compared to the fiscal year ended June 30, 2021. The increase in organic revenue primarily relates to strong end-market demand for prescription products, a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, growth in development services, demand for the segment’s orally disintegrating Zydis commercial products and demand for early-phase development programs.
Pharma and Consumer Health Segment EBITDA increased by $108 million, or 22%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2021. Segment EBITDA increased 21% organically, compared to the fiscal year ended June 30, 2021. The increase in organic Segment EBITDA, similar to that of net revenue, was primarily driven by an increase in demand for prescription products, a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and the margin generated from strong development revenue growth. Year over year growth was also driven by demand for the segment’s orally disintegrating Zydis commercial products, and a favorable impact from prior-year recall charges in our respiratory and specialty platform.
We completed the Acorda transaction in February 2021 and we completed the Bettera Wellness acquisition in October 2021, which collectively increased net revenue and Segment EBITDA on an inorganic basis by 8% and 5%, respectively, during the fiscal year ended June 30, 2022, compared to the corresponding prior-year period. For the fiscal year ended June 30, 2022, we recorded a one-time non-cash inventory fair value adjustment for $7 million resulting from our Bettera Wellness purchase accounting, which unfavorably impacted Segment EBITDA.
We completed the Blow-Fill-Seal Business divestiture in March 2021. For the fiscal year ended June 30, 2022, this divestiture decreased our net revenue and Segment EBITDA on an inorganic basis by 3% and 4%, respectively, compared to the corresponding prior-year period.
Fiscal Year Ended June 30, 2021 compared to the Fiscal Year Ended June 30, 2020
Results for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended
June 30, | | FX Impact | | Constant Currency
Increase (Decrease) |
| 2021 | | 2020 | | | | Change $ | | Change % |
| Net revenue | $ | 3,998 | | | $ | 3,094 | | | $ | 89 | | | $ | 815 | | | 26 | % |
| Cost of sales | 2,646 | | | 2,111 | | | 56 | | | 479 | | | 23 | % |
| Gross margin | 1,352 | | | 983 | | | 33 | | | 336 | | | 34 | % |
| Selling, general, and administrative expenses | 687 | | | 577 | | | 8 | | | 102 | | | 17 | % |
| (Gain) loss on sale of subsidiary | (182) | | | 1 | | | — | | | (183) | | | * |
| Other operating expense | 19 | | | 11 | | | — | | | 8 | | | 96 | % |
| Operating earnings | 828 | | | 394 | | | 25 | | | 409 | | | 104 | % |
| Interest expense, net | 110 | | | 126 | | | 1 | | | (17) | | | (14) | % |
| Other expense, net | 3 | | | 8 | | | 8 | | | (13) | | | (166) | % |
| Earnings before income taxes | 715 | | | 260 | | | 16 | | | 439 | | | 169 | % |
| Income tax expense | 130 | | | 39 | | | 2 | | | 89 | | | 223 | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 585 | | | $ | 221 | | | $ | 14 | | | $ | 350 | | | 159 | % |
| | | | | | | | | |
| | | | | | | | | |
Net Revenue
| | | | | | | | | | | | | | | |
| | 2021 vs. 2020 | |
| Year-Over-Year Change | | Fiscal Year Ended
June 30, | |
| | Net Revenue | |
| Organic | | 25 | % | |
| Impact of acquisitions | | 3 | % | |
| Impact of divestitures | | (2) | % | |
| Constant currency change | | 26 | % | |
| Foreign currency translation impact on reporting | | 3 | % | |
| Total % change | | 29 | % | |
| | | | | |
Net revenue increased by $815 million, or 26%, excluding the impact of foreign exchange, compared to the fiscal year ended June 30, 2020. Net revenue increased 3% as a result of acquisitions, which was partially offset by a 2% decrease in net revenue due to the sale of Catalent USA Woodstock, Inc. (the “Blow-Fill-Seal Business”) in March 2021. Among other acquisitions, we acquired Skeletal in November 2020, and Delphi and Acorda in February 2021. In addition, we divested a facility in Australia in October 2019. Organic net revenue increased 25% on a constant-currency basis, and was primarily driven by robust demand across all our Biologics offerings, in particular demand for our drug product and drug substance offerings for COVID-19-related programs, offset in part by the loss of volume from the voluntary recall of a previously launched product in the respiratory specialty platform in our Pharma and Consumer Health segment and demand decreases attributable to the COVID-19 pandemic that impacted Pharma and Consumer Health net revenue.
Gross Margin
Gross margin increased by $336 million, or 34%, in fiscal 2021 compared to fiscal 2020, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for all Biologics segment offerings, including demand across our drug product and drug substance offerings for COVID-19 related programs. Growth was offset in part by the loss in volume from the voluntary recall of a previously launched product in the respiratory specialty platform in our Pharma and Consumer Health segment and decreased demand for our prescription and consumer health products in our Pharma and Consumer Health segment. On a constant-currency basis, gross margin, as a percentage of net revenue, increased 200 basis points to 34% in the fiscal year ended June 30, 2021, compared to 32% in the prior year, primarily due to the higher margin profile associated with our Biologics segment.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by $102 million, or 17%, in fiscal 2021 compared to fiscal 2020, excluding the impact of foreign exchange, driven by $65 million of employee-related cost primarily incurred for wages and bonuses, a $15 million increase in cost for professional and consulting services, and additional selling, general and administrative expenses from acquired companies of $13 million, including $2 million of incremental depreciation and amortization expense and $3 million related to the cost of various transitional services. These increases were partially offset by $12 million in reduced costs associated with health and welfare benefits and $9 million associated with travel and entertainment expenses.
The year-over-year increase in selling, general, and administrative expenses was also due to a $32 million increase in information technology spend associated with headcount increases, additional cyber security initiatives, insurance premium increases, certain market research initiatives, and COVID-19-related spend for personal protective equipment and test kits for our employees.
Other Operating Expense
Other operating expense for the fiscal years ended June 30, 2021 and 2020 was $19 million and $11 million, respectively. The year-over-year increase was attributable to an increase in impairment charges and an increase in restructuring costs primarily associated with our plan to reduce costs and optimize our infrastructure in Europe by closing our Pharma and Consumer Health facility in Bolton, U.K.
Interest Expense, net
Interest expense, net, of $110 million in fiscal 2021 decreased by $16 million, or 13%, compared to fiscal 2020, driven by savings from repayment of our formerly outstanding dollar-denominated term loans, euro-denominated term loans, euro-denominated 4.75% Senior Notes due 2024 (the “2024 Notes”), and U.S. dollar-denominated 4.875% Senior Notes due 2026 (the “2026 Notes”), partially offset by interest expenses on the 2028 Notes, the new tranche of dollar-denominated term loans, and the 2029 Notes. The savings also includes $6 million of additional capitalized interest costs for the fiscal year ended June 30, 2021 compared to the prior fiscal year due to increased capital expenditures.
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—Debt and Financing Arrangements” and Note 8, Long-Term Obligations and Short-Term Borrowings to the Consolidated Financial Statements.
Other Expense, net
Other expense, net of $3 million for fiscal 2021 was primarily driven by an $11 million premium on early redemption of the 2026 Notes, a write-off of $4 million of previously capitalized financing charges related to our repayment of term loans and our redeemed 2026 Notes, $3 million of financing charges related to our outstanding term loans and a net foreign currency translation loss of $5 million. Those losses were partially offset by a gain of $17 million related to the fair value of the derivative liability associated with the Series A Preferred Stock.
Other expense, net for fiscal 2020 of $8 million was primarily driven by financing charges of $16 million. The financing charges included a $6 million write-off of previously capitalized financing charges related to our repaid euro-denominated term loan under our senior secured credit facilities and redeemed 2024 Notes, and a $10 million premium on early redemption of the 2024 Notes. The loss was partially offset by a foreign currency gain of $3 million and a derivative gain of $3 million related to the change in the fair value of the derivative liability arising from the dividend adjustment mechanism of our Series A Preferred Stock.
Provision for Income Taxes
Our provision for income taxes for the fiscal year ended June 30, 2021 was $130 million relative to earnings before income taxes of $715 million. Our provision for income taxes for the fiscal year ended June 30, 2020 was $39 million relative to earnings before income taxes of $260 million. The increased income tax provision for the fiscal year ended June 30, 2021 over the prior-year was largely the result of an increase in pretax income and a $56 million income tax charge on the divestiture of the Blow-Fill-Seal Business. This increase was partially offset by a $47 million income tax benefit for U.S. foreign tax credits resulting from an amendment to a prior-year return and certain equity compensation deductions. The provision for income taxes was also impacted by the geographic distribution of our pretax income, the tax impact of permanent differences, restructuring, special items, and other discrete tax items that may have unique tax implications depending on the nature of the item.
Segment Review
The below charts depict the percentage of net revenue from each of our two reportable segments for the previous two years. Refer below for discussions regarding the segments’ 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 fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended
June 30, | | FX Impact | | Constant Currency
Increase (Decrease) |
| 2021 | | 2020 | | | | Change $ | | Change % |
| Biologics | | | | | | | | | |
| Net revenue | $ | 1,938 | | | $ | 1,032 | | | $ | 31 | | | $ | 875 | | | 85 | % |
| Segment EBITDA | 615 | | | 239 | | | 12 | | | 364 | | | 152 | % |
| Pharma and Consumer Health | | | | | | | | | |
| Net revenue | 2,063 | | | 2,063 | | | 58 | | | (58) | | | (3) | % |
| Segment EBITDA | 498 | | | 547 | | | 19 | | | (68) | | | (13) | % |
| Inter-segment revenue elimination | (3) | | | (1) | | | — | | | (2) | | | * |
Unallocated Costs(2) | 1 | | | (146) | | | (8) | | | 155 | | | 107 | % |
| Combined totals | | | | | | | | | |
| Net revenue | $ | 3,998 | | | $ | 3,094 | | | $ | 89 | | | $ | 815 | | | 26 | % |
| | | | | | | | | |
| EBITDA from operations | $ | 1,114 | | | $ | 640 | | | $ | 23 | | | $ | 451 | | | 70 | % |
(1) Change % calculations are based on amounts prior to rounding.
* Not meaningful
(2) Unallocated costs include restructuring and special items, stock-based compensation, gain (loss) on sale of subsidiary, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| | Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2021 | | 2020 |
| Impairment charges and gain (loss) on sale of assets | $ | (9) | | | $ | (5) | |
| Stock-based compensation | (51) | | | (48) | |
Restructuring and other special items (a) | (31) | | | (42) | |
| | | |
| | | |
| | | |
Gain (loss) on sale of subsidiary (b) | 182 | | | (1) | |
Other expense, net (c) | (3) | | | (8) | |
| Non-allocated corporate costs, net | (87) | | | (42) | |
| Total unallocated costs | $ | 1 | | | $ | (146) | |
(a) Restructuring and other special items during the fiscal year ended June 30, 2021 include (i) transaction costs for the sale of our Blow-Fill-Seal Business, (ii) transaction and integration costs associated with the acquisition of our facility in Anagni, Italy and the Acorda, Masthercell Global Inc. (“MaSTherCell”), Delphi, Hepatic, Skeletal and SISE transactions, and (iii) restructuring costs associated with the closure of our Pharma and Consumer Health facility in Bolton, U.K. Restructuring and other special items during the fiscal year ended June 30, 2020 include transaction and integration costs associated with the Anagni facility, our cell and gene therapy acquisitions, the divestiture of a facility in Australia, and other restructuring initiatives across our network of sites. Refer to Note 4, Business Combinations and Divestitures for further details on the transactions listed above.
(b) For the fiscal year ended June 30, 2021, gain on sale of subsidiary is due to the divestiture of our Blow-Fill-Seal Business, which was part of our Pharma and Consumer Health segment. Loss on sale of subsidiary for the fiscal year ended June 30, 2020 is due to the divestiture of the Australian facility that was part of the Pharma and Consumer Health segment. Refer to Note 4, Business Combinations and Divestitures for further details on the transactions listed above.
(c) Refer to Note 16, Other Expense, net for details of financing charges and foreign currency translation adjustments recorded within Other Expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
| | | | | | | | | | | |
| | Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2021 | | 2020 |
| Net earnings | $ | 585 | | | $ | 221 | |
| Depreciation and amortization | 289 | | | 254 | |
| Interest expense, net | 110 | | | 126 | |
| Income tax expense | 130 | | | 39 | |
| | | |
| EBITDA from operations | $ | 1,114 | | | $ | 640 | |
Biologics segment | | | | | | | | | | | |
| 2021 vs. 2020 |
| Year-Over-Year Change | Fiscal Year Ended
June 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 76 | % | | 144 | % |
| Impact of acquisitions | 9 | % | | 8 | % |
| | | |
| Constant currency change | 85 | % | | 152 | % |
| Foreign exchange translation impact on reporting | 3 | % | | 5 | % |
| Total % change | 88 | % | | 157 | % |
Net revenue in our Biologics segment increased by $875 million, or 85%, compared to the fiscal year ended June 30, 2020, excluding the impact of foreign exchange. The increase was driven across all segment offerings by robust end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $364 million, or 152%, compared to the fiscal year ended June 30, 2020, excluding the impact of foreign exchange. The increase was driven across all segment offerings by robust end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Several acquisitions contributed to the Biologics inorganic growth in fiscal 2021. Our Anagni, Italy facility, part of which operates within our Biologics segment, and our MaSTherCell acquisition together increased net revenue and Segment EBITDA on an inorganic basis by 9% and 8%, respectively, in the fiscal year ended June 30, 2021, compared to the prior year.
Pharma and Consumer Health Segment | | | | | | | | | | | |
| 2021 vs. 2020 |
| Year-Over-Year Change | Fiscal Year Ended
June 30, |
| Net Revenue | | Segment EBITDA |
| Organic | 2 | % | | (10) | % |
| Impact of acquisitions | 2 | % | | 1 | % |
| Impact of divestitures | (7) | % | | (4) | % |
| Constant currency change | (3) | % | | (13) | % |
| Foreign exchange translation impact on reporting | 3 | % | | 4 | % |
| Total % change | — | % | | (9) | % |
Net revenue in our Pharma and Consumer Health segment decreased by $58 million, or 3%, compared to the fiscal year ended June 30, 2020, excluding the impact of foreign exchange. Net revenue increased 2% organically compared to the fiscal year ended June 30, 2020. The increase was driven by strong demand in our manufacturing and packaging and storage and distribution offerings in North America, development revenue growth and increased demand for the segment’s orally delivered Zydis commercial products and early-phase development programs. The increase was partially offset by the loss of volume resulting from the voluntary recall of a previously launched product in our respiratory specialty platform, reduced end-market demand for prescription products within North America and Europe, as well as lower demand in consumer health products, particularly in cough, cold, and over-the-counter pain relief products attributable to the effects of the COVID-19 pandemic.
Pharma and Consumer Health Segment EBITDA decreased by $68 million, or 13%, compared to the fiscal year ended June 30, 2020, excluding the impact of foreign exchange. Segment EBITDA decreased 10% organically compared to the fiscal year ended June 30, 2020. The decrease, similar to that of net revenue, was primarily driven by the loss of volume resulting from the voluntary recall of a previously launched product in our respiratory specialty platform inclusive of charges of $32 million in the aggregate associated with the recall, a decrease in demand in both the prescription and consumer health portfolio of products, and decreased demand for other non-Zydis orally delivered commercial products. The decrease was partially offset by strong global demand in our manufacturing and packaging and storage and distribution offerings and by the margin generated from strong development revenue growth.
Our Anagni and Acorda transactions increased net revenue and Segment EBITDA on an inorganic, constant-currency basis by 2% and 1%, respectively, in the fiscal year ended June 30, 2021 compared to the prior year. We divested the Blow-Fill-Seal Business in March 2021, which decreased net revenue and Segment EBITDA on an inorganic, constant-currency basis by 7% and 4%, respectively, in the fiscal year ended June 30, 2021 compared to the prior year.
Liquidity and Capital Resources
Sources and use of Cash
Our principal source of liquidity has been cash flow generated from operations and the net proceeds of capital market activities. The principal uses of cash are to fund operating and capital expenditures, business or asset acquisitions, interest payments on debt, and any mandatory or discretionary principal payment on our debt. As of June 30, 2022, and following the September 2021 execution of Amendment No. 6 (the “Sixth Amendment”) to the Credit Agreement, we had available a $725 million Revolving Credit Facility that matures in May 2024, the capacity of which is reduced by the amount of all outstanding letters of credit issued under the senior secured credit facilities and those short-term borrowings referred to as swing-line borrowings. At June 30, 2022, we had $4 million of outstanding letters of credit and no outstanding borrowing under our Revolving Credit Facility.
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 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 July 2027 maturity of our 2027 Notes.
On August 9, 2022, we entered into a purchase agreement to acquire Metrics Contract Services ("Metrics") and will pay approximately $475 million in cash, subject to customary adjustments. Metrics is an oral solids development and manufacturing business specializing in handling highly potent compounds at its facility in Greenville, North Carolina. We intend to fund this acquisition using a combination of cash on hand, existing senior secured credit facilities, and, depending on market conditions, potentially new debt financing. The closing of the acquisition is not contingent on any financing activity.
Cash Flows
Fiscal Year Ended June 30, 2022 Compared to the Fiscal Year Ended June 30, 2021
The following table summarizes our consolidated statements of cash flows for the fiscal year ended June 30, 2022 compared with the fiscal year ended June 30, 2021:
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended
June 30, | | |
| (Dollars in millions) | 2022 | | 2021 | | Change $ |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 439 | | | $ | 433 | | | $ | 6 | |
| Investing activities | $ | (1,884) | | | $ | (649) | | | $ | (1,235) | |
| Financing activities | $ | 1,031 | | | $ | 142 | | | $ | 889 | |
Operating Activities
For the fiscal year ended June 30, 2022, cash provided by operating activities was $439 million, an increase of $6 million compared to $433 million for the prior year. This increase in cash flow from operating activities was primarily due to an increase in operating income, excluding the gain derived from the sale of the Blow-Fill-Seal business in March 2021, a favorable impact from a decline in the rate of trade receivables growth, and a favorable impact from a decline in the rate of inventory growth, which was partially offset by an unfavorable impact from the increase in contract assets.
Investing Activities
For the fiscal year ended June 30, 2022, cash used in investing activities was $1.88 billion, compared to $649 million during fiscal 2021. The increase in cash used in investing activities was primarily driven by a $1.05 billion increase in cash used for business acquisition activities, partially offset by a $52 million decline in the purchase of marketable securities and a $26 million decrease in cash used for purchases of property, plant, and equipment compared to the prior year. Another key driver in the year-over-year change was the lack of proceeds from sale of any subsidiary, as no subsidiary was sold in the current year, compared to $290 million in proceeds from the sale of subsidiaries received in fiscal 2021.
Financing Activities
For the fiscal year ended June 30, 2022, cash provided by financing activities was $1.03 billion, which increased $889 million compared to cash provided by financing activities of $142 million during the fiscal year ended June 30, 2021. The increase in cash provided by financing activities was primarily driven by a $934 million year-over-year increase in cash received from the issuance of debt, partially offset 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, resulting in net proceeds of $82 million.
Debt and Financing Arrangements
Senior Secured Credit Facilities and Sixth Amendment to the Credit Agreement
In September 2021, we completed the Sixth Amendment to the Credit Agreement. Pursuant to the Sixth Amendment, we 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 payments from 0.25% to 0.2506% of the principal amount outstanding for the Incremental Term B-3 Loans and the other term loans outstanding under the Credit Agreement, all of which are U.S. dollar-denominated (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 previously drawn Term B-3 Loans, including 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 Wellness acquisition.
The Sixth Amendment also provided for incremental revolving credit commitments under the Revolving Credit Facility. The applicable rate for all loans drawn under the Revolving Credit Facility is one-month LIBOR plus 2.25%, and such rate can be reduced to one-month LIBOR plus 2.00% in future periods based on a measure of Operating Company's total leverage ratio. The maturity date for the Revolving Credit Facility is May 17, 2024.
Pursuant to the terms of the Credit Agreement, the interest rates under the Term B-3 Loans and loans drawn under the Revolving Credit Facility will be based on a replacement benchmark interest rate when LIBOR is no longer available.
The availability of capacity under the Revolving Credit Facility is reduced by the aggregate value of all outstanding letters of credit under the Credit Agreement. As of June 30, 2022, we had $721 million of unutilized capacity under the Revolving Credit Facility, due to $4 million of outstanding letters of credit.
Further information concerning the senior secured credit facilities, including the Term B-3 Loans and the Revolving Credit Facility, can be found in Note 8, Long-Term Obligations and Short-Term Borrowings to the Consolidated Financial Statements
5.000% Senior Notes due 2027
In June 2019, Operating Company completed a private offering of the 2027 Notes. The 2027 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 2027 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2027 Notes will mature on July 15, 2027 and bear interest at the rate of 5.000% per annum. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The proceeds of the 2027 Notes after payment of the offering fees and expenses were used to repay in full the outstanding borrowings under Operating Company's then-outstanding term loans under its senior secured credit facilities that would otherwise have matured in May 2024.
2.375% Euro-denominated Senior Notes due 2028
In March 2020, Operating Company completed a private offering of the 2028 Notes. The 2028 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 2028 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2028 Notes will mature on March 1, 2028 and bear interest at the rate of 2.375% per annum. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The proceeds of the 2028 Notes after payment of the offering fees and expenses were used to repay in full the outstanding borrowings under Operating Company's euro-denominated term loans under its senior secured credit facilities, that would otherwise have matured in May 2024, and repay in full our Euro-denominated 4.75% Senior Notes due 2024, which would otherwise have matured in December 2024, plus any accrued and unpaid interest thereon, with the remainder available for general corporate purposes.
3.125% Senior Notes due 2029
In February 2021, Operating Company completed a private offering of the 2029 Notes. The 2029 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 2029 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2029 Notes will mature on February 15, 2029 and bear interest at the rate of 3.125% per annum payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The proceeds of the 2029 Notes after payment of the offering fees and expenses were used to repay in full the outstanding borrowings under the 2026 Notes, plus any accrued and unpaid interest thereon, with the remainder available for general corporate purposes.
3.500% Senior Notes due 2030
In September 2021, Operating Company completed a private offering of 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 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 Wellness acquisition.
Deferred Purchase Consideration
In connection with the acquisition of Catalent Indiana, LLC in October 2017, $200 million of the $950 million aggregate nominal purchase price was payable in $50 million installments on each of the first four anniversaries of the closing date. The Company made the installment payments in October 2018, October 2019, October 2020, and the final payment was made in October 2021.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains covenants that, among other things, restrict, subject to certain exceptions, Operating Company’s (and Operating Company’s 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’s subordinated indebtedness; and change Operating Company’s 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 June 30, 2022, Operating Company was in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company’s non-U.S. subsidiaries nor its dormant Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating Company’s 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” 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. See “—Non-GAAP Metrics” for further details on Adjusted EBITDA.
As market conditions warrant, we 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 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 amount involved in any such purchase transaction, individually or in the aggregate, may be material. Any such purchase may involve a substantial amount of one particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series.
The Senior Notes
The Indentures contain certain covenants that, among other things, limit the 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 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 automatically become immediately due and payable. As of June 30, 2022, Operating Company was in compliance with all material covenants under the Indentures.
Liquidity in Foreign Subsidiaries
As of June 30, 2022 and 2021, the amounts of cash and cash equivalents held by foreign subsidiaries were $377 million and $351 million, respectively, out of total consolidated cash and cash equivalents of $449 million and $896 million, respectively. These balances are dispersed across many international locations around the world.
Adjusted EBITDA and Adjusted Net Income per Share
The below tables summarize our fiscal 2022 and 2021 results with respect to certain financial metrics we use to measure performance throughout the fiscal year. Refer to “Non-GAAP Metrics” for further details regarding Adjusted EBITDA and Adjusted net income per share.
A reconciliation between Adjusted EBITDA and net earnings, the most directly comparable measure under U.S. GAAP, which also shows the adjustments from EBITDA from operations, follows: | | | | | | | | | | | |
| Fiscal Year Ended |
| (In millions) | June 30, 2022 | | June 30, 2021 |
| Net earnings | $ | 499 | | | $ | 585 | |
| Interest expense, net | 123 | | | 110 | |
| Income tax expense | 80 | | | 130 | |
| Depreciation and amortization | 378 | | | 289 | |
| | | |
| EBITDA from operations | 1,080 | | | 1,114 | |
| Stock-based compensation | 54 | | | 51 | |
| Impairment charges and gain/loss on sale of assets | 31 | | | 9 | |
| Financing-related expenses and other | 4 | | | 18 | |
| Restructuring costs | 10 | | | 10 | |
| Acquisition, integration, and other special items | 46 | | | 21 | |
| Gain on sale of subsidiary | (1) | | | (182) | |
| | | |
Foreign exchange loss (gain) (included in other, net) (1) | 31 | | | (4) | |
| Inventory fair value step-up charges | 7 | | | — | |
Other adjustments (2) | (3) | | | (17) | |
| | | |
| | | |
| | | |
| Adjusted EBITDA | $ | 1,259 | | | $ | 1,020 | |
| Favorable (unfavorable) FX impact | (23) | | | |
| Adjusted EBITDA - constant currency | $ | 1,282 | | | |
(1) Foreign exchange loss of $31 million for the fiscal year ended June 30, 2022 includes: (a) $12 million of unrealized gains related to foreign trade receivables and payables, (b) $11 million of unrealized losses on the unhedged portion of our euro-denominated debt, and (c) $34 million of unrealized losses on inter-company loans. The foreign exchange adjustment was also affected by the exclusion of realized foreign currency exchange rate gains from the settlement of inter-company loans of $2 million. Inter-company loans exist between our subsidiaries and do not reflect the ongoing results of our trade operations.
Foreign exchange gain of $4 million for the fiscal year ended June 30, 2021 includes: (a) $13 million of unrealized losses related to foreign trade receivables and payables, (b) $3 million of unrealized losses on the unhedged portion of the euro-denominated debt, and (c) $25 million of unrealized gains on inter-company loans. The foreign exchange adjustment was also affected by the exclusion of realized foreign currency exchange rate losses from the settlement of inter-company loans of $5 million. Inter-company loans exist between our subsidiaries and do not reflect the ongoing results of our trade operations.
(2) Primarily represents the gain recorded on the change in the estimated fair value of the derivative liability related to our formerly outstanding Series A Preferred Stock.
A reconciliation between Adjusted Net Income and net earnings, the most directly comparable measure under U.S. GAAP, follows. The table also provides a calculation of Adjusted Net Income per each basic share and each diluted share.
| | | | | | | | | | | |
| Fiscal Year Ended |
| (In millions, except per share data) | June 30, 2022 | | June 30, 2021 |
| Net earnings | $ | 499 | | | $ | 585 | |
Amortization (1) | 123 | | | 93 | |
| Stock-based compensation | 54 | | | 51 | |
| Impairment charges and gain/loss on sale of assets | 31 | | | 9 | |
| Financing-related expenses | 4 | | | 18 | |
| Restructuring costs | 10 | | | 10 | |
| Acquisition, integration, and other special items | 46 | | | 21 | |
| (Gain) on sale of subsidiary | (1) | | | (182) | |
Foreign exchange loss (gain) (included in other expense, net) (2) | 31 | | | (4) | |
| Inventory fair value step-up charges | 7 | | | — | |
Other adjustments (3) | (4) | | | (17) | |
Estimated tax effect of adjustments (4) | (72) | | | 3 | |
Discrete income tax benefit items (5) | (54) | | | (38) | |
| | | |
| Adjusted net income (ANI) | $ | 674 | | | $ | 549 | |
| | | |
| | | |
| | | |
| | | |
| ANI per share: | | | |
ANI per share - basic (6) | $ | 3.82 | | | $ | 3.27 | |
ANI per share - diluted (7) | $ | 3.73 | | | $ | 3.04 | |
(1) Represents the amortization attributable to purchase accounting for previously completed business combinations.
(2) Foreign exchange loss of $31 million for the fiscal year ended June 30, 2022 includes: (a) $12 million of unrealized gains related to foreign trade receivables and payables, (b) $11 million of unrealized losses on the unhedged portion of the euro-denominated debt, and (c) $34 million of unrealized losses on inter-company loans. The foreign exchange adjustment was also affected by the exclusion of realized foreign currency exchange rate gains from the settlement of inter-company loans of $2 million. Inter-company loans exist between our subsidiaries and do not reflect the ongoing results of our trade operations.
Foreign exchange gain of $4 million for the fiscal year ended June 30, 2021 includes: (a) $13 million of unrealized losses related to foreign trade receivables and payables, (b) $3 million of unrealized losses on the unhedged portion of the euro-denominated debt, and (c) $25 million of unrealized gains on inter-company loans. The foreign exchange adjustment was also affected by the exclusion of realized foreign currency exchange rate losses from the
settlement of inter-company loans of $5 million. Inter-company loans exist between our subsidiaries and do not reflect the ongoing results of our trade operations.
(3) Primarily represents the gain recorded on the change in the estimated fair value of the derivative liability related to our formerly outstanding Series A Preferred Stock.
(4) We computed the tax effect of adjustments to net earnings by applying the statutory tax rate in the relevant jurisdictions to the income or expense items that are adjusted in the period presented. If a valuation allowance exists, the rate applied is zero.
(5) Discrete period income tax expense (benefit) items are unusual or infrequently occurring items, primarily including: changes in judgment related to the realizability of deferred tax assets in future years, changes in measurement of a prior-year tax position, deferred tax impact of changes in tax law, and purchase accounting.
(6) Represents Adjusted Net Income divided by the weighted average number of shares of Common Stock outstanding. For the fiscal year ended June 30, 2022 and 2021, the weighted average was 176 million and 168 million, respectively.
(7) Represents Adjusted Net Income divided by the weighted average sum of (a) the number of shares of Common Stock outstanding, plus (b) the number of shares of Common Stock that would be issued assuming exercise or vesting of all potentially dilutive instruments, plus (c) the number of shares of Common Stock equivalent to the shares of Series A Preferred Stock outstanding under the "if-converted" method. For the fiscal year ended June 30, 2022 and 2021, the weighted average was 181 million and 180 million, respectively.
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 February 2021, we replaced 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 under the Credit Agreement was one-month LIBOR (subject to a floor of 0.50%) plus 2.00% as of June 30, 2021; however, as a result of the interest-rate swap agreement, the floating portion of the applicable rate on $500 million of the term loans was effectively fixed at 0.9985% as of February 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 June 30, 2022, we had $874 million of euro-denominated debt outstanding that qualifies as a hedge on a net investment in foreign 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 period.
From time to time, we may use forward 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 foreign currency forward contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use foreign currency exchange contracts. We expect to continue to evaluate hedging opportunities for foreign currency in the future.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements as of June 30, 2022 and 2021 and for the years ended June 30, 2022, 2021 and 2020.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Catalent, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Catalent, Inc. (the Company) as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated August 29, 2022, except for the effect of the material weakness described in the third paragraph of that report, as to which the date is June 12, 2023, expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee of the Company’s Board of Directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of core technology intangible assets in the Bettera acquisition
Description of the Matter
During fiscal 2022, the Company completed its acquisition of Bettera Holdings, LLC (Bettera) for an aggregate nominal purchase price of $1 billion. As discussed in Note 4 to the consolidated Financial Statements, the transaction was accounted for using the acquisition method of accounting for business combinations in accordance with ASC 805.
Auditing the Company's accounting for the Bettera acquisition was complex and required the involvement of specialists due to the significant estimation uncertainty involved in determining the $338 million fair value of the acquired core technology intangible assets. Estimating the fair value of the core technology intangible assets involved the application of a valuation methodology and models using assumptions including revenue growth rates, earnings before interest, taxes, depreciation and amortization (EBITDA) margins and revenue obsolescence rates. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
We tested controls that address the risks of material misstatement relating to the measurement and valuation of the acquired core technology intangible assets, including testing controls over management’s review of the valuation models and the underlying assumptions used to develop such estimates.
To test the estimated fair value of the acquired core technology intangible assets, our audit procedures included, among others, evaluating the Company's selection of a valuation method and testing the models and significant assumptions used in the models, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry and market trends and to the historical results of the acquired business. We also performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the acquired core technology that would result from changes in the assumptions. In addition, we involved internal valuation specialists to assist in our evaluation of the significant assumptions and methodologies used by the Company.
Measurement of uncertain tax positions
Description of the Matter
As discussed in Note 12 to the consolidated financial statements, the Company recorded income tax expense related to US and non-US tax paying jurisdictions totaling $87 million for the year ended June 30, 2022, and a liability for unrecognized tax benefits totaling $4.7 million at June 30, 2022. The Company’s accounting for income taxes involves the application of complex tax regulations in each of the international tax paying jurisdictions in which it operates. The determination of income subject to income tax in each tax paying jurisdiction requires management to apply transfer pricing guidelines for certain intercompany transactions related to certain European countries and make assumptions and estimates about the value of transactions when allocating income and deductions between consolidated entities in different tax paying jurisdictions. The estimates and assumptions used in these allocations can result in uncertainty in the measured tax benefit.
Auditing the completeness and measurement of the liability for recognized tax benefits related to certain intercompany transactions was complex because the assumptions are based on the interpretation of tax laws and legal rulings in multiple tax paying jurisdictions and require significant judgment in determining whether a tax position’s technical merits are more-likely-than-not to be sustained and measuring the amount of tax benefit that qualifies for recognition.
How We Addressed the Matter in Our Audit
We tested controls over the process to assess the technical merits of tax positions related to certain intercompany transactions, as well as management’s process to measure the benefit of those tax positions, including controls over the completeness and accuracy of the underlying data. For example, we tested controls over management’s review of the evaluation of matters identified by and discussed with various tax authorities.
Our audit procedures with respect to the calculation of the liability for unrecognized tax benefits involved an assessment of the technical merits of the Company’s tax positions performed with the assistance of tax subject matter professionals with knowledge of and experience with the application of international and local income tax laws by the relevant income tax authorities. These procedures also included, among others, evaluating third-party advice obtained by the Company and making inquiries of its external tax advisers. We also evaluated the Company’s significant assumptions and the completeness and accuracy of the data used to determine the amount of tax benefits recognized and tested the accuracy of such calculations.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Iselin, New Jersey
August 29, 2022, except for Notes 1 and 19, as to which the date is June 12, 2023.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Catalent, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Catalent, Inc.’s internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, Catalent, Inc. (the Company) has not maintained effective internal control over financial reporting as of June 30, 2022, based on the COSO criteria.
In our report dated August 29, 2022, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on the COSO criteria. Management has subsequently identified deficiencies in controls related to modifications to arrangements accounted for under ASC 606, Revenue from contracts with customers, and has further concluded that these deficiencies represented a material weakness as of June 30, 2022. As a result, management has revised its assessment, as presented in the accompanying Management's Annual Report on Internal Control over Financial Reporting; to conclude that the Company’s internal control over financial reporting was not effective as of June 30, 2022. Accordingly, our present opinion on the effectiveness of internal control over financial reporting as of June 30, 2022, as expressed herein, is different from that expressed in our previous report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment. Management has identified a material weakness in controls related to modifications to arrangements accounted for under ASC 606, Revenue from contracts with customers.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2). This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated August 29, 2022, except for Notes 1 and 19, as to which the date is June 12, 2023, which expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Iselin, New Jersey
August 29, 2022, except for the effect of the material weakness described in the third paragraph above, as to which the date is June 12, 2023.
Catalent, Inc.
Consolidated Balance Sheets
(Dollars in millions, except share and per share data) | | | | | | | | | | | |
| June 30,
2022 | | June 30,
2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 449 | | | $ | 896 | |
| Trade receivables, net of allowance for credit losses of $29 and $12, respectively | 1,051 | | | 1,012 | |
| Inventories | 702 | | | 563 | |
| Prepaid expenses and other | 626 | | | 376 | |
| Marketable securities | 89 | | | 71 | |
| Total current assets | 2,917 | | | 2,918 | |
| Property, plant, and equipment, net | 3,127 | | | 2,524 | |
| Other assets: | | | |
| Goodwill | 3,006 | | | 2,519 | |
| Other intangibles, net | 1,060 | | | 817 | |
| Deferred income taxes | 49 | | | 66 | |
| Other long-term assets | 349 | | | 268 | |
| Total assets | $ | 10,508 | | | $ | 9,112 | |
| | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Current portion of long-term obligations and other short-term borrowings | $ | 31 | | | $ | 75 | |
| Accounts payable | 421 | | | 385 | |
| Other accrued liabilities | 646 | | | 736 | |
| Total current liabilities | 1,098 | | | 1,196 | |
| Long-term obligations, less current portion | 4,171 | | | 3,166 | |
| Pension liability | 103 | | | 137 | |
| Deferred income taxes | 197 | | | 164 | |
| Other liabilities | 164 | | | 175 | |
| Commitment and contingencies (see Note 18) | | | |
| Total liabilities | 5,733 | | | 4,838 | |
| Redeemable preferred stock, $0.01 par value; 0 and 1 million shares authorized at June 30, 2022 and 2021, respectively; 0 and 384,777 shares issued and outstanding at June 30, 2022 and 2021, respectively | — | | | 359 | |
| | | |
| | | |
| Shareholders’ equity: | | | |
| Common stock, $0.01 par value; 1 billion shares authorized at June 30, 2022 and 2021; 179 million and 171 million shares issued and outstanding at June 30, 2022 and 2021, respectively | 2 | | | 2 | |
| | | |
| Preferred stock, $0.01 par value, other than redeemable preferred stock; 100 and 99 million shares authorized at June 30, 2022 and 2021, respectively; 0 shares issued and outstanding at June 30, 2022 and 2021 | — | | | — | |
| Additional paid in capital | 4,649 | | | 4,205 | |
| Retained earnings | 518 | | | 25 | |
| Accumulated other comprehensive loss | (394) | | | (317) | |
| | | |
| | | |
| Total shareholders’ equity | 4,775 | | | 3,915 | |
| Total liabilities, redeemable preferred stock, and shareholders’ equity | $ | 10,508 | | | $ | 9,112 | |
The accompanying notes are an integral part of these consolidated financial statements.
Catalent, Inc.
Consolidated Statements of Operations
(Dollars in millions, except per share data)
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended June 30, |
| | 2022 | | 2021 | | 2020 |
| Net revenue | $ | 4,802 | | | $ | 3,998 | | | $ | 3,094 | |
| Cost of sales | 3,188 | | | 2,646 | | | 2,111 | |
| Gross margin | 1,614 | | | 1,352 | | | 983 | |
| Selling, general, and administrative expenses | 844 | | | 687 | | | 577 | |
| (Gain) loss on sale of subsidiary | (1) | | | (182) | | | 1 | |
| Other operating expense | 41 | | | 19 | | | 11 | |
| | | | | |
| Operating earnings | 730 | | | 828 | | | 394 | |
| Interest expense, net | 123 | | | 110 | | | 126 | |
| Other expense, net | 28 | | | 3 | | | 8 | |
| Earnings before income taxes | 579 | | | 715 | | | 260 | |
| Income tax expense | 80 | | | 130 | | | 39 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net earnings | 499 | | | 585 | | | 221 | |
| Less: Net earnings attributable to preferred shareholders | (16) | | | (56) | | | (48) | |
| Net earnings attributable to common shareholders | $ | 483 | | | $ | 529 | | | $ | 173 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | |
| Earnings per share: | | | | | |
| Basic | | | | | |
| | | | | |
| Net earnings | $ | 2.74 | | | $ | 3.15 | | | $ | 1.16 | |
| Diluted | | | | | |
| | | | | |
| Net earnings | $ | 2.73 | | | $ | 3.11 | | | $ | 1.14 | |
The accompanying notes are an integral part of these consolidated financial statements.
Catalent, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal year ended June 30, |
| 2022 | | 2021 | | 2020 |
| Net earnings | $ | 499 | | | $ | 585 | | | $ | 221 | |
| Other comprehensive (loss) income, net of tax | | | | | |
| Foreign currency translation adjustments | (110) | | | 67 | | | (31) | |
| Defined benefit pension plan | 9 | | | — | | | 2 | |
| Net change in marketable securities | (3) | | | (1) | | | — | |
| | | | | |
| Derivatives and hedges | 27 | | | 3 | | | (3) | |
| | | | | |
| Other comprehensive (loss) income, net of tax | (77) | | | 69 | | | (32) | |
| Comprehensive income | $ | 422 | | | $ | 654 | | | $ | 189 | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Catalent, Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(Dollars in millions, except share data in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Columns may not foot due to rounding | Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | Accumulated Earnings (Deficit) | | Accumulated Other Comprehensive Loss | | | | Total Shareholders’ Equity | | Redeemable Preferred Stock | |
| Balance at June 30, 2019 | 145,738 | | | $ | 2 | | | $ | 2,757 | | | $ | (723) | | | $ | (354) | | | | | $ | 1,682 | | | $ | 607 | | |
| Equity offering, sale of common stock | 16,196 | | | — | | | 1,042 | | | — | | | — | | | | | 1,042 | | | — | | |
| Share issuances related to stock-based compensation | 854 | | | — | | | — | | | — | | | — | | | | | — | | | — | | |
| Stock-based compensation | — | | | — | | | 48 | | | — | | | — | | | | | 48 | | | — | | |
| Cash paid, in lieu of equity, for tax withholding | — | | | — | | | (32) | | | — | | | — | | | | | (32) | | | — | | |
| Employee stock purchase plan | — | | | — | | | 3 | | | — | | | — | | | | | 3 | | | — | | |
| Preferred dividend ($12.50 per share of redeemable preferred stock) | — | | | — | | | — | | | (33) | | | — | | | | | (33) | | | — | | |
| Net earnings | — | | | — | | | — | | | 221 | | | — | | | | | 221 | | | — | | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (32) | | | | | (32) | | | — | | |
| Balance at June 30, 2020 | 162,788 | | | 2 | | | 3,818 | | | (535) | | | (386) | | | | | 2,899 | | | 607 | | |
| Equity offering, sale of common stock | 1,163 | | | — | | | 82 | | | — | | | — | | | | | 82 | | | — | | |
| Share issuances related to stock-based compensation | 1,206 | | | — | | | — | | | — | | | — | | | | | — | | | — | | |
| Conversion of redeemable preferred stock | 5,392 | | | — | | | 253 | | | — | | | — | | | | | 253 | | | (248) | | |
| Stock-based compensation | — | | | — | | | 51 | | | — | | | — | | | | | 51 | | | — | | |
| Cash paid, in lieu of equity, for tax withholding | — | | | — | | | (46) | | | — | | | — | | | | | (46) | | | — | | |
| Exercise of stock options | — | | | — | | | 38 | | | — | | | — | | | | | 38 | | | — | | |
| Employee stock purchase plan | — | | | — | | | 9 | | | — | | | — | | | | | 9 | | | — | | |
| Preferred dividend ($12.50 per share of redeemable preferred stock) | — | | | — | | | — | | | (25) | | | — | | | | | (25) | | | — | | |
| Net earnings | — | | | — | | | — | | | 585 | | | — | | | | | 585 | | | — | | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 69 | | | | | 69 | | | — | | |
| Balance at June 30, 2021 | 170,549 | | | 2 | | | 4,205 | | | 25 | | | (317) | | | | | 3,915 | | | 359 | | |
| | | | | | | | | | | | | | | | |
| Share issuances related to stock-based compensation | 935 | | | — | | | — | | | — | | | — | | | | | — | | | — | | |
| Conversion of redeemable preferred stock | 7,818 | | | — | | | 362 | | | — | | | — | | | | | 362 | | | (359) | | |
| Stock-based compensation | — | | | — | | | 54 | | | — | | | — | | | | | 54 | | | — | | |
| Cash paid, in lieu of equity, for tax withholding | — | | | — | | | (10) | | | — | | | — | | | | | (10) | | | — | | |
| Exercise of stock options | — | | | — | | | 26 | | | — | | | — | | | | | 26 | | | — | | |
| Employee stock purchase plan | — | | | — | | | 12 | | | — | | | — | | | | | 12 | | | — | | |
| Preferred dividend ($12.50 per share of redeemable preferred stock) | — | | | — | | | — | | | (6) | | | — | | | | | (6) | | | — | | |
| Net earnings | — | | | — | | | — | | | 499 | | | — | | | | | 499 | | | — | | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (77) | | | | | (77) | | | — | | |
| Balance at June 30, 2022 | 179,302 | | | 2 | | | 4,649 | | | 518 | | | (394) | | | | | 4,775 | | | — | | |
The accompanying notes are an integral part of these consolidated financial statements.
Catalent, Inc.
Consolidated Statements of Cash Flows
(Dollars in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net earnings | $ | 499 | | | $ | 585 | | | $ | 221 | |
| | | | | |
| | | | | |
| Adjustments to reconcile net earnings to net cash from operations: | | | | | |
| Depreciation and amortization | 378 | | | 289 | | | 254 | |
| Non-cash foreign currency transaction losses (gains), net | 30 | | | (4) | | | 2 | |
| Amortization and write-off of debt financing costs | 7 | | | 11 | | | 12 | |
| | | | | |
| Asset impairments charges and gain/loss on sale of assets | 31 | | | 9 | | | 5 | |
| (Gain) loss on sale of subsidiary | (1) | | | (182) | | | 1 | |
| Financing related charges | 4 | | | 18 | | | 10 | |
| Gain on derivative instrument | (2) | | | (17) | | | (3) | |
| Stock-based compensation | 54 | | | 51 | | | 48 | |
| Provision for deferred income taxes | 9 | | | 64 | | | 2 | |
| Provision for bad debts and inventory | 17 | | | 41 | | | 10 | |
| Change in operating assets and liabilities: | | | | | |
| Increase in trade receivables | (73) | | | (186) | | | (151) | |
| Increase in inventories | (128) | | | (260) | | | (76) | |
| Increase in accounts payable | 37 | | | 50 | | | 72 | |
| Other assets/accrued liabilities, net - current and non-current | (423) | | | (36) | | | 33 | |
| | | | | |
| | | | | |
| Net cash provided by operating activities | 439 | | | 433 | | | 440 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Acquisition of property and equipment and other productive assets | (660) | | | (686) | | | (466) | |
| Purchases of marketable securities | (20) | | | (72) | | | — | |
| | | | | |
| (Settlement on) proceeds from sale of subsidiaries | (3) | | | 287 | | | 21 | |
| Payment for acquisitions, net of cash acquired | (1,199) | | | (147) | | | (379) | |
| Payment made for investments | (2) | | | (31) | | | (3) | |
| | | | | |
| | | | | |
| Net cash used in investing activities | (1,884) | | | (649) | | | (827) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| | | | | |
| Proceeds from borrowings | 1,100 | | | 166 | | | 909 | |
| Payments related to long-term obligations | (78) | | | (67) | | | (860) | |
| | | | | |
| Financing fees paid | (15) | | | (19) | | | (25) | |
| Dividends paid | (4) | | | (22) | | | (36) | |
| | | | | |
| Proceeds from sale of common stock, net | — | | | 82 | | | 1,046 | |
| | | | | |
| Exercise of stock options | 26 | | | 38 | | | — | |
| Cash paid, in lieu of equity, for tax withholding obligation | (10) | | | (46) | | | (32) | |
| Other financing activities | 12 | | | 10 | | | — | |
| | | | | |
| | | | | |
| Net cash provided by financing activities | 1,031 | | | 142 | | | 1,002 | |
| | | | | |
| Effect of foreign currency on cash | (33) | | | 17 | | | (7) | |
| NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS | (447) | | | (57) | | | 608 | |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD | 896 | | | 953 | | | 345 | |
| CASH AND EQUIVALENTS AT END OF PERIOD | $ | 449 | | | $ | 896 | | | $ | 953 | |
| SUPPLEMENTARY CASH FLOW INFORMATION: | | | | | |
| Interest paid | $ | 116 | | | $ | 105 | | | $ | 98 | |
| Income taxes paid, net | $ | 53 | | | $ | 47 | | | $ | 43 | |
| SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY: | | | | | |
| Issuance of Common Stock from partial conversion of redeemable preferred stock | $ | 362 | | | $ | 253 | | | $ | — | |
| Note receivable from sale of Blow-Fill-Seal Business | $ | — | | | $ | 47 | | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
Catalent, Inc.
Notes to Consolidated Financial Statements
1. REVISIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In preparing the consolidated financial statements for the three and nine months ended March 31, 2023, the Company identified a $26 million error related to the over recognition of revenue in the consolidated financial statements it issued with respect to the fiscal year ended 2022. This error resulted from the misapplication of the contract modification guidance in accordance with ASC 606, Revenue from Contracts with Customers, related to one of the Company’s customer arrangements. The Company assessed the materiality of the error both quantitatively and qualitatively and determined this error to be immaterial to the 2022 consolidated financial statements. However, the Company concluded that the effect of correcting the error in the quarter ended March 31, 2023 would materially misstate the Company’s unaudited consolidated financial statements for the three and nine months ended March 31, 2023 and, accordingly, determined that it was necessary to revise the consolidated financial statements it previously issued with respect to the fiscal year ended June 30, 2022. The remainder of the notes to the Company's consolidated financial statements have been updated and revised, as applicable, to reflect the impacts of the adjustment described in this Note 1.
The following tables reflect the impact of this revision on the Company’s consolidated financial statements as of and for the fiscal year ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| Consolidated Balance Sheet | | June 30, 2022 |
| (Dollars in millions) | | As Previously | | | | |
| | Reported | | Adjustment | | As Revised |
| Prepaid expenses and other | | $ | 625 | | | $ | 1 | | | $ | 626 | |
| Total current assets | | 2,916 | | | 1 | | | 2,917 | |
| Total assets | | 10,507 | | | 1 | | | 10,508 | |
| Other accrued liabilities | | 620 | | | 26 | | | 646 | |
| Total current liabilities | | 1,072 | | | 26 | | | 1,098 | |
| Deferred income taxes | | 202 | | | (5) | | | 197 | |
| Total liabilities | | 5,712 | | | 21 | | | 5,733 | |
| Retained earnings | | 538 | | | (20) | | | 518 | |
| Total shareholders' equity | | 4,795 | | | (20) | | | 4,775 | |
| Total liabilities and shareholders' equity | | $ | 10,507 | | | $ | 1 | | | 10,508 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Consolidated Statement of Operations and Statement of Comprehensive Income | | Fiscal Year Ended June 30, 2022 |
| (Dollars in millions) | | As Previously | | | | |
| | Reported | | Adjustment | | As Revised |
| Net revenue | | $ | 4,828 | | | $ | (26) | | | $ | 4,802 | |
| Gross margin | | 1,640 | | | (26) | | | 1,614 | |
| Operating earnings | | 756 | | | (26) | | | 730 | |
| Earnings before income taxes | | 605 | | | (26) | | | 579 | |
| Income tax expense | | 86 | | | (6) | | | 80 | |
| Net earnings | | 519 | | | (20) | | | 499 | |
| | | | | | |
| Net earnings attributable to common shareholders | | 503 | | | (20) | | | 483 | |
| Earnings per share – basic | | 2.85 | | | (0.11) | | | 2.74 | |
| Earnings per share – diluted | | 2.84 | | | (0.11) | | | 2.73 | |
| Comprehensive income | | $ | 442 | | | $ | (20) | | | $ | 422 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Statement of Cash Flows | | | | Fiscal year ended June 30, 2022 |
| (Dollars in millions) | | | | | | | | As Previously | | | | |
| | | | | | | | Reported | | Adjustment | | As Revised |
| Net earnings | | | | | | | | $ | 519 | | | $ | (20) | | | $ | 499 | |
| Provision for deferred income taxes | | | | | | | | 14 | | | (5) | | | 9 | |
| Change in operating assets and liabilities: | | | | | | | | | | | | |
| Other assets/accrued liabilities, net - current and non-current | | | | | | | | $ | (448) | | | $ | 25 | | | $ | (423) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The following table reflects the impact of this revision on the Company’s consolidated statement of operations for the three months ended June 30, 2022 (unaudited):
| | | | | | | | | | | | | | | | | | | | |
| Consolidated Statement of Operations (Unaudited) | | Three Months Ended June 30, 2022 |
| (Dollars in millions) | | As Previously | | | | |
| | Reported | | Adjustment | | As Revised |
| Net revenue | | $ | 1,313 | | | $ | (26) | | | $ | 1,287 | |
| Gross margin | | 488 | | | (26) | | | 462 | |
| Operating earnings | | 246 | | | (26) | | | 220 | |
| Earnings before income taxes | | 211 | | | (26) | | | 185 | |
| Income tax expense | | 23 | | | (6) | | | 17 | |
| Net earnings | | 188 | | | (20) | | | 168 | |
| | | | | | |
| Net earnings attributable to common shareholders | | 188 | | | (20) | | | 168 | |
| Earnings per share – basic | | 1.04 | | | (0.10) | | | 0.94 | |
| Earnings per share – diluted | | $ | 1.04 | | | $ | (0.11) | | | $ | 0.93 | |
| | | | | | |
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. (“Catalent” or the “Company”) directly and wholly owns PTS Intermediate Holdings LLC (“PTS Intermediate”). PTS Intermediate directly and wholly owns Catalent Pharma Solutions, Inc. (“Operating Company”). The financial results of Catalent are primarily comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Since the Company’s initial public offering in July 2014, its common stock, par value $0.01 (the “Common Stock”) has traded on the New York Stock Exchange under the symbol “CTLT”.
The Company provides differentiated development and manufacturing solutions for drugs, protein-based biologics, cell, and gene therapies, vaccines, and consumer health products at over fifty facilities across four continents under rigorous quality and operational standards. Its oral, injectable, and respiratory delivery technologies, along with its state-of-the-art protein, plasmid, viral, and cell and gene therapy manufacturing capacity address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical and consumer health industries.
Reportable Segments
Effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, the Company changed its operating structure and reorganized its executive leadership team accordingly. This new organizational structure includes simplifying the four operating and reportable segments the Company disclosed during fiscal 2022 to two: (i) Biologics and (ii) Pharma and Consumer Health. Set forth below is a summary description of the Company's two current operating and reportable segments. The consolidated financial statements for the years ended June 30, 2022, 2021 and 2020 set forth herein have been recast retrospectively to reflect the new reporting structure.
Biologics—The Biologics segment provides the same services as the Biologics segment the Company reported in fiscal 2022, with some organizational adjustments and the addition of analytical development and testing services for large molecules that were previously disclosed as part of the Company's prior Oral and Specialty Delivery segment. The Biologics segment as reorganized provides development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; plasmid
DNA; induced pluripotent stem cells (iPSCs); oncolytic viruses, and vaccines. It also provides formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and, as noted above, analytical development and testing services for large molecules.
Pharma and Consumer Health—The Pharma and Consumer Health segment encompasses, except as noted above, the offerings of three of the Company's prior reportable segments—Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services—and comprises the Company’s market-leading capabilities for complex oral solids, softgel formulations, Zydis® fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
Each segment reports through a separate management team and ultimately reports to the Company's President and Chief Executive Officer, who is designated as the Chief Operating Decision Maker for segment reporting purposes. The Company's operating segments are the same as its reportable segments. All prior-period comparative segment information has been recast retrospectively to reflect the current reportable segments in accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, promulgated by the Financial Accounting Standards Board (the “FASB”).
Basis of Presentation
These financial statements include all of the Company’s subsidiaries, including those operating outside the United States (“U.S.”) and are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). All significant transactions among the Company’s subsidiaries and reporting segments have been eliminated, other than as noted.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition including determining the transaction price and associated constraint on variable consideration, allowance for credit losses, inventory and long-lived asset valuation, goodwill and other intangible asset valuation and impairment, equity-based compensation, income taxes, derivative valuation, and pension plan asset and liability valuation. Actual amounts may differ from these estimated amounts.
Reclassification
Certain prior-period amounts were 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 outside the U.S. are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of the foreign operations into U.S. dollars are accumulated as a component of other comprehensive income utilizing period-end exchange rates. Since July 2018, the Company has accounted for its Argentine operations as highly inflationary, but this status has not had a material effect on the consolidated financial statements.
The currency fluctuation related to certain long-term inter-company loans where settlement is not planned or anticipated in the foreseeable future have been recorded within the cumulative translation adjustment, a component of other comprehensive income. In addition, the currency fluctuation associated with the portion of the Company’s euro-denominated debt designated as a net investment hedge is included as a component of other comprehensive income. 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, net.” Such foreign currency transaction gains and losses include inter-company loans that are repayable in the foreseeable future.
Cash and Cash Equivalents
All liquid investments purchased with original maturities of three months or less are considered cash equivalents. The carrying value of these cash equivalents approximates fair value.
Allowance for Credit Losses
Trade receivables, contract assets, and other amounts owed to the Company are presented net of an allowance that includes an assessment of expected credit losses. The Company determines its allowance methodology by considering various factors, including the Company’s previous loss history, aging of customer receivable balances, significant aspects of a
geographic location's economic conditions, the current and anticipated future condition of the general economy and the industries in which the Company's primary customers operate. To the extent that the Company identifies that any individual customer's credit quality has deteriorated, the Company establishes allowances based on the individual risk characteristics of that customer. The Company makes concerted efforts to collect all outstanding balances due from customers; however, trade receivables and contract assets are written off against the allowance when the related balances are no longer deemed collectible.
Concentrations of Credit Risk and Major Customers
Concentration of credit risk, with respect to accounts receivable, is limited due to the large number of customers and their dispersion across different geographic areas. The customers are primarily concentrated in the pharmaceutical and consumer products industries. The Company does not normally require collateral or any other security to support credit sales. The Company performs ongoing credit evaluations of its customers’ financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company’s expectations. For the fiscal year ended June 30, 2022, the Company had one customer that accounted for greater than 10% of its net revenue, which was primarily recorded in the Biologics segment. No single customer exceeded 10% of revenue during the fiscal years ended June 30, 2021, and 2020. As of June 30, 2021, the Company had one customer that accounted for approximately 15% or $155 million of its net trade receivable balances. No customer exceeded 10% of trade receivables as of June 30, 2022 or June 30, 2020. However, when considering aggregate trade receivable and contract asset values for significant customers as of June 30, 2022, the Company had one customer that accounted for approximately 14% of its aggregate trade receivable and contract asset values.
Inventories
Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. The Company provides for cost adjustments for excess, obsolete, or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. Inventory consists of costs associated with raw material, labor, and overhead.
Goodwill
The Company accounts for purchased goodwill and intangible assets with indefinite lives in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles - Goodwill and Other. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. The Company performs an impairment evaluation of goodwill annually during the fourth quarter of its fiscal year or when circumstances otherwise indicate an evaluation should be performed.
The evaluation may begin with a qualitative assessment for each reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. Factors considered in a qualitative assessment include, among other things, macroeconomic conditions, industry and market considerations, financial performance of the respective reporting unit and other relevant entity and reporting-unit specific considerations. If the qualitative assessment does not generate a positive response, or if no qualitative assessment is performed, a quantitative assessment, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates, and macroeconomic, industry, and market conditions. In fiscal 2022 and 2020, the Company proceeded immediately to the quantitative assessment, but in fiscal 2021, the Company began its impairment evaluation with the qualitative assessment. The evaluations performed in fiscal 2020, 2021, and 2022 resulted in no impairment charge.
Based on its quantitative assessment conducted as of April 1, 2022, the Company determined for each reporting unit with goodwill that it was more likely than not that its respective fair value exceeded its carrying value, indicating there was no impairment. For more information regarding goodwill balances at June 30, 2022, see Note 5, Goodwill.
Property and Equipment and Other Definite-Lived Intangible Assets
Property and equipment are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, including leasehold improvements and finance lease right-of-use assets that are amortized over the shorter of their useful lives or the terms of the respective leases. The Company generally uses the following range of useful lives for its property and equipment categories: buildings and improvements—5 to 50 years; machinery and equipment—3 to 10 years; and furniture and fixtures—3 to 7 years. Depreciation expense was $255 million for the fiscal year ended June 30, 2022, $196 million for the fiscal year ended June 30, 2021, and $165 million for the fiscal year ended June 30, 2020. Depreciation expense includes amortization of assets related to financing leases. The Company charges repairs and maintenance costs to expense as incurred. The amount of capitalized interest for fiscal 2022, 2021 and 2020 was $15 million, $17 million, and $11 million, respectively.
Intangible assets with finite lives, including customer relationships, core technology, patents, and trademarks, are amortized over their useful lives. The Company also capitalizes certain computer software and development costs in other
intangibles, net, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 5 years. The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate impairment may have occurred pursuant to ASC 360, Property, Plant and Equipment. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an un-discounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the consolidated statements of operations. Fair value is determined based on assumptions the Company believes marketplace participants would utilize and comparable marketplace information in similar arm’s length transactions. The Company recorded impairment charges related to definite-lived intangible assets and property, plant, and equipment of $31 million, $9 million, and $5 million for the fiscal years ended June 30, 2022, 2021, and 2020, respectively.
Post-Retirement and Pension Plans
The Company sponsors various retirement and pension plans, including defined benefit and defined contribution retirement plans. The measurement of the related benefit obligations and the net periodic benefit costs recorded each year are based upon actuarial computations, which require management’s judgment as to certain assumptions. These assumptions include the discount rates used in computing the present value of the benefit obligations and the net periodic benefit costs, the expected future rate of salary increases (for pay-related plans) and the expected long-term rate of return on plan assets (for funded plans). The Company uses the corridor approach to amortize actuarial gains and losses.
The Company has elected to utilize an approach to estimate the service and interest components of net periodic benefit cost for benefit plans that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. The expected long-term rate of return on plan assets is based on the target asset allocation and the average expected rate of growth for the asset classes invested. The average expected rate of growth is derived from a combination of historic returns, current market indicators, and the expected risk premium for each asset class. The Company uses a measurement date of June 30 for all its retirement and postretirement benefit plans.
Derivative Instruments, Hedging Activities, and Fair Value
Derivative Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest-rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments from time to time to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not net any of its derivative positions under master netting arrangements.
Primarily, the Company is exposed to fluctuations in the euro-U.S. dollar exchange rate on its investments in foreign operations in Europe. While the Company does not actively hedge against changes in foreign currency, it has mitigated the exposure of investments in its European operations through a net-investment hedge by denominating a portion of its debt in euros. In addition, a portion of Operating Company's interest payment obligation on its U.S dollar-denominated term loans is exposed to interest rate variability. The Company has mitigated its exposure to this risk by entering into interest-rate swap agreements, which qualify for and are designated as cash-flow hedges. Also, as discussed in Note 10, Derivative Instruments and Hedging Activities, the Company determined that an aspect of the dividend-rate adjustment feature of the Company’s previously outstanding Series A Preferred Stock (as defined below, see Note 14, Equity,Redeemable Preferred Stock, and Accumulated Other Comprehensive Loss) should be accounted for as a derivative liability.
Fair Value
The Company is required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. The Company uses fair value extensively, including in the initial measurement of net assets acquired in a business combination and when accounting for and reporting on certain financial instruments. The Company estimates fair value using an exit price approach, which requires, among other things, that it determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming the risk of non-performance will be the same before and after the transfer. A single estimate of fair value results from a complex series of
judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the assets or liability, the Company may use one or all of the following approaches:
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
•Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
•Income approach, which is based on the present value of the future stream of net cash flows.
Certain investments that are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
Marketable Securities
The Company classifies its liquid debt investments with original maturities greater than ninety days as marketable securities. The Company invests in highly rated corporate debt securities, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any single issuer. The Company regularly reviews its investments and utilizes quantitative and qualitative evidence to evaluate potential impairments. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether it intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. If the criteria are not met, the Company evaluates whether the decline in fair value has resulted from a credit loss or other factors. In making this assessment, management considers, among other factors, the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized costs basis.
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 June 30, 2022, the amortized cost basis of marketable securities approximates fair value and all outstanding marketable securities mature within one year.
Self-Insurance
The Company is partially self-insured for certain employee health benefits and partially self-insured for property losses and casualty claims. The Company accrues for losses based upon experience and actuarial assumptions, including provisions for losses incurred but not reported.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, which is reported in the accompanying consolidated statements of changes in shareholders’ equity, consists of foreign currency translation, net change in marketable securities, and defined benefit pension plan changes.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development costs amounted to $23 million, $21 million, and $21 million for the fiscal years ended June 30, 2022, 2021, and 2020, respectively.
Earnings Per Share
The Company reports net earnings per share in accordance with ASC 260, Earnings per Share. The Company computes basic earnings per share for the Common Stock using the two-class method by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. The Series A Preferred Stock, due to its convertible feature, was participating in nature; accordingly, the outstanding shares of Series A Preferred Stock were included in the two-class method. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential shares of Common Stock that were dilutive and outstanding during the period. The denominator includes the weighted average over the measurement period of the sum of the number of shares of
Common Stock outstanding and the number of additional such shares that would have been outstanding if the shares of Common Stock that were both potentially issuable and dilutive had been issued, and is calculated using the more dilutive of the two-class, treasury stock, and if-converted methods.
Income Taxes
In accordance with ASC 740, Income Taxes, the Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in the respective jurisdictions in which it operates. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that the Company will be able to realize some or all of the deferred tax assets. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in each of its tax jurisdictions. The number of years with open tax audits varies by tax jurisdiction. A number of years may lapse before a particular matter is audited and finally resolved. The Company applies ASC 740 to determine the accounting for uncertain tax positions. This standard prescribes a minimum recognition threshold a tax position is required to meet before the Company may recognize the position in its financial statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, and disclosure. The Company previously elected not to reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Under ASC 718, companies recognize compensation expense using a fair-value-based method for costs related to share-based payments, including stock options and restricted stock units. The expense is measured based on the grant date fair value of the awards, and the expense is recorded over the applicable requisite service period. Forfeitures are recognized as and when they occur. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividends on the underlying shares and the risk-free interest rate.
The terms of the Company’s stock-based compensation plans permit an employee holding vested stock options or restricted stock units to elect to have the Company use a portion of the shares otherwise issuable upon the employee’s exercise of the option or grant, a so-called “net settlement transaction,” as a means of paying the exercise price, meeting tax withholding requirements, or both.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 change in tax laws or rates. The Company adopted the guidance on July 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plan, which removes 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 benefit obligation for the period. The Company adopted the guidance on July 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
New Accounting Standards Not Adopted as of June 30, 2022
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.
3. 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 that the Company expects to be entitled in exchange for transferring the promised goods to and/or performing services for the customer (the “Transaction Price”). To the extent the Transaction Price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the Transaction Price utilizing either the expected value method or the most likely amount method depending on which method is expected to better predict the amount of consideration to which the Company will be entitled. The value of variable consideration is included in the Transaction Price if, and to the extent, it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustments required are recorded on a cumulative catch-up basis, which affects revenue and net income in the period of adjustment.
The Company’s customer contracts generally include provisions entitling the Company to a termination penalty when the customer terminates prior to the contract’s nominal end date. The termination penalties in the customer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and obligations throughout the stated duration of the contract. The Company accounts for a contract termination as a contract modification in the period in which the customer gives notice of termination. The determination of the contract termination penalty is based on the terms stated in the relevant customer agreement. As of the modification date, the Company updates its estimate of the Transaction Price using the expected value method, subject to constraints, and to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustments required are recorded on a cumulative catch-up basis, which would affect revenue and net income in the period of adjustment.
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.
Manufacturing & Commercial Product Supply Revenue
Manufacturing and commercial product supply revenue consists of revenue earned by manufacturing products supplied to customers under long-term commercial supply arrangements. In these arrangements, the customer typically owns and supplies the active pharmaceutical ingredient, (“API”) or other proprietary materials which are used in the manufacturing process. The contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of the Company’s business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. The transaction price is generally stated in the agreement as a fixed price per unit, with no contractual provision for a refund or price concession. In most circumstances, control is transferred to the customer over time, creating a corresponding right to recognize the related revenue, because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date. The selection of the method for measuring progress towards the completion of the Company’s performance obligation requires judgment and is based on the nature of the products to be manufactured and supplied to the customer. For the majority of the Company’s arrangements, progress is measured based on the units of product that have successfully completed the contractually-required product quality assurance process, because the conclusion of that process defines the time when the applicable contract and the related regulatory requirements permit the customer to exercise control over the product’s disposition. The customer is typically responsible for arranging the shipping and handling of product following completion of the quality assurance process. Payment is typically due 30 to 45 days after the goods are delivered as requested by the customer, based on the payment terms set forth in the applicable customer agreement.
Development Services and Clinical Supply Revenue
Development services and clinical supply contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include biologic cell-line development, performing formulation, analytical stability, or other services related to product development, and providing manufacturing services for products that are under development or otherwise not intended for commercial sale. They can also include a combination of the following services: the manufacturing, packaging, storage, distribution, destruction, and inventory management of customer clinical trial material, as well as the sourcing of comparator drug products on behalf of customers to be used in clinical trials to compare performance
with the drug under clinical investigation. The transaction prices for these arrangements are fixed and include amounts stated in the contracts for each promised service. Each service is generally considered to be a separate performance obligation. In most instances, the Company recognizes revenue over time because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date.
The Company measures progress toward the completion of its performance obligations satisfied over time based on the nature of the services to be performed. For certain types of arrangements, revenue is recognized over time and measured using an output method based on the completion of tasks and activities that are performed to satisfy a performance obligation. For certain types of arrangements, revenue is recognized over time and measured using an input method based on effort expended. Each of these methods provides an appropriate depiction of the Company’s progress toward fulfilling its performance obligations for its respective arrangement. In certain development services arrangements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability. In certain clinical supply arrangements, revenue is recognized at the point in time when control transfers, which occurs upon either the delivery of the related output of the service to the customer or the completion of quality testing with respect to the product, and the Company has an enforceable right to payment based on the terms of the arrangement.
The Company allocates consideration to each performance obligation using the “relative standalone selling price” as defined under ASC 606. Generally, the Company utilizes observable standalone selling prices in its allocations of consideration. If observable standalone selling prices are not available, the Company estimates the applicable standalone selling price using a cost-plus-margin approach or an adjusted market assessment approach, in each case, representing the amount that the Company believes the market is willing to pay for the applicable service. Payment is typically due 30 to 45 days following the completion of services provided to the customer, based on the payment terms set forth in the applicable customer agreement.
The Company records revenue for comparator sourcing arrangements on a net basis because it is acting as an agent that does not control the product or service before it is transferred to the customer. Payment for comparator sourcing activity is typically received in advance at the commencement of the contract and is initially recorded as a contract liability.
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.
Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. The contract liabilities balances (current and non-current) as of June 30, 2022 and June 30, 2021 were as follows:
| | | | | | | | |
| (Dollars in millions) | | |
| | |
| Balance at June 30, 2021 | | $ | 321 | |
| | |
| | |
| | |
| | |
| Balance at June 30, 2022 | | $ | 220 | |
| Revenue recognized in the period from amounts included in contracts liability at the beginning of the period: | | $ | (272) | |
| | |
Contract liabilities that will be recognized within 12 months of June 30, 2022 are accounted for in Other accrued liabilities and those that will be recognized longer than 12 months after June 30, 2022 are accounted for within Other liabilities.
Contract Assets
Contract assets primarily relate to the Company's conditional right to receive consideration for development services that have been performed for a customer as of June 30, 2022 but had not yet been invoiced as of June 30, 2022. Contract assets are transferred to trade receivables, net when the Company’s right to receive the consideration becomes unconditional. Contract assets totaled $441 million and $181 million as of June 30, 2022 and 2021, respectively. Contract assets expected to transfer to trade receivables within 12 months are accounted for within Prepaid expenses and other. Contract assets expected to transfer to trade receivables longer than 12 months are accounted for within Other long-term assets.
As of June 30, 2022, the Company's aggregate contract asset balance was $441 million, an increase of $260 million compared to June 30, 2021. The majority of this increase is related to large development programs in the Biologics segment, such as manufacturing and development services for COVID-19 vaccines, where revenue is recorded over time and the ability to invoice customers is dictated by contractual terms. As of June 30, 2022, there were no reserves recorded against the Company's aggregate contract asset balance.
As discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, the Company changed its operating structure and reorganized its executive leadership team accordingly. This new organizational structure includes simplifying the four operating and reportable segments the Company disclosed during fiscal 2022 to two: (i) Biologics and (ii) Pharma and Consumer Health. The disaggregated revenue disclosures below have been reclassified to conform to the Company’s current segment structure.
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, 2022 | Biologics | | Pharma and Consumer Health | | Total |
| Manufacturing & commercial product supply | $ | 608 | | | $ | 1,474 | | | $ | 2,082 | |
| Development services and clinical supply | 1,926 | | | 797 | | | 2,723 | |
| Total | $ | 2,534 | | | $ | 2,271 | | | $ | 4,805 | |
| Inter-segment revenue elimination | | (3) | |
| Combined net revenue | | $ | 4,802 | |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, 2021 | Biologics | | Pharma and Consumer Health | | Total |
| Manufacturing & commercial product supply | $ | 532 | | | $ | 1,321 | | | $ | 1,853 | |
| Development services and clinical supply | 1,406 | | | 742 | | | 2,148 | |
| Total | $ | 1,938 | | | $ | 2,063 | | | $ | 4,001 | |
| Inter-segment revenue elimination | | (3) | |
| Combined net revenue | | $ | 3,998 | |
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, 2020 | Biologics | | Pharma and Consumer Health | | Total |
| Manufacturing & commercial product supply | $ | 332 | | | $ | 1,403 | | | $ | 1,735 | |
| Development services and clinical supply | 700 | | | 660 | | | 1,360 | |
| Total | $ | 1,032 | | | $ | 2,063 | | | $ | 3,095 | |
| Inter-segment revenue elimination | | (1) | |
| Combined net revenue | | $ | 3,094 | |
The following table reflects net revenue by the location where the goods were made or the service performed:
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Fiscal Year Ended
June 30, 2022 | | Fiscal Year Ended
June 30, 2021 | | Fiscal Year Ended
June 30, 2020 |
| | | | | | |
| United States | | $ | 3,084 | | | $ | 2,462 | | | $ | 1,822 | |
| Europe | | 1,506 | | | 1,343 | | | 976 | |
| Other | | 327 | | | 288 | | | 376 | |
| Elimination of revenue attributable to multiple locations | | (115) | | | (95) | | | (80) | |
| Total | | $ | 4,802 | | | $ | 3,998 | | | $ | 3,094 | |
4. BUSINESS COMBINATIONS AND DIVESTITURES
Skeletal Cell Therapy Support SA Acquisition
In November 2020, the Company acquired 100% of the equity interest in Skeletal Cell Therapy Support SA (“Skeletal”) for $15 million, and entered into related supply agreements with the seller. Skeletal operates a cell therapy manufacturing facility in Gosselies, Belgium. The operations were assigned to the Company’s Biologics segment, expanding the Company’s cell therapy capacity for clinical and commercial supply. The acquisition, combined with the Company's other European-based facilities and capabilities in cell therapy, has resulted in an integrated European center of excellence in cell therapy.
The Company accounted for the Skeletal acquisition using the acquisition method in accordance with ASC 805, Business Combinations. The Company funded the entire purchase price with cash on hand and allocated the purchase price among the acquired assets, recognizing $9 million of goodwill. 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 fiscal years ended June 30, 2022 and 2021 were not material to the Company’s statement of operations, financial position, or cash flows.
Acorda Therapeutics, Inc. Transaction
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. In connection with the purchase, Acorda and the Company entered into a long-term supply agreement, under which the Company continues to manufacture and package an Acorda product at the facility. The facility and operations became part of the Company’s Pharma and Consumer Health segment. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the fiscal years ended June 30, 2022 and 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 allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $79 million, inventory of $2 million, and goodwill of $2 million. The remainder of the purchase price was allocated to other current and non-current assets and liabilities assumed in the acquisition.
Delphi Genetics SA Acquisition
In February 2021, the Company acquired 100% of the equity interest in Delphi Genetics SA (“Delphi”) for $50 million. Delphi is a pDNA cell and gene therapy contract development and manufacturing organization based in Gosselies, Belgium. The facility and operations acquired became part of the Company’s Biologics segment. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the fiscal years ended June 30, 2022 and 2021.
The Company accounted for the Delphi transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $4 million, intangible assets of $7 million, other current assets of $3 million, assumed debt of $6 million, other current liabilities of $1 million and goodwill of $43 million.
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 development and cGMP-grade iPSCs based in Lagenfeld, Germany. The operations 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 allocated the purchase price among the assets acquired, recognizing $4 million of current liabilities, $1 million of other liabilities, $14 million of intangible assets, and goodwill of $17 million. Results of this business were not material to the Company's statement of operations, financial position, or cash flows for the fiscal year ended June 30, 2022.
Bettera Holdings, LLC Acquisition
In October 2021, the Company acquired 100% of the equity interest in Bettera Wellness for approximately $1 billion, which was funded in part with net proceeds of the Company’s issuance of $650 million aggregate principal amount of 3.500% Senior Notes due 2030 (the “2030 Notes”) and in part with net proceeds from the Incremental Term B-3 Loans (as defined in Note 8, Long-Term Obligations and Short-Term Borrowings). Bettera Wellness is a manufacturer of nutraceuticals and nutritional supplements in gummy, soft chew, and lozenge delivery formats.
The Company accounted for the Bettera Wellness transaction using the acquisition method in accordance with ASC 805. The Company estimated fair values at the date of acquisition for the allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.
The final purchase price was allocated to assets acquired and liabilities assumed in the acquisition as follows:
| | | | | |
| (Dollars in millions) | Purchase Price Allocation |
| Cash and cash equivalents | $ | 23 | |
| Trade receivables, net | 16 | |
| Inventories | 31 | |
| Other current assets | 4 | |
| Property, plant, and equipment | 72 | |
Other intangibles, net (1) | 361 | |
| Other assets | 12 | |
| Current liabilities | (22) | |
| Other liabilities | (11) | |
| Goodwill | 531 | |
| Total assets acquired and liabilities assumed | $ | 1,017 | |
(1) Other intangibles, net includes core technology of $338 million and customer relationships of $23 million.
The carrying value of trade receivables, inventory, and trade payables, as well as certain other current and non-current assets and liabilities, generally represented the fair value at the date of acquisition.
Property, plant, and equipment assets were valued using the cost approach, which is based on current replacement and/or reproduction cost of the related asset as new, less depreciation attributable to physical, functional, and economic factors. The Company then determined the remaining useful life based on the anticipated life of the asset and Company policy for similar assets.
Core technology intangible assets of $338 million were valued using the multi-period, excess-earnings method, a method that values the intangible asset using the present value of the after-tax cash flows attributable to the intangible asset only. The significant assumptions used in developing the valuation included the estimated annual net cash flows (including application of an appropriate margin to forecasted revenue, revenue obsolescence rate, selling and marketing costs, return on working capital, contributory asset charges, and other factors), the discount rate that appropriately reflects the risk inherent in each future cash
flow stream, and an assessment of the asset’s life cycle, as well as other factors. The assumptions used in the financial forecasts were based on historical data, supplemented by current and anticipated growth rates, management plans, and market-comparable information. Fair-value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. The core technology intangible asset has a weighted average useful life of 10 years.
Goodwill has been allocated to the Pharma and Consumer Health segment as shown in Note 5, Goodwill. Goodwill is mainly comprised of growth from expected increases in capacity utilization and new customers. The goodwill resulting from the Bettera Wellness acquisition is deductible for tax purposes.
Results of this business were not material to the Company's consolidated statement of operations, financial position, or cash flows for the fiscal year ended June 30, 2022.
Vaccine Manufacturing and Innovation Centre UK Limited Asset Acquisition
In April 2022, the Company, through its wholly owned subsidiary, Catalent Oxford Limited, acquired a development and manufacturing facility near Oxford, United Kingdom (“U.K.”) and certain related assets and liabilities from The Vaccine Manufacturing and Innovation Centre UK Limited for $134 million in cash, including $9 million of closing costs. The facility and related assets and liabilities became part of the Company’s Biologics segment.
The Company accounted for this transaction as an acquisition of assets in accordance with ASC 805. The Company funded this acquisition with cash on hand and allocated the purchase price among the net assets acquired, recognizing $1 million of current assets, $165 million of property, plant, and equipment, $18 million of current liabilities, and $14 million of other liabilities. Results of this business were not material to the Company's statement of operations, financial position, or cash flows for the fiscal year ended June 30, 2022.
Princeton Cell Therapy Development and Manufacturing Acquisition
In April 2022, the Company acquired a cell therapy commercial manufacturing facility and operations near Princeton, New Jersey (“Princeton”) from Erytech Pharma S.A. (“Erytech”) for $45 million in cash, subject to customary adjustments. In connection with the purchase, Erytech and the Company entered into a long-term supply agreement, under which the Company will continue to manufacture and package an Erytech product at the Princeton facility. The operations and facility acquired became part of the Company’s Biologics segment.
The Company accounted for this transaction using the acquisition method in accordance with ASC 805. The Company funded this acquisition with cash on hand and preliminarily allocated the purchase price among the assets acquired, recognizing $22 million of property, plant, and equipment, $10 million of other assets, $1 million of current liabilities, $10 million of other liabilities, and goodwill of $24 million. Results of this business were not material to the Company's statement of operations, financial position, or cash flows for the fiscal year ended June 30, 2022.
The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to property, plant and equipment is 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.
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”) 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 Pharma and Consumer 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 divestiture of $182 million, net of transaction costs, for the fiscal year ended June 30, 2021.
During the fiscal year ended June 30, 2022, 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 and $51 million at June 30, 2021 and June 30, 2022, respectively. The fair value at divestiture date consisted of a $50 million aggregate principal amount less a $3 million discount determined using a discounted cash flow model.
(2) The Company determined that the estimated fair value of the contingent consideration from the sale of the Blow-Fill-Seal Business at June 30, 2022 is zero, and therefore no contingent consideration was recorded at divestiture. 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 resulting in net cash proceed of $284 million.
5. GOODWILL
The following table summarizes the changes from June 30, 2020 to June 30, 2021 and then to June 30, 2022 in the carrying amount of goodwill in total and by reporting segment:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Biologics | | Pharma and Consumer Health | | Total |
| Balance at June 30, 2020 | $ | 1,494 | | | $ | 977 | | | $ | 2,471 | |
Additions (1) | 54 | | | 2 | | | 56 | |
Divestitures (2) | — | | | (54) | | | (54) | |
| | | | | |
| | | | | |
| Foreign currency translation adjustments | 14 | | | 32 | | | 46 | |
| Balance at June 30, 2021 | 1,562 | | | 957 | | | 2,519 | |
Additions (3) | 41 | | | 531 | | | 572 | |
| | | | | |
| | | | | |
| | | | | |
| Foreign currency translation adjustments | (37) | | | (48) | | | (85) | |
| Balance at June 30, 2022 | $ | 1,566 | | | $ | 1,440 | | | $ | 3,006 | |
(1) The additions to goodwill arise from the Skeletal (Biologics), Delphi (Biologics) and Acorda (Pharma and Consumer Health) transactions. For further details, see Note 4, Business Combinations and Divestitures.
(2) Represents goodwill associated with the divestiture of the Blow-Fill-Seal Business.
(3) The additions to goodwill arise from the Bettera Wellness (Pharma and Consumer Health), Princeton (Biologics), RheinCell (Biologics), and Delphi (Biologics) acquisitions. For further details, see Note 4, Business Combinations and Divestitures.
The Company recorded no impairment charge to goodwill in fiscal 2022, 2021, or 2020.
6. OTHER INTANGIBLES, NET
The details of other intangible assets subject to amortization as of June 30, 2022 and June 30, 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Amortized intangibles: | | | | | | | |
| Core technology | 11 years | | $ | 480 | | | $ | (121) | | | $ | 359 | |
| Customer relationships | 13 years | | 1,020 | | | (366) | | | 654 | |
| Product relationships | 8 years | | 239 | | | (204) | | | 35 | |
| Other | 4 years | | 24 | | | (12) | | | 12 | |
| Total other intangibles | | | $ | 1,763 | | | $ | (703) | | | $ | 1,060 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| Amortized intangibles: | | | | | | | |
| Core technology | 19 years | | $ | 140 | | | $ | (94) | | | $ | 46 | |
| Customer relationships | 14 years | | 1,024 | | | (306) | | | 718 | |
| Product relationships | 11 years | | 281 | | | (237) | | | 44 | |
| Other | 5 years | | 17 | | | (8) | | | 9 | |
| Total other intangibles | | | $ | 1,462 | | | $ | (645) | | | $ | 817 | |
Amortization expense was $123 million, $93 million, and $89 million for the fiscal years ended June 30, 2022, 2021, and 2020, respectively. Future amortization expense for the next five fiscal years is estimated to be:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Amortization | $ | 132 | | | $ | 131 | | | $ | 129 | | | $ | 121 | | | $ | 105 | | | $ | 442 | | | $ | 1,060 | |
7. RESTRUCTURING 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 closures to streamline Company operations.
During the fiscal year ended June 30, 2022, no material restructuring plan was adopted.
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 Pharma and Consumer Health facility in Bolton, U.K. In connection with this restructuring plan, the Company reduced its headcount by approximately 170 employees and incurred cumulative charges of $10 million, primarily associated with employee severance benefits. For the fiscal year ended June 30, 2022, restructuring charges associated with the Bolton facility closure were $3 million. Restructuring costs for the fiscal years ended June 30, 2022, 2021, and 2020 were recorded in Other Operating Expense in the Consolidated Statement of Operations.
The following table summarizes the costs recorded within restructuring costs:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
(Dollars in millions) | 2022 | | 2021 | | 2020 |
| Restructuring costs: | | | | | |
| Employee-related reorganization | $ | 9 | | | $ | 8 | | | $ | 6 | |
| Facility exit and other costs | 1 | | | 2 | | | — | |
| Total restructuring costs | $ | 10 | | | $ | 10 | | | $ | 6 | |
8. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consist of the following at June 30, 2022 and June 30, 2021:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Maturity as of June 30, 2022 | | June 30, 2022 | | June 30, 2021 |
| Senior secured credit facilities | | | | | |
| | | | | |
| Term loan facility B-3 | February 2028 | | 1,433 | | | 997 | |
| | | | | |
| | | | | |
| | | | | |
| 5.000% senior notes due 2027 | July 2027 | | 500 | | | 500 | |
2.375% euro senior notes due 2028(1) | March 2028 | | 874 | | | 984 | |
| 3.125% senior notes due 2029 | February 2029 | | 550 | | | 550 | |
| 3.500% senior notes due 2030 | April 2030 | | 650 | | | — | |
| Deferred purchase consideration | | | — | | | 50 | |
| | | | | |
| Financing lease obligations | 2022 to 2120 | | 234 | | | 193 | |
| Other obligations | 2022 to 2028 | | 2 | | | 3 | |
| Unamortized discount and debt issuance costs | | | (41) | | | (36) | |
| Total debt | | | 4,202 | | | 3,241 | |
Less: current portion of long-term obligations and other short-term
borrowings | | | 31 | | | 75 | |
| Long-term obligations, less current portion | | | $ | 4,171 | | | $ | 3,166 | |
(1) The decrease in euro-denominated debt at June 30, 2022 compared to the prior year is primarily due to fluctuations in foreign currency exchange rates.
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 as of 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 payments from 0.25% to 0.2506% of the principal amount outstanding for the Incremental Term B-3 Loans and the other term loans outstanding under the Credit Agreement, all of which are U.S. dollar-denominated (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 drawn Term B-3 Loans, including 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 Wellness acquisition.
The Sixth Amendment also provided for incremental revolving credit commitments under Operating Company’s secured revolving credit commitments, which is part of its senior secured credit facilities (as amended, the “Revolving Credit Facility”). The applicable rate for all loans drawn under the Revolving Credit Facility is one-month LIBOR plus 2.25% and such rate can be reduced to one-month LIBOR plus 2.00% in future periods based on a measure of Operating Company's total leverage ratio. The maturity date for the Revolving Credit Facility is May 17, 2024. In addition, pursuant to Amendment No. 5 to the Credit Agreement (the “Fifth Amendment”), certain modifications were made to the Credit Agreement in order to, among other things, provide for determination of a benchmark replacement interest rate when LIBOR is no longer available.
Pursuant to the terms of the Credit Agreement the interest rates under the Term B-3 Loans and loans drawn under the Revolving Credit Facility will be based on a replacement benchmark interest rate when LIBOR is no longer available.
The availability of capacity under the Revolving Credit Facility is reduced by the aggregate value of all outstanding letters of credit under the Credit Agreement. As of June 30, 2022, Operating Company had $721 million of unutilized capacity under the Revolving Credit Facility due to $4 million of outstanding letters of credit.
5.000% Senior Notes due 2027
In June 2019, Operating Company completed a private offering of $500 million aggregate principal amount of 5.000% Senior Notes due 2027 (the “2027 Notes”). The 2027 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 2027 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 2027 Notes will mature on July 15, 2027 and bear interest at the rate of 5.000% per annum. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The proceeds of the 2027 Notes after payment of the offering fees and expenses were used to repay in full the borrowings under Operating Company’s then-outstanding term loans under its senior secured credit facilities that would otherwise have matured in May 2024.
2.375% Euro-denominated Senior Notes due 2028
In March 2020, Operating Company completed a private offering of €825 million aggregate principal amount of 2.375% Senior Notes due 2028 (the "2028 Notes"). The 2028 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 2028 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2028 Notes will mature on March 1, 2028 and bear interest at the rate of 2.375% per annum. Interest is payable semi-annually in arrears on March 1 and September 1 of each year. The proceeds of the 2028 Notes after payment of the offering fees and expenses were used to repay in full the borrowings then outstanding under Operating Company's euro-denominated term loans under its senior secured credit facilities, which would have matured in May 2024, and repay in full Operating Company's euro-denominated 4.75% Senior Notes due 2024 (the “2024 Notes”), which would have matured in December 2024, plus any accrued and unpaid interest thereon, with the remainder available for general corporate purposes.
3.125% Senior Notes due 2029
In February 2021, Operating Company completed a private offering of $550 million aggregate principal amount of 3.125% Senior Notes due 2029 (the "2029 Notes"). The 2029 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 2029 Notes will mature on February 15, 2029 and bear interest at the rate of 3.125% per annum payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2021. The proceeds of the 2029 Notes after payment of the offering fees and expenses were used to repay in full the outstanding borrowings under Operating Company's 4.875% Senior Notes due 2026 (the "2026 Notes"), which would have matured in January 2026 plus any accrued and unpaid interest thereon, with the remainder available for general corporate purposes.
3.500% Senior Notes due 2030
In September 2021, Operating Company completed a private offering of the 2030 Notes (together with the 2027 Notes, the 2028 Notes, and the 2029 Notes, the "Senior 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 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 Wellness acquisition.
Deferred Purchase Consideration
In connection with the acquisition of Cook Pharmica LLC (now Catalent Indiana, LLC) in October 2017, $200 million of the $950 million aggregate nominal purchase price was payable in $50 million installments, on each of the first four anniversaries of the closing date. The Company made installment payments in October 2018, October 2019, October 2020 and the final payment was made in October 2021.
Long-Term and Other Obligations
Other obligations consist primarily of finance leases for buildings and other loans for business and working capital needs. Maturities of long-term obligations, including finance leases of $234 million, and other short-term borrowings for future fiscal years are:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
| Maturities of long-term and other obligations | $ | 31 | | | $ | 31 | | | $ | 29 | | | $ | 26 | | | $ | 27 | | | $ | 4,099 | | | $ | 4,243 | |
Debt Issuance Costs
Debt issuance costs associated with the Credit Agreement (other than its Revolving Credit Facility component) and the Senior Notes are presented as a reduction to the carrying value of the related debt, while debt issuance costs associated with the Revolving Credit Facility are capitalized within other long-term assets on the consolidated balance sheet. All debt issuance costs are amortized over the life of the related obligation through charges to interest expense in the consolidated statements of operations. The unamortized total debt issuance costs, including the costs associated with the Revolving Credit Facility capitalized within other long-term assets, were $42 million and $39 million as of June 30, 2022 and 2021, respectively. Amortization of debt issuance costs totaled $7 million and $6 million for the fiscal years ended June 30, 2022 and 2021, respectively.
Guarantees and Security
Senior Secured Credit Facilities
All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the following assets of Operating Company and each guarantor (Operating Company's parent entity, PTS Intermediate, and each of Operating Company's material domestic subsidiaries), subject to certain exceptions:
•a pledge of 100% of the capital stock of Operating Company and 100% of the equity interests directly held by Operating Company and each guarantor in any wholly owned material subsidiary of Operating Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than 65% of the voting stock of such non-U.S. subsidiary); and
•a security interest in, and mortgages on, substantially all tangible and intangible assets of Operating Company and of each guarantor, subject to certain limited exceptions.
The Senior Notes
All obligations under 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's wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by either PTS Intermediate or the Company.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains covenants that, among other things, restrict, subject to certain exceptions, Operating Company’s (and Operating Company’s 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's subordinated indebtedness and change Operating Company's 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 June 30, 2022, the Company was in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company’s non-U.S. subsidiaries nor its dormant Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating Company’s 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” 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.
The Senior Notes
The various indentures governing the Senior Notes (collectively, the “Indentures”) contain covenants that, among other things, limit the 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 Senior Notes or the applicable Trustee under the Indentures may declare the applicable notes immediately due and payable; or in certain circumstances, the applicable notes will automatically become immediately due and payable. As of June 30, 2022, Operating Company was in compliance with all material covenants under the Indentures.
Estimated Fair Value of Debt Measurements
The estimated fair values of the senior secured credit facilities and Senior Notes are classified as Level 2 (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 are calculated by using a discounted cash flow model with market interest rate as a significant input. The carrying amounts and the estimated fair values of financial instruments as of June 30, 2022 and June 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 | | 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 | | | $ | 483 | | | $ | 500 | | | $ | 539 | |
| 2.375% euro Senior Notes due 2028 | Level 2 | | 874 | | | 744 | | | 984 | | | 993 | |
| 3.125% Senior Notes due 2029 | Level 2 | | 550 | | | 476 | | | 550 | | | 524 | |
| 3.500% senior notes due 2030 | Level 2 | | 650 | | | 561 | | | — | | | — | |
| Senior secured credit facilities & other | Level 2 | | 1,669 | | | 1,575 | | | 1,243 | | | 1,209 | |
| Subtotal | | | $ | 4,243 | | | $ | 3,839 | | | $ | 3,277 | | | $ | 3,265 | |
| Debt issuance costs | | | (41) | | | — | | | (36) | | | — | |
| Total debt | | | $ | 4,202 | | | $ | 3,839 | | | $ | 3,241 | | | $ | 3,265 | |
9. EARNINGS PER SHARE
The Company computed earnings per share (“EPS”) of the Common Stock for fiscal 2020, 2021, and 2022 using the two-class method required due to the participating nature of the formerly outstanding Series A Preferred Stock (as noted and defined in Note 14, Equity, Redeemable Preferred Stock and Accumulated Other Comprehensive Loss). The weighted-average number of shares outstanding utilized in diluted earnings per share is computed using the weighted-average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive instruments. Dilutive securities having an anti-dilutive effect on diluted net income per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company’s equity incentive plans (see Note 15, Stock-Based Compensation) are reflected in diluted earnings per share by application of the treasury stock method. The Company applied 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 fiscal years ended June 30, 2022, 2021, and 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| | Fiscal year ended June 30, |
| (In millions, except per share data) | 2022 | | 2021 | | 2020 |
| Net earnings | $ | 499 | | | $ | 585 | | | $ | 221 | |
| Less: Net earnings attributable to preferred shareholders | (16) | | | (56) | | | (48) | |
| Net earnings attributable to common shareholders | $ | 483 | | | $ | 529 | | | $ | 173 | |
| | | | | |
| Weighted average shares outstanding – basic | 176 | | | 168 | | | 150 | |
| Weighted average dilutive securities issuable – stock plans | 2 | | | 2 | | | 2 | |
| Total weighted average shares outstanding - diluted | 178 | | | 170 | | | 152 | |
| | | | | |
| Earnings per share: | | | | | |
| Basic | $ | 2.74 | | | $ | 3.15 | | | $ | 1.16 | |
| Diluted | $ | 2.73 | | | $ | 3.11 | | | $ | 1.14 | |
| | | | | |
| | | | | |
The Company's Series A Preferred Stock was deemed a participating security, meaning that it had the right to participate in undistributed earnings with the Company's Common Stock. 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. On November 18, 2021 (the “Final Conversion Date”), the holders of Series A Preferred Stock converted the remaining 384,777 shares of Series A Preferred Stock and $2 million of unpaid accrued dividends into shares of Common Stock (the “Final Conversion”). These holders received 20.32 shares of Common Stock for each converted share of Series A Preferred Stock, resulting in the aggregate issuance of 7,817,554 shares of Common Stock by the Company. See Note 14, Equity, Redeemable Preferred Stock and Accumulated Other Comprehensive Loss for further details.
The diluted weighted average number of shares outstanding for the fiscal years ended June 30, 2022, 2021 and 2020 did not include the following weighted average number of shares of Common Stock associated with the formerly outstanding Series A Preferred Stock or the weighted average number of shares of Common Stock associated with outstanding equity grants due to their antidilutive effect:
| | | | | | | | | | | | | | | | | |
| Fiscal year ended June 30, |
| (share counts in millions) | 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| Series A Preferred Stock | 3 | | | 10 | | | 13 | |
| | | | | |
| | | | | |
| | | | | |
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the currency exchange rates applicable to its investments in foreign operations. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated the exposure arising from its investments in its European operations by denominating a portion of its Senior Notes in euros. At June 30, 2022, the Company had euro-denominated debt outstanding of $874 million (U.S. dollar equivalent), which qualifies as a hedge of a net investment in foreign operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of the translation gains or losses are reported in accumulated other comprehensive income (loss) as part of the cumulative translation adjustment. The unhedged portions of the translation gains or losses are reported in the consolidated statements of operations. The following table includes net investment hedge activity during the fiscal years ended June 30, 2022 and 2021, respectively:
| | | | | | | | | | | |
| (Dollars in millions) | June 30, 2022 | | June 30, 2021 |
| Unrealized foreign exchange gain (loss) within Other Comprehensive Income | $ | 121 | | | $ | (56) | |
| Unrealized foreign exchange loss within the Consolidated Statements of Operations | $ | (11) | | | $ | (3) | |
The net accumulated gain of this net investment hedge within accumulated other comprehensive loss was $127 million as of June 30, 2022. Amounts are reclassified out of accumulated other comprehensive loss into earnings when the entity in which the gains and losses reside is either sold or substantially liquidated.
Preferred Stock Derivative Liability
As discussed in Note 14, Equity, Redeemable 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 million after taking into account the $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 was 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.
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. The remainder of the derivative liability was settled on the Final Conversion Date due to the Final Conversion. The fair value of the derivative liability as of the Final Conversion Date was $1 million. 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 executing the Fifth Amendment, the Company settled the April 2020 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 fiscal 2021 loss was deferred in shareholders’ equity as a component of accumulated other comprehensive loss, net of tax, and amortized as an adjustment to interest expense, net over the original term of the Company’s U.S dollar-denominated term loans repaid in February 2021 in connection with the Fifth Amendment.
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.
A summary of the estimated fair value of the interest-rate swap reported in the consolidated balance sheets is stated in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | June 30, 2021 |
| (in millions) | | Balance Sheet Classification | | Estimated Fair Value | | Balance Sheet Classification | | Estimated Fair Value |
| Interest-rate swap | | Other long-term assets | | $ | 36 | | | 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 on a recurring basis and the fair value measurement for such assets and liabilities at June 30, 2022 and 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Basis of Fair Value Measurement |
| June 30, 2022 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Marketable securities | | $ | 89 | | | $ | 89 | | | $ | — | | | $ | — | |
| | | | | | | | |
| Interest-rate swap | | 36 | | | — | | | 36 | | | — | |
| Trading securities | | $ | 2 | | | $ | 2 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 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 derivative associated with the formerly outstanding Series A Preferred Stock was determined using an option pricing methodology, specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporated 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 was highly sensitive to changes in unobservable inputs, such as the expected volatility and the Company’s credit spread. The estimated fair value of the Series A Preferred Stock derivative liability was classified as Level 3 in the fair-value hierarchy due to the significant management judgment required to 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 from June 30, 2021 to June 30, 2022:
| | | | | |
(Dollars in millions) | Fair Value Measurement of
Series A Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3) |
| Balance at June 30, 2021 | $ | 3 | |
| Change in estimated fair value of Series A Preferred Stock derivative liability | (2) | |
| Settlement of derivative liability upon Final Conversion | (1) | |
| Balance at June 30, 2022 | $ | — | |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-lived assets, goodwill, and other intangible assets are subject to non-recurring fair value measurement for the evaluation of potential impairment. Other than the fair value estimates disclosed in Note 4, Business Combinations and Divestitures, there was no non-recurring fair value measurement during the fiscal years ended June 30, 2022 and 2021.
12. INCOME TAXES
Earnings before income taxes are as follows for fiscal 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2020 |
| U.S. operations | $ | 224 | | | $ | 457 | | | $ | 121 | |
| Non-U.S. operations | 355 | | | 258 | | | 139 | |
| Total | $ | 579 | | | $ | 715 | | | $ | 260 | |
The provision for income taxes consists of the following for fiscal 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | (8) | | | $ | 8 | | | $ | 1 | |
| State and local | 14 | | | 20 | | | 1 | |
| Non-U.S. | 66 | | | 38 | | | 33 | |
| Total current expense | $ | 72 | | | $ | 66 | | | $ | 35 | |
| Deferred: | | | | | |
| Federal | $ | 6 | | | $ | 62 | | | $ | 11 | |
| State and local | (5) | | | 7 | | | 6 | |
| Non-U.S. | 7 | | | (5) | | | (13) | |
| Total deferred expense | $ | 8 | | | $ | 64 | | | $ | 4 | |
| | | | | |
| Total provision | $ | 80 | | | $ | 130 | | | $ | 39 | |
A reconciliation of the provision starting from the tax computed at the federal statutory income tax rate to the tax computed at the Company’s effective income tax rate is as follows for the fiscal years ended 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2020 |
| Provision at U.S. federal statutory tax rate | $ | 122 | | | $ | 150 | | | $ | 55 | |
| State and local income taxes | 10 | | | 26 | | | 6 | |
| Foreign tax rate differential | (28) | | | (14) | | | (6) | |
| Global intangible low tax income | 6 | | | 3 | | | 3 | |
| Other permanent items | 2 | | | (5) | | | 2 | |
| Unrecognized tax positions | 1 | | | 3 | | | (1) | |
| Tax valuation allowance | 94 | | | (7) | | | (21) | |
| Foreign tax credit | (43) | | | (24) | | | (3) | |
| Withholding tax and other foreign taxes | 1 | | | 1 | | | 1 | |
| Change in tax rate | 1 | | | 2 | | | 4 | |
| | | | | |
| R&D tax credit | (2) | | | (5) | | | (2) | |
| Swiss tax reform | (83) | | | — | | | — | |
| Other | (1) | | | — | | | 1 | |
| Total provision | $ | 80 | | | $ | 130 | | | $ | 39 | |
The income tax provision for the fiscal year ended June 30, 2022 is not comparable to the provision in the prior year due to changes in the geographic mix of pretax income, changes in the tax impact of permanent differences and credits, and the tax
impact of discrete items. The lower effective tax rate for the fiscal year ended June 30, 2022 is primarily due to (i) increased income tax benefit resulting from a relative increase in non-U.S. earnings that are subject to more favorable tax rates than in the U.S., and (ii) an increased U.S. foreign tax credit due to amended prior-year returns. The Company also recognized a net deferred benefit of $21 million related to recently enacted tax reform in Switzerland and related transition rules (collectively, “Swiss Tax Reform”) presented in the table above in two components, a gross $83 million deferred tax benefit partially offset by a $62 million valuation allowance charge. The net deferred benefit of $21 million is the best estimate of the deferred tax benefit arising from Swiss Tax Reform. Swiss Tax Reform benefits were partially offset by certain deemed income inclusions in the U.S.and a deferred income tax charge for establishing valuation allowances against the net deferred tax assets of certain Belgian operations. The income tax provision for the fiscal year ended June 30, 2021 was higher than the income tax provision for the fiscal year ended June 30, 2020 due to the sale of the Blow-Fill-Seal Business and an increase in state taxes, offset by an increase in foreign tax credits due to amended prior year returns, as well as a reduction in the foreign valuation allowance.
The Company intends to repatriate foreign earnings taxed in prior fiscal years as a result of the changes imposed by the 2017 U.S. Tax Cuts and Jobs Act. In addition to these foreign earnings previously taxed, as of June 30, 2022, for purposes of ASC 740-10-25-3, the Company had $241 million of undistributed earnings from non-U.S. subsidiaries that it intends to reinvest permanently in its non-U.S. operations. As these ASC 740-10-25-3 earnings are considered permanently reinvested, no tax provision has been accrued. It is not feasible to estimate the amount of tax that might be payable on the eventual remittance of such earnings.
Deferred income taxes arise from temporary differences between the financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the Company's deferred income tax assets and liabilities are as follows at June 30, 2022 and 2021:
| | | | | | | | | | | |
| Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Accrued liabilities | $ | 33 | | | $ | 43 | |
| Equity compensation | 14 | | | 15 | |
| Loss and tax credit carryforwards | 230 | | | 187 | |
| Foreign currency | 19 | | | 12 | |
| Pension | 17 | | | 24 | |
| Interest-related | 14 | | | 14 | |
| Deferred revenue | 1 | | | 3 | |
| | | |
| Lease liabilities | 39 | | | 35 | |
| Euro-denominated debt | — | | | 23 | |
| Other | 2 | | | — | |
| Total deferred income tax assets | $ | 369 | | | $ | 356 | |
| Valuation allowance | (149) | | | (65) | |
| Net deferred income tax assets | $ | 220 | | | $ | 291 | |
| | | |
| | | |
| Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 |
| Deferred income tax liabilities: | | | |
| | | |
| | | |
| Euro-denominated debt | $ | (6) | | | $ | — | |
| Property-related | (227) | | | (171) | |
| Goodwill and other intangibles | (113) | | | (194) | |
| Right-of-use assets | (21) | | | (18) | |
| Other | (1) | | | (6) | |
| | | |
| Total deferred income tax liabilities | $ | (368) | | | $ | (389) | |
| | | |
| Net deferred tax liability | $ | (148) | | | $ | (98) | |
Deferred tax assets and liabilities in the preceding table are in the following captions in the consolidated balance sheets at June 30, 2022 and 2021: | | | | | | | | | | | |
| Fiscal Year Ended
June 30, |
| (Dollars in millions) | 2022 | | 2021 |
| Non-current deferred tax asset | $ | 49 | | | $ | 66 | |
| Non-current deferred tax liability | (197) | | | (164) | |
| Net deferred tax liability | $ | (148) | | | $ | (98) | |
At June 30, 2022, the Company had federal net operating loss (“NOL”) carryforwards of $532 million, $211 million of which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The majority of the $211 million federal NOL carryforwards subject to Section 382 of the Internal Revenue Code are attributed to the Company's acquisitions of Pharmatek Laboratories, Inc., Juniper Pharmaceuticals, Inc., Paragon Bioservices, Inc., and MastherCell Global Inc. (“MaSTherCell”). As of June 30, 2022, $461 million of the Company's federal NOL carryforwards have an indefinite life and the remaining NOL carryforwards will expire in fiscal years 2023 through 2037.
At June 30, 2022, the Company had state tax NOL carryforwards of $431 million. Substantially all state NOL carryforwards have a twenty-year carryforward period. At June 30, 2022, the Company had non-U.S. tax NOL carryforwards of $240 million, a majority of which are available for at least three years or have an indefinite carryforward period.
The Company had valuation allowances of $149 million and $65 million as of June 30, 2022 and 2021, respectively, against its deferred tax assets. The Company considered all available evidence, both positive and negative, in assessing the need for a valuation allowance against tax assets. Four possible sources of taxable income were evaluated when assessing the realizability of deferred tax assets:
•carrybacks of existing NOLs (if and to the extent permitted under the tax law);
•future reversals of existing taxable temporary differences;
•tax planning strategies; and
•future taxable income exclusive of reversing temporary differences and carryforwards.
While the valuation allowance related to certain U.S. combined states was released during the fiscal year ended June 30, 2019, there remained as of June 30, 2022 a valuation allowance for the NOLs and deductible temporary differences in the remaining combined and separate states of $37 million. The state valuation allowance as of June 30, 2022 is due to the Company’s history of tax losses and anticipated loss utilization rates in separate filing status states as well as the difference in the rules related to allocated and apportioned income for separate filing status states versus combined filing status states.
The Company considered the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that the Company would realize the value of its deferred tax assets based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax laws. During the fiscal year ended June 30, 2022, the Company established valuation allowances on NOLs and temporary differences related to certain Belgian operations in the aggregate amount of $26 million. In addition, the Company established valuation allowances on temporary differences related to intangibles in Switzerland in the amount of $62 million.
In the normal course of business, the Company's income taxes are subject to audits by federal, state, and foreign tax authorities, some of which are ongoing and may result in proposed assessments. Germany and the U.K. are among the jurisdictions where the Company has substantial tax positions. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal 2009. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. The Company assesses its income tax positions and records benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the amount that has a greater than 50% likelihood of being realized upon resolution with the taxing authority that has full knowledge of all relevant information based on the technical merit. Interest and penalties are accrued, where applicable.
As of June 30, 2022, the Company had a total of $5 million of unrecognized tax benefits. A reconciliation of unrecognized tax benefits, excluding accrued interest, as of June 30, 2022, 2021, and 2020 is as follows:
| | | | | |
| (Dollars in millions) |
| Balance at June 30, 2019 | $ | 4 | |
| |
| Additions for tax positions of prior years | 1 | |
| |
| |
| Lapse of the applicable statute of limitations | (1) | |
| Balance at June 30, 2020 | $ | 4 | |
| |
| Additions for tax positions of prior years | 3 | |
| |
| |
| Lapse of the applicable statute of limitations | (2) | |
| Balance at June 30, 2021 | $ | 5 | |
| Additions for tax positions related to the current year | 1 | |
| Additions for tax positions of prior years | 1 | |
| |
| Settlements | (1) | |
| Lapse of the applicable statute of limitations | (1) | |
| Balance at June 30, 2022 | $ | 5 | |
All of the unrecognized tax benefits as of June 30, 2022 and 2021 would, if subsequently recognized, favorably affect the effective income tax rate.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2022, the Company has $1 million of accrued interest related to uncertain tax positions, with a reduction from the prior year, as a result of statute of limitations lapses and settlements. The Company had $1 million of accrued interest related to uncertain tax positions as of both June 30, 2021 and 2020.
13. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement plans, including defined benefit pension plans and defined contribution plans. Substantially all of the Company’s domestic non-union employees are eligible to participate in employer-sponsored retirement savings plans, which include plans created under Section 401(k) of the Internal Revenue Code that provide for the Company to match a portion of contributions by participating U.S. employees. The Company’s contributions to the plans are discretionary but are subject to certain minimum requirements as specified in the plans. The Company uses a measurement date of June 30 for all of its retirement and postretirement benefit plans.
The Company records obligations related to its withdrawal from one multi-employer pension plan that covered former employees at three former sites. This withdrawal was classified as a mass withdrawal under the Multiemployer Pension Plan Amendments Act of 1980, as amended, and the Pension Protection Act of 2006 and resulted in the recognition of liabilities associated with the Company’s long-term obligations in prior years not presented, which were primarily recorded as an expense within discontinued operations. The estimated discounted value of the projected contributions related to these plans is $38 million as of June 30, 2022 and 2021. The annual cash impact associated with the Company’s long-term obligation arising from this plan is $2 million per year.
The following table provides a reconciliation of the change in projected benefit obligation and fair value of plan assets for the defined benefit retirement and other retirement plans, excluding the multi-employer pension plan liability:
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Benefits | | Other Post-Retirement Benefits |
| June 30, | | June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Accumulated Benefit Obligation | $ | 262 | | | $ | 364 | | | $ | 2 | | | $ | 2 | |
| | | | | | | |
| Change in Benefit Obligation | | | | | | | |
| Benefit obligation at beginning of year | 372 | | | 358 | | | 2 | | | 3 | |
| Company service cost | 4 | | | 4 | | | — | | | — | |
| Interest cost | 5 | | | 4 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Settlements | (1) | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Benefits paid | (9) | | | (13) | | | — | | | (1) | |
| | | | | | | |
Actuarial (gain) loss (1) | (71) | | | (9) | | | — | | | — | |
| Exchange rate (loss) gain | (32) | | | 28 | | | — | | | — | |
| Benefit obligation at end of year | $ | 268 | | | $ | 372 | | | $ | 2 | | | $ | 2 | |
| | | | | | | |
| Change in Plan Assets | | | | | | | |
| Fair value of plan assets at beginning of year | 318 | | | 295 | | | — | | | — | |
| Actual return on plan assets | (50) | | | (1) | | | — | | | — | |
| Company contributions | 10 | | | 11 | | | — | | | — | |
| | | | | | | |
| Settlements | (1) | | | — | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Benefits paid | (9) | | | (13) | | | — | | | — | |
| | | | | | | |
| Exchange rate gain (loss) | (28) | | | 26 | | | — | | | — | |
| Fair value of plan assets at end of year | $ | 240 | | | $ | 318 | | | $ | — | | | $ | — | |
| | | | | | | |
| Funded Status | | | | | | | |
| Funded status at end of year | (28) | | | (54) | | | (2) | | | (2) | |
| | | | | | | |
| Net pension liability | $ | (28) | | | $ | (54) | | | $ | (2) | | | $ | (2) | |
(1) For the fiscal year ended June 30, 2022, the actuarial gain is driven by a large increase in the aggregate discount rate.
The following table provides a reconciliation of the net amount recognized in the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Benefits | | Other Post-Retirement Benefits |
| June 30, | | June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Amounts Recognized in Statement of Financial Position | | | | | | | |
| Noncurrent assets | $ | 37 | | | $ | 43 | | | $ | — | | | $ | — | |
| Current liabilities | (1) | | | (1) | | | — | | | — | |
| Noncurrent liabilities | (64) | | | (96) | | | (2) | | | (2) | |
| Total liability | (28) | | | (54) | | | (2) | | | (2) | |
| | | | | | | |
| Amounts Recognized in Accumulated Other Comprehensive Loss | | | | | | | |
| | | | | | | |
| Prior service cost | (1) | | | (1) | | | — | | | — | |
| Net loss (gain) | 49 | | | 62 | | | (1) | | | (1) | |
| Total accumulated other comprehensive loss (income) at the end of the fiscal year | 48 | | | 61 | | | (1) | | | (1) | |
| | | | | | | |
| Additional Information for Plan with ABO or PBO in Excess of Plan Assets | | | | | | | |
| Projected benefit obligation | 132 | | | 130 | | | 2 | | | 2 | |
| Accumulated benefit obligation | 128 | | | 124 | | | 2 | | | 2 | |
| Fair value of plan assets | 67 | | | 32 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Components of Net Periodic Benefit Cost | | | | | | | |
| Service cost | 4 | | | 4 | | | — | | | — | |
| Interest cost | 5 | | | 4 | | | — | | | — | |
| Expected return on plan assets | (10) | | | (11) | | | — | | | — | |
| Amortization of unrecognized: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net loss | 2 | | | 3 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Net periodic benefit cost | $ | 1 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Benefits | | Other Post-Retirement Benefits |
| June 30, | | June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income | | | | | | | |
| Net gain arising during the year | $ | (14) | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Exchange rate loss recognized during the year | 1 | | | — | | | — | | | — | |
| Total recognized in other comprehensive income | $ | (13) | | | $ | — | | | $ | — | | | $ | — | |
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income | | | | | | | |
| Total recognized in net periodic benefit cost and other comprehensive income | $ | (12) | | | $ | — | | | $ | — | | | $ | — | |
| Estimated Amounts to be Amortized from Accumulated Other Comprehensive Income into Net Periodic Benefit Cost | | | | | | | |
| Amortization of: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net loss | $ | 1 | | | $ | 3 | | | $ | — | | | $ | — | |
| Financial Assumptions Used to Determine Benefit Obligations at the Balance Sheet Date | | | | | | | |
| Discount rate (%) | 3.6 | % | | 1.6 | % | | 4.0 | % | | 2.0 | % |
| Rate of compensation increases (%) | 2.7 | % | | 2.0 | % | | n/a | | n/a |
| Financial Assumptions Used to Determine Net Periodic Benefit Cost for Financial Year | | | | | | | |
| Discount rate (%) | 1.6 | % | | 1.4 | % | | 2.0 | % | | 1.8 | % |
| Rate of compensation increases (%) | 2.0 | % | | 2.0 | % | | n/a | | n/a |
| Expected long-term rate of return (%) | 3.4 | % | | 3.6 | % | | n/a | | n/a |
| Expected Future Contributions | | | | | | | |
| Fiscal year 2023 | $ | 7 | | | $ | 8 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retirement Benefits | | Other Post-Retirement Benefits |
| June 30, | | June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Expected Future Benefit Payments | | | | | | | |
| Financial year | | | | | | | |
| 2023 | $ | 14 | | | $ | 13 | | | $ | — | | | $ | — | |
| 2024 | 13 | | | 14 | | | — | | | — | |
| 2025 | 14 | | | 15 | | | — | | | — | |
| 2026 | 16 | | | 15 | | | — | | | — | |
| 2027 | 14 | | | 15 | | | — | | | — | |
| 2028-2032 | $ | 80 | | | $ | 84 | | | $ | 1 | | | $ | 1 | |
| | | | | | | |
| Actual Asset Allocation (%) | | | | | | | |
| Equities | 4.1 | % | | 4.4 | % | | — | % | | — | % |
| Government bonds | 35.6 | % | | 30.6 | % | | — | % | | — | % |
| Corporate bonds | 18.3 | % | | 21.0 | % | | — | % | | — | % |
| Property | 4.9 | % | | 3.5 | % | | — | % | | — | % |
| Insurance contracts | 12.0 | % | | 9.6 | % | | — | % | | — | % |
| Other | 25.1 | % | | 30.9 | % | | — | % | | — | % |
| Total | 100.0 | % | | 100.0 | % | | — | % | | — | % |
| | | | | | | |
| Actual Asset Allocation (Amount) | | | | | | | |
| Equities | $ | 10 | | | $ | 14 | | | $ | — | | | $ | — | |
| Government bonds | 85 | | | 97 | | | — | | | — | |
| Corporate bonds | 44 | | | 67 | | | — | | | — | |
| Property | 12 | | | 11 | | | — | | | — | |
| Insurance contracts | 29 | | | 31 | | | — | | | — | |
| Other | 60 | | | 98 | | | — | | | — | |
| Total | $ | 240 | | | $ | 318 | | | $ | — | | | $ | — | |
| | | | | | | |
| Target Asset Allocation (%) | | | | | | | |
| Equities | 4.1 | % | | 4.5 | % | | — | % | | — | % |
| Government bonds | 35.6 | % | | 30.5 | % | | — | % | | — | % |
| Corporate bonds | 18.3 | % | | 21.1 | % | | — | % | | — | % |
| Property | 4.9 | % | | 3.5 | % | | — | % | | — | % |
| Insurance contracts | 12.0 | % | | 9.6 | % | | — | % | | — | % |
| Other | 25.1 | % | | 30.8 | % | | — | % | | — | % |
| Total | 100.0 | % | | 100.0 | % | | — | % | | — | % |
The Company's Investment Committee employs a building-block approach in determining the long-term rate of return for plan assets, with proper consideration of diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data are reviewed to check for reasonability and appropriateness.
Plan assets are recognized and measured at fair value in accordance with the accounting standards regarding fair value measurements. The following are valuation techniques used to determine the fair value of each major category of assets:
•Short-term investments, equity securities, fixed-income securities, and real estate are valued using quoted market prices or other valuation methods, and thus are classified within Level 1 or Level 2.
•Insurance contracts and other types of investments include investments with some observable and unobservable prices that are adjusted by cash contributions and distributions, and thus are classified within Level 2 or Level 3.
The following tables provide a summary of plan assets that are measured at fair value as of June 30, 2022 and 2021, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2022 (dollars in millions) | Level 1 | | Level 2 | | Level 3 | | Investments Measured at Net Asset Value | | Total Assets |
|
| Equity securities | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Debt securities | — | | | 129 | | | — | | | — | | | 129 | |
| Real estate | — | | | 10 | | | 2 | | | — | | | 12 | |
Other (1) | — | | | 64 | | | 25 | | | — | | | 89 | |
| Total | $ | — | | | $ | 213 | | | $ | 27 | | | $ | — | | | $ | 240 | |
(1) Other as of June 30, 2022, included $35 million of investments in hedge funds related to the Company's U.K. pension plan, which were classified as Level 2.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2021 (dollars in millions) | Level 1 | | Level 2 | | Level 3 | | Investments Measured at Net Asset Value | | Total Assets |
|
| Equity securities | $ | — | | | $ | 14 | | | $ | — | | | $ | — | | | $ | 14 | |
| Debt securities | — | | | 164 | | | — | | | — | | | 164 | |
| Real estate | — | | | 11 | | | — | | | — | | | 11 | |
Other (1) | — | | | 106 | | | 23 | | | — | | | 129 | |
| Total | $ | — | | | $ | 295 | | | $ | 23 | | | $ | — | | | $ | 318 | |
(1) Other as of June 30, 2021, included $62 million of investments in hedge funds related to the Company's U.K. pension plan, which were classified as Level 2.
Level 3 other assets as of June 30, 2022 and 2021 consist of an insurance contract in the U.K. to fulfill the benefit obligations for a portion of the participant benefits. The value of this commitment is determined using the same assumptions and methods used to value the pension liability of the associated plan. Level 3 other assets for the same periods also include the partial funding of a pension liability relating to current and former employees of the Company’s Eberbach, Germany facility through a Company promissory note with an annual rate of interest of 5%. The value of this commitment fluctuates due to contributions and benefit payments in addition to loan interest.
The following table provides a reconciliation of the beginning and ending balances of Level 3 assets as well as the changes during the period attributable to assets held and those purchases, sales, settlements, contributions, and benefits that were paid:
| | | | | | | | | | | | | | | | | |
| Fair Value Measurement Using Significant Unobservable Inputs Total (Level 3) | | Fair Value Measurement Using Significant Unobservable Inputs Insurance Contracts | | Fair Value Measurement Using Significant Unobservable Inputs Other |
| Total (Level 3) | | |
| (Dollars in millions) | | |
| Beginning Balance at June 30, 2021 | $ | 23 | | | $ | 3 | | | $ | 20 | |
| Actual return on plan assets: | | | | | |
| Relating to assets still held at the reporting date | (2) | | | — | | | (2) | |
| | | | | |
| Purchases, sales, settlements, contributions and benefits paid | (5) | | | (3) | | | (2) | |
| Transfers in or out of Level 3, net | 11 | | | 9 | | | 2 | |
| Ending Balance at June 30, 2022 | $ | 27 | | | $ | 9 | | | $ | 18 | |
The Company's investment policy reflects the long-term nature of the plans’ funding obligations. The assets are invested to provide the opportunity for both income and growth of principal. This objective is pursued as a long-term goal designed to provide required benefits for participants without undue risk. It is expected that this objective can be achieved through a well-diversified asset portfolio. All equity investments are made within the guidelines of quality, marketability, and diversification
mandated by the Employee Retirement Income Security Act of 1974, as amended (for plans subject to the act) and other relevant legal requirements. Investment managers are directed to maintain equity portfolios at a risk level approximately equivalent to that of the specific benchmark established for that portfolio. Assets invested in fixed income securities and pooled fixed-income portfolios are managed actively to pursue opportunities presented by changes in interest rates, credit ratings, or maturity premiums.
| | | | | | | | | | | |
| Other Post-Retirement Benefits |
| Assumed Healthcare Cost Trend Rates at the Balance Sheet Date | 2022 | | 2021 |
| | | |
| | | |
| Healthcare cost trend rate – initial (%) | | | |
| Pre-65 | n/a | | n/a |
| Post-65 | 4.6 | % | | 7.3 | % |
| Healthcare cost trend rate – ultimate (%) | | | |
| Pre-65 | n/a | | n/a |
| Post-65 | 4.1 | % | | 4.4 | % |
| Year in which ultimate rates are reached | | | |
| Pre-65 | n/a | | n/a |
| Post-65 | 2040 | | | 2035 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
14. EQUITY, REDEEMABLE PREFERRED STOCK, AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Description of Capital Stock
The Company is authorized to issue 1.00 billion shares of its Common Stock and 100 million 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.
Public Offerings of Common 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 8 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 $548 million after the payment of associated offering expenses. The net proceeds of the June 2020 Equity Offering were used to repay $200 million of prophylactic 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 million additional shares, resulting in net proceeds of $82 million from the June 2020 Equity Offering, which was recorded in the fiscal year ended June 30, 2021.
On February 6, 2020, the Company completed a public offering of its Common Stock (the “February 2020 Equity Offering”), in which the Company sold 8 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 million. The net proceeds of the February 2020 Equity Offering were used to repay $100 million of borrowings earlier in the quarter under Operating Company's Revolving Credit Facility and the consideration for the MaSTherCell acquisition due at its closing, with the remainder available for general corporate purposes.
Redeemable Preferred Stock
In May 2019, the Company designated 1 million 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 and issued and sold 650,000 shares of the Series A Preferred Stock for an aggregate price of $650 million, to affiliates of Leonard Green & Partners, L.P., each share having an stated value of $1,000.
Proceeds from the offering of the Series A Preferred Stock, net of stock issuance costs, were $646 million, of which $40 million was allocated to the dividend-adjustment feature at its issuance and separately accounted for as a derivative liability. Each change in the fair value of derivative liability during a fiscal quarter was recorded as a non-operating expense in the consolidated statement of operations.
As described in Note 9, 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. The Company recognized no gain or loss upon the Partial Conversion.
As a result of the Partial Conversion, additional paid in capital increased $253 million, which included $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 the unpaid accrued dividend.
On the Final Conversion Date, holders of Series A Preferred Stock converted the remaining 384,777 shares and $2 million of unpaid accrued dividends into shares of Common Stock. These holders received 20.32 shares of Common Stock for each converted share of Series A Preferred Stock, resulting in the issuance of 7,817,554 shares of Common Stock. The Company recognized no gain or loss upon the Final Conversion.
As a result of the Final Conversion, additional paid in capital increased $362 million, which included $1 million related to the fair value of the portion of the derivative liability that was settled upon the Final Conversion and $2 million related to the unpaid accrued dividend. See Note 11, Fair Value Measurements, for detail concerning the change in fair value during the fiscal year ended June 30, 2022.
Following the Final Conversion, no share of the Series A Preferred Stock remained outstanding, and the Company re-assigned all of the authorized shares of Series A Preferred Stock as undesignated shares of preferred stock.
The components of the changes in the cumulative translation adjustment, derivatives and hedges, minimum pension liability, and marketable securities for the fiscal years ended June 30, 2022, 2021, and 2020 consists of:
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2020 |
| Foreign currency translation adjustments: | | | | | |
| Net investment hedge | $ | 121 | | | $ | (56) | | | $ | 3 | |
| Long-term inter-company loans | (37) | | | 39 | | | (9) | |
| Translation adjustments | (169) | | | 72 | | | (25) | |
| Total foreign currency translation adjustments, pretax | (85) | | | 55 | | | (31) | |
| Tax expense (benefit) | 25 | | | (12) | | | — | |
| Total foreign currency translation adjustments, net of tax | $ | (110) | | | $ | 67 | | | $ | (31) | |
| | | | | |
| Net change in derivatives and hedges: | | | | | |
| Net gain (loss) recognized during the year, pretax | $ | 36 | | | $ | 4 | | | $ | (4) | |
| | | | | |
| | | | | |
| | | | | |
| Tax expense (benefit) | 9 | | | 1 | | | (1) | |
| Net change in derivatives and hedges, net of tax | $ | 27 | | | $ | 3 | | | $ | (3) | |
| | | | | |
| Net change in minimum pension liability: | | | | | |
| Net gain recognized during the year, pretax | $ | 13 | | | $ | — | | | $ | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Tax expense | 4 | | | — | | | 2 | |
| Net change in minimum pension liability, net of tax | $ | 9 | | | $ | — | | | $ | 2 | |
| | | | | |
| Net change in marketable securities: | | | | | |
| Net loss recognized during the year, pretax | $ | (3) | | | $ | (1) | | | $ | — | |
| | | | | |
| | | | | |
| | | | | |
| Tax expense (benefit) | — | | | — | | | — | |
| Net change in marketable securities, net of tax | $ | (3) | | | $ | (1) | | | $ | — | |
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss by component and changes for the fiscal years ended June 30, 2022, 2021, and 2020 consist of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Currency Translation Adjustment | | Pension Liability Adjustments | | Derivatives and Hedges | | Marketable Securities | | Other | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at June 30, 2019 | $ | (304) | | | $ | (49) | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (354) | |
| Other comprehensive loss before reclassifications | (31) | | | — | | | (3) | | | — | | | — | | | (34) | |
| Amounts reclassified from other comprehensive loss | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Balance at June 30, 2020 | (335) | | | (47) | | | (3) | | | — | | | (1) | | | (386) | |
| Other comprehensive loss before reclassifications | 67 | | | — | | | 3 | | | (1) | | | — | | | 69 | |
| | | | | | | | | | | |
| Balance at June 30, 2021 | (268) | | | (47) | | | — | | | (1) | | | (1) | | | (317) | |
| Other comprehensive income (loss) before reclassifications | (110) | | | 8 | | | 27 | | | (3) | | | — | | | (78) | |
| Amounts reclassified from other comprehensive loss | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Balance at June 30, 2022 | $ | (378) | | | $ | (38) | | | $ | 27 | | | $ | (4) | | | $ | (1) | | | $ | (394) | |
15. STOCK-BASED COMPENSATION
The Company’s stock-based compensation is comprised of stock options, restricted stock units, performance-based restricted stock units, and restricted stock.
2014 and 2018 Omnibus Incentive Plans
In 2014, the Company’s board of directors adopted, and the holder of a majority of the shares approved, the 2014 Omnibus Incentive Plan (the “2014 Plan”). The 2014 Plan provided certain members of management, employees, and directors of the Company and its subsidiaries with the opportunity to obtain various incentives, including grants of stock options, restricted stock units (defined below), and restricted stock. In October 2018, the Company’s shareholders approved the 2018 Omnibus Incentive Plan (the “2018 Plan”), and, as a result, new awards may no longer be issued under the 2014 Plan, although it remains in effect as to any previously granted award. The 2018 Plan is substantially similar to the 2014 Plan, except that (a) a total of 15,600,000 shares of Common Stock (subject to adjustment) may be issued under the 2018 Plan, (b) each share of Common Stock issuable under the 2018 Plan pursuant to a restricted stock or restricted stock unit award will reduce the number of reserved shares by 2.25 shares, and (c) the 2018 Plan imposes a limit on the aggregate value of awards that may be made in a single year to a non-employee director. Both the 2014 Plan and the 2018 Plan permit “net settlement” of vested awards, pursuant to which the award holder forfeits a portion of the vested award to satisfy the purchase price (in the case of options), the holder’s withholding tax obligation, if any (in all cases), or both. Where the holder net-settles the tax obligation, the Company pays the amount of the withholding tax to the U.S. government in cash, which is accounted for as an adjustment to Additional Paid in Capital.
Stock Compensation Expense
Stock compensation expense recognized in the consolidated statements of operations was $54 million, $51 million, and $48 million in fiscal 2022, 2021, and 2020, respectively. Stock compensation expense is classified in selling, general, and administrative expenses as well as cost of sales. The Company has elected to account for forfeitures as they occur.
Stock Options
Stock options granted under the 2014 Plan or 2018 Plan, as applicable, during fiscal 2022, 2021, and 2020 represent approximately 183,000, 231,000, and 329,000 shares of Common Stock, respectively. Each stock option granted under the 2014 Plan or 2018 Plan vests in equal annual installments over a four-year period from the date of grant, contingent upon the participant’s continued employment with the Company, except for a small number of grants that vest based on the achievement of operating performance targets set forth in the award documents.
Methodology and Assumptions
All outstanding stock options have an exercise price per share equal to the fair market value of one share of Common Stock on the date of grant. All outstanding stock options have a contractual term of 10 years, subject to forfeiture under certain
conditions upon separation of employment. The grant-date fair value is recognized as expense on a graded-vesting basis over the vesting period. The fair value of stock options is determined using the Black-Scholes-Merton option pricing model for service and performance-based awards, and an adaptation of the Black-Scholes-Merton option valuation model, which takes into consideration the internal rate of return thresholds, for market-based awards. This model adaptation is essentially equivalent to the use of a path dependent-lattice model.
The weighted average of assumptions used in estimating the fair value of stock options granted during each year were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
| Expected volatility | 37% | | 27% | | 23 | % | - | 24% |
| Expected life (in years) | 3.7 | | 6.25 | | 6.25 |
| Risk-free interest rate | 0.7% | | 0.3% | | 1.7 | % | - | 1.9% |
| Dividend yield | None | | None | | None |
Public trading of the Common Stock commenced only in July 2014, and, as a result, there was only limited relevant historical volatility experience available; therefore, the expected volatility assumptions for fiscal year 2021 and 2020 were based on the historical volatility of the closing share prices of a comparable peer group. The Company selected peer companies from the pharmaceutical industry with similar characteristics, including market capitalization, number of employees and product focus. In addition, since the Company did not have a pattern of exercise behavior of option holders, for fiscal years 2021 and 2020, the Company used the simplified method to determine the expected life of each option, which is the mid-point between the vesting date and the end of the contractual term. Effective in fiscal year 2022, the expected volatility and expected holding period were based on the historical volatility and historical holding period of the Common Stock of the Company. The risk-free interest rate for the expected life of the option is based on the comparable U.S. Treasury yield curve in effect at the time of the grant. The weighted-average grant-date fair value of stock options in fiscal 2022, 2021, and 2020 was $32.07 per share, $24.36 per share, and $15.22 per share, respectively.
The following table summarizes stock option activity and shares subject to outstanding options for the fiscal year ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | |
| | Time | | | |
| Weighted Average Exercise Price | Number of Shares | Weighted Average Contractual Term | Aggregate Intrinsic Value | | | | | | | |
| |
| |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Outstanding as of June 30, 2021 | $ | 49.77 | | 1,280,174 | | 4.92 | $ | 74,696,700 | | | | | | | | |
| Granted | 113.00 | | 182,751 | | — | | — | | | | | | | | |
| Exercised | 42.11 | | 386,456 | | — | | 29,329,353 | | | | | | | | |
| Forfeited | 39.43 | | 17,559 | | — | | — | | | | | | | | |
| Expired / Canceled | 36.97 | | 3,399 | | — | | — | | | | | | | | |
| Outstanding as of June 30, 2022 | 63.74 | | 1,055,511 | | 6.91 | 47,013,454 | | | | | | | | |
| Vest and expected to vest as of June 30, 2022 | 63.74 | | 1,055,511 | | 6.91 | 47,013,454 | | | | | | | | |
| Vested and exercisable as of June 30, 2022 | $ | 43.80 | | 437,034 | | 5.76 | $ | 27,748,162 | | | | | | | | |
The intrinsic value of the options exercised in fiscal 2022 was $29 million. The total fair value of options vested during the period was $6 million.
The intrinsic value of the options exercised in fiscal 2021 was $64 million. The total fair value of options vested during the period was $7 million.
As of June 30, 2022, $2 million of unrecognized compensation cost related to granted and not forfeited stock options is expected to be recognized as expense over a weighted-average period of approximately 2.6 years.
Restricted Stock and Restricted Stock Units
The Company may grant to employees and members of its board of directors under the 2018 Plan (and formerly granted under the 2014 Plan) shares of restricted stock and units each representing the right to one share of Common Stock (“restricted
stock units”). Since the IPO, the Company has granted to employees and directors restricted stock units and restricted stock that vest over specified periods as well as restricted stock units and restricted stock that have certain performance-related vesting requirements (“performance stock units” and “performance stock,” respectively). The restricted stock and restricted stock units granted during fiscal 2022 and 2021 had grant date fair values aggregating $57 million and $47 million, respectively, which represent approximately 535,000 and 502,000 shares of Common Stock, respectively. Under the 2014 Plan or 2018 Plan, as appropriate, the performance stock and performance stock units vest upon achieving Company financial performance metrics established at the outset of the three-year performance period associated with each grant. The metrics for the fiscal 2020, 2021, and 2022 performance stock and performance stock unit grants were based on performance against a mix of adjusted EPS targets and relative total shareholder return (“RTSR”) targets. Note that adjusted EPS is calculated as a quotient of tax-effected Adjusted EBITDA by the weighted average number of fully diluted shares, a financial measure that is not defined under U.S. GAAP and is subject to important limitations. The performance stock and performance stock units vest following the end of their respective three-year performance periods upon a determination of achievement relative to the targets. Each quarter during the period in which the performance stock and performance stock units are outstanding, the Company estimates the likelihood of such achievement by the end of the performance period in order to determine the probability of vesting. The number of shares actually earned at the end of the three-year period for the fiscal 2020, 2021 and 2022 grants will vary, based only on actual performance, from 0% to 200%, or from 0% to 150%, of the target number of performance stock or performance stock units specified on the date of grant, in the case of adjusted EPS and RTSR grants, respectively. Time-based restricted stock units and restricted stock generally vest on the second or third anniversary of the date of grant, subject to the participant’s continued employment with the Company.
Methodology and Assumptions - Expense Recognition and Grant Date Fair Value
The fair values of (a) time-based restricted stock units and restricted stock are recognized as expense on a cliff-vesting schedule over the applicable vesting period and (b) performance shares and performance share units are re-assessed quarterly as discussed above.
The grant date fair values of both time-based and performance-based shares and units are determined based on the number of shares subject to the grants and the fair value of the Common Stock on the dates of the grants, as determined by the closing market prices.
Time-Based Restricted Stock Units and Restricted Stock
The following table summarizes activity in unvested time-based restricted stock units and restricted stock for the fiscal year ended June 30, 2022: | | | | | | | | | | | |
| Time-Based Units and Shares | | Weighted Average Grant-Date Fair Value |
| | | |
| | | |
| | | |
| | | |
| Unvested as of June 30, 2021 | 764,356 | | | $ | 65.54 | |
| Granted | 324,091 | | | 117.52 | |
| Vested | 292,945 | | | 52.11 | |
| Cancelled/forfeited/adjusted | 73,064 | | | 96.04 | |
| Unvested as of June 30, 2022 | 722,438 | | | 91.42 | |
Adjusted EPS and RTSR-Based Performance Share Units and Performance Shares
The following table summarizes activity in unvested performance share units and performance shares for the fiscal year ended June 30, 2022: | | | | | | | | | | | |
| Performance-Based Units and Shares | | Weighted Average Grant-Date Fair Value |
| | | |
| | | |
| | | |
| | | |
| Target Number Unvested as of June 30, 2021 | 392,095 | | | $ | 58.16 | |
| Target Number Granted | 103,946 | | | 113.57 | |
| Target Number Vested | 168,325 | | | 43.84 | |
| Target Number Cancelled/forfeited/adjusted | 21,970 | | | 88.57 | |
| Target Number Unvested as of June 30, 2022 | 305,746 | | | $ | 83.75 | |
Valuation of RTSR Performance Shares and Performance Share Units
The fair value of each RTSR performance share unit and performance share is determined using the Monte Carlo pricing model because the number of shares to be awarded is subject to a market condition. The Monte Carlo simulation is a generally accepted statistical technique used to simulate a range of possible future outcomes. Because the valuation model considers a range of possible outcomes, compensation cost is recognized regardless of whether the market condition is actually satisfied.
The assumptions used in estimating the fair value of the RTSR performance share units and performance shares granted during each year were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
| 2022 | | 2021 |
| Expected volatility | 39 | % | - | 41% | | 39 | % | - | 42% |
| Expected life (in years) | 2.4 | - | 2.9 | | 2.4 | - | 2.9 |
| Risk-free interest rates | 0.3 | % | - | 1.5% | | 0.1 | % | - | 0.2% |
| Dividend yield | None | | None |
The following table summarizes activity in unvested RTSR performance share units and performance shares for the fiscal year ended June 30, 2022 | | | | | | | | | | | |
| RTSR Units and Shares | | Weighted Average Grant-Date Fair Value |
| | | |
| | | |
| | | |
| | | |
| Target Number Unvested as of June 30, 2021 | 327,028 | | | $ | 68.92 | |
| Target Number Granted | 107,197 | | | 110.34 | |
| Target Number Vested | 132,565 | | | 47.70 | |
| Target Number Cancelled/forfeited/adjusted | 20,345 | | | 95.70 | |
| Target Number Unvested as of June 30, 2022 | 281,315 | | | $ | 91.04 | |
As of June 30, 2022, $57 million of unrecognized compensation cost related to restricted stock and restricted stock units (including performance shares and performance share units, respectively) is expected to be recognized as expense over a weighted-average period of approximately 1.8 years. The weighted-average grant-date fair value of restricted stock and restricted stock units in fiscal 2022, 2021, and 2020 was $109.63 per share, $94.19 per share, and $57.17 per share, respectively. The fair value of restricted stock units vested in fiscal 2022, 2021, and 2020 was $33 million, $39 million, and $35 million, respectively.
16. OTHER EXPENSE, NET
The components of other expense, net for the fiscal years ended June 30, 2022, 2021, and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
June 30, |
| (Dollars in millions) | | | | | 2022 | | 2021 | | 2020 |
| Other (income) expense, net | | | | | | | | | |
Debt refinancing costs (1) | | | | | $ | 4 | | | $ | 18 | | | $ | 16 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Foreign currency losses (gains) (2) | | | | | 33 | | | 5 | | | (3) | |
Other (3) | | | | | (9) | | | (20) | | | (5) | |
| Total other expense, net | | | | | $ | 28 | | | $ | 3 | | | $ | 8 | |
(1) Debt refinancing costs for the fiscal year ended June 30, 2022 consists of $4 million of financing charges related to the Company's Incremental Term B-3 Loans.
Debt financing costs for the fiscal year ended June 30, 2021 includes (a) a write-off of $4 million of previously capitalized financing charges related to the Company’s repayment of U.S. dollar-denominated term loans and the 2026 Notes in February 2021, (b) $3 million of financing charges related to issuance of the Company’s initial tranche of Term B-3 Loans, and (c) an $11 million premium on early redemption of the 2026 Notes.
Debt financing costs for the fiscal year ended June 30, 2020 includes (x) a write-off of $6 million of previously capitalized financing charges related to the Company's repaid euro-denominated term loans under its senior secured credit facilities and the Company's redeemed 2024 Notes, and (y) a $10 million premium on early redemption of the 2024 Notes.
(2) Foreign currency losses (gains) include both cash and non-cash transactions.
(3) Other, for the fiscal years ended June 30, 2022, 2021 and 2020 includes, in part, total realized and unrealized gain of $2 million, $17 million, and $3 million, respectively, related to the fair value of the derivative liability associated with the formerly outstanding Series A Preferred Stock.
17. LEASES
The Company leases certain manufacturing and office facilities, land, vehicles, and equipment. The terms of these leases vary widely, although most have terms between 3 and 10 years.
In accordance with ASC 842, Leases, the Company recognizes a “right-of-use” asset and related lease liability at the commencement date of each lease based on the present value of the fixed lease payments over the expected lease term inclusive of any rent escalation provisions or incentives received. The lease term for this purpose will include any renewal period where the Company determines that it is reasonably certain that it will exercise the option to renew. While certain leases also permit the Company to terminate the lease in advance of the nominal term upon payment of an associated penalty, the Company generally does not take into account potential early termination dates in its determination of the lease term as it is reasonably certain not to exercise an early-termination option as of the lease commencement date.
The Company uses its incremental borrowing rate, which represents the interest rate the Company would expect to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms, in order to calculate the present value of a lease, when the implicit discount rate for its leases is not readily determinable.
For operating leases, fixed lease payments are recognized as operating lease expense on straight-line basis over the lease term. For finance leases, the Company recognizes depreciation expense associated with the leased asset acquired and interest expense related to the financing portion. Variable payments are recognized in the period incurred. As permitted by ASC 842, the Company has elected not to separate those components of a lease agreement not related to the leasing of an asset from those components that are related.
The Company does not record leases with an initial lease term of 12 months or less on its consolidated balance sheets. The Company recognizes lease expense for these short-term leases on a straight-line basis over the lease term.
Supplemental information concerning the leases recorded in the Company's consolidated balance sheet as of June 30, 2022 is detailed in the following table: | | | | | | | | |
| (Dollars in millions) | Line item in the consolidated balance sheet | Balance at
June 30, 2022 |
| Right-of-use assets: | | |
| Finance leases | Property, plant, and equipment, net | $ | 178 | |
| Operating leases | Other long-term assets | 93 | |
| | |
| Current lease liabilities: | | |
| Finance leases | Current portion of long-term obligations and other short-term borrowings | 17 | |
| Operating leases | Other accrued liabilities | 14 | |
| | |
| Non-current lease liabilities: | | |
| Finance leases | Long-term obligations, less current portion | 217 | |
| Operating leases | Other liabilities | $ | 85 | |
The components of the net lease costs for the fiscal year ended June 30, 2022 reflected in the Company's consolidated statement of operations were as follows: | | | | | | | | |
| (Dollars in millions) | | Fiscal Year Ended
June 30, 2022 |
| Financing lease costs: | | |
| Amortization of right-of-use assets | | $ | 17 | |
| Interest on lease liabilities | | 12 | |
| Total | | 29 | |
| | |
| Operating lease costs | | 28 | |
| Variable lease costs | | 8 | |
| Total lease costs | | $ | 65 | |
The short-term lease cost amounted to $8 million during the fiscal year ended June 30, 2022.
The weighted average remaining lease term and weighted average discount rate related to the Company's right-of-use assets and lease liabilities as of June 30, 2022 are as follows:
| | | | | |
| Weighted average remaining lease term (years): | |
| Finance leases | 17.7 |
| Operating leases | 13.7 |
| Weighted average discount rate: | |
| Finance leases | 6.1 | % |
| Operating leases | 4.3 | % |
Supplemental information concerning the cash-flow impact arising from the Company's leases for the fiscal year ended June 30, 2022 recorded in the Company's unaudited consolidated statement of cash flows is detailed in the following table (in
millions): | | | | | | | | | |
| | | Fiscal Year Ended
June 30, 2022 |
| Cash paid for amounts included in lease liabilities: | | | |
| Financing cash flows used for finance leases | | | $ | 15 | |
| Operating cash flows used for finance leases | | | 11 | |
| Operating cash flows used for operating leases | | | 19 | |
| | | |
| Non-cash transactions: | | | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | | 59 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | $ | 31 | |
As of June 30, 2022, the Company expects that its future minimum lease payments will become due and payable as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Financing Leases | | Operating Leases | | Total |
| 2023 | $ | 29 | | | $ | 17 | | | $ | 46 | |
| 2024 | 28 | | | 14 | | | 42 | |
| 2025 | 25 | | | 11 | | | 36 | |
| 2026 | 22 | | | 11 | | | 33 | |
| 2027 | 22 | | | 11 | | | 33 | |
| Thereafter | 238 | | | 74 | | | 312 | |
| Total minimum lease payments | 364 | | | 138 | | | 502 | |
| Less: interest | 130 | | | 39 | | | 169 | |
| Total lease liabilities | $ | 234 | | | $ | 99 | | | $ | 333 | |
18. COMMITMENTS AND CONTINGENCIES
Contingent Losses
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 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.
19. SEGMENT AND GEOGRAPHIC INFORMATION
As discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, the Company changed its operating structure and reorganized its executive leadership team accordingly. This new organizational structure included simplifying the four operating and reportable segments the Company disclosed during fiscal 2022 to two: (i) Biologics and (ii) Pharma and Consumer Health. The segment disclosures below have been recast retrospectively to conform to the Company’s current segment structure.
The Company evaluates the performance of its segments based on segment earnings before other (expense) income, impairments, restructuring costs, interest expense, income tax expense, and depreciation and amortization (“Segment EBITDA”).
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 the setting of strategic goals and annual goals for the segments, and (b) in order 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 table includes Segment EBITDA for each of the Company's current reportable segments during the fiscal years ended June 30, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
| Segment EBITDA reconciled to net earnings: | | | | | |
| Biologics | $ | 777 | | | $ | 615 | | | $ | 239 | |
| Pharma and Consumer Health | 589 | | | 498 | | | 547 | |
| Subtotal | $ | 1,366 | | | $ | 1,113 | | | $ | 786 | |
| Reconciling items to net earnings | | | | | |
Unallocated costs (1) | (286) | | | 1 | | | (146) | |
| Depreciation and amortization | (378) | | | (289) | | | (254) | |
| Interest expense, net | (123) | | | (110) | | | (126) | |
| Income tax expense | (80) | | | (130) | | | (39) | |
| | | | | |
| Net earnings | $ | 499 | | | $ | 585 | | | $ | 221 | |
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain (loss) on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Fiscal Year Ended June 30, |
| 2022 | | 2021 | | 2020 |
Impairment charges and gain/loss on sale of assets(a) | $ | (31) | | | $ | (9) | | | $ | (5) | |
| Stock-based compensation | (54) | | | (51) | | | (48) | |
Restructuring and other special items (b) | (55) | | | (31) | | | (42) | |
Gain (loss) on sale of subsidiary (c) | 1 | | | 182 | | | (1) | |
| | | | | |
| | | | | |
| | | | | |
| Other expense, net | (28) | | | (3) | | | (8) | |
| Non-allocated corporate costs, net | (119) | | | (87) | | | (42) | |
| Total unallocated costs | $ | (286) | | | $ | 1 | | | $ | (146) | |
(a) For the fiscal year ended June 30, 2022, impairment charges are primarily due to fixed asset impairment charges associated with dedicated equipment for a product the Company no longer manufactures in its respiratory and specialty platform and obsolete equipment in its Biologics platform.
(b) Restructuring and other special items for the fiscal year ended June 30, 2022 include (i) transaction and integration costs primarily associated with the Princeton, Bettera Wellness, Delphi, Hepatic, Acorda and RheinCell transactions and (ii) unrealized losses on venture capital investments.
Restructuring and other special items for the fiscal year ended June 30, 2021 include transaction and integration costs associated with the Anagni, Italy facility acquisition and the MaSTherCell, Skeletal, Delphi, and Acorda transactions, in addition to restructuring costs associated with the closure of the Company's Pharma and Consumer Health facility in Bolton, U.K.
Restructuring and other special items during the fiscal year ended June 30, 2020 include transaction and integration costs associated with the Company’s cell and gene therapy acquisitions and the disposal of a facility in Australia.
(c) Gain on sale of subsidiary for the fiscal years ended June 30, 2022 and 2021 is affiliated with the sale of the Blow-Fill-Seal Business. Loss on sale of subsidiary for the fiscal year ended June 30, 2020 is affiliated with the disposal of a facility in Australia.
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated balance sheets.
Total Assets | | | | | | | | | | | |
| (Dollars in millions) | June 30, 2022 | | June 30, 2021 |
| Biologics | $ | 5,770 | | | $ | 5,009 | |
| Pharma and Consumer Health | 4,356 | | | 3,320 | |
| Corporate and eliminations | 382 | | | 783 | |
| Total assets | $ | 10,508 | | | $ | 9,112 | |
Capital Expenditures | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, |
| (Dollars in millions) | 2022 | | 2021 | | 2020 |
| Biologics | $ | 453 | | | $ | 516 | | | $ | 330 | |
| Pharma and Consumer Health | 183 | | | 151 | | | 119 | |
| Corporate | 30 | | | 19 | | | 17 | |
| Total capital expenditures | $ | 666 | | | $ | 686 | | | $ | 466 | |
The following table presents long-lived assets(1) by geographic area: | | | | | | | | | | | | | | | | | |
| | | Long-Lived Assets (1) |
| | | | | |
| (Dollars in millions) | | | | | | | June 30, 2022 | | June 30, 2021 |
| United States | | | | | | | $ | 2,267 | | | $ | 1,867 | |
| Europe | | | | | | | 747 | | | 541 | |
| Other | | | | | | | 113 | | | 116 | |
| | | | | | | | | |
| Total | | | | | | | $ | 3,127 | | | $ | 2,524 | |
(1) Long-lived assets include property, plant, and equipment, net of accumulated depreciation.
For further details on segment and geographic information, see Note 3, Revenue Recognition.
20. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at June 30, 2022 and June 30, 2021 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) | June 30,
2022 | | June 30,
2021 |
| Raw materials and supplies | $ | 651 | | | $ | 469 | |
| Work-in-process | 109 | | | 151 | |
| | | |
| Total inventories, gross | 760 | | | 620 | |
| Inventory cost adjustment | (58) | | | (57) | |
| Total inventories | $ | 702 | | | $ | 563 | |
Prepaid expenses and other
Prepaid expenses and other current assets consist of the following: | | | | | | | | | | | |
| (Dollars in millions) | June 30,
2022 | | June 30,
2021 |
| Prepaid expenses | $ | 61 | | | $ | 46 | |
| Short-term contract assets | 398 | | | 181 | |
| Spare parts supplies | 22 | | | 30 | |
| Prepaid income tax | 27 | | | 22 | |
| Non-U.S. value-added tax | 48 | | | 50 | |
| | | |
| | | |
| | | |
| Other current assets | 70 | | | 47 | |
| Total prepaid expenses and other | $ | 626 | | | $ | 376 | |
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following: | | | | | | | | | | | |
| (Dollars in millions) | June 30,
2022 | | June 30,
2021 |
| Land, buildings, and improvements | $ | 1,687 | | | $ | 1,571 | |
| Machinery and equipment | 1,891 | | | 1,558 | |
| Furniture and fixtures | 48 | | | 31 | |
| Construction in progress | 848 | | | 543 | |
| Property and equipment, at cost | 4,474 | | | 3,703 | |
| Accumulated depreciation | (1,347) | | | (1,179) | |
| Property, plant, and equipment, net | $ | 3,127 | | | $ | 2,524 | |
Other long-term assets
Other long-term assets consist of the following: | | | | | | | | | | | |
| (Dollars in millions) | June 30,
2022 | | June 30,
2021 |
| Operating lease right-of-use-assets | $ | 93 | | | $ | 84 | |
| Note receivable | 51 | | | 47 | |
| | | |
| Pension assets | 37 | | | 43 | |
| Corporate-owned life insurance policies | 35 | | | 35 | |
| | | |
| Venture capital investments | 33 | | | 38 | |
| Interest rate swap | 36 | | | 2 | |
| Long-term contract assets | 43 | | | — | |
| Other | 21 | | | 19 | |
| Total other long-term assets | $ | 349 | | | $ | 268 | |
Other accrued liabilities
Other accrued liabilities consist of the following: | | | | | | | | | | | |
| (Dollars in millions) | June 30,
2022 | | June 30,
2021 |
| Contract liabilities | $ | 211 | | | $ | 305 | |
| Accrued employee-related expenses | 198 | | | 184 | |
| Accrued expenses | 140 | | | 170 | |
| Operating lease liabilities | 14 | | | 16 | |
| Restructuring accrual | 1 | | | 4 | |
| | | |
| Accrued interest | 32 | | | 27 | |
| | | |
| | | |
| Accrued income tax | 50 | | | 30 | |
| Total other accrued liabilities | $ | 646 | | | $ | 736 | |
21. SUBSEQUENT EVENTS
Change in Operating and Reporting Structure
Effective July 1, 2022, in connection with the appointment of a new President and Chief Executive Officer, who also serves as the Company's Chief Operating Decision Maker, the Company changed its operating structure and reorganized its executive leadership team. This new organizational structure includes a shift from four operating and reporting segments to two segments ((i) Biologics, and (ii) Pharma and Consumer Health), each of which represented approximately half of the Company's net revenue in fiscal 2022. The Company's revised operating and reporting segments are comprised of the following:
•Biologics - The Biologics segment provides the same services as the segment we reported in fiscal 2022, with some organizational adjustments and the addition of existing analytical development and testing services for large molecules that was previously offered by the Oral and Specialty Delivery segment. The Biologics segment now provides development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; plasmid DNA; iPSCs, and vaccines. It also provides formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and, as noted above, analytical development and testing services for large molecules.
•Pharma and Consumer Health - The Pharma and Consumer Health segment encompasses the offerings of three prior segments - Softgel and Oral Technologies, Oral and Specialty Delivery and Clinical Supply Services - and comprises the Company’s market-leading capabilities for complex oral solids, softgel formulations, Zydis® fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
The Chief Operating Decision Maker received information and assessed performance during the fiscal year ended June 30, 2022 based on our historic operating and reporting segments in place for the entirety of fiscal 2022. All future interim and annual reporting periods will disclose the Company's performance using its new operating structure and segments described above, with results from prior reporting periods recast retrospectively to reflect the conversion.
Metrics Contract Services Purchase Agreement
On August 9, 2022, the Company entered into an agreement to acquire Metrics Contract Services (“Metrics”) from Mayne Pharma Group Limited for $475 million. Metrics is an oral solids development and manufacturing business specializing in handling highly potent compounds at its facility in Greenville, North Carolina. Upon closing, the operations and facility of Metrics will become part of the Company’s newly configured Pharma and Consumer Health segment described elsewhere in this Note 21, Subsequent Events. The agreement is subject to customary closing conditions and is expected to close before December 31, 2022.
ITEM 9A. 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 Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. At the time that the Original Form 10-K was filed on August 29, 2022, our management, including our Chief Executive Officer and our Chief Financial Officer, had evaluated the effectiveness of the design and operation of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level. Subsequent to this evaluation, our management, including our Chief Executive Officer and current Interim Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of June 30, 2022, due to the material weakness in internal control over financial reporting described below.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions in which we participate and any disposition or use of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations from approved personnel; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because either conditions change or the degree of compliance with our policies and procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of June 30, 2022. In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We did not maintain effective controls over the appropriateness of revenue recognition related to modifications of customer agreements at our Bloomington, Indiana facility. Specifically, we did not maintain effective controls to properly identify and assess the accounting treatment of modifications to arrangements that were accounted for under ASC 606, Revenue from Contracts with Customers. The reviewer had insufficient knowledge of the requirements of the ASC 606 revenue recognition accounting model and therefore, the review procedures were not performed with the necessary level of competency to prevent or detect a material misstatement on a timely basis. Furthermore, the compensating control to review the accounting assessments for contract modifications was not sufficiently designed to detect accounting misstatements. As discussed in the Explanatory Note to this Amendment and Note 1 to the Consolidated Financial Statements contained in Part II, Item 8, “Financial Statements and Supplementary Data,” these control deficiencies resulted in an immaterial revision to our June 30, 2022, consolidated financial statements to correct an overstatement of revenue of $26 million. While these deficiencies did not result in a material misstatement of our consolidated financial statements, there is a reasonable possibility that these deficiencies could have resulted in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.
In Management's Annual Report on Internal Control Over Financial Reporting included in the Original Form 10-K, management, including our Chief Executive Officer and our Chief Financial Officer, concluded our internal control over financial reporting was effective as of June 30, 2022. Management subsequently concluded that the material weakness described above existed as of June 30, 2022. As a result, management has concluded that we did not maintain effective internal control over financial reporting as of June 30, 2022 based on the criteria in Internal Control-Integrated Framework(2013 version) issued by COSO. Accordingly, management has restated its report on internal control over financial reporting.
The effectiveness of our internal control over financial reporting as of June 30, 2022 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included in Part II, Item 8. “Financial Statements and Supplementary Data,” in this Amendment.
Remediation Plan
As part of our commitment to strengthening our internal control over financial reporting, we are implementing remedial actions under the oversight of the Audit Committee of our Board of Directors to address these deficiencies, including:
•Hiring additional technical accounting resources within our Bloomington, Indiana site and within the corporate controllership group.
•Enhancing the design of our management review controls relating to the accounting for contract modifications, including offered concessions.
•Additional training for our Executive Leadership Team, and other critical customer-facing personnel, on revenue-recognition principles including contract modifications relating to offered concessions.
We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and make any further change management determines appropriate.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
(b) Exhibits.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves and you should not rely on them for that purpose. In particular, any representation or warranty made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
| | | | | | | | | | |
| Exhibit No. | Description | | |
| | 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). | | |
| | | | |
| | Fourth Amended and Restated Certificate of Incorporation of Catalent, Inc., as filed with the Secretary of State of the State of Delaware on October 28, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 2, 2021). | | |
| | | |
| | Bylaws of Catalent, Inc., effective January 27, 2022 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on February 1, 2022). | | |
| | | | |
| | Indenture, dated June 27, 2019, 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 June 27, 2019). | | |
| | | | |
| | Form of 5.00% Senior Notes due 2027 (included as part of Exhibit 4.1 above). | | |
| | | | |
| | Indenture, dated March 2, 2020, by and among Catalent Pharma Solutions, Inc., the subsidiary guarantors named therein, Deutsche Trustee Company Limited, as trustee, Deutsche Bank AG, London Branch, as principal paying agent, and Deutsche Bank Luxembourg S.A., as transfer agent and registrar (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 3, 2020). | | |
| | | | |
| | Form of 2.375% Senior Notes due 2028 (included as part of Exhibit 4.2 above). | | |
| | | | |
| | Indenture, dated February 22, 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 February 21, 2021). | | |
| | | | |
| | Form of 3.125% Senior Notes due 2029 (included as part of Exhibit 4.3 above). | | |
| | | | |
| | 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). | | |
| | | | |
| | Form of 3.500% Senior Notes due 2030 (included as part of Exhibit 4.4 above). | | |
| | | | |
| | Description of the Company’s Common Stock, par value $0.01 (incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K filed on August 27, 2019). | | |
| | | | |
| | Catalent, Inc. 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 5, 2014).† | | |
| | | | |
| | Catalent, Inc. 2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 6, 2018). † | | |
| | | | |
|
| Catalent Pharma Solutions, Inc. Deferred Compensation Plan as amended and restated effective January 1, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2017).† | | |
| | | | |
| | Amendment to the Catalent Pharma Solutions, Inc. Deferred Compensation Plan effective January 1, 2017 (incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K filed on August 28, 2017). † | | |
| | | | |
| | | | | | | | | | |
| | Amendment No. 2 to the Catalent Pharma Solutions, Inc. Deferred Compensation Plan effective October 16, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2017).† | | |
| | | | |
| | Form of Restricted Stock Unit Agreement for U.S. Non-Employee Directors (incorporated by reference to Exhibit 10.5.4 to the Company’s Annual Report on Form 10-K filed on August 31, 2020). † | | |
| | | |
| | Form of 2018 Omnibus Incentive Plan Restricted Stock Unit Agreement for U.S. Employees (incorporated by reference to exhibit 10.40 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2019). † | | |
| | | | |
| | Form of 2018 Omnibus Incentive Plan Restricted Stock Unit Agreement for non-U.S. Employees (incorporated by reference to exhibit 10.41 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2019). † | | |
| | | | |
| | Form of 2018 Omnibus Incentive Plan Option Agreement for U.S. Employees (incorporated by reference to exhibit 10.44 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2019). † | | |
| | | | |
| | Form of 2018 Omnibus Incentive Plan Option Agreement for non-U.S. Employees (incorporated by reference to exhibit 10.45 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2019). † | | |
| | | | |
| | Form of the Performance Share Unit Agreement for U.S. Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2019).† | | |
| | | | |
| | Form of the Performance Share Unit Agreement for Non-U.S. Employees (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2019).† | | |
| | | | |
| | Summary of Management Incentive Plan for the fiscal year ended June 30, 2021 (incorporated by reference to exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on November 3, 2020). † | | |
| | | | |
| | Management Incentive Plan Summary for the fiscal year ending June 30, 2022 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 2, 2021). | | |
| | | | |
| | Amended and Restated Credit Agreement, dated as of May 20, 2014, relating to the Credit Agreement, dated as of April 10, 2007, as amended, among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, Morgan Stanley Senior Funding, Inc., as the administrative agent, collateral agent and swing line lender and other lenders as parties thereto (incorporated by reference to Exhibit 10.1 to Catalent Pharma Solutions, Inc.’s Current Report on Form 8-K filed on May 27, 2014). | | |
| | | | |
| | Amendment No. 1, dated December 1, 2014 to Amended and Restated Credit Agreement, dated as of May 20, 2014 among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, Morgan Stanley Senior Funding, Inc., as the administrative agent, collateral agent and swing line lender and other lenders as parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 2, 2014). | | |
| | | | |
| | Amendment No. 2 to Amended and Restated Credit Agreement, dated as of December 9, 2016, by and among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, Morgan Stanley Senior Funding, Inc. as administrative agent, collateral agent and swing line lender and the lenders party 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, Morgan Stanley Senior Funding, Inc. and JP Morgan Chase Bank, N.A. as L/C Issuers, the other lenders party thereto and the other agents party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 12, 2016). | | |
| | | | |
| | Amendment No. 3 to Amended and Restated Credit Agreement, dated as of October 18, 2017, by and among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, Morgan Stanley Senior Funding, Inc., as administrative agent, collateral agent and swing line lender and the lenders party 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, Morgan Stanley Senior Funding, Inc. and JPMorgan Chase Bank, N.A., as L/C Issuers, the other lenders party thereto and the other agents party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 18, 2017). | | |
| | | | |
| | Amendment No. 4 to Amended and Restated Credit Agreement, dated as of May 17, 2019, by and among Catalent Pharma Solutions, Inc., PTS Intermediate Holdings LLC, Morgan Stanley Senior Funding, Inc., as administrative agent, collateral agent and swing line lender and the lenders party 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, Morgan Stanley Senior Funding, Inc. and JPMorgan Chase Bank, N.A., as L/C Issuers, the other lenders party thereto and the other agents party thereto (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 22, 2019). | | |
| | | | |
| | | | | | | | | | |
| | Amendment No. 5 to Amended and Restated Credit Agreement, dated as of February 22, 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 February 22, 2021). | | |
| | | | |
| | 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). | | |
| | | | |
| | Intellectual Property Security Agreement, dated as of April 10, 2007, among PTS Acquisition Corp., Cardinal Health 409, Inc., PTS Intermediate Holdings LLC, Certain Subsidiaries of Holdings Identified Therein and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.21 to Catalent Pharma Solutions, Inc.’s Registration Statement on Form S-4 filed on December 6, 2007). | | |
| | | | |
| | Intellectual Property Security Agreement Supplement, dated as of July 1, 2008, to the Intellectual Property Security Agreement, dated as of April 10, 2007, among PTS Acquisition Corp., Cardinal Health 409, Inc., PTS Intermediate Holdings LLC, Certain Subsidiaries of Holdings Identified Therein and Morgan Stanley Senior Funding, Inc. (incorporated by reference to Exhibit 10.28 to Catalent Pharma Solutions, Inc.’s Annual Report on Form 10-K filed on September 29, 2008). | | |
| | | | |
| | Stockholders’ Agreement, dated as of May 17, 2019, by and among Catalent, Inc., Green Equity Investors VII, L.P., Green Equity Investors Side VII, L.P., LGP Associates VII-A LLC and LGP Associates VII-B LLC (incorporated by reference to exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 22, 2019). | | |
| | | | |
| | Registration Rights Agreement, dated as of May 17, 2019, by and among Catalent, Inc., Green Equity Investors VII, L.P., Green Equity Investors Side VII, L.P., LGP Associates VII-A LLC and LGP Associates VII-B LLC (incorporated by reference to exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 22, 2019). | | |
| | | | |
| | Form of Severance Agreement between named executive officers and Catalent Pharma Solutions, Inc. (incorporated by reference to Exhibit 10.3 to Catalent Pharma Solutions, Inc.’s Annual Report on Form 10-K filed on September 17, 2010).† | | |
| | | | |
| | Employment Agreement, dated October 22, 2014 by and among Catalent, Inc. and John R. Chiminski (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 24, 2014). † | | |
| | | | |
| | Amendment to Employment Agreement, dated August 23, 2017, by and between Catalent, Inc. and John R. Chiminski (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 28, 2017). † | | |
| | | | |
| | Second Amendment to Employment Agreement, dated August 11, 2020, by and between Catalent, Inc. and John R. Chiminski(incorporated by reference to Exhibit 10.12.2 to the Company’s Annual Report on Form 10-K filed on August 31, 2020). † | | |
| | | | |
| | Amended and Restated Employment Agreement, dated January 4, 2022, by and between Catalent, Inc. and John R. Chiminski (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 5, 2022). † | | |
| | | | |
| | Offer letter, dated March 13, 2018, between Steven Fasman and Catalent Pharma Solutions Inc. (incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K filed on August 27, 2019) † | | |
| | | | |
| | Offer letter, dated July 7, 2022, between Steven Fasman and Catalent, Inc. (incorporated by reference to Exhibit 10.12.1 to the Company’s Annual Report on Form 10-K filed on August 29, 2022). † | | |
| | | | |
| | Offer letter, dated March 15, 2018, between Aristippos Gennadios and Catalent Pharma Solutions LLC (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on August 29, 2022). † | | |
| | | | |
| | Offer letter, dated July 7, 2022, between Aristippos Gennadios and Catalent, Inc. (incorporated by reference to Exhibit 10.13.1 to the Company’s Annual Report on Form 10-K filed on August 29, 2022). † | | |
| | | | |
| | | | | | | | | | |
| | Terms and Conditions of Employment Statement, dated February 1, 2018, between Alessandro Maselli and Catalent Pharma Solutions (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K filed on August 27, 2019). † | | |
| | | | |
| | Offer letter, dated January 31, 2019, between Alessandro Maselli and Catalent Pharma Solutions (incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed on August 27, 2019). † | | |
| | | | |
| | Employment Agreement, dated January 4, 2022, by and between Catalent, Inc. and Alessandro Maselli (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 5, 2022). | | |
| | | | |
| | Offer letter, dated May 10, 2021, between Thomas Castellano and Catalent Pharma Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 11, 2021). † | | |
| | | | |
| | Subsidiaries of the Registrant. (incorporated by reference to Exhibit 21.1 to the Company’s Annual Report on Form 10-K filed on August 29, 2022). * | | |
| | | | |
| | Consent of Ernst & Young LLP. * | | |
| | | | |
| | 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. * | | |
| | | | |
| | 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. * | | |
| | | | |
| | 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. ** | | |
| | | | |
| | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | | |
| | | | |
| 101.1 | | The following materials are formatted in inline XBRL (inline eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. * | | |
| | | | |
| 104 | | The cover page of this Annual Report on Form 10-K/A, formatted as Inline XBRL and contained in Exhibit 101.1. | | |
* Filed herewith
** Furnished herewith
† Represents a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | June 12, 2023 | By: | | /s/ ALESSANDRO MASELLI |
| | | | Alessandro Maselli |
| | | | President and Chief Executive Officer |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | Date |
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| /s/ ALESSANDRO MASELLI | | President and Chief Executive Officer (Principal Executive Officer) and Director | 6/12/2023 |
| Alessandro Maselli | | |
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| /s/ JOHN R. CHIMINSKI | | Executive Chair and Director | 6/12/2023 |
| John R. Chiminski | | | |
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| /s/ MADHAVAN BALACHANDRAN | | Director | 6/12/2023 |
| Madhavan Balachandran | | | |
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| /s/ MICHAEL J. BARBER | | Director | 6/12/2023 |
| Michael J. Barber | | | |
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| /s/ J. MARTIN CARROLL | | Director | 6/12/2023 |
| J. Martin Carroll | | | |
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| /s/ ROLF CLASSON | | Director | 6/12/2023 |
| Rolf Classon | | | |
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| /s/ ROSEMARY A. CRANE | | Director | 6/12/2023 |
| Rosemary A. Crane | | | |
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| /s/ JOHN J. GREISCH | | Director | 6/12/2023 |
| John J. Greisch | | | |
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| /s/ CHRISTA KREUZBURG | | Director | 6/12/2023 |
| Christa Kreuzburg | | | |
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| /s/ GREGORY T. LUCIER | | Director | 6/12/2023 |
| Gregory T. Lucier | | | |
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| /s/ DONALD E. MOREL, JR. | | Director | 6/12/2023 |
| Donald E. Morel, Jr. | | | |
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| /s/ JACK STAHL | | Director | 6/12/2023 |
| Jack Stahl | | | |
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| /s/ KAREN FLYNN | | Director | 6/12/2023 |
| Karen Flynn | | | |
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| /s/ RICKY HOPSON | | Senior Vice President and Interim Chief Financial | 6/12/2023 |
| Ricky Hopson | | Officer (Principal Financial Officer) | |
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| /s/ KAREN SANTIAGO | | Vice President and Chief Accounting Officer | 6/12/2023 |
| Karen Santiago | | | |
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