UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
| | | | | |
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2019
or
| | | | | |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
001-36587
(Commission File Number)
_____________________________
Catalent, Inc.
(Exact name of registrant as specified in its charter)
_____________________________
| | | | | | | | | | | | | | |
| Delaware | | | | 20-8737688 |
| (State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
| | | | |
| 14 Schoolhouse Road, | Somerset, | NJ | | 08873 |
| (Address of principal executive offices) | | | | (Zip code) |
(732) 537-6200
Registrant's telephone number, including area code
______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x☒ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x☒ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer x
| | | Accelerated filer ¨
| |
Large accelerated filer | ☒ | | Accelerated filer | ¨ | |
| Non-accelerated filer | ¨ | | | Smaller reporting company¨ | | ¨ |
| | | Emerging growth company¨ | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x☒ No
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading symbols(s) | Name of each exchange on which registered |
| Common Stock | CTLT | New York Stock Exchange |
On May 3,November 1, 2019, there were 145,715,171146,308,834 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.
CATALENT, INC. and Subsidiaries
INDEX TO FORM 10-Q
For the Three and Nine Months Ended March 31,September 30, 2019
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| Item 1. | | |
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Special Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.
These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statement is subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.
Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include, but are not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 20182019 (the "Fiscal 2018 10-K"“Fiscal 2019 10-K”) and the following:
•We participate in a highly competitive market, and increased competition may adversely affect our business.
•The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition, and results of operations may be harmed if our customers spend less on, or are less successful in, these activities.
•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.
•Failure to comply with existing and future regulatory requirements could adversely affect our results of operations and financial condition or result in claims from customers.
•Failure to provide quality offerings to our customers could have an adverse effect on our business and subject us to regulatory actions or costly litigation.
•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.
•Our global operations are subject to economic, political, and regulatory risks, including the risks of changing regulatory standards or changing interpretations of existing standards, that could affect the profitability of our operations or require costly changes to our procedures.
•The exit of the United Kingdom (the "U.K."“U.K.”) from the European Union could have future adverse effects on our operations, revenues, and costs, and therefore our profitability.
•If we do not enhance our existing or introduce new technology or service offerings in a timely manner, our offerings may become obsolete over time, customers may not buy our offerings, and our revenue and profitability may decline.
•We and our customers depend on patents, copyrights, trademarks, know-how, trade secrets, and other forms of intellectual property protections, but these protections may not be adequate.
•Our 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.
•Changes in market access or healthcare reimbursement for our customers’ products in the United States ("(“U.S."”) or internationally, including possible changes to the U.S. Affordable Care Act, could adversely affect our results of operations and financial condition by affecting demand for our offerings or the financial health of our customers.
•As a global enterprise, fluctuations in the exchange rate of the U.S. dollar, our reporting currency, against foreignother currencies could have a material adverse effect on our financial performance and results of operations.
•Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.
•Our ability to use our net operating loss carryforwards, ex-U.S. tax credit carryforwards, and certain other tax attributes may be limited.
•Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net U.S. deferred tax assets.
•We are dependent on key personnel.
•We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counter-parties, and the risks generally associated with information and communications systems could adversely affect our results of operations. We are continuously working to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cyber-security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises of data security.
•We engage from time to time in acquisitions and other transactions, including the pending acquisition of Paragon Bioservices, Inc. (“Paragon”), that may complement or expand our business or divest of non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significant risks, including risks relating to our ability to successfully and efficiently integrate acquisitions or execute on dispositions and realize anticipated benefits therefrom. The failure to execute or realize the full benefits from any such transaction could have a negative effect on our operations.
•Our offerings orGene therapy is a relatively new and still-developing mode of treatment, dependent on cutting-edge technologies, and our customers’ gene therapies may be perceived as unsafe or may result in unforeseen adverse events. Negative public opinion, continuing research, or increased regulatory scrutiny of gene therapy and its financial cost may damage public perception of the safety, utility, or efficacy of gene therapies and harm our customers’ ability to conduct their business or obtain regulatory approvals for their gene therapy products, may infringeand thereby have an indirect, adverse effect on the intellectual property rights of third parties.
•We are subject to environmental, health, and safety laws and regulations, which could increase our costs and restrict our operations in the future.
•We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
•Certain of our pension plans are underfunded, and additional cash contributions we may make to increase the funding level will reduce the cash available for our business, such as the payment of our interest expense.
•Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry, expose us to interest-rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness.
•Our debt agreements contain restrictions that limit our flexibility in operating our business.
•Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability timely to pay our substantial indebtedness.
•We may 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 caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We use our website (www.catalent.com), our corporate Facebook page (https://www.facebook.com/CatalentPharmaSolutions), and our corporate Twitter account (@catalentpharma) as channels for the distribution of information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission ("SEC"(“SEC”) filings, and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Catalent, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited; Dollarsdollars in millions, except per share data)
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | |
| Net revenue | Net revenue | $ | 617.5 | | $ | 627.9 | | $ | 1,792.3 | | $ | 1,778.1 | Net revenue | $ | 664.7 | | | $ | 551.8 | | |
| Cost of sales | Cost of sales | 418.8 | | 436.2 | | 1,243.7 | | 1,258.9 | Cost of sales | 487.0 | | | 403.3 | | |
| Gross margin | Gross margin | 198.7 | | 191.7 | | 548.6 | | 519.2 | Gross margin | 177.7 | | | 148.5 | | |
| Selling, general, and administrative expenses | Selling, general, and administrative expenses | 129.9 | | 117.6 | | 368.6 | | 339.9 | Selling, general, and administrative expenses | 142.8 | | | 115.5 | | |
| Impairment charges and (gain)/loss on sale of assets | Impairment charges and (gain)/loss on sale of assets | (0.1) | | 0.2 | | 2.7 | | 4.4 | Impairment charges and (gain)/loss on sale of assets | (0.2) | | | 2.9 | | |
| Restructuring and other | Restructuring and other | 3.1 | | 1.4 | | 12.9 | | 2.7 | Restructuring and other | 0.7 | | | 9.7 | | |
| | Operating earnings | Operating earnings | 65.8 | | 72.5 | | 164.4 | | 172.2 | Operating earnings | 34.4 | | | 20.4 | | |
| Interest expense, net | Interest expense, net | 26.4 | | 29.9 | | 80.0 | | 81.4 | Interest expense, net | 36.3 | | | 28.1 | | |
| Other (income)/expense, net | Other (income)/expense, net | (3.2) | | 9.9 | | 3.9 | | 28.2 | Other (income)/expense, net | 4.9 | | | 5.7 | | |
| Earnings from continuing operations before income taxes | 42.6 | | 32.7 | | 80.5 | | 62.6 | |
| Income tax expense | 10.9 | | 13.7 | | 14.2 | | 61.7 | |
| Earnings/(loss) from operations before income taxes | | Earnings/(loss) from operations before income taxes | (6.8) | | | (13.4) | | |
| Income tax expense/(benefit) | | Income tax expense/(benefit) | (6.9) | | | 1.0 | | |
| | Net earnings | $ | 31.7 | | $ | 19.0 | | $ | 66.3 | | $ | 0.9 | |
| Net earnings/(loss) | | Net earnings/(loss) | 0.1 | | | (14.4) | | |
| | Less: Series A Preferred Stock dividend | | Less: Series A Preferred Stock dividend | (8.1) | | | — | | |
| Net earnings/(loss) attributable to common shareholders | | Net earnings/(loss) attributable to common shareholders | $ | (8.0) | | | | $ | (14.4) | | |
| | | Earnings per share: | | |
| Earnings/(loss) per share: | | Earnings/(loss) per share: | | |
| Basic | Basic | | Basic | | |
| | Net earnings | $ | 0.22 | | $ | 0.14 | | $ | 0.46 | | $ | 0.01 | |
| Net earnings/(loss) | | Net earnings/(loss) | $ | (0.05) | | | $ | (0.10) | | |
| Diluted | Diluted | | | | | Diluted | | |
| | Net earnings | $ | 0.22 | | $ | 0.14 | | $ | 0.46 | | $ | 0.01 | |
| Net earnings/(loss) | | Net earnings/(loss) | $ | (0.05) | | | $ | (0.10) | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited; Dollarsdollars in millions)
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | |
| Net earnings | $ | 31.7 | | $ | 19.0 | | $ | 66.3 | | $ | 0.9 | |
| Net earnings/(loss) | | Net earnings/(loss) | $ | 0.1 | | | $ | (14.4) | | |
| Other comprehensive income/(loss), net of tax | Other comprehensive income/(loss), net of tax | | Other comprehensive income/(loss), net of tax | | |
| Foreign currency translation adjustments | Foreign currency translation adjustments | 21.5 | | 38.2 | | (4.9) | | 62.9 | Foreign currency translation adjustments | (21.8) | | | (8.8) | | |
| Pension and other post-retirement adjustments | Pension and other post-retirement adjustments | 0.4 | | 0.4 | | 1.4 | | 1.3 | Pension and other post-retirement adjustments | (0.3) | | | 0.4 | | |
| Available for sale investments | — | | 0.7 | | — | | (5.7) | |
| | | Other comprehensive income/(loss), net of tax | Other comprehensive income/(loss), net of tax | 21.9 | | 39.3 | | (3.5) | | 58.5 | Other comprehensive income/(loss), net of tax | (22.1) | | | (8.4) | | |
| Comprehensive income/(loss) | Comprehensive income/(loss) | $ | 53.6 | | $ | 58.3 | | $ | 62.8 | | $ | 59.4 | Comprehensive income/(loss) | $ | (22.0) | | | $ | (22.8) | | |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited; Dollarsdollars in millions, except share and per share data)
| | | March 31,
2019 | | June 30,
2018 | | September 30,
2019 | | June 30,
2019 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 227.9 | | $ | 410.2 | Cash and cash equivalents | $ | 243.4 | | | $ | 345.4 | |
| Trade receivables, net | Trade receivables, net | 583.5 | | 555.8 | Trade receivables, net | 647.9 | | | 693.1 | |
| Inventories | Inventories | 247.0 | | 209.1 | Inventories | 250.7 | | | 257.2 | |
| Prepaid expenses and other | Prepaid expenses and other | 85.3 | | 65.2 | Prepaid expenses and other | 124.8 | | | 100.1 | |
| Total current assets | Total current assets | 1,143.7 | | 1,240.3 | Total current assets | 1,266.8 | | | 1,395.8 | |
| Property, plant, and equipment, net | Property, plant, and equipment, net | 1,301.5 | | 1,270.6 | Property, plant, and equipment, net | 1,561.1 | | | 1,536.7 | |
| Other assets: | Other assets: | | Other assets: | |
| Goodwill | Goodwill | 1,409.3 | | 1,397.2 | Goodwill | 2,195.9 | | | 2,220.9 | |
| Other intangibles, net | Other intangibles, net | 554.4 | | 544.9 | Other intangibles, net | 902.9 | | | 930.8 | |
| Deferred income taxes | Deferred income taxes | 30.1 | | 32.9 | Deferred income taxes | 34.1 | | | 38.6 | |
| Other | Other | 54.1 | | 45.2 | Other | 158.7 | | | 61.2 | |
| Total assets | Total assets | $ | 4,493.1 | | $ | 4,531.1 | Total assets | $ | 6,119.5 | | | $ | 6,184.0 | |
| | LIABILITIES AND SHAREHOLDER’S DEFICIT | | |
| LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY | | LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Current portion of long-term obligations and other short-term borrowings | Current portion of long-term obligations and other short-term borrowings | $ | 70.3 | | $ | 71.9 | Current portion of long-term obligations and other short-term borrowings | $ | 74.3 | | | $ | 76.5 | |
| Accounts payable | Accounts payable | 202.3 | | 192.1 | Accounts payable | 214.0 | | | 255.8 | |
| Other accrued liabilities | Other accrued liabilities | 252.8 | | 312.9 | Other accrued liabilities | 327.5 | | | 338.4 | |
| Total current liabilities | Total current liabilities | 525.4 | | 576.9 | Total current liabilities | 615.8 | | | 670.7 | |
| Long-term obligations, less current portion | Long-term obligations, less current portion | 2,116.3 | | 2,649.4 | Long-term obligations, less current portion | 2,858.7 | | | 2,882.8 | |
| Pension liability | Pension liability | 128.5 | | 131.6 | Pension liability | 139.6 | | | 143.6 | |
| Deferred income taxes | Deferred income taxes | 32.7 | | 32.5 | Deferred income taxes | 70.5 | | | 74.4 | |
| Other liabilities | Other liabilities | 69.5 | | 54.0 | Other liabilities | 179.0 | | | 124.3 | |
| Commitment and contingencies (see Note 14) | | |
| Commitment and contingencies (see Note 16) | | Commitment and contingencies (see Note 16) | — | | | | — | |
| | Total liabilities | | Total liabilities | 3,863.6 | | | | 3,895.8 | |
| Redeemable preferred stock, $0.01 par value; 1.0 million shares authorized on September 30 and June 30, 2019; 650,000 shares issued and outstanding on September 30 and June 30, 2019 | | Redeemable preferred stock, $0.01 par value; 1.0 million shares authorized on September 30 and June 30, 2019; 650,000 shares issued and outstanding on September 30 and June 30, 2019 | 606.6 | | | | 606.6 | |
| Shareholders' equity: | Shareholders' equity: | | Shareholders' equity: | |
| Common stock $0.01 par value; 1.0 billion shares authorized on March 31, 2019 and June 30, 2018, 145,706,760 and 133,423,628 issued and outstanding on March 31, 2019 and June 30, 2018, respectively. | 1.5 | | 1.3 | |
| Preferred stock $0.01 par value; 100 million authorized on March 31, 2019 and June 30, 2018, 0 issued and outstanding on March 31, 2019 and June 30, 2018. | — | | — | |
| Common stock, $0.01 par value; 1.0 billion shares authorized on September 30 and June 30, 2019; 146.2 million and 145.7 million issued and outstanding on September 30 and June 30, 2019, respectively. | | Common stock, $0.01 par value; 1.0 billion shares authorized on September 30 and June 30, 2019; 146.2 million and 145.7 million issued and outstanding on September 30 and June 30, 2019, respectively. | 1.5 | | | 1.5 | |
| Preferred stock, $0.01 par value; 99 million authorized on September 30 and June 30, 2019; 0 issued and outstanding on September 30 and June 30, 2019. | | Preferred stock, $0.01 par value; 99 million authorized on September 30 and June 30, 2019; 0 issued and outstanding on September 30 and June 30, 2019. | — | | | — | |
| | Additional paid in capital | Additional paid in capital | 2,739.2 | | 2,283.3 | Additional paid in capital | 2,755.2 | | | 2,757.4 | |
| Accumulated deficit | Accumulated deficit | (790.7) | | (872.1) | Accumulated deficit | (731.4) | | | (723.4) | |
| Accumulated other comprehensive income/(loss) | Accumulated other comprehensive income/(loss) | (329.3) | | (325.8) | Accumulated other comprehensive income/(loss) | (376.0) | | | (353.9) | |
| | Total shareholder's equity | 1,620.7 | | 1,086.7 | |
| Total liabilities and shareholder’s equity | $ | 4,493.1 | | $ | 4,531.1 | |
| Total shareholders' equity | | Total shareholders' equity | 1,649.3 | | | 1,681.6 | |
| Total liabilities, redeemable preferred stock, and shareholders' equity | | Total liabilities, redeemable preferred stock, and shareholders' equity | $ | 6,119.5 | | | $ | 6,184.0 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity/(Deficit)
(Unaudited; Dollarsdollars in millions, except share data in thousands)
Three Months Ended March 31,September 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional
Paid in
Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at December 31, 2018 | 145,622.9 | | $ | 1.5 | | $ | 2,735.1 | | | | $ | (822.4) | | $ | (351.2) | | | | $ | 1,563.0 |
| | | | | | | | | | | | | | | |
| Equity offering, sale of common stock | | | | | (0.2) | | | | | | | | | | (0.2) |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 83.9 | | — | | | | | | | | | | | | — |
| Stock-based compensation | | | | | 6.6 | | | | | | | | | | 6.6 |
Cash paid, in lieu of equity, for tax withholding | | | | | (2.3) | | | | | | | | | | (2.3) |
| | | | | | | | | | | | | | | |
| Net earnings | | | | | | | | | 31.7 | | | | | | 31.7 |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | 21.9 | | | | 21.9 |
| Balance at March 31, 2019 | 145,706.8 | | $ | 1.5 | | $ | 2,739.2 | | | | $ | (790.7) | | $ | (329.3) | | | | $ | 1,620.7 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional
Paid in
Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at June 30, 2019 | 145,738.3 | | | $ | 1.5 | | | $ | 2,757.4 | | | | | $ | (723.4) | | | $ | (353.9) | | | | | $ | 1,681.6 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 497.4 | | | | | | | | | | | | | | | | — | |
| Stock-based compensation | | | | | 16.6 | | | | | | | | | | | 16.6 | |
Cash paid, in lieu of equity, for tax withholding | | | | | (18.1) | | | | | | | | | | | (18.1) | |
| Non-qualified stock | | | | | (0.7) | | | | | | | | | | | (0.7) | |
| Preferred dividend | | | | | | | | | (8.1) | | | | | | | (8.1) | |
| Net earnings | | | | | | | | | 0.1 | | | | | | | 0.1 | |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | (22.1) | | | | | (22.1) | |
| Balance at September 30, 2019 | 146,235.7 | | | $ | 1.5 | | | $ | 2,755.2 | | | | | $ | (731.4) | | | $ | (376.0) | | | | | $ | 1,649.3 | |
Three Months Ended March 31,September 30, 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at December 31, 2017 | 133,318.0 | | $ | 1.3 | | $ | 2,272.9 | | | | $ | (973.8) | | $ | (294.9) | | | | $ | 1,005.5 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 51.3 | | — | | | | | | | | | | | | — |
| Stock-based compensation | | | | | 5.6 | | | | | | | | | | 5.6 |
Cash paid, in lieu of equity, for tax withholding | | | | | (1.0) | | | | | | | | | | (1.0) |
| | | | | | | | | | | | | | | |
| Net earnings | | | | | | | | | 19.0 | | | | | | 19.0 |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | 39.3 | | | | 39.3 |
| Balance at March 31, 2018 | 133,369.3 | | $ | 1.3 | | $ | 2,277.5 | | | | $ | (954.8) | | $ | (255.6) | | | | $ | 1,068.4 |
| | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at June 30, 2018 | 133,423.6 | | | $ | 1.3 | | | $ | 2,283.3 | | | | | $ | (872.1) | | | $ | (325.8) | | | | | $ | 1,086.7 | |
Cumulative effect of change in accounting for ASC 606, net of tax | | | | | | | | | 15.1 | | | | | | | 15.1 | |
| Equity offering, sale of common stock | 11,431.4 | | | 0.1 | | | 445.4 | | | | | | | | | | | 445.5 | |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 366.0 | | | — | | | | | | | | | | | | | — | |
| Stock-based compensation | | | | | 10.0 | | | | | | | | | | | 10.0 | |
Cash paid, in lieu of equity, for tax
withholding | | | | | (5.1) | | | | | | | | | | | (5.1) | |
| | | | | | | | | | | | | | | |
| Net earnings/(loss) | | | | | | | | | (14.4) | | | | | | | (14.4) | |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | (8.4) | | | | | (8.4) | |
| Balance at September 30, 2018 | 145,221.0 | | | $ | 1.4 | | | $ | 2,733.6 | | | | | $ | (871.4) | | | $ | (334.2) | | | | | $ | 1,529.4 | |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity/(Deficit)
(Unaudited; Dollars in millions, except share data in thousands)
Nine Months ended March 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at June 30, 2018 | 133,423.6 | | $ | 1.3 | | $ | 2,283.3 | | | | $ | (872.1) | | $ | (325.8) | | | | $ | 1,086.7 |
Cumulative effect of change in accounting for ASC 606, net of tax | | | | | | | | | 15.1 | | | | | | 15.1 |
| Equity offering, sale of common stock | 11,431.4 | | 0.1 | | 445.2 | | | | | | | | | | 445.3 |
| | | | | | | | | | | | | | | |
Share issuances related to stock-based compensation | 851.8 | | 0.1 | | (0.1) | | | | | | | | | | — |
| Stock-based compensation | | | | | 24.1 | | | | | | | | | | 24.1 |
Cash paid, in lieu of equity, for tax withholding | | | | | (13.3) | | | | | | | | | | (13.3) |
| | | | | | | | | | | | | | | |
| Net earnings | | | | | | | | | 66.3 | | | | | | 66.3 |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | (3.5) | | | | (3.5) |
| Balance at March 31, 2019 | 145,706.8 | | $ | 1.5 | | $ | 2,739.2 | | | | $ | (790.7) | | $ | (329.3) | | | | $ | 1,620.7 |
Nine Months ended March 31, 2018
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid in Capital | | | | Accumulated Deficit | | Accumulated Other Comprehensive Income/(Loss) | | | | Total Shareholders' Equity/ (Deficit) |
| Balance at June 30, 2017 | 125,049.9 | | $ | 1.3 | | $ | 1,992.0 | | | | $ | (955.7) | | $ | (314.1) | | | | $ | 723.5 |
| | | | | | | | | | | | | | | |
| Equity offering, sale of common stock | 7,354.2 | | — | | 277.8 | | | | | | | | | | 277.8 |
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Share issuances related to stock-based compensation | 965.2 | | — | | — | | | | | | | | | | — |
| Stock-based compensation | | | | | 21.1 | | | | | | | | | | 21.1 |
Cash paid, in lieu of equity, for tax withholding | | | | | (13.4) | | | | | | | | | | (13.4) |
| | | | | | | | | | | | | | | |
| Net earnings | | | | | | | | | 0.9 | | | | | | 0.9 |
Other comprehensive income/(loss), net of
tax | | | | | | | | | | | 58.5 | | | | 58.5 |
| Balance at March 31, 2018 | 133,369.3 | | $ | 1.3 | | $ | 2,277.5 | | | | $ | (954.8) | | $ | (255.6) | | | | $ | 1,068.4 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; Dollarsdollars in millions)
| | | | | | | | | | | |
| Nine Months Ended
March 31, | | |
| 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net earnings | $ | 66.3 | | $ | 0.9 |
| | | |
| | | |
| Adjustments to reconcile earnings from operations to net cash from operations: | | | |
| Depreciation and amortization | 173.9 | | 137.5 |
| Non-cash foreign currency transaction (gain)/loss, net | (1.7) | | 14.3 |
| Amortization and write-off of debt financing costs | 7.1 | | 3.6 |
| Asset impairments charges and (gain)/loss on sale of assets | 2.7 | | 4.4 |
| | | |
| Reclassification of financing fees paid | — | | 11.8 |
| Stock-based compensation | 24.1 | | 21.1 |
| Provision/(benefit) for deferred income taxes | (0.7) | | 40.3 |
| Provision for bad debts and inventory | 10.6 | | 4.9 |
| Change in operating assets and liabilities: | | | |
| Decrease/(increase) in trade receivables | (26.6) | | 33.6 |
| Decrease/(increase) in inventories | (43.1) | | (6.3) |
| Increase/(decrease) in accounts payable | 5.9 | | 15.3 |
Other assets/accrued liabilities, net — current and non-current | (58.7) | | (10.2) |
| | | |
| | | |
| Net cash provided by operating activities | 159.8 | | 271.2 |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Acquisition of property and equipment and other productive assets | (129.3) | | (117.7) |
| Proceeds from sale of property and equipment | 0.4 | | 1.8 |
| Proceeds from sale of subsidiaries | — | | 3.4 |
| | | |
| Payment for acquisitions, net of cash acquired | (127.5) | | (748.0) |
| Payment made for investments | (1.3) | | — |
| | | |
| | | |
| Net cash (used in) investing activities | (257.7) | | (860.5) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Net change in other borrowings | (6.5) | | (2.6) |
| | | |
| Proceeds from borrowing, net | — | | 442.6 |
| Payments related to long-term obligations | (508.0) | | (14.2) |
| Financing fees paid | — | | (15.6) |
| | | |
| Proceeds from sale of common stock, net | 445.3 | | 277.8 |
| Cash paid, in lieu of equity, for tax-withholding obligations | (13.3) | | (13.4) |
| | | |
| | | |
| Net cash (used in)/provided by financing activities | (82.5) | | 674.6 |
| Effect of foreign currency exchange on cash | (1.9) | | 17.9 |
| NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS | (182.3) | | 103.2 |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD | 410.2 | | 288.3 |
| CASH AND EQUIVALENTS AT END OF PERIOD | $ | 227.9 | | $ | 391.5 |
| SUPPLEMENTARY CASH FLOW INFORMATION: | | | |
| Interest paid | $ | 74.6 | | $ | 57.2 |
| Income taxes paid, net | $ | 35.4 | | $ | 8.3 |
| | | | | | | | | | | |
| Three Months Ended
September 30, | | |
| 2019 | | 2018 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net earnings/(loss) | $ | 0.1 | | | $ | (14.4) | |
| | | |
| | | |
| Adjustments to reconcile earnings from operations to net cash from operations: | | | |
| Depreciation and amortization | 60.6 | | | 52.9 | |
| Non-cash foreign currency transaction (gain)/loss, net | (0.1) | | | 2.0 | |
| Amortization and write-off of debt financing costs | 1.5 | | | 5.2 | |
| Asset impairments charges and (gain)/loss on sale of assets | (0.2) | | | 2.9 | |
| | | |
| | | |
| (Gain)/loss on derivative instrument | 8.9 | | | — | |
| Equity compensation | 16.6 | | | 10.0 | |
| Provision/(benefit) for deferred income taxes | (0.6) | | | 1.2 | |
| Provision for bad debts and inventory | 4.1 | | | 2.8 | |
| Change in operating assets and liabilities: | | | |
| Decrease/(increase) in trade receivables | 34.1 | | | 73.7 | |
| Decrease/(increase) in inventories | 0.2 | | | (21.0) | |
| Increase/(decrease) in accounts payable | (47.3) | | | (18.3) | |
| Other assets/accrued liabilities, net—current and non-current | (52.7) | | | (55.8) | |
| | | |
| | | |
| Net cash provided by operating activities | 25.2 | | | 41.2 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Acquisition of property, equipment, and other productive assets | (73.5) | | | (38.3) | |
| | | |
| | | |
| | | |
| Payment for acquisitions, net of cash acquired | (10.7) | | | (127.5) | |
| Payment made for investments | (0.7) | | | — | |
| | | |
| | | |
| Net cash (used in) investing activities | (84.9) | | | (165.8) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Net change in other borrowings | (2.5) | | | (4.5) | |
| | | |
| | | |
| Payments related to long-term obligations | (3.3) | | | (454.7) | |
| | | |
| | | |
| Dividends paid | (11.9) | | | — | |
| Proceeds from sale of common stock, net | — | | | 445.5 | |
| Cash paid, in lieu of equity, for tax-withholding obligations | (18.1) | | | (5.1) | |
| | | |
| | | |
| Net cash (used in)/provided by financing activities | (35.8) | | | (18.8) | |
| Effect of foreign currency exchange on cash | (6.5) | | | (0.7) | |
| NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS | (102.0) | | | (144.1) | |
| CASH AND EQUIVALENTS AT BEGINNING OF PERIOD | 345.4 | | | 410.2 | |
| CASH AND EQUIVALENTS AT END OF PERIOD | $ | 243.4 | | | $ | 266.1 | |
| SUPPLEMENTARY CASH FLOW INFORMATION: | | | |
| Interest paid | $ | 24.8 | | | $ | 29.5 | |
| Income taxes paid, net | $ | 12.7 | | | $ | 14.8 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Catalent, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. ("Catalent"(“Catalent” or the "Company"“Company”) directly and wholly owns PTS Intermediate Holdings LLC ("(“Intermediate Holdings"Holdings”). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. ("(“Operating Company"Company”). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"(“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the ninethree months ended March 31,September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending June 30, 2019.2020. The consolidated balance sheet at June 30, 20182019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 20182019 filed with the Securities and Exchange Commission (the "SEC"“SEC”).
In fiscal 2018,2020, the Company engaged in a business reorganization to better align its internal business unit structure with its "Follow“Follow the Molecule"Molecule” strategy and the increased focus on its biologics-related offerings. Under the revised structure, the Company created two newchanged the components of three of its four operating segments from the former Drug Delivery Solutions segment:segments:
•Softgel and Oral Technologies, which includes formulation, development, and clinical and commercial manufacturing of soft capsules, or “softgels”, as well as large-scale manufacturing of oral solid dose forms, for pharmaceutical and consumer health markets, and supporting ancillary services; and
•Biologics, and Specialty Drug Delivery, which encompasses biologic cell-line and viral vector gene therapy development and manufacturing; formulation, development, and manufacturing development and manufacturing services for blow-fill-seal unit doses,parenteral dose forms, including prefilled syringes, vials, and cartridges; and analytical development and testing services for large molecules; and development and manufacturing for inhaled products for delivery via metered dose inhalers, dry powder inhalers, and intra-nasal sprays; and
•Oral Drugand Specialty Delivery, which encompasses comprehensiveincludes formulation, development, and small-to-medium scale manufacturing for most types of oral solid dose forms, including Zydis orally dissolving tablets; formulation, development, and manufacture of blow-fill-seal unit doses, metered dose inhalers, and nasal products; and analytical development and testing capabilities using advanced processing technologies such as bioavailability enhancement, controlled release, particle size engineering, and taste-masking for solid oral-dose forms.small molecules.
Each of these three segments, along with the two new segmentsCompany's fourth segment, Clinical Supply Services, which remains unchanged, reports through a separate management team and ultimately reports to the Company's Chief Executive Officer, who is designated as the Chief Operating Decision Maker (“CODM”) for segment reporting purposes. The Company's operating segments are the same as its reporting segments. All prior-period comparative segment information has been restated 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”).
Reclassification
Certain prior-period amounts were reclassified to conform to the current period presentation. As discussed below in “—Recent Financial Accounting Standards—Recently Adopted Accounting Standards” and in Note 15, Leases, contract assets previously presented in trade receivables, net are now presented in prepaid expenses and other.
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 these foreign operations outside the U.S. into U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. In June 2018, as a result of the three-year cumulative consumer price index exceeding 100%, Argentina was classified as having a highly inflationary economy. Beginning onSince July 1, 2018, the Company accountshas accounted for its Argentine operations as highly inflationary.
Research and Development Costs
The Company expenses research and development costs as incurred. Costs incurred in connection with the development of new offerings and manufacturing process improvements are recorded within selling, general, and administrative expenses. Such research and development costs included in selling, general, and administrative expenses amounted to $0.9$0.5 million and $2.4$0.5 million for the three and nine months ended March 31,September 30, 2019 respectively, and $1.8 million and $5.1 million for the three and nine months ended March 31,and 2018, respectively. Costs incurred in connection with research and development
services the Company provides to customers and services performed in support of the commercial manufacturing process for customers are recorded within cost of sales. Such research and development costs included in cost of sales amounted to $11.8$13.8 million and $37.4$11.3 million for the three and nine months ended March 31,September 30, 2019 respectively, and $11.2 million and $33.6 million for the three and nine months ended March 31, 2018, respectively.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In May 2014,February 2016, the Financial Accounting Standard Board ("FASB")FASB issued Accounting Standards Update ("ASU")(“2014-09, Revenue from Contracts with CustomersASU”) 2016-02, Leases (Topic 842), which was codified assupersedes ASC 606840, Leases. The new guidance requires lessees to recognize most leases on their balance sheets for the rights and superseded nearly all existing revenue-recognition guidance. The guidance’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange forobligations created by those goods or services. In doing so, the guidance creates a five-step model that requires a company to exercise judgment when considering the terms of the contracts and all relevant facts and circumstances. The five steps require a company to identify customer contracts, identify the separate performance obligations, determine the transaction price, allocate the transaction price to the separate performance obligations, and recognize revenue when or as each performance obligation is satisfied.leases. The guidance allows for either full retrospective adoption, where the standard is applied to all periods presented, or modified retrospective adoption, where the standard is applied only to the most current period presented in the financial statements. The Company adopted the guidance as of July 1, 2018 using the modified retrospective approach applied to contracts that were not completed as of that date. The Company recorded a cumulative effect adjustment to the fiscal 2019 opening balance of its accumulated deficit upon adoption of this guidance, which decreased beginning accumulated deficit by $15.1 million.
The following table provides the impact of adopting the guidance on the Company’s financial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Three months Ended March 31, 2019 | | | | | | Nine months Ended March 31, 2019 | | | | |
| (Dollars in millions) | As Reported | | Effects of Change | | Amount without Adoption of ASC 606 | | As Reported | | Effects of Change | | Amount without Adoption of ASC 606 |
| Net revenue | $ | 617.5 | | $ | 23.6 | | $ | 641.1 | | $ | 1,792.3 | | $ | 40.2 | | $ | 1,832.5 |
| Cost of sales | 418.8 | | 21.8 | | 440.6 | | 1,243.7 | | 52.4 | | 1,296.1 |
| Gross margin | 198.7 | | 1.8 | | 200.5 | | 548.6 | | (12.2) | | 536.4 |
| Earnings from continuing operations before income taxes | 42.6 | | 1.8 | | 44.4 | | 80.5 | | (12.2) | | 68.3 |
| Income tax expense | 10.9 | | (0.2) | | 10.7 | | 14.2 | | (4.0) | | 10.2 |
| Net earnings/(loss) | $ | 31.7 | | $ | 2.0 | | $ | 33.7 | | $ | 66.3 | | $ | (8.2) | | $ | 58.1 |
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The impact of ASC 606 on the Company's consolidated balance sheet is immaterial.
The adoption of ASC 606resulted in three primary changes as compared to the previous revenue recognition guidance: (a) revenue from commercial product supply is recognized following successful completion of the required quality assurance process where it was previously recognized upon shipment of the product to the customer; (b) earlier recognition of revenue from certain commercial supply contract cancellations is recognized as variable consideration as the Company’s performance obligations are satisfied rather than only upon agreement ofrequires enhanced disclosures regarding the amount, with the customer;timing, and (c) revenue from sourcing comparator drug product for clinical supply services is recorded netuncertainty of the cost of procuring it rather than at full value with a corresponding expense. Refer to Note 2 for the Company's revenue recognition policy.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to report the service cost component of the net periodic benefit cost in the same income statement line as other compensation costscash flows arising from services rendered by employees during the reporting period. The other components of the net benefit costs will be presented in the income statement separately from the service costleases and below the income from operations subtotal. The Company adopted this guidance as of July 1, 2018, on a retrospective basis, which had an effect on the consolidated statement of operations for the three and nine months ended March 31, 2018. The following table summarizes the Company's As Previously Reported and As Adjusted changes to the consolidated statement of operations for the three and nine months ended March 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 | | | | Nine Months Ended March 31, 2018 | | |
| (Dollars in millions) | As Previously Reported | | As Adjusted | | As Previously Reported | | As Adjusted |
| Selling, general, and administrative expenses | $ | 117.0 | | $ | 117.6 | | $ | 338.3 | | $ | 339.9 |
| Operating earnings | 73.1 | | 72.5 | | 173.8 | | 172.2 |
| Other expense, net | 10.5 | | 9.9 | | 29.8 | | 28.2 |
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which reduces the complexity of and simplifies the application of hedge accounting by issuers. The ASU isbecame effective for fiscal yearspublic reporting entities in annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted this guidance as of July 1, 2018 on a prospective basis. Therequires adoption of this guidance was not material to the Company's consolidated financial statements.
In May 2017,new standard using the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when an entity will apply modification accounting for changes to stock-based compensation arrangements. Modification accounting applies if the value, vesting conditions, or classification of an award changes.modified retrospective approach. The Company adopted thisthe guidance prospectivelyon July 1, 2019 and elected the transition method that allows for the application of the standard at the adoption date rather than at the beginning of fiscal 2019.the earliest comparative period presented in the financial statements. The Company also elected the package of practical expedients; as a result, it did not reassess: (i) whether any expired or existing contract is or contains a lease, (ii) whether any expired or existing lease requires capitalization under the new guidance, and (iii) the initial direct cost for any existing lease. The Company also elected (x) not to reassess lease terms using hindsight and (y) to combine lease and non-lease components within a single lease agreement. Upon adoption, the Company recognized $46 million of lease liabilities and a corresponding amount for right-of-use assets on its consolidated balance sheet. The adoption of thisthe guidance wasdid not materialhave any effect on the Company’s consolidated statements of operations or cash flows. Refer to Note 15, Leases for further discussion of the Company's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides additional guidance on the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company adopted this guidance prospectively at the beginning of fiscal 2019. The adoption of this guidance was not material to the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which changes thelease accounting for equity investments and financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The ASU requires equity investments with readily determinable fair values to be measured at fair value and to recognize change in fair value in net earnings. The ASU is not applicable to equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee. The Company adopted this guidance at the beginning of fiscal 2019. The adoption of this guidance was not material to the Company's consolidated financial statements.policy.
New Accounting Standards Not Adopted as of March 31,September 30, 2019
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transaction between participants in a collaboration arrangement should be accounted for under ASC 606 when the counterparty is a customer. The guidance also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and allows for either a retrospective or prospective application. The Company does not expect the adoption of thethis guidance to have a material impact toon its consolidated financial statements.
In FebruaryAugust 2018, the FASB issued ASU 2018-13ASU 2018-02, Income Statement—Reporting Comprehensive Income, Fair Value Measurement (Topic 220)820): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeDisclosure Framework—Changes to the Disclosure Requirement for Fair Value Measurement, which permits an entity to reclassify to retained earningschanges the stranded tax effects caused by the Tax Cutsdisclosure requirements on fair value measurements in Topic 820. The guidance eliminates certain disclosure requirements that are no longer considered cost beneficial and Jobs Act of 2017 on items within accumulated other comprehensive income/(loss).adds new disclosure requirement for Level 3 fair value measurements. The ASU will be effective for fiscal years beginning after December 15, 20182019 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of thethis guidance to have a material impact toon its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new accounting model known as Credit Expected Credit Losses (
("CECL"CECL”). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables. The ASU will be effective for fiscal years beginning after December 15, 2019. The Company does not expect the adoption of the guidance to have a material impact to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will supersede ASC 840 Leases. The new guidance requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for public reporting entities in annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The guidance is required to be adopted using the modified retrospective approach. The Company will adopt the guidance on July 1, 2019, and anticipates that most of its operating leases will result in the recognition of additional assets and corresponding liabilities on its consolidated balance sheets. The Company will elect the transition method that allows for the application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company has selected a lease accounting tool and made progress in validating lease data validation for contracts that are in the Company's current lease portfolio and continues to assess the impact of embedded leases in certain agreements.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.
The following tables allocate revenue, for the three and nine months ended March 31,September 30, 2019 and September 30, 2018, by type of activity and reporting segment (in millions):
| | Three months ended March 31, 2019 | Softgel Technologies | | Biologics & Specialty Drug Delivery | | Oral Drug Delivery | | Clinical Supply Services | | Total | |
| Three months ended September 30, 2019 | | Three months ended September 30, 2019 | Softgel & Oral Technologies | | Biologics | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | Manufacturing & commercial product supply | $ | 200.2 | | $ | 97.8 | | $ | 107.7 | | $ | — | | $ | 405.7 | Manufacturing & commercial product supply | $ | 242.0 | | | $ | 64.4 | | | $ | 76.0 | | | $ | — | | | $ | 382.4 | |
| Development services | Development services | 14.3 | | 74.3 | | 54.0 | | — | | 142.6 | Development services | 21.7 | | | 124.2 | | | 56.6 | | | — | | | 202.5 | |
| Clinical supply services | Clinical supply services | — | | — | | — | | 77.8 | | 77.8 | Clinical supply services | — | | | — | | | — | | | 84.6 | | | 84.6 | |
| Total | Total | $ | 214.5 | | $ | 172.1 | | $ | 161.7 | | $ | 77.8 | | $ | 626.1 | Total | $ | 263.7 | | | $ | 188.6 | | | $ | 132.6 | | | $ | 84.6 | | | $ | 669.5 | |
| | | | Inter-segment revenue elimination | | | (8.6) | | | | Inter-segment revenue elimination | | | | (4.8) | |
| | Combined net revenue | | | $ | 617.5 | | Combined net revenue | | | $ | 664.7 | |
| | Nine months ended March 31, 2019 | Softgel Technologies | | Biologics & Specialty Drug Delivery | | Oral Drug Delivery | | Clinical Supply Services | | Total | |
| Three months ended September 30, 2018 | | Three months ended September 30, 2018 | Softgel & Oral Technologies | | Biologics | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Manufacturing & commercial product supply | Manufacturing & commercial product supply | $ | 581.6 | | $ | 260.2 | | $ | 289.9 | | $ | — | | $ | 1,131.7 | Manufacturing & commercial product supply | $ | 218.2 | | | $ | 52.0 | | | $ | 62.2 | | | $ | — | | | $ | 332.4 | |
| Development services | Development services | 45.8 | | 250.8 | | 155.9 | | — | | 452.5 | Development services | 21.9 | | | 73.7 | | | 48.6 | | | — | | | 144.2 | |
| Clinical supply services | Clinical supply services | — | | — | | — | | 236.3 | | 236.3 | Clinical supply services | — | | | — | | | — | | | 77.7 | | | 77.7 | |
| Total | Total | $ | 627.4 | | $ | 511.0 | | $ | 445.8 | | $ | 236.3 | | $ | 1,820.5 | Total | $ | 240.1 | | | $ | 125.7 | | | $ | 110.8 | | | $ | 77.7 | | | $ | 554.3 | |
| | | | Inter-segment revenue elimination | | | (28.2) | | | | Inter-segment revenue elimination | | | | (2.5) | |
| | Combined net revenue | | | $ | 1,792.3 | | Combined net revenue | | | $ | 551.8 | |
The following table allocates revenue by the location where the goods were made or the service performed:
| | (Dollars in millions) | (Dollars in millions) | | Three months ended March 31, 2019 | | Nine months ended March 31, 2019 | (Dollars in millions) | | Three Months Ended September 30, 2019 | | Three Months Ended September 30, 2018 | |
| | United States | United States | | $ | 318.4 | | $ | 913.9 | United States | | $ | 362.3 | | | $ | 264.4 | | |
| Europe | Europe | | 200.8 | | 609.9 | Europe | | 210.1 | | | 196.4 | | |
| International Other | International Other | | 108.2 | | 321.6 | International Other | | 110.9 | | | 107.6 | | |
| Elimination of revenue attributable to multiple locations | Elimination of revenue attributable to multiple locations | | (9.9) | | (53.1) | Elimination of revenue attributable to multiple locations | | (18.6) | | | (16.6) | | |
| Total | Total | | $ | 617.5 | | $ | 1,792.3 | Total | | $ | 664.7 | | | $ | 551.8 | | |
Development Services Revenue
Development services 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. The transaction prices for these arrangements are fixed and include amounts stated in the contracts for each promised service, and each service is generally considered to be a separate performance obligation. 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 related to biologic cell-line development, 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 all other 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.
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 an adjusted market assessment approach, representing the amount that the Company believes the market is willing to pay for the applicable service. Payment is typically due 30 to 90 days following the completion of services provided to the customer, based on the payment terms set forth in the applicable customer agreement.
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, or API, that is used in the manufacturing process. The Company recognizes revenue forcontract generally includes the terms of the manufacturing services and supplying commercial products as control is transferredrelated product quality assurance procedures to comply with regulatory requirements. Due to the customer, which is measured based on product that has successfully completed contractually required quality assurance process. Revenue is measured based onregulated nature of the amount of consideration the Company expects to receive in exchange for providingCompany’s business, these products and services. The contractual performance obligation generally includes manufacture and the completion of product quality release testing procedures specified in the contract. These activitiescontract terms are highly interdependent and, thustherefore, 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. 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. Progress is measured based on the units of product that have successfully completed the contractually required product quality assurance process, as the conclusion of that process generally 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 quality assurance.
Payment is typically due 30 to 90 days after the goods are shipped toas requested by the customer, based on the payment terms set forth in the applicable customer agreement.
Development Services Revenue
Development services contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include (1) the delivery of a formulation report, analytical and stability testing report, or other report on product- or molecule-based studies or (2) the manufacture of products under development or otherwise not intended for commercial sale. The transaction prices for these arrangements include fixed consideration of the amounts stated in the contracts for each promised good or service, which are generally considered to be separate performance obligations. The Company recognizes revenue when or as control of each individual performance obligation is transferred to the customer and exercises judgment in determining the timing of revenue recognition by analyzing the point in time or period over which the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the arrangement. Control generally transfers to the customer when services have been completed or the customer has accepted the product or service deliverable and the Company has right to payment based on the terms of the agreement.
In certain arrangements, the Company recognizes revenue over time as the Company satisfies performance obligations. Satisfaction of the performance obligations is measured using an output method measure of progress based on effort expended by the Company. In other arrangements, revenue is recognized when the customer has taken legal title to or accepted the product or service deliverable and the Company has a right to payment based on the terms of the arrangement.
Development services contracts may also include certain success-based milestone payments for completed performance obligations, such as regulatory approval and product validation prior to the commencement of commercial supply. Revenue associated with developmental milestones is considered variable consideration and is typically recognized when the success-based milestone is achieved, and no significant revenue reversal is anticipated.
The Company allocates consideration to each performance obligation based on the relative selling price. Payment is typically due 30 to 90 days following the completion of services provided to the customer based on the payment terms set forth in the applicable customer agreement. Certain development service arrangements require a portion of the contract consideration to be received in advance at the commencement of the contract and is initially recorded as a contract liability.
Clinical Supply Services Revenue
Clinical supply services contracts generally take the form of fee-for-service arrangements. Performance obligations for clinical supply services revenue typically include a combination of the following services: the manufacturing, packaging, storage, distribution, destruction, and inventory management of customer clinical trials materials. Performance obligations can also include 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. In certain arrangements, the Company recognizes revenue over time when the Company satisfies performance obligations. Satisfaction of the performance obligations is measured using an outputinput method measure of progress based on effort expended by the Company. In other 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 has taken legal title or acceptedthe completion of quality testing with respect to the product, or service deliverable and the Company has an enforceable right to payment based on the
terms of the arrangement. Payment is typically due 30 to 90 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.
Licensing Revenue
The Company occasionally enters into arrangements with its customers that include licenses of functional intellectual property, including patents, or other intangible property (“out-licensing”). Revenue from such arrangements are within the scope of ASC 606. The Company does not have any material license arrangement that contains more than one performance obligation. The terms of such out-licensing arrangements include the license of functional intellectual or intangible property (primarily drug formulae) and typically provide for payment by the licensee of one or more of the following: non-refundable, up-front license fees or royalties on net sales of licensed products. The Company recognizes revenue from nonrefundable, up-front license fees when the licensed intellectual property is made available for the customer’s use and benefit, which is
generally at the inception of the arrangement. Royalty payments from such arrangements are recognized when subsequent sale or usage of an item subject to the royalty occurs and the performance obligation to which royalty relates is satisfied.
Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. Changes in the contractualcontract liabilities balance during the ninethree months ended March 31,September 30, 2019 are as follows:
| | | | | | | | |
| (Dollars in millions) | | |
| Contract liability | | |
Balance at June 30, 20182019 | | $ | 100.9177.4 | |
| | |
| | |
| | |
| | |
Balance at March 31,September 30, 2019 | | $ | 106.9182.5 | |
| Revenue recognized in the period from: | | |
Amounts included in contractscontract liability at the beginning of the period | | $ | 53.442.8 | |
Remaining Performance Obligations
For the Softgel Technologies, Biologics and Specialty Drug Delivery, and Oral Drug Delivery segments, remaining performance obligations represent firm orders for manufacturing and commercial product supply, including minimum volume commitments and future development services, for which there are incomplete performance obligations. For the Clinical Supply Services segment, remaining performance obligations represent estimated future service revenues from work not yet completed under signed contracts. The remaining performance obligations as of March 31, 2019 were $1,327.9 million, including approximately $346.2 million related to our Clinical Supply Services segment. We expect to recognize approximately 47% of the remaining performance obligations in existence as of March 31, 2019 over the next three months, with the remaining recognized thereafter.
3. BUSINESS COMBINATIONS
Juniper Pharmaceuticals AcquisitionNovavax Transaction Overview
On August 14, 2018, OperatingJuly 31, 2019, Catalent Maryland, Inc. (formerly Paragon Bioservices, Inc., “Paragon”), which contains the Company's gene therapy development and manufacturing related businesses, acquired from Novavax Inc. (“Novavax”) certain property, plant and equipment, rights to two facilities under leases in southern Maryland, certain raw material inventory, and the right to assume the employment of more than 100 Novavax employees located at those facilities in the areas of operations, quality, and product development, among other things. Paragon made a cash payment of $18.3 million in connection with the acquisition. The Company acquired Juniper Pharmaceuticals, Inc.,considers the transaction to be a Delaware corporation ("Juniper") through a tender offerbusiness combination under ASC 805, Business Combinations and back-end merger, pursuantaccounted for it using the acquisition method of accounting. The Company estimated fair values at the acquisition date for the allocation of consideration to the terms of an agreement and plan of merger (the "Juniper Merger Agreement"), and Juniper became a wholly owned subsidiary of Operating Company. Under the terms of the Juniper Merger Agreement, all outstanding options to purchase Juniper shares were canceled in exchange for cash equal to the product of the number of Juniper shares subject to the option and the difference between the price per share paid in the tender offer and the exercise price. Similarly, all outstanding restricted stock units in respect of Juniper shares were canceled in exchange for cash equal to the product of the number of units and the price per share paid in the tender offer. Juniper has expertise in formulation development and supply and augments the Company's pre-existing portfolio of solid-state screening, pre-formulation, formulation, analytical, and bioavailability enhancement solutions, including the development of drug products produced using spray-dried dispersion, with integrated development, analytical, and clinical manufacturing. Juniper also owns the ex-U.S. rights to and supplies for sale to its licensee of such rights CRINONE®, a reproductive therapy. The primary operations of the acquired business are located in owned facilities aggregating 38,000 square feet in Nottingham, U.K. and is now included in the Oral Drug Delivery segment. Results of this segment include the results of Juniper for the period since the acquisition.items.
The aggregate purchase consideration net of cash acquired, of $127.5 million was funded bywith cash on hand. As a result of the preliminary fair value allocations, the Company recognized intangible assetsproperty, plant, and equipment of $69.0$15.6 million and $11.0$0.3 million for product relationships and customer relationships, respectively.inventory. The remainder of the preliminary fair value, $2.4 million, was allocated to goodwill, primarily the value of the existing organized and trained work force.
The Novavax transaction expanded Paragon’s early-development capabilities and supplemented Paragon’s pool of experienced biologics operatives to support its growth.
Paragon Bioservices, Inc. Acquisition
On May 17, 2019, the Company acquired 100% of the equity interest in Paragon for an aggregate nominal purchase price of $1,192.1 million, which was subject to adjustment (as further discussed below), in order to enhance the Company’s end-to-end integrated biopharmaceutical solutions. Paragon is a leading contract development and manufacturing organization (“CDMO”) focused on the development and manufacturing of cutting-edge biopharmaceuticals, including viral vectors used in gene therapies.
The Company estimated fair values at the acquisition date for the preliminary allocation of consideration to the net tangible and intangible assets acquired and goodwill. The fair value allocation is expected to be completed upon finalization of an independent appraisal overliabilities assumed. During the next several months, butmeasurement period ending no later than one year fromafter the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired, which may differ materially from these preliminary estimates. Amounts subject to finalization include working capital adjustments and income taxes. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined. During the first quarter the Company received an escrow refund of $7.6 million related to as assessment of various asset and liability balances and expenses as of the acquisition date. The adjustment is reflected in both goodwill and cash (part of other net assets). This adjustment had no impact on the consolidated statement of operations. There was no other change in these balances related to the acquisition noted during this period.
The Company accounted for the transaction using the acquisition method of accounting for business combinations, in accordance with ASC 805.
Pending Acquisition as of September 30, 2019
On June 15, 2019, Operating Company and Bristol-Myers Squibb S.r.l. (“BMS”), entered into a Sale and Purchase Agreement for the acquisition of BMS’s oral solid, biologics, and sterile product manufacturing and packaging facility in Anagni, Italy (“Anagni”) for consideration of €45.0 million, subject to adjustment, plus the value of initiating certain services to aid the transition from BMS to Company ownership. At the closing of this acquisition, BMS will enter into a five-year agreement with respect to the continuing supply by the Company of certain products currently produced at the Anagni facility.
Adding Anagni to the Company’s global network will expand its biologics drug product offering in Europe, which the Company expects will enable it to both capture a larger segment of the biologics market in that region and complement its existing European sterile fill/finish capabilities. The acquisition will also add oral solid manufacturing and packaging capacity to augment the Company's current capabilities in Europe.
The Anagni acquisition is expected to close during the second quarter of fiscal 2020.
4. GOODWILL
The following table summarizes the changes between June 30, 20182019 and March 31,September 30, 2019 in the carrying amount of goodwill in total and by reporting segment:
| | (Dollars in millions) | (Dollars in millions) | Softgel Technologies | | Biologics and Specialty Drug Delivery | | Oral Drug Delivery | | Clinical Supply Services | | Total | (Dollars in millions) | Softgel & Oral Technologies | | Biologics | | Oral & Specialty Delivery | | Clinical Supply Services | | Total |
| Balance at June 30, 2018 | $ | 415.2 | | $ | 505.7 | | $ | 319.9 | | $ | 156.4 | | $ | 1,397.2 | |
| Balance at June 30, 2019 | | Balance at June 30, 2019 | $ | 409.2 | | | $ | 1,320.0 | | | $ | 340.3 | | | $ | 151.4 | | | $ | 2,220.9 | |
| Additions | Additions | — | | — | | 23.6 | | — | | 23.6 | Additions | — | | | 2.4 | | | — | | | — | | | 2.4 | |
| Reallocation | | Reallocation | 108.1 | | | (124.3) | | | 16.2 | | | — | | | — | |
| Other | | Other | (1.6) | | | (7.4) | | | 1.1 | | | — | | | (7.9) | |
| | Foreign currency translation adjustments | Foreign currency translation adjustments | (8.4) | | (1.4) | | (1.1) | | (0.6) | | (11.5) | Foreign currency translation adjustments | (10.2) | | | (1.6) | | | (3.8) | | | (3.9) | | | (19.5) | |
| Balance at March 31, 2019 | $ | 406.8 | | $ | 504.3 | | $ | 342.4 | | $ | 155.8 | | $ | 1,409.3 | |
| Balance at September 30, 2019 | | Balance at September 30, 2019 | $ | 505.5 | | | $ | 1,189.1 | | | $ | 353.8 | | | $ | 147.5 | | | $ | 2,195.9 | |
The increase inaddition to goodwill in the Biologics reporting segment relates to the Novavax transaction. See Note 3, Business Combinations. The reallocation of goodwill relates to the adjustments to the Company’s reporting segments, as a result of which certain assets moved from the Biologics reporting segment to the Oral Drugand Specialty Delivery reporting segment, is a result ofand other assets moved from the Juniper acquisition.Oral and Specialty Delivery reporting segment to the Softgel and Oral Technologies reporting segment. The Company did not record anrecorded no impairment charge to goodwill in the current period.
5. DEFINITE-LIVED LONG-LIVED ASSETS
The Company’s definite-lived long-lived assets include property, plant, and equipment as well as intangible assets with definite lives. Refer to Note 16, Supplemental Balance Sheet Information for details related to property, plant, and equipment.
The details of other intangibles, net as of March 31,September 30, 2019 and June 30, 20182019 are as follows:
| | (Dollars in millions) | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| March 31, 2019 | | | | | | | | |
| September 30, 2019 | | September 30, 2019 | | | | | | | |
| Amortized intangibles: | Amortized intangibles: | | Amortized intangibles: | |
| Core technology | Core technology | 18 years | | $ | 168.9 | | $ | (104.1) | | $ | 64.8 | Core technology | 18 years | | $ | 133.9 | | | $ | (77.2) | | | $ | 56.7 | |
| Customer relationships | Customer relationships | 14 years | | 597.5 | | (171.7) | | 425.8 | Customer relationships | 14 years | | 974.4 | | | (195.2) | | | 779.2 | |
| Product relationships | Product relationships | 11 years | | 277.8 | | (214.0) | | 63.8 | Product relationships | 11 years | | 269.4 | | | (210.0) | | | 59.4 | |
| Other | | Other | 4 years | | 9.4 | | | (1.8) | | | 7.6 | |
| Total intangible assets | Total intangible assets | | $ | 1,044.2 | | $ | (489.8) | | $ | 554.4 | Total intangible assets | | $ | 1,387.1 | | | $ | (484.2) | | | $ | 902.9 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| June 30, 2019 | | | | | | | |
| Amortized intangibles: | | | | | | | |
| Core technology | 18 years | | $ | 168.2 | | | $ | (105.6) | | | $ | 62.6 | |
| Customer relationships | 14 years | | 981.1 | | | (182.5) | | | 798.6 | |
| Product relationships | 11 years | | 275.5 | | | (213.9) | | | 61.6 | |
| Other | 4 years | | 9.3 | | | (1.3) | | | 8.0 | |
| Total intangible assets | | | $ | 1,434.1 | | | $ | (503.3) | | | $ | 930.8 | |
The increasesdecreases in the gross carrying value of core technology, customer relationships, and product relationships as of March 31,September 30, 2019 compared to the prior-year period are associated with the acquisitionsale of Juniperan intangible property licensing right and the reclassification of intangible assets to other assets related to the sale of the Company’s facility in August 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Weighted Average Life | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
| June 30, 2018 | | | | | | | |
| Amortized intangibles: | | | | | | | |
| Core technology | 18 years | | $ | 170.8 | | $ | (85.3) | | $ | 85.5 |
| Customer relationships | 14 years | | 587.0 | | (140.9) | | 446.1 |
| Product relationships | 12 years | | 210.5 | | (197.2) | | 13.3 |
| Total intangible assets | | | $ | 968.3 | | $ | (423.4) | | $ | 544.9 |
Amortization expense was $31.4$21.5 million and $69.1$18.2 million for the three and nine months ended March 31,September 30, 2019 respectively, and $17.6 million and $45.1 million for the three and nine months ended March 31, 2018, respectively. During the three months ended March 31, 2019, the Company recorded $12.3 million of accelerated amortization related to a product participation licensing right. Future amortization expense for the next five fiscal years is estimated to be:
| | (Dollars in millions) | (Dollars in millions) | Remainder
Fiscal 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | (Dollars in millions) | Remainder
Fiscal 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 |
| Amortization expense | Amortization expense | $ | 14.2 | | $ | 56.7 | | $ | 56.7 | | $ | 56.7 | | $ | 56.7 | | $ | 56.6 | Amortization expense | $ | 62.9 | | | $ | 85.9 | | | $ | 85.2 | | | $ | 84.7 | | | $ | 84.5 | | | $ | 83.9 | |
6. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consistconsisted of the following at March 31,September 30, 2019 and June 30, 2018:2019:
| | (Dollars in millions) | (Dollars in millions) | Maturity as of March 31, 2019 | | March 31, 2019 | | June 30, 2018 | (Dollars in millions) | Maturity as of September 30, 2019 | | September 30, 2019 | | June 30, 2019 |
| Senior Secured Credit Facilities | | | | | | |
| Senior secured credit facilities | | Senior secured credit facilities | | | | | |
| | | Term loan facility U.S. dollar-denominated | Term loan facility U.S. dollar-denominated | May 2024 | | $ | 772.4 | | $ | 1,228.4 | Term loan facility U.S. dollar-denominated | May 2026 | | $ | 934.4 | | | $ | 936.2 | |
| | Term loan facility euro-denominated | Term loan facility euro-denominated | May 2024 | | 344.3 | | 358.9 | Term loan facility euro-denominated | May 2024 | | 332.7 | | | 346.8 | |
| Revolving credit facility | | Revolving credit facility | May 2024 | | — | | | — | |
| Euro-denominated 4.75% Senior Notes due 2024 | Euro-denominated 4.75% Senior Notes due 2024 | December 2024 | | 424.1 | | 438.4 | Euro-denominated 4.75% Senior Notes due 2024 | December 2024 | | 411.9 | | | 428.3 | |
| U.S. dollar-denominated 4.875% Senior Notes due 2026 | U.S. dollar-denominated 4.875% Senior Notes due 2026 | January 2026 | | 444.4 | | 443.8 | U.S. dollar-denominated 4.875% Senior Notes due 2026 | January 2026 | | 444.8 | | | 444.6 | |
| | U.S. dollar-denominated 5.00% Senior Notes due 2027 | | U.S. dollar-denominated 5.00% Senior Notes due 2027 | July 2027 | | 492.4 | | | 492.1 | |
| Deferred purchase consideration | Deferred purchase consideration | October 2021 | | 142.8 | | 188.9 | Deferred purchase consideration | October 2021 | | 145.1 | | | 143.9 | |
| $200 million revolving credit facility | May 2022 | | — | | — | |
| Capital lease obligations | Capital lease obligations | 2020 to 2032 | | 57.5 | | 60.8 | Capital lease obligations | 2020 to 2044 | | 166.8 | | | 167.3 | |
| Other obligations | Other obligations | 2018 to 2019 | | 1.1 | | 2.1 | Other obligations | 2019 to 2024 | | 4.9 | | | 0.1 | |
| Total | Total | | 2,186.6 | | 2,721.3 | Total | | 2,933.0 | | | 2,959.3 | |
Less: Current portion of long-term obligations and other short-term
borrowings | Less: Current portion of long-term obligations and other short-term
borrowings | | 70.3 | | 71.9 | Less: Current portion of long-term obligations and other short-term
borrowings | | 74.3 | | | 76.5 | |
| Long-term obligations, less current portion | Long-term obligations, less current portion | | $ | 2,116.3 | | $ | 2,649.4 | Long-term obligations, less current portion | | $ | 2,858.7 | | | $ | 2,882.8 | |
Senior Secured Credit Facilities and ThirdFourth Amendment
On October 18, 2017,In May 2019, Operating Company completed Amendment No. 3a fourth amendment (the "Third Amendment"“Fourth Amendment”) to its Amended and Restated Credit Agreement, dated as of May 20, 2014 (as subsequently amended through the "Credit Agreement"), governingFourth Amendment, the “Credit Agreement”). As part of the Fourth Amendment, Operating Company borrowed $950 million aggregate principal amount of incremental term B loans (the “Incremental Dollar Term B-2 Loans”) and replaced the existing revolving credit commitments of $200 million with new revolving credit commitments of $550 million (the “Incremental Revolving Credit Commitments”). The Incremental Dollar Term B-2 Loans will mature at the earlier of (1) May 17, 2026 and (2) the 91st day prior to the maturity of Operating Company’s 4.75%senior securedunsecured notes due 2024 (the “Euro Notes”) or a permitted refinancing thereof, if on such 91st day any of the Euro Notes remains outstanding. There is a prepayment premium of 1.00% to any principal amount of the Incremental Dollar Term B-2 Loans that is subject to a repricing event during the first six-month period after the Fourth Amendment effective date. The Incremental Revolving Credit Commitments constitute revolving credit facilities that provide U.S.commitments under the Credit Agreement. The maturity date for the revolving loans is now the earlier of (1) May 17, 2024 and (2) the 91st day prior to
the maturity of any dollar denominated term loans euro-denominatedor euro term loans and a revolving credit facility. The Third Amendment loweredunder the interest rateCredit Agreement, or any permitted refinancing thereof, if on U.S. dollar-denominated and euro-denominatedsuch 91st day any of such dollar term loans andor euro term loans remains outstanding. Under the revolving credit facility and extended the maturity dates on the senior secured credit facilities by three years. From the Third Amendment,Credit Agreement, the applicable rate for U.S. dollar-denominated term loans, including the Incremental Dollar Term B-2 Loans, is LIBOR (the London Interbank Offered Rate, subject(subject to a floor of 1.00%) plus 2.25%, and the applicable rate for euro-denominated term loans is Euribor (the Euro Interbank Offered Rate published by the European Money Markets Institute, subject to a floor of 1.00%) plus 1.75%. The applicable rate for the revolving loans wasis initially set at LIBOR plus 2.25%, and such rate can additionally be reduced to LIBOR plus 2.00% in future periods based on a measure of Operating Company's total leverage ratio. The euro-denominated term loans and revolving loans will now mature in May 2024 and May 2022, respectively.
On July 27, 2018, the Company completed an underwritten public equity offering (the "2018 Equity Offering") and used the net proceeds coupled with cash on hand to repay $450.0 million of the outstanding borrowings under its U.S. dollar-denominated term loans on July 31, 2018.2024.
Euro-denominated 4.75% Senior Notes due 2024
OnIn December 9, 2016, Operating Company completed a private offering of €380.0 million aggregate principal amount of 4.75% Senior Notes due 2024 (the "Euro Notes").the Euro Notes. The Euro 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 Euro Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”) and outside the United StatesU.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The Euro Notes will mature on December 15, 2024, bear interest at the rate of 4.75% per annum and are payable semi-annually in arrears on June 15 and December 15 of each year.
U.S. Dollar-denominated 4.875% Senior Notes due 2026
OnIn October 18, 2017, Operating Company completed a private offering of $450.0 million aggregate principal amount of 4.875% Senior Notes due 2026 (the "USD Notes"“USD 2026 Notes”). The USD 2026 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 USD 2026 Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United StatesU.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The USD 2026 Notes will mature on January 15, 2026, bear interest at the rate of 4.875% per annum, and are payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The net proceeds
U.S. dollar-denominated 5.00% Senior Notes due 2027
In June 2019, Operating Company completed a private offering of $500.0 million aggregate principal amount of 5.00% Senior Notes due 2027 (the “USD 2027 Notes” and, together with the USD 2026 Notes, the “USD Notes”; and the USD Notes offering, after paymentand Euro Notes together, the “Senior Notes”). The USD 2027 Notes are fully and unconditionally guaranteed, jointly and severally, by all of the initial purchasers' discountwholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The USD 2027 Notes were offered in the U.S to qualified institutional buyers in reliance on Rule 144A under the Securities Act and related feesoutside the U.S only to non-U.S. investors pursuant to Regulation S under the Securities Act. The USD 2027 Notes will mature on July 15, 2027, bear interest at the rate of 5.00% per annum, and expenses, were used to fund a portionare payable semi-annually in arrears on January 15 and July 15 of the consideration foreach year, beginning on January 15, 2020.
Deferred Purchase Consideration
In connection with the acquisition of Catalent Indiana LLC ("Catalent Indiana") due at its closing.
Deferred Purchase Consideration
Thein October 2017, $200.0 million of the $950.0 million aggregate nominal purchase price for Catalent Indiana in October 2017 included $200.0 million of deferred considerationis payable in $50$50.0 million installments, on each of the first four anniversaries of the closing date. The Company paid the first of these four paymentsinstallment in October 2018. The balance of the deferred purchase consideration was initially recorded at fair value as of the acquisition date, with the difference between the remaining nominal amount and included a component ofthe fair value treated as imputed interest.
Bridge Loan Facility
On September 18, 2017, contemporaneous with the Company entering into the agreement to acquire Catalent Indiana, Operating Company entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc., JP Morgan Chase Bank, N.A., Royal Bank of Canada, RBC Capital Markets, Bank of America, N.A., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as commitment parties. Pursuant to the debt commitment letter and subject to its terms and conditions, the commitment parties agreed to provide a senior unsecured bridge loan facility (the "Bridge Facility") of up to $700.0 million in the aggregate for the purpose of providing any back-up financing necessary to fund a portion of the consideration to be paid in the acquisition and related fees, costs, and expenses (the "Bridge Loan Commitment"). In connection with entering into the Bridge Facility, Operating Company incurred $6.1 million of associated fees. Operating Company did not draw on it to fund the acquisition, the Company expensed the $6.1 million in the second quarter of fiscal 2018 as part of other expense, net and the facility was closed.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of 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 March 31,September 30, 2019, 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 or Puerto Rico subsidiaries 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 GAAP, and is subject to important limitations.
The Euro Notes and the USDSenior Notes
The Indenturesvarious indentures governing the EuroSenior Notes and(collectively, the USD Notes (the "Indentures"“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 EuroSenior Notes or the then-outstanding USD Notes, or either of the Trusteesapplicable Trustee under the Indentures may declare the applicable notes immediately due and payable; or in certain circumstances, the applicable notes will become automatically immediately due and payable. As of March 31,September 30, 2019, Operating Company was in compliance with all material covenants under the Indentures.
Fair Value of Debt Instruments
The estimated fair valuevalues of the senior secured credit facility, afacilities and Senior Notes are classified as Level 2 fair-value estimate, is based onin the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities and considers collateral, if any. The estimated fair value ofhierarchy and are calculated by using discounted cash flow models with the Euro and USD Notes,market interest rate as a Level 1 fair-value estimate, is based on the quoted market prices of the instruments.significant input. The carrying amounts and the estimated fair values of financial instruments as of March 31,September 30, 2019 and June 30, 20182019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | | | June 30, 2018 | | |
| (Dollars in millions) | Fair Value Measurement | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Euro-denominated 4.75% Senior Notes | Level 1 | $ | 424.1 | | $ | 441.1 | | $ | 438.4 | | $ | 457.6 |
| U.S. Dollar-denominated 4.875% Senior Notes | Level 1 | 444.4 | | 437.7 | | 443.8 | | 428.3 |
| Senior Secured Credit Facilities & Other | Level 2 | 1,318.1 | | 1,270.2 | | 1,839.1 | | 1,768.0 |
| Total | | $ | 2,186.6 | | $ | 2,149.0 | | $ | 2,721.3 | | $ | 2,653.9 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 | | | | June 30, 2019 | | |
| (Dollars in millions) | Fair Value Measurement | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
Euro-denominated 4.75% senior notes due
2024 | Level 2 | $ | 411.9 | | | $ | 425.9 | | | $ | 428.3 | | | $ | 454.2 | |
U.S. dollar-denominated 4.875% senior notes
due 2026 | Level 2 | 444.8 | | | 460.9 | | | 444.6 | | | 457.0 | |
U.S. dollar-denominated 5.00% senior notes
due 2027 | Level 2 | 492.4 | | | 523.4 | | | 492.1 | | | 509.0 | |
| Senior secured credit facilities & other | Level 2 | 1,583.9 | | | 1,550.1 | | | 1,594.3 | | | 1,526.0 | |
| Total | | $ | 2,933.0 | | | $ | 2,960.3 | | | $ | 2,959.3 | | | $ | 2,946.2 | |
7. EARNINGS PER SHARE
The Company computes earnings per share (“EPS”) of the Company's common stock, par value $0.01 (the "Common Stock") using the two-class method required due to the participating nature of the Series A Preferred Stock (as defined and discussed in Note 14, Redeemable Preferred Stock—Series A Preferred). Diluted net income per share is computed using the weighted average number of shares of Common Stock outstanding plus the weighted average number of shares of Common Stock that would be issued assuming exercise or conversion of all potentially dilutive instruments. Dilutive securities having an anti-dilutive effect on diluted net income per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company’s equity incentive plans are reflected in diluted earnings per share by application of the treasury stock method. The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the three and nine months ended March 31,September 30, 2019 and 2018, respectively, are as follows (in millions, except share and per share data):
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| (Dollars in millions, except per share data) | | (Dollars in millions, except per share data) | 2019 | | 2018 | |
| | 2019 | | 2018 | | 2019 | | 2018 | |
| | Net earnings | $ | 31.7 | | $ | 19.0 | | $ | 66.3 | | $ | 0.9 | |
| Net earnings/(loss) | | Net earnings/(loss) | $ | 0.1 | | | $ | (14.4) | | |
| Less: Series A Preferred Stock dividend | | Less: Series A Preferred Stock dividend | (8.1) | | | — | | |
| Net earnings/(loss) attributable to common shareholders | | Net earnings/(loss) attributable to common shareholders | $ | (8.0) | | | | $ | (14.4) | | |
| | Weighted average shares outstanding | Weighted average shares outstanding | 145,145,310 | | 133,123,679 | | 143,896,635 | | 130,577,726 | Weighted average shares outstanding | 145,663,115 | | | 142,149,315 | | |
| Dilutive securities issuable-stock plans | 1,612,961 | | 1,985,612 | | 1,696,575 | | 1,981,630 | |
| | Total weighted average diluted shares outstanding | Total weighted average diluted shares outstanding | 146,758,271 | | 135,109,291 | | 145,593,210 | | 132,559,356 | Total weighted average diluted shares outstanding | 145,663,115 | | | 142,149,315 | | |
| | Earnings per share: | Earnings per share: | | | | Earnings per share: | | | |
| | Basic | Basic | $ | 0.22 | | $ | 0.14 | | $ | 0.46 | | $ | 0.01 | Basic | $ | (0.05) | | | $ | (0.10) | | |
| | Diluted | Diluted | $ | 0.22 | | $ | 0.14 | | $ | 0.46 | | $ | 0.01 | Diluted | $ | (0.05) | | | $ | (0.10) | | |
The computationFor the periods of net loss, basic and diluted earnings per share forEPS are the three and nine months ended March 31, 2019 excludessame as the effectassumed exercise of the potential common shares issuable under employee-held stock options and restrictedconversion of convertible preferred stock units of approximately 0.9 million and 1.0 million shares, respectively, because they are anti-dilutive. The computation of diluted earnings per share for the three and nine months ended March 31, 2018 excludes the effect of the potential common shares issuable under employee-held stock options and restricted stock units of approximately 0.2 million and 0.4 million shares, respectively because they are anti-dilutive.
8. OTHER (INCOME)/EXPENSE, NET
The components of other (income)/expense, net for the three and nine months ended March 31,September 30, 2019 and 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
| Other (income)/expense, net | | | | | | | |
Debt refinancing costs (1) | $ | — | | $ | — | | $ | 4.2 | | $ | 11.8 |
| | | | | | | |
| | | | | | | |
Foreign currency (gains) and losses (2) | (3.2) | | 10.4 | | (0.8) | | 17.3 |
| Other | — | | (0.5) | | 0.5 | | (0.9) |
| Total other (income)/expense, net | $ | (3.2) | | $ | 9.9 | | $ | 3.9 | | $ | 28.2 |
Prior year results have been adjusted for adoption of ASU 2017-07, Compensation - Retirement benefits (Topic 715). Refer to Note 1. | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | |
| (Dollars in millions) | 2019 | | 2018 | | | | |
| Other (income)/expense, net | | | | | | | |
Debt refinancing costs (1) | $ | 0.1 | | | $ | 4.2 | | | | | |
| | | | | | | |
| | | | | | | |
Foreign currency (gains) and losses (2) | (3.1) | | | 1.7 | | | | | |
Other (3) | 7.9 | | | (0.2) | | | | | |
| Total other (income)/expense, net | $ | 4.9 | | | $ | 5.7 | | | | | |
(1) The expense in the ninethree months ended March 31, 2019September 30, 2018 includes a write-off of $4.2 million of previously capitalized financing charges related to the Company's U.S. dollar term loan under its senior secured credit facility. The prior-year debt refinancing costs include financing charges related to the offering of the USD Notes and the Third Amendment and also include a $6.1 million charge for commitment fees paid during the first quarter of fiscal 2018 on the Bridge Facility.
(2) Foreign currency remeasurement (gains) and losses include both cash and non-cash transactions.
(3) Included within Other for the three months ended September 30, 2019 are unrealized losses of $8.9 million related to the fair value of the derivative liability associated with the Series A Preferred Stock.
9. RESTRUCTURING AND OTHER COSTS
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 expansions and closures to streamline Company operations.
Other Costs/(Income)
Other costs/(income) includes settlement charges, net of any insurance recoveries, related to The restructuring costs for the probable resolution of certain customer claims related to a previous temporary suspension of operations at a softgel manufacturing facility.
The following table summarizes the significant costs recorded within restructuringthree months ended September 30, 2019 and other costs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | Nine Months Ended
March 31, | | |
(Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
| Restructuring costs: | | | | | | | |
| Employee-related reorganization | $ | 3.1 | | $ | 1.2 | | $ | 12.9 | | $ | 4.5 |
| | | | | | | |
| Facility exit and other costs | — | | 0.2 | | — | | — |
| Total restructuring costs | $ | 3.1 | | $ | 1.4 | | $ | 12.9 | | $ | 4.5 |
| Other - customer claims, net of insurance recoveries | — | | — | | — | | (1.8) |
| Total restructuring and other costs | $ | 3.1 | | $ | 1.4 | | $ | 12.9 | | $ | 2.7 |
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to fluctuations in the applicable exchange rate on its investments in foreign operations.operations outside the U.S. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated its exposure from its investments in its European operations by denominating a portion of its debt in euros. At March 31,September 30, 2019, the Company had euro-denominated debt outstanding of $768.4$744.6 million that is designated and qualifies as a hedge of a net investment in foreign
operations. For non-derivatives designated and qualifying as net investment hedges, the translation gains or losses are reported in accumulated other comprehensive income/(loss) as part of the cumulative translation adjustment. The non-hedge portions of the euro-denominated debt translation gains or losses are reported in the consolidated statement of operations. The following table includes net investment hedge activity during the three and nine months ended March 31,September 30, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Unrealized foreign exchange gain/(loss) within other comprehensive income | $ | 5.9 | | $ | (22.1) | | $ | 17.3 | | $ | (43.6) |
Unrealized foreign exchange gain/(loss) within statement of operations | $ | 2.9 | | $ | (15.5) | | $ | 9.8 | | $ | (31.7) |
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | | | | | |
| (Dollars in millions) | 2019 | | 2018 | | | | |
Unrealized foreign exchange gain/(loss) within other comprehensive income | $ | 20.3 | | | $ | (4.2) | | | | | |
Unrealized foreign exchange gain/(loss) within statement of operations | $ | 9.7 | | | $ | (2.5) | | | | | |
The net accumulated gain of the instrument designated as a hedge as of March 31,September 30, 2019 within other comprehensive income/(loss) was approximately $64.9$80.1 million. Amounts are reclassified out of accumulated other comprehensive income/(loss) into earnings when the entity to which the gains and losses relate is either sold or substantially liquidated.
2019 Derivative Liability
As discussed in Note 14, Redeemable Preferred Stock—Series A Preferred, in May 2019, the Company issued shares of Series A Preferred Stock in exchange for net proceeds of $646.3 million after taking into account the $3.7 million issuance cost.
The dividend rate used to determine the amount of the quarterly dividend payable on shares of the Series A Preferred Stock is subject to adjustment so as to provide holders of shares of Series A Preferred Stock with certain protections against a decline in the trading price of shares of Common Stock. The Company determined that this feature should be accounted for as a derivative liability, since the feature fluctuates inversely to changes in the trading price and is also linked to the performance of the S&P 500 stock index. Accordingly, the Company bifurcated the adjustable dividend feature from the remainder of the Series A Preferred Stock and accounted for this feature as a derivative liability at fair value. The Company will recognize changes in the fair value of the derivative liability in the consolidated statements of operations for each reporting period. The fair value was determined using an option pricing methodology, specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporates the terms and conditions of the preferred stock arrangement, historical stock price volatility, the risk-free interest rate, a credit spread based on the yield indexes of high-yield bonds, and the trading price of shares of the Common Stock. The calculation of the estimated fair value of the derivative liability is highly sensitive to changes in unobservable inputs, such as the expected volatility and the Company's specific credit spread.
The Company recorded a loss of $8.9 million on the change in the estimated fair value of the derivative liability from July 1, 2019 through September 30, 2019, which is reflected as a non-operating expense in the consolidated statements of operations. The fair value of the derivative liability as of September 30, 2019 was $35.7 million.
The fair value is classified as Level 3 in the fair value hierarchy due to the significant management judgment required for the assumptions underlying the calculation of value. The following table sets forth a summary of changes in the estimated fair value of the derivative liability:
| | | | | | | | |
(Dollars in millions) | | Fair Value Measurements of
Series A Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3) |
| Balance at July 1, 2019 | | $ | 26.8 | |
| Change in estimated fair value of Series A Preferred Stock derivative liability | | 8.9 | |
| Balance at September 30, 2019 | | $ | 35.7 | |
11. INCOME TAXES
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the "2017 Tax Act"). The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income ("GILTI"), (2) the Foreign Derived Intangible Income ("FDII") deduction, and (3) the Base Erosion Anti-Abuse Tax ("BEAT"), and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses, and certain employee expenses. While the impact of the mandatory one-time transition tax was recognized in fiscal 2018, the remaining provisions are effective for fiscal years after 2018.
As noted above, the 2017 Tax Act subjects a US Company to tax on GILTI earned by certain foreign subsidiaries. The Company will account for GILTI in the year the tax is incurred as a period cost.
Other Tax Matters
The Company accounts for income taxes in accordance with ASC 740, Income Taxes("ASC 740"). Generally, fluctuations in the effective tax rate are primarily due to changes in U.S. and non-U.S. pretax income resulting from the Company’s business mix and changes in the tax impact of special items and other discrete tax items, which may have unique tax implications depending on the nature of the item. Such discrete items include, but are not limited to, changes in foreign statutory tax rates, the amortization of certain assets, and the tax impact of changes in its ASC 740the Company's unrecognized tax benefit reserves. reserves and the tax impact of certain equity compensation.
In the normal course of business, the Company is subject to examination by taxing authorities around the world, including such major jurisdictions as the United States, Germany, France, and the United Kingdom. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal year 2009. Under the terms of the 2007 purchase agreement by which the stockholders at that time acquired their interest in the Company, the Company is indemnified by its former owner for tax liabilities that may arise after the 2007 purchase that relate to tax periods prior to April 10, 2007. The indemnification agreement applies to, among other taxes, any and all federal, state, and international income-based taxes as well as related interest and penalties. As of March 31,both September 30, 2019 and June 30, 2018, approximately2019, $0.6 million and $0.7 million, respectively, of unrecognized tax benefit areis subject to indemnification by the Company's former owner.
ASC 740 includes guidance on the accounting for uncertainty in income taxes recognized in the financial statements. This standard provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeal or litigation process, based on the technical merits. As of March 31,September 30, 2019 and June 30, 2018, the Company had a total of $3.9 million and $2.2 million of unrecognized tax benefits, respectively.
As of March 31, 2019, and June 30, 2018, the Company had a total of $5.3 million and $4.1$5.2 million, respectively, of uncertain tax positions (including accrued interest and penalties). As of both of these dates, $3.9$3.8 million and $2.2 million, respectively, represent the amount of unrecognized tax benefits, which, if recognized, would favorably affect the effective income tax rate. The Company recognizes interestInterest and penalties related to uncertain tax positions are recognized as a component of income tax expense. As of March 31,September 30, 2019 and June 30, 2018,2019, the Company has approximately $1.4$1.5 million and $2.0$1.4 million, respectively, of accrued interest and penalties related to uncertain tax positions. As of these dates, the portion of such interest and penalties subject to indemnification by its former owner is $1.4 million and $1.3 million, respectively.
The Company recorded a benefit for income taxes for the three months ended September 30, 2019 of $6.9 million relative to losses from operations before income taxes of $6.8 million. The amount of this benefit is primarily driven by U.S. income tax deductions, also referred to as a windfall benefit, related to the Company’s equity compensation expense. The Company recorded a provision for income taxes for the three months ended September 30, 2018 of $1.0 million relative to losses from operations before income taxes of $13.4 million. The income tax provision for the current period is not comparable to the same period of the prior year due to changes in pretax income over many jurisdictions and $1.6 million, respectively.the impact of discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, special items, certain equity related compensation and other discrete tax items, which may have unique tax implications depending on the nature of the item.
12. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of the Company’s net periodic benefit costs are as follows:
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| (Dollars in millions) | (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in millions) | 2019 | | 2018 | |
| Components of net periodic benefit cost: | Components of net periodic benefit cost: | | | | | | | | Components of net periodic benefit cost: | | | | |
| Selling, general, and administrative expenses: | Selling, general, and administrative expenses: | | Selling, general, and administrative expenses: | | |
| Service cost | Service cost | $ | 0.9 | | $ | 0.9 | | $ | 2.7 | | $ | 2.7 | Service cost | $ | 0.6 | | | $ | 0.9 | | |
| Other (income)/expense, net: | Other (income)/expense, net: | | Other (income)/expense, net: | | |
| Interest cost | Interest cost | 1.9 | | 1.9 | | 5.7 | | 5.5 | Interest cost | 1.7 | | | 1.9 | | |
| Expected return on plan assets | Expected return on plan assets | (2.7) | | (3.1) | | (7.9) | | (8.9) | Expected return on plan assets | (2.7) | | | (2.6) | | |
Amortization (1) | Amortization (1) | 0.6 | | 0.6 | | 1.8 | | 1.8 | Amortization (1) | 0.8 | | | 0.6 | | |
| Net amount recognized | Net amount recognized | $ | 0.7 | | $ | 0.3 | | $ | 2.3 | | $ | 1.1 | Net amount recognized | $ | 0.4 | | | $ | 0.8 | | |
(1) Amount represents the amortization of unrecognized actuarial gains/(losses).
As previously disclosed, the Company notified the trustees of a multi-employer pension plan of its withdrawal from participation in such plan in fiscal 2012. The actuarial review process administered by the plan trustees ended in fiscal 2015. The liability reported reflects the present value of the Company's expected future long-term obligations. The estimated discounted value of the projected contributions related to such plans was $38.9$38.8 million and $39.0$38.8 million as of March 31,September 30, 2019 and June 30, 2018,2019, respectively, and is included within pension liability on the consolidated balance sheets. The annual cash impact associated with the Company's obligations in such plan is approximately $1.7 million per year.
13. EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Description of Capital Stock
The Company is authorized to issue 1,000,000,000 shares of common stock, par value $0.01 per share ("Common Stock"),Stock, and 100,000,000 shares of preferred stock, par value $0.01 per share. Under the Company's certificate of incorporation, each share of Common Stock has one vote, and the Common Stock votes together as a single class.
Public Stock Offering
On July 27, 2018, the Company completed the a public offering of its Common Stock (the “2018 Equity Offering a public offering”), in which the Company sold 11.4 million shares, including the underwriters' over-allotment option, of Common Stock at a price of $40.24 per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company obtained total net proceeds from the 2018 Equity Offering, including the over-allotment exercise, of $445.5 million. The net proceeds of the 2018 Equity Offering were used to repay a corresponding portion of the outstanding borrowings under Operating Company's U.S. dollar-denominated term loans.
On September 29, 2017, the Company completed a public offering (the "2017 Equity Offering"), pursuant to which the Company sold 7.4 million shares, including the underwriters' over-allotment option, of Common Stock at a price of $39.10 per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company obtained total net proceeds from the 2017 Equity Offering, including the over-allotment exercise, of $277.8 million. The net proceeds of the 2017 Equity Offering were used to fund a portion of the consideration for the Catalent Indiana acquisition due at its closing.
Outstanding Stock
Shares of Common Stock outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.70.5 million shares as of March 31,September 30, 2019. Shares of unvested restricted stock are excluded from ourthe calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding, except when the effect would be anti-dilutive.
The Company has 650,000 shares of its preferred stock outstanding. See Note 14, Redeemable Preferred Stock—Series A Preferred.
Stock Repurchase Program
On October 29, 2015, the Company’s Board of Directors authorized a share repurchase program to use up to $100.0 million to repurchase shares of outstanding Common Stock. Under the program, the Company is authorized to repurchase
shares through open market purchases, privately negotiated transactions, or otherwise as permitted by applicable federal securities laws. There has been no purchase pursuant to this program as of March 31,September 30, 2019.
Accumulated Other Comprehensive Income/(loss)
The components of the changes in the cumulative translation adjustment, minimum pension liability, and available for sale investment for the three and nine months ended March 31,September 30, 2019 and 2018 are presented below.
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| (Dollars in millions) | (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in millions) | 2019 | | 2018 | |
| Foreign currency translation adjustments: | Foreign currency translation adjustments: | | | | | | | | Foreign currency translation adjustments: | | | | |
| Net investment hedge | Net investment hedge | $ | 5.9 | | $ | (22.1) | | $ | 17.3 | | $ | (43.6) | Net investment hedge | $ | 20.3 | | | $ | (4.2) | | |
| Long-term intercompany loans | Long-term intercompany loans | 17.1 | | 17.5 | | 3.0 | | 28.7 | Long-term intercompany loans | (6.5) | | | (3.3) | | |
| Translation adjustments | Translation adjustments | 0.9 | | 36.6 | | (20.9) | | 67.5 | Translation adjustments | (32.3) | | | (2.8) | | |
| Total foreign currency translation adjustment, pretax | Total foreign currency translation adjustment, pretax | 23.9 | | 32.0 | | (0.6) | | 52.6 | Total foreign currency translation adjustment, pretax | (18.5) | | | (10.3) | | |
| Tax expense/(benefit) | Tax expense/(benefit) | 2.4 | | (6.2) | | 4.3 | | (10.3) | Tax expense/(benefit) | 3.3 | | | (1.5) | | |
| Total foreign currency translation adjustment, net of tax | Total foreign currency translation adjustment, net of tax | $ | 21.5 | | $ | 38.2 | | $ | (4.9) | | $ | 62.9 | Total foreign currency translation adjustment, net of tax | $ | (21.8) | | | $ | (8.8) | | |
| | Net change in minimum pension liability | Net change in minimum pension liability | | Net change in minimum pension liability | | |
| | Net gain recognized during the period | $ | 0.6 | | $ | 0.6 | | 1.9 | | 1.8 | |
| Net (gain)/loss recognized during the period | | Net (gain)/loss recognized during the period | $ | (0.6) | | | $ | 0.6 | | |
| | Total pension liability, pretax | Total pension liability, pretax | 0.6 | | 0.6 | | 1.9 | | 1.8 | Total pension liability, pretax | (0.6) | | | 0.6 | | |
| Tax expense | 0.2 | | 0.2 | | 0.5 | | 0.5 | |
| Tax expense/(benefit) | | Tax expense/(benefit) | (0.3) | | | 0.2 | | |
| Net change in minimum pension liability, net of tax | Net change in minimum pension liability, net of tax | $ | 0.4 | | $ | 0.4 | | $ | 1.4 | | $ | 1.3 | Net change in minimum pension liability, net of tax | $ | (0.3) | | | $ | 0.4 | | |
| | Net change in available for sale investment: | | |
| Net loss recognized during the period | $ | — | | $ | 0.9 | | — | | (7.9) | |
| Total available for sale investment, pretax | — | | 0.9 | | — | | (7.9) | |
| Tax benefit | — | | 0.2 | | — | | (2.2) | |
| Net change in available for sale investment, net of tax | $ | — | | $ | 0.7 | | $ | — | | $ | (5.7) | |
| |
For the three months ended March 31,September 30, 2019, the changes in accumulated other comprehensive income/(loss), net of tax by component are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Exchange Translation Adjustments | | Pension and Liability Adjustments | | | | | | Available for Sale Investment Adjustments | | Total |
| Balance at December 31, 2018 | $ | (311.5) | | $ | (38.6) | | | | | | $ | (1.1) | | $ | (351.2) |
| Other comprehensive income/(loss) before reclassifications | 21.5 | | — | | | | | | — | | 21.5 |
| Amounts reclassified from accumulated other comprehensive income/(loss) | — | | 0.4 | | | | | | — | | 0.4 |
| Net current period other comprehensive income/(loss) | 21.5 | | 0.4 | | | | | | — | | 21.9 |
| Balance at March 31, 2019 | $ | (290.0) | | $ | (38.2) | | | | | | $ | (1.1) | | $ | (329.3) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Exchange Translation Adjustments | | | Pension and Liability Adjustments | | | | | | | Other | | | Total | |
| Balance at June 30, 2019 | $ | (303.7) | | | $ | (49.1) | | | | | | | $ | (1.1) | | | $ | (353.9) | |
Other comprehensive income/(loss) before
reclassifications | (21.8) | | | — | | | | | | | — | | | (21.8) | |
Amounts reclassified from accumulated other
comprehensive income/(loss) | — | | | (0.3) | | | | | | | — | | | (0.3) | |
| Net current period other comprehensive income/(loss) | (21.8) | | | (0.3) | | | | | | | — | | | (22.1) | |
| Balance at September 30, 2019 | $ | (325.5) | | | $ | (49.4) | | | | | | | $ | (1.1) | | | $ | (376.0) | |
14. REDEEMABLE PREFERRED STOCK — SERIES A PREFERRED
During May 2019, the Company designated 1,000,000 shares of its preferred stock, par value $0.01, as its “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), pursuant to a certificate of designation of preferences, rights, and limitations (as amended, the “Certificate of Designation”) filed with the Delaware Secretary of State, and issued and sold 650,000 shares of the Series A Preferred Stock for an aggregate purchase price of $650.0 million, to affiliates of Leonard Green & Partners, L.P. (the “Series A Investors”), each share having an initial stated value of $1,000 (as such value may be adjusted in accordance with the terms of the Certificate of Designation, the “Stated Value”). The Series A Preferred Stock ranks senior to the Company’s Common Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company.
The holders of Series A Preferred Stock are entitled to vote with the holders of the Common Stock as a single class on an “as-converted” basis and, for so long as the Series A Investors or their successors have the right to designate a nominee for election to the board pursuant to their stockholders’ agreement with the Company, have the right to elect one board member voting as a separate class. They also have veto rights over certain amendments to the Company’s organizational documents that would have an adverse effect on the rights of the Series A Preferred Stock; issuance of senior or pari passu securities; or the incurrence of indebtedness above certain leverage ratios, as set forth in the Certificate of Designation.
Holders of Series A Preferred Stock have the right under the Certificate of Designation to receive a liquidation preference entitling them to be paid out of assets available for distribution to stockholders before any payment may be made to holders of any other class or series of capital stock, the value of which preference is equal to the greater of (a) the Stated Value plus all accrued and unpaid dividends or (b) the amount that such holders would have been entitled to receive upon the Company’s liquidation, dissolution, and winding up if all outstanding shares of Series A Preferred Stock had been converted into shares of Common Stock immediately prior to such liquidation, dissolution, or winding up.
Holders of Series A Preferred Stock are also entitled (a) to receive a cumulative annual dividend equal to 5.0%of the Stated Value, payable quarterly in arrears in cash, by increasing the Stated Value, or in a combination thereof at Catalent’s election, with such rate subject to an increase to 6.5% or 8.0% depending on the price of the Common Stock at the fourth (or in certain cases fifth) anniversary of the initial issuance, as set forth in the Certificate of Designation, and (b) to participate in the distribution of any ordinary dividend on the Common Stock calculated on an as-converted basis.
The Series A Preferred Stock is subject to conversion or redemption under various circumstances, including the right of holders to convert some or all of their shares into shares of Common Stock after twelve months at a fixed price of $49.54 (the “Conversion Price”) and the Company’s right to (x) convert all outstanding shares of Series A Preferred Stock at any time after the third anniversary of the initial issuance if the price of the Common Stock exceeds 150.0% of the Conversion Price or (y) redeem all outstanding shares of Series A Preferred Stock at any time after the fifth anniversary of the initial issuance at a price per share equal to the Stated Value, plus accrued and unpaid dividends, for cash, shares of Common Stock, or a combination of these. The Conversion Price is subject to customary anti-dilution and other adjustments. In addition, holders of shares of Series A Preferred Stock are eligible to demand redemption of their shares in the event of a change of control. Due to these various rights, privileges, and preferences, the Company has classified the Series A Preferred Stock as temporary (mezzanine) equity on its consolidated balance sheets.
Proceeds from the offering of the Series A Preferred Stock, net of stock issuance costs, were $646.3 million, which were used to fund a portion of the consideration for the Paragon acquisition due at its closing. Of the net proceeds, $39.7 million was allocated to the dividend adjustment feature at its issuance and separately accounted for as a derivative liability, as disclosed in Note 10, Derivative Instruments and Hedging Activities; thus, the proceeds of the issuance were allocated as follows:
| | | | | |
| (Dollars in millions) | |
| |
| Issuance of Series A Preferred Stock | $ | 650.0 | |
| Stock issuance costs | (3.7) | |
| Net of stock issuance costs | 646.3 | |
Derivative liability (Portion of preferred stock allocated to dividend adjustment at inception - see
Note 10) | (39.7) | |
| Net proceeds from Series A Preferred Stock issuance | $ | 606.6 | |
Any change in the fair value of derivative liability is recorded as non-operating expenses in the consolidated statement of operations. See Note 10, Derivative Instruments and Hedging Activities for detail concerning the change in fair value during the three months ended September 30, 2019.
15. 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. 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 Catalent 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, since the implicit discount rate for its leases is not readily determinable.
Fixed lease payments are recognized on straight-line basis over the lease term, while 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 unaudited consolidated balance sheet as of September 30, 2019 is detailed in the following table:
| | | | | | | | |
| (Dollars in millions) | Line item in the consolidated balance sheet | Balance at September 30, 2019 |
| Right-of-use assets: | | |
| Finance leases | Property, plant, and equipment, net | $ | 122.9 | |
| Operating leases | Other assets | 65.7 | |
| | |
| Current lease liabilities: | | |
| Finance leases | Current portion of long-term obligations and other short-term borrowings | 9.5 | |
| Operating leases | Other accrued liabilities | 10.6 | |
| | |
| Non-current lease liabilities: | | |
| Finance leases | Long-term obligations, less current portion | 157.3 | |
| Operating leases | Other liabilities | 56.6 | |
The components of the net lease costs for the three months ended September 30, 2019 reflected in the Company's unaudited consolidated statement of operations were as follows:
| | | | | |
| (Dollars in millions) | Three months ended September 30, 2019 |
| Finance lease costs: | |
| Amortization of right-of-use assets | $ | 1.9 | |
| Interest on lease liabilities | 3.1 | |
| Total | 5.0 | |
| |
| Operating lease costs | 4.2 | |
| Variable lease costs | 1.7 | |
| Total lease costs | $ | 10.9 | |
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 September 30, 2019 are as follows:
| | | | | |
| Weighted average remaining lease term (years): | |
| Finance leases | 16.1 |
| Operating leases | 9.2 |
| Weighted average discount rate: | |
| Finance leases | 6.7 | % |
| Operating leases | 4.4 | % |
Supplemental information concerning the cash-flow impact arising from the Company's leases for the three months ended September 30, 2019 recorded in the Company's unaudited consolidated statement of cash flows is detailed in the following table (in millions):
For the nine months ended March 31, | | | | | |
| Cash paid for amounts included in lease liabilities: | |
| Financing cash flows from finance leases | $ | 2.2 | |
| Operating cash flows from finance leases | 3.1 | |
| Operating cash flows from operating leases | 2.4 | |
| |
| Non-cash transactions: | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | 4.1 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 23.7 | |
As of September 30, 2019, the changes in accumulated other comprehensive income/(loss), net of tax by component areCompany expects that its future minimum lease payments will become due and payable as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Foreign Exchange Translation Adjustments | | Pension and Liability Adjustments | | | | | | Available for Sale Investment Adjustments | | Total |
| Balance at June 30, 2018 | $ | (285.1) | | $ | (39.6) | | | | | | $ | (1.1) | | $ | (325.8) |
| Other comprehensive income/(loss) before reclassifications | (4.9) | | — | | | | | | — | | (4.9) |
| Amounts reclassified from accumulated other comprehensive income/(loss) | — | | 1.4 | | | | | | — | | 1.4 |
| Net current period other comprehensive income/(loss) | (4.9) | | 1.4 | | | | | | — | | (3.5) |
| Balance at March 31, 2019 | $ | (290.0) | | $ | (38.2) | | | | | | $ | (1.1) | | $ | (329.3) |
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Finance Leases | | Operating Leases | | Total |
| Remainder of 2020 | $ | 15.8 | | | $ | 10.0 | | | $ | 25.8 | |
| 2021 | 20.0 | | | 12.4 | | | 32.4 | |
| 2022 | 17.9 | | | 11.7 | | | 29.6 | |
| 2023 | 17.4 | | | 11.3 | | | 28.7 | |
| 2024 | 16.8 | | | 8.0 | | | 24.8 | |
| Thereafter | 181.2 | | | 30.6 | | | 211.8 | |
| Total minimum lease payments | 269.1 | | | 84.0 | | | 353.1 | |
| Less: interest | 102.3 | | | 16.8 | | | 119.1 | |
| Total lease liabilities | $ | 166.8 | | | $ | 67.2 | | | $ | 234.0 | |
14.16. COMMITMENTS AND CONTINGENCIES
SEC inquiry into Juniper Pharmaceuticals, Inc.
On August 14, 2018, Operating Company acquired Juniper pursuant to the Juniper Merger Agreement. On November 14, 2016, Juniper filed with the SEC restated audited consolidated financial statements for the fiscal years ended December 31, 2013 through December 31, 2015, including the unaudited consolidated financial information for each quarterly period within the fiscal years ended December 31, 2014 and 2015, and restated unaudited consolidated financial statements for the quarters ended March 31, 2016 and June 30, 2016 and the related quarters in 2015, in order to correct certain timing errors regarding how it recognized revenue from a supply contract with an affiliate of Merck KGaA. On January 24, 2017, Juniper received a subpoena from the SEC requesting information concerning these restatements and related issues. Juniper responded to the subpoena and cooperated with the SEC’s inquiry, which included the taking of testimony from former Juniper employees and others. The Company has been notified by SEC staff that their investigation has concluded and that they do not intend to recommend an enforcement action by the SEC against Juniper.
Other
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s consolidated financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, the Company receives subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. The Company expects to incur costs in future periods in connection with future requests.
15.17. SEGMENT INFORMATION
TheAs disclosed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, the Company now conducts its business within the following operating segments: Softgel and Oral Technologies, Biologics, Oral and Specialty Drug Delivery, Oral Drug Delivery, and Clinical Supply Services. The Company evaluates the performance of its segments based on segment earnings before other (expense)/income, impairments, restructuring costs, interest expense, income tax expense/(benefit), and depreciation and amortization ("(“Segment EBITDA"EBITDA”). "EBITDA“EBITDA from operations"operations” is consolidated earnings from operations before interest expense, income tax expense/(benefit), and depreciation and amortization. Segment EBITDA and EBITDA from operations are not defined in GAAP and may not be comparable to similarly titled measures used by other companies.
The following tables include net revenue and Segment EBITDA for each of the Company's current reporting segments during the three and nine months ended March 31,September 30, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
| Softgel Technologies | | | | | | | |
| Net revenue | $ | 214.5 | | $ | 228.5 | | $ | 627.4 | | $ | 676.3 |
| Segment EBITDA | $ | 48.4 | | $ | 52.2 | | $ | 125.9 | | $ | 137.4 |
| Biologics and Specialty Drug Delivery | | | | | | | |
| Net revenue | 172.1 | | 166.0 | | 511.0 | | 406.4 |
| Segment EBITDA | 41.8 | | 37.8 | | 119.1 | | 86.4 |
| Oral Drug Delivery | | | | | | | |
| Net revenue | 161.7 | | 148.4 | | 445.8 | | 420.2 |
| Segment EBITDA | 50.9 | | 43.0 | | 123.1 | | 122.9 |
| Clinical Supply Services | | | | | | | |
| Net revenue | 77.8 | | 104.4 | | 236.3 | | 322.8 |
| Segment EBITDA | 20.3 | | 18.8 | | 61.5 | | 54.5 |
| Inter-segment revenue elimination | (8.6) | | (19.4) | | (28.2) | | (47.6) |
Unallocated costs (1) | (26.0) | | (37.5) | | (95.2) | | (119.7) |
| Combined totals: | | | | | | | |
| Net revenue | $ | 617.5 | | $ | 627.9 | | $ | 1,792.3 | | $ | 1,778.1 |
| | | | | | | |
| EBITDA from operations | $ | 135.4 | | $ | 114.3 | | $ | 334.4 | | $ | 281.5 |
| | | | | | | | | | | |
| (Dollars in millions) | Three Months Ended
September 30, | | |
| 2019 | | 2018 |
| Net revenue: | | | |
| Softgel and Oral Technologies | $ | 263.7 | | | $ | 240.1 | |
| Biologics | 188.6 | | | 125.7 | |
| Oral and Specialty Delivery | 132.6 | | | 110.8 | |
| Clinical Supply Services | 84.6 | | | 77.7 | |
| Inter-segment revenue elimination | (4.8) | | | (2.5) | |
| Net revenue | $ | 664.7 | | | $ | 551.8 | |
| | | | | | | | | | | |
| (Dollars in millions) | Three Months Ended
September 30, | | |
| 2019 | | 2018 |
| Segment EBITDA reconciled to net earnings/(loss): | | | |
| Softgel and Oral Technologies | $ | 46.4 | | | $ | 41.3 | |
| Biologics | 35.8 | | | 27.0 | |
| Oral and Specialty Delivery | 27.7 | | | 18.9 | |
| Clinical Supply Services | 21.6 | | | 20.2 | |
| Sub-Total | $ | 131.5 | | | $ | 107.4 | |
| Reconciling items to net earnings/(loss) | | | |
Unallocated costs (1) | (41.4) | | | (39.8) | |
| Depreciation and amortization | (60.6) | | | (52.9) | |
| Interest expense, net | (36.3) | | | (28.1) | |
| Income tax expense/(benefit) | $ | 6.9 | | | (1.0) | |
| | | |
| Net earnings/(loss) | $ | 0.1 | | | $ | (14.4) | |
(1) Unallocated costs include restructuring and special items, equity-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| | | Three Months Ended
March 31, | | | Nine Months Ended
March 31, | | | Three Months Ended
September 30, | |
| (Dollars in millions) | (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 | (Dollars in millions) | 2019 | | 2018 | |
| Impairment charges and gain/(loss) on sale of assets | Impairment charges and gain/(loss) on sale of assets | $ | 0.1 | | $ | (0.2) | | $ | (2.7) | | $ | (4.4) | Impairment charges and gain/(loss) on sale of assets | $ | 0.2 | | | $ | (2.9) | | |
| Stock-based compensation | Stock-based compensation | (6.6) | | (5.6) | | (24.1) | | (21.1) | Stock-based compensation | (16.6) | | | (10.0) | | |
Restructuring and other special items (a) | Restructuring and other special items (a) | (16.1) | | (10.5) | | (35.2) | | (34.7) | Restructuring and other special items (a) | (11.8) | | | (13.2) | | |
| Other income/(expense), net (b) | Other income/(expense), net (b) | 3.2 | | (9.9) | | (3.9) | | (28.2) | Other income/(expense), net (b) | (4.9) | | | (5.7) | | |
| Non-allocated corporate costs, net | (6.6) | | (11.3) | | (29.3) | | (31.3) | |
| Unallocated corporate costs, net | | Unallocated corporate costs, net | (8.3) | | | (8.0) | | |
| Total unallocated costs | Total unallocated costs | $ | (26.0) | | $ | (37.5) | | $ | (95.2) | | $ | (119.7) | Total unallocated costs | $ | (41.4) | | | $ | (39.8) | | |
(a) Restructuring and other special items during the three months ended September 30, 2019 include transaction and integration costs associated primarilywith the Company’s gene therapy acquisitions, the disposal of one of our sites in Australia (which closed in October 2019), and other restructuring initiatives across the Company's network of sites. Restructuring and other special items during the three months ended September 30, 2018 include transaction and integration costs associated with the acquisitions of Catalent Indiana and Juniper.
(b) Refer to Note 8, Other (Income)(income)/Expense,expense, net, for details of financing changescharges and foreign currency translation adjustments recorded within Otherother income/(expense), net.
Provided below is a reconciliation between net earnings and EBITDA from operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 | | 2019 | | 2018 |
| Net earnings | $ | 31.7 | | $ | 19.0 | | $ | 66.3 | | $ | 0.9 |
| Depreciation and amortization | 66.4 | | 51.7 | | 173.9 | | 137.5 |
| Interest expense, net | 26.4 | | 29.9 | | 80.0 | | 81.4 |
| Income tax expense | 10.9 | | 13.7 | | 14.2 | | 61.7 |
| | | | | | | |
| EBITDA from operations | $ | 135.4 | | $ | 114.3 | | $ | 334.4 | | $ | 281.5 |
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated financial statements. Prior year segment assets have been restated to conform with current year presentation, which excludes intercompany balances.
| | | | | | | | | | | |
| (Dollars in millions) | March 31,
2019 | | June 30,
2018 |
| Assets | | | |
| Softgel Technologies | $ | 1,144.2 | | $ | 1,139.8 |
| Biologics and Specialty Drug Delivery | 1,620.7 | | 1,615.4 |
| Oral Drug Delivery | 1,180.1 | | 999.5 |
| Clinical Supply Services | 477.7 | | 452.7 |
| Corporate and eliminations | 70.4 | | 323.7 |
| Total assets | $ | 4,493.1 | | $ | 4,531.1 |
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2019 | | June 30,
2019 |
| Assets | | | |
| Softgel and Oral Technologies | $ | 1,478.7 | | | $ | 1,586.5 | |
| Biologics | 2,849.3 | | | 2,825.7 | |
| Oral and Specialty Delivery | 1,190.9 | | | 1,098.7 | |
| Clinical Supply Services | 464.9 | | | 463.2 | |
| Corporate and eliminations | 135.7 | | | 209.9 | |
| Total assets | $ | 6,119.5 | | | $ | 6,184.0 | |
16.18. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at March 31, 2019September 30, and June 30, 20182019 is detailed in the following tables.
Inventories
Work-in-process and finished goods inventories include raw materials, labor, and overhead. Total inventories consist of the following:
| | (Dollars in millions) | (Dollars in millions) | March 31,
2019 | | June 30,
2018 | (Dollars in millions) | September 30,
2019 | | June 30,
2019 |
| Raw materials and supplies | Raw materials and supplies | $ | 167.1 | | $ | 137.1 | Raw materials and supplies | $ | 169.5 | | | $ | 161.6 | |
| Work-in-process | 59.2 | | 42.3 | |
| Finished goods | 41.9 | | 48.3 | |
| Work-in-process & finished goods | | Work-in-process & finished goods | 101.6 | | | 115.0 | |
| | Total inventories, gross | Total inventories, gross | 268.2 | | 227.7 | Total inventories, gross | 271.1 | | | 276.6 | |
| Inventory cost adjustment | Inventory cost adjustment | (21.2) | | (18.6) | Inventory cost adjustment | (20.4) | | | (19.4) | |
| Inventories | Inventories | $ | 247.0 | | $ | 209.1 | Inventories | $ | 250.7 | | | $ | 257.2 | |
Prepaid expenses and other
Prepaid expenses and other consist of the following:
| | (Dollars in millions) | (Dollars in millions) | March 31,
2019 | | June 30,
2018 | (Dollars in millions) | September 30,
2019 | | June 30,
2019 |
| Prepaid expenses | Prepaid expenses | $ | 30.2 | | $ | 19.2 | Prepaid expenses | $ | 41.1 | | | $ | 18.7 | |
| Contract assets | | Contract assets | 16.1 | | | 23.3 | |
Current assets held for sale (1) | | Current assets held for sale (1) | 11.7 | | | — | |
| Spare parts supplies | Spare parts supplies | 9.7 | | 11.1 | Spare parts supplies | 8.4 | | | 8.1 | |
| Prepaid income tax | Prepaid income tax | 10.9 | | 7.2 | Prepaid income tax | 9.9 | | | 10.0 | |
| | Non-U.S. value-added tax | Non-U.S. value-added tax | 14.5 | | 12.5 | Non-U.S. value-added tax | 12.3 | | | 16.4 | |
| | Other current assets | Other current assets | 20.0 | | 15.2 | Other current assets | 25.3 | | | 23.6 | |
| Prepaid expenses and other | Prepaid expenses and other | $ | 85.3 | | $ | 65.2 | Prepaid expenses and other | $ | 124.8 | | | $ | 100.1 | |
(1) In fiscal 2018, the Company agreed to sell its facility in Braeside, Australia, which is part of the Softgel and Oral Technologies segment. As of September 30, 2019, the facility's assets met the criteria to be classified as held for sale; as a result, these assets and liabilities have been reclassified within the other assets and liabilities line on the consolidated balance sheets. Non-current assets held for sale and current liabilities held for sale of $29.1 million and $12.2 million, respectively, are presented in Other assets and Other accrued liabilities, respectively on the consolidated balance sheet as of September 30, 2019. The sale transaction closed in the second quarter of fiscal 2020.
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following:
| | | | | | | | | | | |
| (Dollars in millions) | March 31,
2019 | | June 30,
2018 |
| Land, buildings, and improvements | $ | 956.7 | | $ | 928.1 |
| Machinery, equipment, and capitalized software | 1,030.0 | | 988.1 |
| Furniture and fixtures | 16.0 | | 14.9 |
| Construction in progress | 180.4 | | 166.8 |
| Property, plant, and equipment, at cost | 2,183.1 | | 2,097.9 |
| Accumulated depreciation | (881.6) | | (827.3) |
| Property, plant, and equipment, net | $ | 1,301.5 | | $ | 1,270.6 |
| | | | | | | | | | | |
| (Dollars in millions) | September 30,
2019 | | June 30,
2019 |
| Land, buildings, and improvements | $ | 1,046.3 | | | $ | 1,049.4 | |
| Machinery, equipment, and capitalized software | 1,102.0 | | | 1,104.9 | |
| Furniture and fixtures | 17.1 | | | 16.9 | |
| Construction in progress | 315.1 | | | 278.9 | |
| Property, plant, and equipment, at cost | 2,480.5 | | | 2,450.1 | |
| Accumulated depreciation | (919.4) | | | (913.4) | |
| Property, plant, and equipment, net | $ | 1,561.1 | | | $ | 1,536.7 | |
Depreciation expense was $35.0 million and $104.8$39.1 million for the three and nine months ended March 31,September 30, 2019 respectively, and $34.1 million and $92.4$34.7 million for the three and nine months ended March 31, 2018, respectively.September 30, 2018. Depreciation expense includes amortization of assets related to capital leases. The Company charges repairs and maintenance costs to expense as incurred. The amount of capitalized interest was immaterial for all periods presented.
Other accrued liabilities
Other accrued liabilities consist of the following:
| | (Dollars in millions) | (Dollars in millions) | March 31,
2019 | | June 30,
2018 | (Dollars in millions) | September 30,
2019 | | June 30,
2019 |
| Accrued employee-related expenses | Accrued employee-related expenses | $ | 88.7 | | $ | 104.3 | Accrued employee-related expenses | $ | 83.4 | | | $ | 103.9 | |
| Restructuring accrual | Restructuring accrual | 9.9 | | 9.4 | Restructuring accrual | 5.7 | | | 8.2 | |
| | Accrued interest | Accrued interest | 10.8 | | 16.5 | Accrued interest | 17.4 | | | 11.7 | |
| | Contract liability | Contract liability | 89.2 | | 100.9 | Contract liability | 159.6 | | | 155.2 | |
| Accrued income tax | Accrued income tax | 10.2 | | 25.9 | Accrued income tax | — | | | 8.5 | |
Current liabilities held for sale (1) | | Current liabilities held for sale (1) | 12.2 | | | — | |
| Other accrued liabilities and expenses | Other accrued liabilities and expenses | 44.0 | | 55.9 | Other accrued liabilities and expenses | 49.2 | | | 50.9 | |
| Other accrued liabilities | Other accrued liabilities | $ | 252.8 | | $ | 312.9 | Other accrued liabilities | $ | 327.5 | | | $ | 338.4 | |
17. SUBSEQUENT EVENTS
Paragon Bioservices Acquisition and Related Financings
On April 15, 2019, Operating Company and Paragon Bioservices, Inc. ("Paragon") became parties to a definitive agreement for the acquisition of Paragon by Operating Company for an aggregate purchase price of $1.2 billion. Paragon engages in advanced biological material development, analysis, and commercialization and is, among other things, a viral vector contract development and manufacturing organization for gene therapies. The transaction is expected to close(1) See footnote (1) in the fourth quarter of fiscal 2019.
To fund a portion of the Paragon acquisition, Operating Company obtained a binding commitment from JPMorgan Chase Bank, N.A. for $650 millionPrepaid expenses and other table earlier in incremental U.S. dollar term loans under its existing senior secured credit facilities, subject to customary closing conditions, including the closing of the acquisition, and the execution of definitive documentation. In addition, Catalent has entered into a definitive agreement to issue up to $1 billion of shares of a new series of convertible preferred stock (the “Series A Preferred Stock”) to two funds affiliated with Leonard Green & Partners, L.P., of which Catalent intends to issue shares valued at $650 million, and the proceeds of this issuance will be available, subject to customary closing conditions, including the closing of the acquisition, to fund the remaining purchase consideration.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
We are the leading global provider of advanced delivery technologies and development solutions for drugs, biologics, and consumer and animal health products. Our oral, injectable, gene therapy, and respiratory delivery technologies address the full diversity of the pharmaceutical industry, including small molecules, protein and gene therapy biologics, and consumer and animal health products. Through our extensive capabilities and deep expertise in product development, we help our customers take products to market faster, including nearly half of new drug products approved by the U.S. Food and Drug Administration in the last decade. Our advanced delivery technology platforms, which include those in our Softgel and Oral Technologies, Biologics, and Specialty Drug Delivery,Oral and Oral DrugSpecialty Delivery segments, our proven formulation, manufacturing, and regulatory expertise, and our broad and deep intellectual property enable our customers to develop more products and better treatments for patients and consumers. Across both development and delivery, our commitment to reliably supply our customers’ and their patients' needs is the foundation for the value we provide; annually, we produce approximately 73 billion doses for nearly 7,000 customer products or approximately 1 in every 20 doses of such product taken each year by patients and consumers around the world. We believe that, through our investments in growth-enabling capacity and capabilities, our ongoing focus on operational and quality excellence, the sales of existing customer products, the introduction of new customer products, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated margins and realize the growth potential from these areas.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"(“GAAP”). These standards require management to makeManagement made certain estimates and assumptions thatduring the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions affect amountsthe 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 and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, variable consideration in revenue recognition, inventory and long-lived asset valuation, goodwill and other intangible asset impairment, income taxes, derivative financial instruments, self-insurance accruals, loss contingencies, and restructuring charge reserves. Actual amounts may differ from these estimated amounts.than others.
There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 20182019 10-K, other than recently adopted accounting principles as disclosed in Note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, which adoptions had no material impact on net earnings.
Non-GAAP Performance Metrics
Use of EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense/(benefit) for income taxes, and depreciation and amortization ("(“EBITDA from operations"operations”). EBITDA from operations is not defined under GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for the readers of our consolidated financial statements, and such information is not meant to replace or supersede 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 GAAP measure to EBITDA from operations is net earnings. Included in this report is a reconciliation of net earnings to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before other (income)/expense, impairments, restructuring costs, interest expense, income tax expense/(benefit), and depreciation and amortization ("(“Segment EBITDA"EBITDA”).
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant currency basis as excluding the impact of foreign exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with 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 GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are useful measures calculated by the Company to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations and include joint ventures and revenue from product-participation-related activities entered into within the year. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance with GAAP. These measures, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with GAAP.
Three Months Ended March 31,September 30, 2019 Compared to the Three Months Ended March 31,September 30, 2018
The below tables summarize several financial metrics we use to measure performance for the three months ended March 31,September 30, 2019 and three months ended March 31,September 30, 2018. Refer to the discussions below regarding performance and use of key financial metrics.
We adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), as of July 1, 2018 using the modified retrospective method. The reported results for the three and nine months ended March 31, 2019 reflects the application of the new standard while the reported results for the three and nine months ended March 31, 2018 were prepared under the previously effective guidance of ASC 605, Revenue Recognition.
Results for the three months ended March 31,September 30, 2019 compared to the three months ended March 31,September 30, 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | FX Impact | | Constant Currency Increase/(Decrease) | | |
| 2019 | | 2018 | | | | Change $ | | Change % |
| Net revenue | $ | 617.5 | | $ | 627.9 | | $ | (21.2) | | $ | 10.8 | | 2 | % |
| Cost of sales | 418.8 | | 436.2 | | (15.3) | | (2.1) | | * | |
| Gross margin | 198.7 | | 191.7 | | (5.9) | | 12.9 | | 7 | % |
| Selling, general and administrative expenses | 129.9 | | 117.6 | | (2.2) | | 14.5 | | 12 | % |
| Impairment charges and (gain)/loss on sale of assets | (0.1) | | 0.2 | | — | | (0.3) | | (150) | % |
| Restructuring and other | 3.1 | | 1.4 | | (0.1) | | 1.8 | | 129 | % |
| | | | | | | | | |
| Operating earnings | 65.8 | | 72.5 | | (3.6) | | (3.1) | | (4) | % |
| Interest expense, net | 26.4 | | 29.9 | | (0.3) | | (3.2) | | (11) | % |
| Other (income)/expense, net | (3.2) | | 9.9 | | (1.3) | | (11.8) | | (199) | % |
| Earnings from continuing operations before income taxes | 42.6 | | 32.7 | | (2.0) | | 11.9 | | 36 | % |
| Income tax expense | 10.9 | | 13.7 | | (0.3) | | (2.5) | | (18) | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 31.7 | | $ | 19.0 | | $ | (1.7) | | $ | 14.4 | | 76 | % |
| | | | | | | | | |
| | | | | | | | | |
*Percentage not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | FX Impact | | Constant Currency Increase/(Decrease) | | |
| (Dollars in Millions) | 2019 | | 2018 | | | | Change $ | | Change % |
| Net revenue | $ | 664.7 | | | $ | 551.8 | | | $ | (11.0) | | | $ | 123.9 | | | 22 | % |
| Cost of sales | 487.0 | | | 403.3 | | | (8.1) | | | 91.8 | | | 23 | % |
| Gross margin | 177.7 | | | 148.5 | | | (2.9) | | | 32.1 | | | 22 | % |
| Selling, general and administrative expenses | 142.8 | | | 115.5 | | | (1.0) | | | 28.3 | | | 25 | % |
| Impairment charges and (gain)/loss on sale of assets | (0.2) | | | 2.9 | | | — | | | (3.1) | | | (107) | % |
| Restructuring and other | 0.7 | | | 9.7 | | | — | | | (9.0) | | | (93) | % |
| | | | | | | | | |
| Operating earnings | 34.4 | | | 20.4 | | | (1.9) | | | 15.9 | | | 78 | % |
| Interest expense, net | 36.3 | | | 28.1 | | | (0.1) | | | 8.3 | | | 30 | % |
| Other (income)/expense, net | 4.9 | | | 5.7 | | | (1.8) | | | 1.0 | | | 18 | % |
| Earnings/(loss) from operations before income taxes | (6.8) | | | (13.4) | | | — | | | 6.6 | | | (49) | % |
| Income tax expense/(benefit) | (6.9) | | | 1.0 | | | (0.1) | | | (7.8) | | | (780) | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings/(loss) | $ | 0.1 | | | $ | (14.4) | | | $ | 0.1 | | | $ | 14.4 | | | (100) | % |
| | | | | | | | | |
| | | | | | | | | |
Net Revenue
| | | | | |
| 2019 vs. 2018 |
| Factors Contributing to Year-Over-Year Change | Three Months Ended
March 31, |
| Net Revenue |
| Revenue without acquisitions/divestitures | (1)11 | % |
| Impact of acquisitions | 311 | % |
| |
| Constant currency change | 222 | % |
| Foreign currency translation impact on reporting | (4)(2) | % |
| Total % change | (2)20 | % |
Net revenue increased $10.8$123.9 million, or 2%22%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange, primarily driven by growth fromexchange. Net revenue increased 11% as a result of acquisitions. We acquired Juniper Pharmaceuticals, Inc. ("Juniper"(“Juniper”) in August 2018.2018 and Catalent Maryland, Inc. (formerly Paragon Bioservices, Inc., “Paragon”) in May 2019. Net revenue decreased 1%increased 11% without the impact of acquisitions on a constant-currency basis, primarily related to a reductionvolume increases in revenue from comparator sourcing arrangements within our Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services segment. As a result of the adoption of ASC 606, we recorded comparator sourcing arrangements on a net basis versus a gross basis, resulting in a decrease in net revenue of 4%, with no corresponding decrease to EBITDA, partially offset by increased net revenue within our Biologics and Specialty Drug Delivery segment.segments.
Gross Margin
Gross margin increased $12.9$32.1 million, or 7%22%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange, primarily as a result of the Juniper acquisition.our acquisitions and increased volumes as discussed above. On a constant-currency basis, gross margin, as a percentage of revenue, increased 150decreased 20 basis points to 32.0%26.7% in the three months ended March 31,September 30, 2019, compared to 30.5%26.9% in the prior-year period. As a result of the adoption of ASC 606, the Company recorded comparator sourcing arrangements on a net basis versus a gross basis, which resulted in an increase to gross margin percentage of 110 basis points.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $14.5$28.3 million, or 12%25%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange, primarily relating to additional selling, general and administrative expenses from acceleratedacquired companies of $22.4 million, including $8.7 million of incremental depreciation and amortization expense and $2.2 million of $12 million related to product participation licensing rights within our Oral Drug Delivery segment.employee-related costs. Selling, general, and administrative expenses further increased approximately $7$5.0 million relating to transaction-related costs, partially offsetfor non-cash equity-based compensation, driven by a decrease in employee related costs.the achievement of certain performance-based metrics during the first quarter of fiscal 2020.
Restructuring and Other
Restructuring and other costs of $3.1$0.7 million for the three months ended March 31,September 30, 2019 increaseddecreased $9.0 million, or 93%, compared to the three months ended March 31,September 30, 2018. Restructuring expense varies period-to-period based on the timing of site consolidation efforts and other efforts to further streamline the business.
Interest Expense, net
Interest expense, net of $26.4$36.3 million for the three months ended March 31,September 30, 2019 decreasedincreased by $3.5$8.2 million compared to the three months ended March 31,September 30, 2018, primarily driven by a $450 million payment on our U.S. dollar-denominated term loans on August 1, 2018, principally funded by our underwritten public equityincreased debt associated with the financing of the Paragon acquisition in May 2019 and Operating Company's June 2019 offering of July 27, 20185.00% Senior Notes due 2027 (the "2018 Equity Offering""USD 2027 Notes"), a $50 million payment on.
For additional information concerning our deferreddebt 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 6 to the consolidated financial statements.
A component of the purchase consideration related toprice for the acquisition of Catalent Indiana LLC ("Catalent Indiana") in Octoberfiscal 2018 ordinary-course principal payments on our term loans, and an overall reduction in interest rates on our senior secured credit facilities compared to the prior-year period.
A component of the purchase price for the Catalent Indiana acquisition consistsconsisted of $200.0 million in deferred purchase consideration payable in four annual $50.0 million installments on the first four anniversary dates of the acquisition. We made the first such payment in October 2018, and the present value of the balance is accounted for as debt, with the difference between the nominal value and the present value considered imputed interest expense.
Other (Income)/Expense, net
Other income,expense, net of $3.2$4.9 million for the three months ended March 31,September 30, 2019 was primarily driven by a loss of $8.9 million related to the change in the fair value of the derivative liability arising from the dividend adjustment mechanism of the series A convertible preferred stock, par value $0.01 (the "Series A Preferred Stock"). The loss was partially offset by non-cash foreign currency translation gains. See Notes 10 and 14 to the consolidated financial statements for more details on the Series A Preferred Stock dividend adjustment mechanism. Other expense, net of $9.9$5.7 million for the three months ended March 31,September 30, 2018 was primarily driven by non-cash foreign currency translation losses.
Income Tax Expense
In December 2017,Our benefit for income taxes for the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the "2017 Tax Act").three months ended September 30, 2019 was $6.9 million relative to loss from operations before income taxes of $6.8 million. The 2017 Tax Act significantly revisedamount of this benefit is primarily driven by U.S. income tax law by, among other provisions, (a) loweringdeductions, also referred to as a windfall benefit, related to the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transitional tax on previously deferred foreign earnings, (c) creating provisions regarding (1) income deemed to be Global Intangible Low Tax Income ("GILTI"), (2) the Foreign Derived Intangible Income ("FDII") deduction, and (3) the Base Erosion Anti-Abuse Tax ("BEAT"), and (d) eliminating or reducing certain income tax deductions, such as deductions for interest expense, executiveCompany’s equity compensation expense, and certain employee expenses.
expense. Our provision for income taxes for the three months ended March 31, 2019September 30, 2018 was $10.9$1.0 million relative to earningslosses from operations before income taxes of $42.6$13.4 million. Our provision for income taxes for the three months ended March 31, 2018 was $13.7 million relative to earnings from operations before income taxes of $32.7 million. The change to the income tax provision for the current period is comparednot comparable to the same period of the prior year is primarily relateddue to changes in pretax income over many jurisdictions and the impact of the 2017 Tax Act and other discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in our geographic pretax income resulting from our business mix and changes in the tax impact of permanent differences, restructuring, other special items, certain equity-related compensation, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Segment Review
The following charts depict the percentages of revenue for each of the Company's four segments for the three months ended March 31,September 30, 2019 compared to the three months ended March 31,September 30, 2018. Refer below for discussions regarding the segments' revenue and EBITDA performance.
Our results on a segment basis for the three months ended March 31,September 30, 2019 compared to the three months ended March 31,September 30, 2018 were as follows:
| | | | Three Months Ended
March 31, | | | FX Impact | | Constant Currency Increase/(Decrease) | | | Three Months Ended
September 30, | | | FX Impact | | Constant Currency Increase/(Decrease) | |
| 2019 | | 2018 | | | | Change $ | | Change % | |
| Softgel Technologies | | | | | | | | | | |
| (Dollars in Millions) | | (Dollars in Millions) | 2019 | | 2018 | | | | Change $ | | Change % |
| Softgel and Oral Technologies | | Softgel and Oral Technologies | | | | | | | | | |
| Net revenue | Net revenue | $ | 214.5 | | $ | 228.5 | | $ | (12.2) | | $ | (1.8) | | (1) | % | Net revenue | $ | 263.7 | | | $ | 240.1 | | | $ | (6.0) | | | $ | 29.6 | | | 12 | % |
| Segment EBITDA | Segment EBITDA | $ | 48.4 | | $ | 52.2 | | $ | (2.6) | | $ | (1.2) | | (2) | % | Segment EBITDA | $ | 46.4 | | | $ | 41.3 | | | $ | (1.0) | | | $ | 6.1 | | | 15 | % |
| Biologics and Specialty Drug Delivery | | |
| Biologics | | Biologics | |
| Net revenue | Net revenue | 172.1 | | 166.0 | | (2.7) | | 8.8 | | 5 | % | Net revenue | 188.6 | | | 125.7 | | | (1.5) | | | 64.4 | | | 51 | % |
| Segment EBITDA | Segment EBITDA | 41.8 | | 37.8 | | (0.6) | | 4.6 | | 12 | % | Segment EBITDA | 35.8 | | | 27.0 | | | (0.2) | | | 9.0 | | | 33 | % |
| Oral Drug Delivery | | |
| Oral and Specialty Delivery | | Oral and Specialty Delivery | |
| Net revenue | Net revenue | 161.7 | | 148.4 | | (4.3) | | 17.6 | | 12 | % | Net revenue | 132.6 | | | 110.8 | | | (1.9) | | | 23.7 | | | 21 | % |
| Segment EBITDA | Segment EBITDA | 50.9 | | 43.0 | | (1.1) | | 9.0 | | 21 | % | Segment EBITDA | 27.7 | | | 18.9 | | | (0.8) | | | 9.6 | | | 51 | % |
| Clinical Supply Services | Clinical Supply Services | | Clinical Supply Services | |
| Net revenue | Net revenue | 77.8 | | 104.4 | | (2.5) | | (24.1) | | (23) | % | Net revenue | 84.6 | | | 77.7 | | | (1.7) | | | 8.6 | | | 11 | % |
| Segment EBITDA | Segment EBITDA | 20.3 | | 18.8 | | (1.1) | | 2.6 | | 14 | % | Segment EBITDA | 21.6 | | | 20.2 | | | (0.8) | | | 2.2 | | | 11 | % |
| Inter-segment revenue elimination | Inter-segment revenue elimination | (8.6) | | (19.4) | | 0.5 | | 10.3 | | (53) | % | Inter-segment revenue elimination | (4.8) | | | (2.5) | | | 0.1 | | | (2.4) | | | (96) | % |
Unallocated Costs(1) | Unallocated Costs(1) | (26.0) | | (37.5) | | 1.7 | | 9.8 | | (26) | % | Unallocated Costs (1) | (41.4) | | | (39.8) | | | 2.0 | | | (3.6) | | | 9 | % |
| Combined totals | Combined totals | | Combined totals | |
| Net revenue | Net revenue | $ | 617.5 | | $ | 627.9 | | $ | (21.2) | | $ | 10.8 | | 2 | % | Net revenue | $ | 664.7 | | | $ | 551.8 | | | $ | (11.0) | | | $ | 123.9 | | | 22 | % |
| | EBITDA from continuing operations | $ | 135.4 | | $ | 114.3 | | $ | (3.7) | | $ | 24.8 | | 22 | % | |
| EBITDA from operations | | EBITDA from operations | $ | 90.1 | | | $ | 67.6 | | | $ | (0.8) | | | $ | 23.3 | | | 34 | % |
(1) Unallocated costs include restructuring and special items, stock-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 |
| Impairment charges and gain/(loss) on sale of assets | $ | 0.1 | | $ | (0.2) |
| Stock-based compensation | (6.6) | | (5.6) |
Restructuring and other special items (a) | (16.1) | | (10.5) |
| | | |
| | | |
| | | |
| Other (expense), net | 3.2 | | (9.9) |
| Non-allocated corporate costs, net | (6.6) | | (11.3) |
| Total unallocated costs | $ | (26.0) | | $ | (37.5) |
| | | | | | | | | | | |
| | Three Months Ended
September 30, | | |
| (Dollars in millions) | 2019 | | 2018 |
| Impairment charges and gain/(loss) on sale of assets | $ | 0.2 | | | $ | (2.9) | |
| Stock-based compensation | (16.6) | | | (10.0) | |
Restructuring and other special items (a) | (11.8) | | | (13.2) | |
| | | |
| | | |
| | | |
| Other (expense), net | (4.9) | | | (5.7) | |
| Unallocated corporate costs, net | (8.3) | | | (8.0) | |
| Total unallocated costs | $ | (41.4) | | | $ | (39.8) | |
(a) Restructuring and other special items during the three months ended September 30, 2019 include transaction and integration costs associated primarilywith the Company’s gene therapy acquisitions, the disposal of one of our sites in Australia (which closed in October 2019), and other restructuring initiatives across the Company's network of sites. Restructuring and other special items during the three months ended September 30, 2018 include transaction and integration costs associated with the acquisitions of Catalent Indiana and Juniper.
Provided below is a reconciliation of net earnings to EBITDA from operations:
| | | | Three Months Ended
March 31, | | | Three Months Ended
September 30, | |
| (Dollars in millions) | (Dollars in millions) | 2019 | | 2018 | (Dollars in millions) | 2019 | | 2018 |
| Net earnings | Net earnings | $ | 31.7 | | $ | 19.0 | Net earnings | $ | 0.1 | | | $ | (14.4) | |
| Depreciation and amortization | Depreciation and amortization | 66.4 | | 51.7 | Depreciation and amortization | 60.6 | | | 52.9 | |
| Interest expense, net | Interest expense, net | 26.4 | | 29.9 | Interest expense, net | 36.3 | | | 28.1 | |
| Income tax expense | Income tax expense | 10.9 | | 13.7 | Income tax expense | (6.9) | | | 1.0 | |
| | EBITDA from operations | EBITDA from operations | $ | 135.4 | | $ | 114.3 | EBITDA from operations | $ | 90.1 | | | $ | 67.6 | |
Softgel and Oral Technologies segment
| | | 2019 vs. 2018 | | | 2019 vs. 2018 | |
| Factors Contributing to Year-Over-Year Change | Factors Contributing to Year-Over-Year Change | Three Months Ended
March 31, | | Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, | |
| | Net Revenue | | Segment EBITDA | | Net Revenue | | Segment EBITDA |
| Revenue/Segment EBITDA without divestitures | Revenue/Segment EBITDA without divestitures | (1) | % | | (2) | % | Revenue/Segment EBITDA without divestitures | 12 | % | | 15 | % |
| Impact of divestitures | Impact of divestitures | — | % | | — | % | Impact of divestitures | — | % | | — | % |
| Constant currency change | Constant currency change | (1) | % | | (2) | % | Constant currency change | 12 | % | | 15 | % |
| Foreign currency translation impact on reporting | Foreign currency translation impact on reporting | (5) | % | | (5) | % | Foreign currency translation impact on reporting | (2) | % | | (3) | % |
| Total % change | Total % change | (6) | % | | (7) | % | Total % change | 10 | % | | 12 | % |
Softgel and Oral Technologies net revenue decreasedincreased by $1.8$29.6 million, or 1%12%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2018, primarily dueSeptember 30, 2018. The increase relates to decreased end-market volume increases across our consumer health portfolio within Europe as well as increased demand forin our prescription productsproduct business in North America, and decreased volume in our consumer health business of 1% resulting from a shortage in ibuprofen supply,which is partially offset by an increase in end-market demand in our European consumer health business.attributable to recently launched products.
Softgel and Oral Technologies segment EBITDA decreased $1.2increased $6.1 million, or 2%15%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange, driven primarily by the decreasedexchange. The increase relates to volume resulting from shortage inincreases across our ibuprofen supply 3%, partially offset by a favorableconsumer health portfolio within Europe, as well as increased demand in our European consumer healthcare business.higher-margin prescription product business in North America, the latter of which is partially attributable to recently launched products.
Biologics and Specialty Drug Delivery segment
| | | 2019 vs. 2018 | | | 2019 vs. 2018 | |
| Factors Contributing to Year-Over-Year Change | Factors Contributing to Year-Over-Year Change | Three Months Ended
March 31, | | Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, | |
| | Net Revenue | | Segment EBITDA | | Net Revenue | | Segment EBITDA |
| Revenue/Segment EBITDA without acquisitions | Revenue/Segment EBITDA without acquisitions | 5 | % | | 12 | % | Revenue/Segment EBITDA without acquisitions | 6 | % | | (18) | % |
| Impact of acquisitions | Impact of acquisitions | — | % | | — | % | Impact of acquisitions | 45 | % | | 51 | % |
| Constant currency change | Constant currency change | 5 | % | | 12 | % | Constant currency change | 51 | % | | 33 | % |
| Foreign exchange fluctuation | Foreign exchange fluctuation | (1) | % | | (2) | % | Foreign exchange fluctuation | (1) | % | | (1) | % |
| Total % change | Total % change | 4 | % | | 10 | % | Total % change | 50 | % | | 32 | % |
Net revenue in our Biologics and Specialty Drug Delivery segment increased by $8.8$64.4 million, or 5%51%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange. The net revenue increase was driven primarily by acquisitions. Excluding the effect of acquisitions, the net revenue increase was driven primarily by increased end-market demand for our U.S. drug product offerings, of 13%, partiallydue to improved capacity utilization, offset slightly by unfavorable timing relativedecreased volume demand related to our U.S. drug substance product offering, principally due to the prior year and decreased end-customer demandfiscal 2019 completion of a limited duration customer contract for our U.S. based drug substance biologics offerings of 5% and decreased end-market demand for products within our respiratory and ophthalmic platform of 3%.non-cell line clinical manufacturing services.
Biologics and Specialty Drug Delivery segment EBITDA increased by $4.6$9 million, or 12%33%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange,exchange. Segment EBITDA without acquisitions decreased from the prior-year period, primarily due to increased end-marketdecreased volume demand and favorable mix withinrelated to our U.S. drug substance product offering, mostly due to the fiscal 2019 completion of a limited duration customer contract for non-cell line clinical manufacturing services, partially offset by timing of revenue recognition in the prior period and unfavorable end-customerincreased demand for our U.S. based drug substanceproduct offering.
On May 17, 2019, we acquired Paragon, which increased net revenue and Segment EBITDA on an inorganic basis in our Biologics segment by 45% and 51%, respectively, in the three months ended September 30, 2019 compared to the corresponding prior-year period. Oral Drugand Specialty Delivery segment
| | | 2019 vs. 2018 | | | 2019 vs. 2018 | |
| Factors Contributing to Year-Over-Year Change | Factors Contributing to Year-Over-Year Change | Three Months Ended
March 31, | | Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, | |
| | Net Revenue | | Segment EBITDA | | Net Revenue | | Segment EBITDA |
| Revenue/Segment EBITDA without acquisitions/divestitures | Revenue/Segment EBITDA without acquisitions/divestitures | 1 | % | | 8 | % | Revenue/Segment EBITDA without acquisitions/divestitures | 18 | % | | 46 | % |
| Impact of acquisitions | Impact of acquisitions | 11 | % | | 13 | % | Impact of acquisitions | 3 | % | | 5 | % |
| | Constant currency change | Constant currency change | 12 | % | | 21 | % | Constant currency change | 21 | % | | 51 | % |
| Foreign currency translation impact on reporting | Foreign currency translation impact on reporting | (3) | % | | (3) | % | Foreign currency translation impact on reporting | (1) | % | | (4) | % |
| Total % Change | Total % Change | 9 | % | | 18 | % | Total % Change | 20 | % | | 47 | % |
Net revenue in our Oral Drugand Specialty Delivery segment increased by $17.6 million, or 12%, compared to the three months ended March 31, 2018, excluding the impact of foreign exchange, primarily as a result of the Juniper acquisition. Revenue without acquisitions increased 1%, primarily driven by a favorable impact of 8% from product participation profit accelerated into the third quarter, partially offset by decreased end-market demand for certain higher-margin offerings primarily in our U.S. operations within our commercial oral delivery solutions platform.
Oral Drug Delivery segment EBITDA increased by $9$23.7 million, or 21%, compared to the three months ended March 31,September 30, 2018, excluding the impact of foreign exchange, primarilyexchange. The increase is principally attributable to strong end-market demand for oral commercial products across the U.S. and Europe as a resultwell as an increase related to the intake of new molecules within our development and analytical services platform.
Oral and Specialty Delivery segment EBITDA increased by $9.6 million, or 51%, compared to the Juniper acquisition.three months ended September 30, 2018, excluding the impact of foreign exchange. Segment EBITDA without acquisitions increased 8%46%, primarily due to a favorable impact of 29% from product participation profit accelerated into the third quarter, partially offset by decreasedstrong end-market demand for certain higher-margin offerings primarilyoral commercial products across the U.S. and Europe, as well as an increase in our U.S. operationsthe intake of new molecules within our commercial oral delivery solutionsdevelopment and analytical services platform.
On August 14, 2018, we acquired Juniper, which increased net revenue and Segment EBITDA in our Oral Drugand Specialty Delivery segment for the three months ended March 31,September 30, 2019 by 11%3% and 13%5%, respectively, compared to the prior-year period.
Clinical Supply Services segment
| | | 2019 vs. 2018 | | | 2019 vs. 2018 | |
| Factors Contributing to Year-Over-Year Change | Factors Contributing to Year-Over-Year Change | Three Months Ended
March 31, | | Factors Contributing to Year-Over-Year Change | Three Months Ended
September 30, | |
| | Net Revenue | | Segment EBITDA | | Net Revenue | | Segment EBITDA |
| Revenue/Segment EBITDA | Revenue/Segment EBITDA | 2 | % | | 14 | % | Revenue/Segment EBITDA | 11 | % | | 11 | % |
| Comparator revenue recognition adoption impact | Comparator revenue recognition adoption impact | (25) | % | | — | % | Comparator revenue recognition adoption impact | — | % | | — | % |
| | Constant currency change | Constant currency change | (23) | % | | 14 | % | Constant currency change | 11 | % | | 11 | % |
| Foreign currency translation impact on reporting | Foreign currency translation impact on reporting | (2) | % | | (6) | % | Foreign currency translation impact on reporting | (2) | % | | (4) | % |
| Total % Change | Total % Change | (25) | % | | 8 | % | Total % Change | 9 | % | | 7 | % |
Clinical Supply Services net revenue decreasedincreased by $24.1$8.6 million, or 23%11%, excluding the impact of foreign exchange, compared to the three months ended March 31,September 30, 2018. As a result of the adoption of ASC 606, the Company recorded comparator sourcing arrangements on a net basis versus a gross basis resultingThe increase was driven by strong demand in a decrease to net revenue of 25%, partially offset by increased volume in our storage and distribution and manufacturing and packaging business.businesses.
Clinical Supply Services segment EBITDA increased by $2.6$2.2 million, or 14%11%, excluding the impact of foreign exchange, compared to the three months ended March 31,September 30, 2018, primarily due to higher volume and improved profitability in our manufacturing and packaging business as well as improved capacity utilization across the network.
Nine Months Ended March 31, 2019 Compared to the Nine Months Ended March 31, 2018
The below tables summarize several financial metrics we use to measure performance for the nine months ended March 31, 2019 and nine months ended March 31, 2018. Refer to the discussions below regarding performance and use of key financial metrics.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
March 31, | | | | FX Impact | | Constant Currency Increase/(Decrease) | | |
| 2019 | | 2018 | | | | Change $ | | Change % |
| Net revenue | $ | 1,792.3 | | $ | 1,778.1 | | $ | (40.0) | | $ | 54.2 | | 3 | % |
| Cost of sales | 1,243.7 | | 1,258.9 | | (28.8) | | 13.6 | | 1 | % |
| Gross margin | 548.6 | | 519.2 | | (11.2) | | 40.6 | | 8 | % |
| Selling, general and administrative expenses | 368.6 | | 339.9 | | (3.9) | | 32.6 | | 10 | % |
| Impairment charges and (gain)/loss on sale of assets | 2.7 | | 4.4 | | — | | (1.7) | | (39) | % |
| Restructuring and other | 12.9 | | 2.7 | | (0.4) | | 10.6 | | 393 | % |
| | | | | | | | | |
| Operating earnings | 164.4 | | 172.2 | | (6.9) | | (0.9) | | (1) | % |
| Interest expense, net | 80.0 | | 81.4 | | (0.4) | | (1.0) | | (1) | % |
| Other (income)/expense, net | 3.9 | | 28.2 | | (2.4) | | (21.9) | | (78) | % |
| Earnings from continuing operations before income taxes | 80.5 | | 62.6 | | (4.1) | | 22.0 | | 35 | % |
| Income tax expense | 14.2 | | 61.7 | | (0.4) | | (47.1) | | (76) | % |
| | | | | | | | | |
| | | | | | | | | |
| Net earnings | $ | 66.3 | | $ | 0.9 | | $ | (3.7) | | $ | 69.1 | | * | |
| | | | | | | | | |
| | | | | | | | | |
*Percentage not meaningful
Net Revenue
| | | | | | | |
| 2019 vs. 2018 | | |
Factors Contributing to Year-Over-Year Change | Nine Months Ended
March 31, | | |
| Net Revenue | | |
Revenue without acquisitions/divestitures | (3) | % | | |
Impact of acquisitions | 7 | % | | |
Impact of divestitures | (1) | % | | |
Constant currency change | 3 | % | | |
Foreign currency translation impact on reporting | (2) | % | | |
Total % change | 1 | % | | |
Net revenue increased by $54.2 million, or 3%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange, primarily due to acquisitions. We acquired Catalent Indiana in October 2017 and Juniper in August 2018,
which increased revenue by 7%. Further excluding the impact of acquisitions and divestitures, net revenue decreased 3%, primarily related to a reduction in revenue from comparator sourcing arrangements within our Clinical Supply Services segment. As a result of the adoption of ASC 606, we recorded comparator sourcing arrangements on a net basis versus a gross basis, resulting in a decrease in net revenue of 5%, with no corresponding decrease to EBITDA, partially offset by increased net revenue within our Biologics and Specialty Drug Delivery segment.
Gross Margin
Gross margin increased by $40.6 million, or 8%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange, primarily due to increased sales volumes as a result of acquisitions as discussed above. On a constant currency basis, gross margin, as a percentage of revenue, was 30.6% in the nine months ended March 31, 2019, an increase from the prior year of 130 basis points, primarily as a result of the adoption of ASC 606. The Company now records comparator sourcing arrangements on a net basis versus a gross basis, which resulted in an increase to gross margin percentage of 140 basis points.
Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by $32.6 million, or 10%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange, primarily as a result of the Catalent Indiana and Juniper acquisitions by approximately $16 million, which included approximately $12 million of incremental depreciation and amortization expense and approximately $3 million of employee-related costs. Selling, general, and administrative expenses further increased by $12 million from accelerated amortization related to product participation licensing rights within our Oral Drug Delivery segment and $5 million for transaction-related expenses.
Impairment Charges and Loss on Sale of Assets
Impairment charges for the nine months ended March 31, 2019 and March 31, 2018 were $2.7 million and $4.4 million, respectively. Impairment charges in the current year were related to fixed assets that ceased being used and whose value was therefore not recoverable. The prior year included the loss on the sales of two Asia Pacific manufacturing sites in the Softgel Technologies segment. The site divestitures were not material, either individually or in the aggregate, to the segment or to our business as a whole.
Restructuring and Other
Restructuring and other charges of $12.9 million for the nine months ended March 31, 2019 increased by $10.2 million, compared to the nine months ended March 31, 2018 and were driven by increases in employee-related actions. Restructuring expense varies period-to-period based on site consolidation efforts and other efforts to further streamline the business.
Interest Expense, net
Interest expense, net of $80.0 million for the nine months ended March 31, 2019 decreased by $1.4 million, or 2%, compared to the nine months ended March 31, 2018, primarily driven by higher average level of outstanding debt during the first quarter of fiscal 2019 and deferred purchase consideration for the Catalent Indiana acquisitions in October 2017, partially offset by the debt paydown following the 2018 Equity Offering, ordinary-course principal payments on our term loans, and an overall reduction in our interest rates on our senior secured credit facilities compared to the prior-year period.
Other Expense, net
Other expense, net of $3.9 million for the nine months ended March 31, 2019 was primarily driven by a $4.2 million charge from the partial extinguishment of our U.S. dollar-denominated term loans on August 1, 2018 to reduce our debt discount and deferred financing costs. Other expense, net also includes non-cash foreign currency translation gains in the period of $0.8 million.
Other expense, net for the nine months ended March 31, 2018 of $28.2 million was primarily driven by financing charges of $11.8 million related to the USD Notes offering and the Third Amendment, which included a $6.1 million charge for commitment fees paid during the first quarter of fiscal 2018. Other expense, net also included $15.5 million of foreign currency exchange re-measurement primarily driven by our euro-denominated debt.
Income Tax Expense
In December 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the "2017 Tax Act"). The 2017 Tax Act significantly revised U.S. income tax law by, among other provisions, (a) lowering the applicable U.S.
federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transitional tax on previously deferred foreign earnings, (c) creating provisions regarding (1) income deemed to be Global Intangible Low Tax Income ("GILTI"), (2) the Foreign Derived Intangible Income ("FDII") deduction, and (3) the Base Erosion Anti-Abuse Tax ("BEAT"), and (d) eliminating or reducing certain income tax deductions, such as deductions for interest expense, executive compensation expense, and certain employee expenses.
Our provision for income taxes for the nine months ended March 31, 2019 was $14.2 million relative to earnings from continuing operations before income taxes of $80.5 million. Our provision for income taxes for the nine months ended March 31, 2018 was $61.7 million relative to earnings from continuing operations before income taxes of $62.6 million. The income tax provision for the current period as compared to the same period of the prior year is greatly different due to the impact of 2017 Tax. Generally, fluctuations in our effective tax rate are primarily due to changes in the geographic distribution of our pretax income resulting from our business mix and changes in the tax impact of permanent differences, restructuring, other special items, and other discrete tax items, which may have unique tax implications depending on the nature of the item.
Segment Review
The below charts depict the percentage of revenue for each of the Company's four segments for the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018. Refer below for discussions regarding the segments' revenue and EBITDA performance.
Our results on a segment basis for the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended
March 31, | | | | FX Impact | | Constant Currency Increase/(Decrease) | | |
| 2019 | | 2018 | | | | Change $ | | Change % |
| Softgel Technologies | | | | | | | | | |
| Net revenue | $ | 627.4 | | $ | 676.3 | | $ | (25.5) | | $ | (23.4) | | (3) | % |
| Segment EBITDA | 125.9 | | 137.4 | | (5.4) | | (6.1) | | (4) | % |
| Biologics and Specialty Drug Delivery | | | | | | | | | |
| Net revenue | 511.0 | | 406.4 | | (3.9) | | 108.5 | | 27 | % |
| Segment EBITDA | 119.1 | | 86.4 | | (0.5) | | 33.2 | | 38 | % |
| Oral Drug Delivery | | | | | | | | | |
| Net revenue | 445.8 | | 420.2 | | (6.7) | | 32.3 | | 8 | % |
| Segment EBITDA | 123.1 | | 122.9 | | (2.1) | | 2.3 | | 2 | % |
| Clinical Supply Services | | | | | | | | | |
| Net revenue | 236.3 | | 322.8 | | (4.0) | | (82.5) | | (26) | % |
| Segment EBITDA | 61.5 | | 54.5 | | (1.7) | | 8.7 | | 16 | % |
| Inter-segment revenue elimination | (28.2) | | (47.6) | | 0.1 | | 19.3 | | (41) | % |
Unallocated Costs (1) | (95.2) | | (119.7) | | 2.9 | | 21.6 | | (18) | % |
| Combined totals | | | | | | | | | |
| Net revenue | $ | 1,792.3 | | $ | 1,778.1 | | $ | (40.0) | | $ | 54.2 | | 3 | % |
| | | | | | | | | |
| EBITDA from continuing operations | $ | 334.4 | | $ | 281.5 | | $ | (6.8) | | $ | 59.7 | | 21 | % |
(1) Unallocated costs include restructuring and special items, equity-based compensation, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
| | | | | | | | | | | |
| | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 |
| Impairment charges and gain/(loss) on sale of assets | $ | (2.7) | | $ | (4.4) |
| Equity compensation | (24.1) | | (21.1) |
Restructuring and other special items (a) | (35.2) | | (34.7) |
| | | |
| | | |
| | | |
Other (expense), net (b) | (3.9) | | (28.2) |
| Non-allocated corporate costs, net | (29.3) | | (31.3) |
| Total unallocated costs | $ | (95.2) | | $ | (119.7) |
(a) Restructuring and other special items include transaction and integration costs associated with the acquisition of Catalent Indiana and Juniper.
(b) Other (expense), net of $3.9 million for the nine months ended March 31, 2019 was primarily driven by a write-off of $4.2 million of previously capitalized financing charges related to the Company's U.S. dollar term loan under its senior secured credit facility. The nine months ended March 31, 2018 includes financing charges of $11.8 million related to the USD Notes offering and the Third Amendment, which included a $6.1 million charge for commitment fees paid during the first quarter of fiscal 2018. Other expenses in 2018 also includes $15.5 million of foreign currency exchange re-measurement primarily driven by our euro-denominated debt.
Provided below is a reconciliation of net earnings to EBITDA from continuing operations:
| | | | | | | | | | | |
| | Nine Months Ended
March 31, | | |
| (Dollars in millions) | 2019 | | 2018 |
| Net earnings | $ | 66.3 | | $ | 0.9 |
| Depreciation and amortization | 173.9 | | 137.5 |
| Interest expense, net | 80.0 | | 81.4 |
| Income tax expense | 14.2 | | 61.7 |
| | | |
| EBITDA from operations | $ | 334.4 | | $ | 281.5 |
Softgel Technologies segment
| | | | | | | | | | | |
| 2019 vs. 2018 | | |
| Factors Contributing to Year-Over-Year Change | Nine Months Ended
March 31, | | |
| Net Revenue | | Segment EBITDA |
| Revenue / Segment EBITDA without divestitures | (2) | % | | (4) | % |
| | | |
| Impact of divestitures | (1) | % | | — | % |
| Constant currency change | (3) | % | | (4) | % |
| Foreign exchange fluctuation | (4) | % | | (4) | % |
| Total % change | (7) | % | | (8) | % |
Softgel Technologies’ net revenue decreased $23.4 million, or 3%, excluding the impact of foreign exchange, as compared to the nine months ended March 31, 2018. Net revenue decreased 2%, compared to the nine months ended March 31, 2018, excluding the impact of divestitures. Net revenue without divestitures decreased 2%, primarily due to lower end-market volumestrong demand for prescription products in North America and decreased volume in our consumer health business of 1% resulting from a shortage in our ibuprofen supply, partially offset by higher end-market demand for our consumer health products in Europe.
Softgel Technologies’ Segment EBITDA decreased by $6.1 million, or 4%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange. Segment EBITDA decreased primarily due to a shortage in our ibuprofen supply, which led to a decrease in our consumer health business by 5%, and a reduction of product participation profit of 3%, partially offset by favorable shift in product mix within our European consumer health business.
In December 2017, we divested two manufacturing sites in Asia Pacific in the Softgel Technologies segment in order to better streamline our global operations. The site divestitures resulted in a decrease to net revenue of 1% with no impact to Segment EBITDA in the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018.
Biologics and Specialty Drug Delivery segment
| | | | | | | | | | | |
| 2019 vs. 2018 | | |
| Factors Contributing to Year-Over-Year Change | Nine Months Ended
March 31, | | |
| Net Revenue | | Segment EBITDA |
| Revenue / Segment EBITDA without acquisitions | 9 | % | | 9 | % |
| Impact of acquisitions | 18 | % | | 29 | % |
| Constant currency change | 27 | % | | 38 | % |
| Foreign exchange fluctuation | (1) | % | | — | % |
| Total % change | 26 | % | | 38 | % |
| | | |
Net revenue in our Biologics and Specialty Drug Delivery segment increased by $108.5 million, or 27%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange. Net revenue without acquisitions increased by 9%, driven primarily by increased end-market demand for our drug product offerings.
Biologics and Specialty Drug Delivery segment EBITDA increased by $33.2 million, or 38%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange. Segment EBITDA without acquisitions increased by 9%, primarily due to increased volume demand from our drug product offerings, partially offset by decreased volume demand related to our drug substance product offerings.
On October 23, 2017, we acquired Catalent Indiana, which increased net revenue and Segment EBITDA in our Biologics and Specialty Drug Delivery segment by 18% and 29%, respectively, in the nine months ended March 31, 2019 compared to the corresponding prior-year period.
Oral Drug Delivery segment
| | | | | | | | | | | |
| 2019 vs. 2018 | | |
| Factors Contributing to Year-Over-Year Change | Nine Months Ended
March 31, | | |
| Net Revenue | | Segment EBITDA |
| Revenue / Segment EBITDA without acquisitions | (3) | % | | (14) | % |
| Impact of acquisitions | 11 | % | | 16 | % |
| | | |
| Constant currency change | 8 | % | | 2 | % |
| Foreign exchange fluctuation | (2) | % | | (2) | % |
| Total % Change | 6 | % | | — | % |
Net revenue in our Oral Drug Delivery segment increased by $32.3 million, or 8%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange, primarily resulting from our Juniper acquisition. Revenue without acquisitions decreased 3%, primarily driven by decreased end-market demand for certain higher-margin offerings primarily in our U.S. operations within our commercial oral delivery solutions platform, partially offset by a favorable impact from product participation profit accelerated into the third quarter.
Oral Drug Delivery’s Segment EBITDA increased by $2.3 million, or 2%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange. Segment EBITDA without acquisitions decreased 14%, primarily due to decreased volumes related to certain higher-margin offerings within our commercial oral delivery solutions platform, partially offset by a favorable impact from product participation profit of 9% accelerated into the third quarter.
On August 14, 2018, we acquired Juniper, which increased net revenue and Segment EBITDA in our Oral Drug Delivery segment for the nine months ended March 31, 2019 by 11% and 16%, respectively, compared to the prior-year period.
Clinical Supply Services segment
| | | | | | | | | | | |
| 2019 vs. 2018 | | |
| Factors Contributing to Year-Over-Year Change | Nine Months Ended
March 31, | | |
| Net Revenue | | Segment EBITDA |
| Revenue / Segment EBITDA | 1 | % | | 16 | % |
| Comparator revenue recognition adoption impact | (27) | % | | — | % |
| | | |
| Constant currency change | (26) | % | | 16 | % |
| Foreign exchange fluctuation | (1) | % | | (3) | % |
| Total % Change | (27) | % | | 13 | % |
Clinical Supply Services’ net revenue decreased by $82.5 million, or 26%, compared to the nine months ended March 31, 2018, excluding the impact of foreign exchange. As a result of the adoption of ASC 606, the Company recorded comparator sourcing arrangements on a net basis versus a gross basis resulting in a decrease to net revenue by 27%, partially offset by an increase in revenue primarily due to higher volume in our storage and distribution and manufacturing and packaging business and higher comparator sourcing volume as compared to the prior-year period.
Clinical Supply Services’ Segment EBITDA increased by $8.7 million, or 16%, excluding the impact of foreign exchange, as compared to the nine months ended March 31, 2018, primarily due to increased sales volumes in our storage and distribution business and improved capacity utilization across the network.businesses.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sourcesources of liquidity hashave been cash flows generated from operations and certain financing activities for acquisitions. The principal uses of cash are to fund planned operating and capital expenditures, business or asset acquisitions, interest payments on debt, the payment of deferred purchase consideration from the Catalent Indiana acquisition, the payment of the quarterly dividend on the Series A Preferred Stock, and any mandatory or discretionary principal paymentspayment on debt issuances.our debt. At the current stated value of the Series A Preferred Stock outstanding as of September 30, 2019, the aggregate amount of each regular quarterly dividend, if paid in cash, is $8.1 million. As of March 31,September 30, 2019, Operating Company had available a $200$550 million revolving credit facility that matures in May 20222024 (following the Third Amendmentexecution in October 2017)May 2019 of the fourth amendment (the "Fourth Amendment") to Operating Company's amended and restated credit agreement dated May 2014 (as amended, the "Credit Agreement"), the capacity of which was reduced by $6.3$6.7 million in letters of credit outstanding as of March 31,September 30, 2019. The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as swing-line borrowings. As of March 31,September 30, 2019, we had no outstanding borrowings 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 with respect to payment of the next $50.0 million installment on the Catalent Indiana deferred purchase consideration, due in October 2019, and our quarterly regular dividend on the Series A Preferred Stock, if paid in cash, as well as the amounts expected to become due with respect to our pending capital projects. We have no significant maturity under any of our bank or note debt until the euro-denominated term loans in our senior secured credit facility mature in May 2024. After payment of the October 2019 deferred purchase consideration installment, we will have only two remaining annual payments of $50.0 million each.
On October 29, 2015, our Board of Directors authorized a share repurchase program to use up to $100.0 million to repurchase shares of our outstanding common stock, par value $0.01 ("(“Common Stock"Stock”). Under the program, we are authorized to repurchase shares through open market purchases, privately negotiated transactions, or otherwise as permitted by applicable federal securities laws. There has been no purchase pursuant to this program as of March 31,September 30, 2019.
Cash Flows
The following table summarizes our consolidated statementstatements of cash flows:
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended
March 31, | | | | |
| (Dollars in millions) | 2019 | | 2018 | | $ Change |
| Net cash provided by/(used in): | | | | | |
| Operating activities | $ | 159.8 | | $ | 271.2 | | $ | (111.4) |
| Investing activities | $ | (257.7) | | $ | (860.5) | | $ | 602.8 |
| Financing activities | $ | (82.5) | | $ | 674.6 | | $ | (757.1) |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | | | |
| (Dollars in millions) | 2019 | | 2018 | | $ Change |
| Net cash provided by/(used in): | | | | | |
| Operating activities | $ | 25.2 | | | $ | 41.2 | | | $ | (16.0) | |
| Investing activities | $ | (84.9) | | | $ | (165.8) | | | $ | 80.9 | |
| Financing activities | $ | (35.8) | | | $ | (18.8) | | | $ | (17.0) | |
Operating Activities
For the ninethree months ended March 31,September 30, 2019, cash provided by operating activities was $159.8$25.2 million, compared to $271.2$41.2 million for the corresponding prior-year period. Cash flow from operating activities for the ninethree months ended March 31,September 30, 2019 decreased primarily due to a higher collection of receivablesdecreased in accounts receivable cash collections during the current-year three-month period compared to the corresponding prior-year periodperiod. The decrease in rate of accounts receivable cash collections is attributable to higher revenue and higher inventory levels duringdays sales outstanding in the current-year nine-monthsthree month period compared to the prior-year period.
Investing Activities
For the ninethree months ended March 31,September 30, 2019, cash used in investing activities was $257.7$84.9 million, compared to $860.5$165.8 million for the ninethree months ended March 31, 2018,September 30, 2018. The decrease was primarily driven by $748.0$127.5 million of cash paid, for the acquisition of Catalent Indiana, net of cash acquired, during the prior-year nine-month period, while cash paid for acquisition during the current-year nine-months period was $127.5 million, net of cash acquired, for the acquisition of Juniper in August 2018. Other use of cash2018, partially offset by increased in investing activities includes cash used in acquisitions of property, plant, and equipment, which totaled $129.3$73.5 million for the ninethree months ended March 31,September 30, 2019 compared to $117.7$38.3 million in the ninethree months ended March 31, 2018.September 30, 2018, including the July 2019 acquisition of assets from Novavax, Inc. for our gene therapy product offering.
Financing Activities
For the ninethree months ended March 31,September 30, 2019, cash used in financing activities was $82.5$35.8 million, compared to cash provided byused in financing activities of $674.6$18.8 million for the ninethree months ended March 31,September 30, 2018. The cash used in financing activities during the current nine-monthcurrent-year period is primarily driven by $450consists of $11.9 million of dividends paid on the Series A Preferred Stock with respect to both the period from issuance through June 30, 2019 and the first quarter of fiscal 2020, $18.1 million of cash paid in lieu of equity for tax withholding obligations on equity compensation and $5.8 million paid on outstanding borrowings. The cash used in financing activities during the prior-year period consists of $450.0 million used in a partial paydown in July 2018 of the then-outstanding U.S. dollar-denominated term loan, offset in July 2018, and the first installment payment on the deferred purchase consideration of which $44.0 million represents the deemed principal portion of the debt. These payments were offsetsubstantial part by net proceeds of $445.3 million raised as part offrom the Company's July 2018 Equity Offering. In the 2018 Equity Offering, we sold 11.4 million shares, including the underwriters' over-allotment, of our Common Stock at a price to the public of $40.24 per share, before underwriting discounts and commissions. The net proceeds of $445.3 million include the effect of discounts and commissions and other offering expenses. We used the net proceeds to repay a corresponding portion of the outstanding borrowings under the U.S. dollar-denominated term loans. The cash provided by financing activities in the prior-year nine-month period was primarily driven by net proceeds of $442 million and $277.8 million raised as part of our USD Notes offering and a primary offering of ourshares of its Common Stock in September 2017 (the "2017 Equity Offering"), respectively, during the prior-year nine-month period. In the 2017 Equity Offering, we sold 7.4 million shares, including the underwriters' over-allotment, at a price to the public of $39.10 per share, before underwriting discounts and commissions. The net proceeds of $277.8 million include the effect of discounts and commissions and other offering expenses. The net proceeds of the 2017 Equity Offering were used to fund a portion of the initial consideration for the Catalent Indiana acquisition.Stock.
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 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 Euro Notes and the USDSenior Notes
All obligations under Operating Company's 4.75% senior unsecured notes due 2024 (the "Euro Notes"), Operating Company's 4.875% Senior Notes due 2026 (the "USD 2026 Notes"), and the USD 2027 Notes (together with the Euro Notes and the USD 2026 Notes, 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. The EuroEach of the Senior Notes and the USD Notes are eachis separately guaranteed by all of Operating Company's wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. NeitherNone of the EuroSenior Notes nor the USD Notes areis guaranteed by either PTS Intermediate Holdings LLC or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of 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 March 31,September 30, 2019, 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 or its 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"“Consolidated EBITDA” in the Credit Agreement). Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under GAAP, and is subject to important limitations.
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on our balance sheet or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transactions, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchases made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, and in related adverse tax consequences to us.
The Euro Notes and the USDSenior Notes
The Indenturesseveral indentures governing each of the EuroSenior Notes and(collectively, the USD Notes (the "Indentures"“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,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,sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates;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 EuroSenior Notes, or the then-outstanding USD Notes, or either of the Trusteesapplicable Trustee under the Indentures, may declare the applicable notesSenior Notes immediately due and payable,payable; or in certain circumstances, the applicable notesSenior Notes will become automatically immediately due and payable. As of March 31,September 30, 2019, Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As of March 31,September 30, 2019 and June 30, 2018,2019, the amounts of cash and cash equivalents held by foreign subsidiaries were $183.1$184.9 million and $124.7$203.9 million, respectively, out of the total consolidated cash and cash equivalents of $227.9$243.4 million and $410.2$345.4 million, respectively. These balances are dispersed across many locations around the world.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate fluctuations. We may use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed- and floating-rate assets and liabilities. Historically, we have used interest-rate swaps to manage the economic effect of variable-rate interest obligations associated with our floating-rate term loans so that the interest payable on the term loans effectively becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on our future interest expense. As of March 31,September 30, 2019, we did not have any interest-rate swap agreement in place that would have the economic effect of modifying the variable-rate interest obligations associated with our floating-rate term loans.
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 March 31,September 30, 2019, we had $768.4$744.6 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in foreign operations. Refer to Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further discussion of net investment hedge activity in the period.
From time to time, we may use forward foreign currency exchange contracts to manage our exposure to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs. In addition, we may use such contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use any forward foreign currency exchange contracts. We expect to continue to evaluate hedging opportunities for foreign currency in the future.
Contractual Obligations
Besides the change in our long-term obligations related to the $450.0 million partial paydown of outstanding borrowings under Operating Company's U.S. dollar-denominated term loans on July 31, 2018, thereThere has been no significant change to our contractual obligations since our Fiscal 20182019 10-K. Refer to Note 6 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion regarding our long-term obligations.
Off-Balance Sheet Arrangements
Other than operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangements as of March 31,September 30, 2019.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to changes in interest rates associated with our long-term debt obligations and foreign exchange rate changes.
Interest Rate Risk
The Company has historically used interest-rate swaps to manage the economic effect of variable-rate interest obligations associated with our floating-rate term loans so that the interest payable on the term loans effectively becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on our future interest expense. As of March 31,September 30, 2019, we did not have any interest-rate swap agreementsagreement in place that would either have the economic effect of modifying the variable-rate interest obligations associated with our floating-rate term loans or would be considered an effective cash flow hedge for financial reporting purposes.
Foreign Currency Exchange Risk
By the nature of our global operations, we are exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation. These exposures are transactional and translational in nature. Since we manufacture and sell our products throughout the world, our foreign-currency risk is diversified. Principal drivers of this diversified foreign-exchange exposure include the European euro, British pound, Argentinean peso, Brazilian real, and Australian dollar. Our transactional exposure arises from the purchase and sale of goods and services in currencies other than the functional currency of our operational units. We also have exposure related to the translation of financial statements of our foreign subsidiaries into U.S. dollars, the functional currency of Operating Company. The financial statements of our operations outside the U.S. are measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign operations in U.S. dollars are accumulated as a component of accumulated other comprehensive income/(loss) utilizing period-end exchange rates. Foreign-currency transaction gains and losses calculated by utilizing weighted average exchange rates for the period are included in the statements of operations in other (income)/expense, net. Such foreign-currency transaction gains and losses include inter-company loans denominated in non-U.S. dollar currencies.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any control or procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our President and Chief Executive Officer, and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of March 31,September 30, 2019, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the first quarter,we implemented controls related to the adoption of Accounting Standards Codification 842, Leases and the related financial statement reporting. There was no other 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.
In October 2017, the CompanyMay 2019, we acquired Catalent Indiana.Paragon. During the ninethree months ended March 31,September 30, 2019, we continued to integrate Catalent IndianaParagon into the Company’sour financial reporting processes and procedures and internal control over financial reporting. As part of this process, we have undertaken efforts to significantly enhance the internal controls of Catalent Indiana,Paragon, which were not subject to the internal control requirements applicable to U.S. public companies prior to our acquisition, to bring them in line with our internal controls over financial reporting, and those efforts are ongoing.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
SEC inquiry into Juniper Pharmaceuticals, Inc.
On August 14, 2018, Operating Company acquired Juniper. On November 14, 2016, Juniper filed with the SEC restated audited consolidated financial statements for the fiscal years ended December 31, 2013 through December 31, 2015, including the unaudited consolidated financial information for each quarterly period within the fiscal years ended December 31, 2014 and 2015, and restated unaudited consolidated financial statements for the quarters ended March 31, 2016 and June 30, 2016 and the related quarters in 2015, in order to correct certain timing errors regarding how it recognized revenue from a supply contract with an affiliate of Merck KGaA. On January 24, 2017, Juniper received a subpoena from the SEC requesting information concerning these restatements and related issues. Juniper responded to the subpoena and cooperated with the SEC's inquiry, which included the taking of testimony from former Juniper employees and others. The Company has been notified by SEC staff that their investigation has concluded and that they do not intend to recommend an enforcement action by the SEC against Juniper.
Other
From time to time, the Companywe 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 intendsWe intend to vigorously defend itselfourselves against any such litigation and doesdo not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’sour consolidated financial statements. In addition, the healthcare industry is highly regulated, and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, the Company receiveswe receive subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The CompanyWe generally respondsrespond 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 expectsWe expect to incur costs in future periods in connection with future requests.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled "Risk Factors"“Risk Factors” in our Fiscal 20182019 10-K, for the fiscal year ended June 30, 2018, which could materially affect our business, financial condition, or future results. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. Other than what was disclosed in the Special Note Regarding Forward-Looking Statements, there has been no material change to the risk factors disclosed in our Fiscal 20182019 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Purchase of Equity Securities
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
Exhibits:
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| | AgreementCertificate of Amendment to Certificate of Designation of Preferences, Rights and PlanLimitations of Merger, dated April 14, 2019, by and amongSeries A Convertible Preferred Stock, Par Value $0.01 Per Share, of Catalent, Pharma Solutions, Inc.; Paragon Bioservices, Inc.; solely for purposes of 4.12 (solely with respect to the Equity Financing (as defined therein)) and Section 8.19, Catalent, Inc.; and Pearl Shareholder Representative, LLC. Disclosure schedules and exhibits have been omitted. The Merger Agreement as filed identifies such schedules and exhibits, including the general nature of their contents. Catalent, Inc. agrees to furnish a copy of any omitted attachment to the Securities and Exchange Commission on a confidential basis upon request (incorporated by reference to exhibit 2.13.1 to the Company'sCompany’s Current Report on Form 8-K filed on April 17, 2019, File No. 001-36587)September 13, 2019). |
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| | Form of 2018 OIP Restricted Stock Unit Agreement for U.S. Employees † * |
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| | Form of 2018 OIP Restricted Stock Unit Agreement for Non-U.S. Employees † * |
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| | Form of 2018 OIP Performance Share Unit Agreement for U.S. Employees (three-year performance period)Employees. † * |
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| | Form of 2018 OIP Performance Share Unit Agreement for Non-U.S. Employees (three-year performance period)Employees. † * |
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| | Form of 2018 OIP Option AgreementManagement Incentive Plan for U.S. Employees † * |
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| | Form of 2018 OIP Option Agreement for Non-U.S. Employeesthe fiscal year ending June 30, 2020. † * |
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| | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*amended. * |
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| | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*amended. * |
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| | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**2002. ** |
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| | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**2002. ** |
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| 101.1 | | | The following financial information from Catalent, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2019 formatted in inline XBRL: (i) Consolidated Statements of Operations for the Three and Nine Months Ended March 31,September 30, 2019 and 2018; (ii) Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended March 31,September 30, 2019 and 2018 (iii) Consolidated Balance Sheets as of March 31,September 30, 2019 and June 30, 2018; (iv) Consolidated Statement of Changes in Shareholders’ Equity/(Deficit) as of March 31,September 30, 2019; (v) Consolidated Statements of Cash Flows for the NineThree Months Ended March 31,September 30, 2019 and 2018; and (vi) Notes to Unaudited Consolidated Financial Statements. |
* 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 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: | May 7,November 5, 2019 | By: | | /s/ John R. Chiminski |
| | | | John R. Chiminski |
| | | | Chief Executive Officer |
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| Date: | May 7,November 5, 2019 | By: | | /s/ Wetteny Joseph |
| | | | Wetteny Joseph |
| | | | Senior Vice President & Chief Financial Officer |
