The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and related notes, which appear elsewhere in this Annual Report. This
section of the Annual Report generally discusses the fiscal years ended June 30,
2021 and 2020 and year-to-year comparisons between the fiscal years ended June
30, 2021 and 2020. The discussion of our results of operations for the fiscal
year ended June 30, 2019 and a comparison of our results for the fiscal years
ended June 30, 2020 and 2019 is included in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations, of our Annual Report
on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on
August 31, 2020 and is incorporated herein by reference. In addition to
historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. You should carefully read “Special Note Regarding
Forward-Looking Statements” in this Annual Report. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Annual Report, particularly in “Item 1A. Risk Factors.”
Overview
We provide differentiated development and manufacturing solutions for drugs,
protein-based biologics, cell and gene therapies, and consumer health products
at over fifty facilities across four continents under rigorous quality and
operational standards. Our oral, injectable, and respiratory delivery
technologies, along with our state-of-the-art protein and cell and gene therapy
manufacturing capacity, address a wide and growing range of modalities and
therapeutic and other categories across the biopharmaceutical and consumer
health industries. Through our extensive capabilities, growth-enabling capacity,
and deep expertise in product development, regulatory compliance, and clinical
trial supply, we can help our customers take products to market faster,
including nearly half of new drug products approved by the FDA in the last
decade. Our development and manufacturing platforms, which include those in our
Biologics, Softgel and Oral Technologies, and Oral and Specialty Delivery
segments, our proven formulation, supply, and regulatory expertise, and our
broad and deep development and manufacturing know-how enable our customers to
advance and then bring to market more products and better treatments for
patients and consumers. Our commitment to reliably supply our customers’ and
their patients’ needs is the foundation for the value we provide; annually, we
produce more than 70 billion doses for nearly 7,000 customer products, or
approximately 1 in every 24 doses of such products taken each year by patients
and consumers around the world. We believe that through our investments in
state-of-the-art facilities and capacity expansion, including investments in
facilities focused on new treatment modalities and other attractive market
segments our continuous improvement activities devoted to operational and
quality excellence, the sales of existing and introduction of new customer
products, and, in some cases, our innovation activities and patents, we will
continue to attract premium opportunities and realize the growth potential from
these areas.
We currently operate in four operating segments, which also constitute our four
reporting segments: Biologics, Softgel and Oral Technologies, Oral and Specialty
Delivery, and Clinical Supply Services, as further described in “Business-Our
Reporting Segments” contained elsewhere in this Annual Report.
The COVID-19 Pandemic
Our response to COVID-19
Since the start of the COVID-19 pandemic, we have taken and continue to take
steps to protect our employees, ensure the integrity and quality of our products
and services, and to maintain business continuity for our customers and their
patients who depend on us to manufacture and supply critical products to the
market. To address the multiple dimensions of the pandemic, senior,
multi-disciplinary teams reporting directly to our Chief Executive Officer have
been continuously monitoring the global situation, executing mitigation
activities whenever and wherever required, and implementing a phased and
structured return to our facilities as circumstances have permitted for those
employees who have been working remotely.
Among other things, we implemented measures to avoid or reduce infection or
contamination in line with guidelines issued by the U.S. Centers for Disease
Control and Prevention, the World Health Organization, and local authorities
where we operate, re-emphasized good hygiene practices, restricted non-employee
access to our sites, reorganized our workflows where permitted to maximize
physical distancing, limited employee travel, facilitated safer alternatives to
travel to and from work, and employed remote-working strategies. We have
reviewed and will continue to analyze our supply chain to identify any risk,
delay, or concern that may have an impact on our ability to deliver our services
and products. To date, we have not identified any significant risk, delay, or
concern that would have a substantial effect on such delivery. We have adopted
various procedures to minimize and manage any future disruption to our ongoing
operations, including the creation and activation of
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new and existing business continuity plans when needed. Our existing procedures,
which are consistent with cGMP and other regulatory standards, are intended to
assure the integrity of our supply against any contamination. We have a detailed
response plan to manage any impact of the virus on employee health, site
operations, and product supply, including immediate assessment of the health of
employees reporting symptoms, comprehensive risk assessment of any impact to
quality, additional cleaning protocols, and alternative shift patterns to
compensate should fewer employees be available.
Impact of COVID-19 on Our Business and Results of Operations
Throughout fiscal 2021, we observed some increases in customer delays and
cancellations, occasional increases in absenteeism of production employees in
our facilities in certain affected regions, disruptions at times in certain
clinical trials supported by our Clinical Supply Services segment, and a delay
in inspections and product approvals by the FDA and regulatory authorities
globally. A portion of our customers reported a reduction in demand,
particularly in our consumer health product lines, and a larger percentage
reported an increase in demand.
We have also seen increased demand and significant revenue increases and the
potential for further revenue increases from COVID-19-related products,
particularly in our Biologics segment. As part of our response to the COVID-19
pandemic, we accelerated and enhanced certain of our capital improvement plans
to expand capacity for manufacturing drug substance and drug product for
protein-based biologics and cell and gene therapies, particularly at our drug
product facilities in Bloomington, Indiana, Anagni, Italy, and our
commercial-scale viral vector manufacturing facility in Maryland. In order to
meet customer demand for developing, manufacturing and packaging
COVID-19-related products, we hired approximately 2,200 new employees at our
facilities in Indiana, Maryland, and Anagni, Italy, and built and brought online
new clean room suites, manufacturing lines and other facilities expansions in
those locations ahead of schedule. We have also implemented various strategies
to protect our financial condition and results of operations should we
experience a reduction in demand for COVID-19 related products, such as ensuring
contractual take-or-pay and minimum volume requirements for the manufacture of
certain COVID-19 related products. However, the extent and duration of revenue
associated with COVID-19-related products is uncertain and dependent, in
important respects, on factors outside our control.
The COVID-19-vaccines we manufacture are still pending approval from the FDA and
other non-U.S. regulatory authorities and may not receive approval. The future
duration and extent of the COVID-19 pandemic and the future demand for COVID-19
vaccines and therapies is unknown. Public opinion of certain COVID-19 vaccines
and therapies and the product owners and manufacturers can change quickly and
affect the demand for certain products and services, although they should not
affect any required minimum payment for a COVID-19 related product subject to a
“take-or-pay” provision. In addition, any concentration of revenue from certain
COVID-19 vaccine products enhances our operational risk with respect to quality,
security, regulatory inspections and business disruption resulting from any
unforeseen event that affects any of the facilities and communities in which we
manufacture COVID-19 vaccines. We have implemented various mechanisms to protect
our customers, their material and product, and our business continuity, such as
enhanced security measures at certain facilities and heightened cybersecurity
controls.
See also “Risk Factors – Risks Related to Our Business and the Industry in Which
We Operate – Our business, financial condition, and results of operations may be
adversely affected by global health epidemics, including the COVID-19 pandemic”
and “Risk Factors – Risks Related to Our Business and the Industry in Which We
Operate – The continually evolving nature of the COVID-19 pandemic and the
resulting public health response, including the changing demand for various
COVID-19 vaccines and treatments from both patients and governments around the
world, may affect on sales of the COVID-19 products we manufacture” elsewhere in
this Annual Report.
Critical Accounting Policies and Recent Accounting Pronouncements
The following disclosure supplements the descriptions of our accounting policies
contained in Note 1 to our Consolidated Financial Statements regarding
significant areas of judgment. Management made certain estimates and assumptions
during the preparation of the Consolidated Financial Statements in accordance
with U.S. GAAP. These estimates and assumptions affect the reported amount of
assets and liabilities and disclosures of contingent assets and liabilities in
the Consolidated Financial Statements. These estimates also affect the reported
amount of net earnings during the reporting periods. Actual results could differ
from those estimates. Because of the size of the financial statement elements to
which they relate, some of our accounting policies and estimates have a more
significant impact on the Consolidated Financial Statements than others.
Management has discussed the development and selection of these critical
accounting policies and estimates with the audit committee of our board of
directors. A discussion of some of our more significant accounting policies and
estimates follows.
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Revenue
We sell products and services directly to our pharmaceutical, biopharmaceutical,
and consumer health customers. The majority of our business is conducted through
manufacturing and commercial product supply, development services, and clinical
supply services.
Our contracts with customers often include promises to transfer multiple
products and services to a customer. Determining whether products and services
are considered distinct performance obligations that should be accounted for
separately versus together may require judgment. For our manufacturing and
commercial product supply revenue, the contract generally includes the terms of
the manufacturing services and related product quality assurance procedures to
comply with regulatory requirements. Due to the regulated nature of our
business, these contract terms are highly interdependent and, therefore, are
considered to be a single combined performance obligation. For our development
services and clinical supply services revenue, our performance obligations vary
per contract and are accounted for as separate performance obligations. If a
contract contains a single performance obligation, we allocate the entire
transaction price to the single performance obligation. If a contract contains
multiple performance obligations, we allocate consideration to each performance
obligation using the “relative standalone selling price” as defined under
Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers. Generally, we utilize observable standalone selling prices in our
allocations of consideration. If observable standalone selling prices are not
available, we estimate the applicable standalone selling price using an adjusted
market assessment approach, representing the amount that we believe the market
is willing to pay for the applicable service. Revenue is recognized over time
using an appropriate method of measuring progress towards fulfilling our
performance obligation for the respective arrangement. Determining the measure
of progress that consistently depicts our satisfaction of performance
obligations within each of our revenue streams across similar arrangements
requires judgment.
Licensing revenue
We occasionally enter into arrangements with customers that include licensing of
functional intellectual property, including drug formulae, or other intangible
property (“out-licensing”). We do not have any material license arrangement that
contains more than one performance obligation. Our out-licensing generally
entitles us to nonrefundable, up-front fees or royalties. Nonrefundable,
up-front license fees are recognized as revenue when the licensed property is
made available for the customer’s use and benefit, provided there is no
unsatisfied performance obligation included in 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.
Goodwill and Indefinite-Lived Intangible Assets
We account for purchased goodwill and intangible assets with indefinite lives in
accordance with ASC 350, Intangibles – Goodwill and Other. Under ASC 350,
goodwill and intangible assets with indefinite lives are not amortized, but
instead are tested for impairment at least annually. We perform an impairment
evaluation of goodwill annually during the fourth quarter of our fiscal year or
when circumstances otherwise indicate an evaluation should be performed. The
evaluation may begin with a qualitative assessment for each reporting unit to
determine whether it is more-likely-than-not that the fair value of the
reporting unit is less than its carrying value. If the qualitative assessment
does not generate a positive response, or if no qualitative assessment is
performed, a quantitative assessment, based upon discounted cash flows, is
performed and requires management to estimate future cash flows, growth rates,
and economic and market conditions. In fiscal 2020, we proceeded immediately to
the quantitative assessment, but in fiscal 2019 and 2021 we began with the
qualitative assessment. Accordingly, no sensitivity analysis was performed for
fiscal 2021. The evaluations performed in fiscal 2019, 2020 and 2021 resulted in
no impairment charge.
See Notes 4, Goodwill and 5, Other Intangibles, net to the Consolidated
Financial Statements.
Series A Preferred Stock Dividend Adjustment Feature
The terms of the Series A Preferred Stock include a dividend adjustment feature
to provide the holders with certain protections against a decline in the trading
price of our Common Stock. Because this adjustment feature depends in part on
the value of external metrics at future dates, over which we have no control,
this feature is accounted for separately from the rest of the Series A Preferred
Stock as a derivative instrument, which is measured at fair value, as of the
valuation date, using a combination of (i) a Monte Carlo simulation and (ii) a
binomial lattice model, which incorporates the terms and conditions of the
Series A Preferred Stock and is based on changes in the market prices of shares
of our Common Stock over successive periods. Key assumptions used in both models
include the current market price of one share of the Common Stock and its
historical and expected volatility, risk-neutral interest rates, and the
remaining term of the adjustment feature. The calculation of the estimated fair
value of the derivative liability is highly sensitive to changes in the
unobservable inputs, such as the expected volatility and our specific credit
spread. We recognize the derivative as either an asset or liability in the
consolidated balance
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sheets at its fair value and revalue it as of the end of each quarterly
reporting period; changes in the fair value are recognized in the consolidated
statements of operations.
Income Taxes
In accordance with ASC 740, Income Taxes, we account for income taxes using the
asset and liability method. The asset and liability method requires recognition
of deferred tax assets and liabilities for expected future tax consequences of
temporary differences that currently exist between tax bases and the
corresponding financial reporting bases of our assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates in the
respective jurisdictions in which we operate. Deferred taxes are not provided on
the undistributed earnings of subsidiaries outside of the U.S. when it is
expected that these earnings will be permanently reinvested. In fiscal 2018, we
recorded a provision for U.S. income taxes and foreign withholding taxes in
relation to expected repatriations as a result of the 2017 U.S. Tax Cuts and
Jobs Act (the “2017 Tax Act”), but we have not made any provision for U.S.
income taxes on the remaining undistributed earnings of foreign subsidiaries as
those earnings are considered permanently reinvested in the operations of those
foreign subsidiaries in post fiscal 2018 years.
The 2017 Tax Act imposed taxes on so-called “global intangible low-taxed income”
(“GILTI”) earned by certain foreign subsidiaries of a U.S. company. In
accordance with ASC 740, we made an accounting policy election to treat taxes
due on future U.S. inclusions in taxable income related to GILTI as a
current-period expense when incurred.
We assess the realizability of deferred tax assets by considering all available
evidence, both positive and negative, in assessing the need for a valuation
allowance for deferred tax assets. We evaluate four possible sources of taxable
income when assessing the realization of deferred tax assets:
•carrybacks of existing NOLs (if and to the extent permitted by tax law);
•future reversals of existing taxable temporary differences;
•tax planning strategies; and
•future taxable income exclusive of reversing temporary differences and
carryforwards.
We consider the need to maintain a valuation allowance on deferred tax assets
based on management’s assessment of whether it is more likely than not that we
would realize those deferred tax assets as a result of future reversals of
existing taxable temporary differences and the ability to generate sufficient
taxable income within the carryforward period available under the applicable tax
law.
Unrecognized tax benefits are generated when there are differences between tax
positions taken in a tax return and amounts recognized in the Consolidated
Financial Statements. Tax benefits are recognized in the Consolidated Financial
Statements when it is more likely than not that a tax position will be sustained
upon examination. To the extent we prevail in matters for which liabilities have
been established or are required to pay amounts in excess of our liabilities,
our effective income tax rate in a given period could be materially affected. An
unfavorable income tax settlement may require the use of cash and result in an
increase in our effective income tax rate in the year it is resolved. A
favorable income tax settlement would be recognized as a reduction in the
effective income tax rate in the year of resolution.
Our accounting for income taxes involves the application of complex tax
regulations in the U.S. and in each of the non-U.S. jurisdictions in which we
operate, particularly European tax jurisdictions. The determination of income
subject to taxation in each tax-paying jurisdiction requires us to review
reported book income and the events occurring during the year in each
jurisdiction in which we operate. In addition, the application of deferred tax
assets and liabilities will have an effect on the tax expense in each
jurisdiction. For those entities engaging in transactions with affiliates, we
apply transfer-pricing guidelines relevant in many jurisdictions in which we
operate and make certain informed and reasonable assumptions and estimates about
the relative value of contributions by affiliates when assessing the allocation
of income and deductions between consolidated entities in different
jurisdictions. The estimates and assumptions used in these allocations can
result in uncertainty in the measured tax benefit.
Factors Affecting our Performance
Fluctuations in Operating Results
Our annual financial reporting periods end on June 30. Our revenue and net
earnings are generally higher in the third and fourth quarters of each fiscal
year, with our first fiscal quarter typically generating our lowest revenue of
any quarter, and our last fiscal quarter typically generating our highest
revenue. These fluctuations are primarily the result of the timing of our, and
our customers’, annual operational maintenance periods at locations in Europe
and the U.S., the seasonality associated with pharmaceutical and biotechnology
budgetary spending decisions, clinical trial and research and development
schedules, the
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timing of new product launches and length of time needed to obtain full market
penetration, and, to a lesser extent, the time of the year some of our
customers’ products are in higher demand.
Acquisition and Related Integration Efforts
Our growth and profitability are affected by the acquisitions we complete and
the speed at which we integrate those acquisitions into our existing operating
platforms. In fiscal 2019, we completed acquisitions of an early-phase
development site in the U.K. and a gene therapy business in the U.S., which have
been integrated into our Oral and Specialty Delivery and Biologics segments,
respectively. In fiscal 2020, we completed the acquisition of additional gene
and cell therapy assets in the U.S. and Belgium, which have been integrated into
our Biologics segment. We also completed the acquisition of the Anagni facility
in Italy, which has been integrated into our Oral and Specialty Delivery and
Biologics segments. In fiscal 2021, we expanded the capacity and capabilities of
our Biologics segment through five acquisitions. First, in September 2020, we
purchased a facility in Bloomington, Indiana that was still undergoing
qualification at the time of acquisition and is intended to support development
and early-phase clinical fill and finish activities. We also completed four
additional acquisitions in Gosselies, Belgium: (i) the November 2020 purchase of
Skeletal Cell Therapy Support SA (“Skeletal”), including its cell therapy
manufacturing facility; (ii) the April 2021 purchase of Hepatic Cell Therapy
Support SA (“Hepatic”), which also included a cell therapy manufacturing
facility co-located with Skeletal in a building owned by Société
d’infrastructures, de services et d’énergies SA (“SISE”); (iii) the June 2021
purchase of SISE, the owner of the building housing Skeletal and Hepatic’s
facilities; and (iv) the February 2021 purchase of Delphi. In February 2021, we
also acquired a dry powder inhaler and spray dry manufacturing business from
Acorda Therapeutics, Inc. (“Acorda”), which is included in our Oral and
Specialty Delivery segment.
Foreign Exchange Rates
Our operating network is global, and, as a result, we have substantial revenues
and operating expenses that are denominated in currencies other than the U.S.
dollar, the currency in which we report our financial results, and are therefore
influenced by changes in currency exchange rates. In fiscal 2021, approximately
38% of our revenue was generated from our operations outside the U.S.
Significant foreign currencies for our operations include the British pound,
European euro, Brazilian real, Argentine peso, Japanese yen, and the Canadian
dollar.
Trends Affecting Our Business
Industry
We participate in nearly every sector of the global pharmaceutical and
biotechnology industry, which has been estimated to generate more than $1
trillion in annual revenue, including, but not limited to, the prescription drug
and biologic sectors as well as consumer health, which includes the
over-the-counter and vitamins and nutritional supplement sectors. Innovative
pharmaceuticals, and biologics in particular, continue to play a critical role
in the global market, while the share of revenue due to generic drugs and
biosimilars is increasing in both developed and developing markets. Sustained
developed market demand and rapid growth in emerging economies is driving
consumer health product growth. Payors, both public and private, have sought to
limit the economic impact of pharmaceutical and biologics product demand through
greater use of generic and biosimilar drugs, access and spending controls, and
health technology assessment techniques, favoring products that deliver truly
differentiated outcomes.
New Molecule Development and R&D Sourcing
Continued strengthening in early-stage development pipelines for drugs and
biologics, compounded by increasing clinical trial breadth and complexity,
support our belief in the attractive growth prospects for development
solutions. Large companies are in many cases reconfiguring their R&D resources,
increasingly involving the use of strategic partners for important outsourced
functions and new treatment modalities. Additionally, an increasing portion of
compounds in development are from companies that do not have a full research and
development infrastructure, and thus are more likely to need strategic
development solutions partners.
Demographics
Aging population demographics in developed countries, combined with the global
COVID-19 pandemic and health care reforms in many global markets that are
expanding access to treatments to a greater proportion of the global population,
will continue to drive increases in demand for pharmaceuticals, biologics, and
consumer health products. Increasing economic affluence in developing regions
will further increase demand for healthcare treatments, and we are taking active
steps to allow us to participate effectively in these growth regions and product
categories.
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Finally, we believe the market access and payor pressures our customers face,
global supply chain complexity, and the increasing demand for improved and new
modality treatments will continue to escalate the need for advanced formulation
and manufacturing, product differentiation, improved outcomes, and treatment
cost reduction, all of which can often be addressed using our advanced delivery
technologies.
Non-GAAP Metrics
As described in this section, management uses various financial metrics,
including certain metrics that are not based on concepts defined in U.S. GAAP,
to measure and assess the performance of our business, to make critical business
decisions, and to assess our compliance with certain financial obligations. We
therefore believe that presentation of certain of these non-GAAP metrics in this
Annual Report will aid investors in understanding our business.
EBITDA from operations
Management measures operating performance based on consolidated earnings from
operations before interest expense, expense (benefit) for income taxes and
depreciation and amortization, adjusted for the income attributable to
non-controlling interests (“EBITDA from operations”). EBITDA from operations is
not defined under U.S. GAAP, is not a measure of operating income, operating
performance, or liquidity presented in accordance with U.S. GAAP, and is subject
to important limitations.
We believe that the presentation of EBITDA from operations enhances an
investor’s understanding of our financial performance. We believe this measure
is a useful financial metric to assess our operating performance across periods
and use this measure for business planning purposes. In addition, given the
significant investments that we have made in the past in property, plant and
equipment, depreciation and amortization expenses represent a meaningful portion
of our cost structure. We believe that disclosing EBITDA from operations 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 without consideration of
non-cash depreciation and amortization expense. We present EBITDA from
operations in order to provide supplemental information that we consider
relevant for the readers of the Consolidated Financial Statements, and such
information is not meant to replace or supersede U.S. GAAP measures. Our
definition of EBITDA from operations may not be the same as similarly titled
measures used by other companies. The most directly comparable measure to EBITDA
from operations defined under U.S. GAAP is net earnings. Included in this
Management’s Discussion and Analysis is a reconciliation of net earnings to
EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment
earnings before non-controlling interest, other (income) expense, impairments,
restructuring costs, interest expense, income tax expense (benefit), and
depreciation and amortization (“Segment EBITDA”).
Adjusted EBITDA
Under the Credit Agreement and in the Indentures, the ability of Operating
Company to engage in certain activities, such as incurring certain additional
indebtedness, making certain investments and paying certain dividends, is tied
to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA” in
the Credit Agreement and “EBITDA” in the Indentures). Adjusted EBITDA is a
covenant compliance measure in our Credit Agreement and Indentures, particularly
those covenants governing debt incurrence and restricted payments. Adjusted
EBITDA is based on the definitions in the Credit Agreement, is not defined under
U.S. GAAP, is not a measure of operating income, operating performance or
liquidity presented in accordance with U.S. GAAP, and is subject to important
limitations. Because not all companies use identical calculations, our
presentation of Adjusted EBITDA may not be comparable to other similarly titled
measures of other companies.
In addition, we use Adjusted EBITDA as a performance metric that guides
management in its operation of and planning for the future of the business and
drives certain management compensation programs. Management believes that
Adjusted EBITDA provides a useful measure of our operating performance from
period to period by excluding certain items that are not representative of our
core business, including interest expense and non-cash charges like depreciation
and amortization.
The measure under U.S. GAAP most directly comparable to Adjusted EBITDA is net
earnings. In calculating Adjusted EBITDA, we add back certain non-cash,
non-recurring and other items that are deducted when calculating EBITDA from
operations and net earnings, consistent with the requirements of the Credit
Agreement. Adjusted EBITDA, among other things:
•does not include non-cash stock-based employee compensation expense and certain
other non-cash charges;
•does not include cash and non-cash restructuring, severance and relocation
costs incurred to realize future cost savings and enhance operations;
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•adds back any non-controlling interest expense, which represents minority
investors’ ownership of non-wholly owned consolidated subsidiaries and is,
therefore, not available; and
•includes estimated cost savings that have not yet been fully reflected in our
results.
Adjusted Net Income and Adjusted Net Income per Share
We use Adjusted Net Income and Adjusted Net Income per share (which we sometimes
refer to as “Adjusted EPS”) as performance metrics. Adjusted Net Income is not
defined under U.S. GAAP, is not a measure of operating income, operating
performance, or liquidity presented in accordance with U.S. GAAP, and is subject
to important limitations. We believe that providing information concerning
Adjusted Net Income and Adjusted Net Income per share enhances an investor’s
understanding of our financial performance. We believe that these measures are
useful financial metrics to assess our operating performance from period to
period by excluding certain items that we believe are not representative of our
core business, and we use these measures for business planning and executive
compensation purposes. We define Adjusted Net Income as net earnings adjusted
for (1) earnings or loss from discontinued operations, net of tax, (2)
amortization attributable to purchase accounting, and (3) income or loss from
non-controlling interest in majority-owned operations. We also make adjustments
for other cash and non-cash items (as shown above, in “-Adjusted EBITDA”),
partially offset by our estimate of the tax effects as a result of such cash and
non-cash items. Our definition of Adjusted Net Income may not be the same as
similarly titled measures used by other companies. Adjusted Net Income per share
is computed by dividing Adjusted Net Income by the weighted average diluted
shares outstanding.
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period
comparisons, we believe the presentation of results on a constant currency basis
in addition to reported results helps improve investors’ ability to understand
our operating results and evaluate our performance in comparison to prior
periods. Constant currency information compares results between periods as if
exchange rates had remained constant period-over-period. We use results on a
constant currency basis as one measure to evaluate our performance. In this
Annual Report, we calculate constant currency by calculating current-year
results using prior-year foreign currency exchange rates. We generally refer to
such amounts calculated on a constant currency basis as excluding the impact of
foreign exchange. These results should be considered in addition to, not as a
substitute for, results reported in accordance with U.S. GAAP. Results on a
constant currency basis, as we present them, may not be comparable to similarly
titled measures used by other companies and are not measures of performance
presented in accordance with U.S. GAAP.
Summary Two-Year Key Financial Performance Metrics
Discussion of the year-over-year changes for the fiscal year ended June 30, 2020
compared to the fiscal year ended June 30, 2019 and the results of operations
and cash flows for the fiscal year ended June 30, 2019, is included in Item 7,
Management’s Discussion and Analysis of Financial Condition and Result of
Operations of our Annual Report on Form 10-K for the fiscal year ended June 30,
2020, filed with the SEC on August 31, 2020, and is incorporated herein by
reference.
The below tables summarize our results in fiscal 2021 and 2020 with respect to
several financial metrics we use to measure performance. Refer to the
discussions below regarding performance and the use of key financial metrics and
“-Non-GAAP Metrics-Use of Constant Currency” concerning the measurement of
revenue at “constant currency.”
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Fiscal Year Ended June 30, 2021 compared to the Fiscal Year Ended June 30, 2020
Results for the fiscal year ended June 30, 2021 compared to the fiscal year
ended June 30, 2020 were as follows:
Fiscal Year Ended Constant Currency
(Dollars in millions) June 30, FX Impact Increase (Decrease)
2021 2020 Change $ Change %
Net revenue $ 3,998$ 3,094$ 89$ 815 26 %
Cost of sales 2,646 2,111 56 479 23 %
Gross margin 1,352 983 33 336 34 %
Selling, general, and administrative
expenses 687 577 8 102 17 %
(Gain) loss on sale of subsidiary (182) 1 – (183) *
Other operating expense 19 11 – 8 96 %
Operating earnings 828 394 25 409 104 %
Interest expense, net 110 126 1 (17) (14) %
Other expense, net 3 8 8 (13) (166) %
Earnings before income taxes 715 260 16 439 169 %
Income tax expense 130 39 2 89 223 %
Net earnings $ 585$ 221$ 14$ 350 159 %
Net Revenue
2021 vs. 2020
Fiscal Year Ended
Year-Over-Year Change June 30,
Net Revenue
Organic 25 %
Impact of acquisitions 3 %
Impact of divestitures (2) %
Constant currency change 26 %
Foreign currency translation impact on reporting 3 %
Total % change 29 %
Net revenue increased by $815 million, or 26%, excluding the impact of foreign
exchange, compared to the fiscal year ended June 30, 2020. Net revenue increased
3% as a result of acquisitions, which was partially offset by a 2% decrease in
net revenue due to the sale of Catalent USA Woodstock, Inc. (the “Blow-Fill-Seal
Business”) in March 2021. Among other acquisitions, we acquired Skeletal in
November 2020, and Delphi and Acorda in February 2021. In addition, we divested
a facility in Australia in October 2019. Organic net revenue increased 25% on a
constant-currency basis, and was primarily driven by robust demand across all
our Biologics offerings, in particular demand for our drug product and drug
substance offerings for COVID-19-related programs, offset in part by the loss of
volume from the voluntary recall of a previously launched product in the
respiratory specialty platform in our Oral and Specialty Delivery segment and
demand decreases attributable to the COVID-19 pandemic that impacted Softgel and
Oral Technologies net revenue.
Gross Margin
Gross margin increased by $336 million, or 34%, in fiscal 2021 compared to
fiscal 2020, excluding the impact of foreign exchange, primarily as a result of
the strong margin profile for all Biologics segment offerings, including demand
across our drug product and drug substance offerings for COVID-19 related
programs. Growth was offset in part by the loss in volume from the voluntary
recall of a previously launched product in the respiratory specialty platform in
our Oral and Specialty Delivery segment and decreased demand for our
prescription and consumer health products in our Softgel and Oral Technologies
segment. On a constant-currency basis, gross margin, as a percentage of net
revenue, increased 200 basis points to 34% in the fiscal year ended June 30,
2021, compared to 32% in the prior year, primarily due to the higher margin
profile associated with our Biologics segment.
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Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by $102 million, or 17%,
in fiscal 2021 compared to fiscal 2020, excluding the impact of foreign
exchange, driven by $65 million of employee-related cost primarily incurred for
wages and bonuses, a $15 million increase in cost for professional and
consulting services, and additional selling, general and administrative expenses
from acquired companies of $13 million, including $2 million of incremental
depreciation and amortization expense and $3 million related to the cost of
various transitional services. These increases were partially offset by $12
million in reduced costs associated with health and welfare benefits and $9
million associated with travel and entertainment expenses.
The year-over-year increase in selling, general, and administrative expenses was
also due to a $32 million increase in information technology spend associated
with headcount increases, additional cyber security initiatives, insurance
premium increases, certain market research initiatives, and COVID-19-related
spend for personal protective equipment and test kits for our employees.
Other Operating Expense
Other operating expense for the fiscal years ended June 30, 2021 and 2020 was
$19 million and $11 million, respectively. The year-over-year increase was
attributable to an increase in impairment charges and an increase in
restructuring costs primarily associated with our plan to reduce costs and
optimize our infrastructure in Europe by closing our Clinical Supply Services
facility in Bolton, U.K.
Interest Expense, net
Interest expense, net, of $110 million in fiscal 2021 decreased by $16 million,
or 13%, compared to fiscal 2020, driven by savings from repayment of our
formerly outstanding dollar-denominated term loans, euro-denominated term loans,
euro-denominated 4.75% Senior Notes due 2024 (the “2024 Notes”), and U.S.
dollar-denominated 4.875% Senior Notes due 2026 (the “2026 Notes”), partially
offset by interest expenses on the 2028 Notes, the new tranche of
dollar-denominated term loans, and the 2029 Notes. The savings also includes $6
million of additional capitalized interest costs for the fiscal year ended June
30, 2021 compared to the prior fiscal year due to increased capital
expenditures.
For additional information concerning our debt and financing arrangements,
including the changing mix of debt and equity in our capital structure, see
“-Liquidity and Capital Resources-Debt and Financing Arrangements” and Note 7,
Long-Term Obligations and Short-Term Borrowings to the Consolidated Financial
Statements.
Other Expense, net
Other expense, net of $3 million for fiscal 2021 was primarily driven by an $11
million premium on early redemption of the 2026 Notes, a write-off of $4 million
of previously capitalized financing charges related to our repayment of term
loans and our redeemed 2026 Notes, $3 million of financing charges related to
our outstanding term loans and a net foreign currency translation loss of $5
million. Those losses were partially offset by a gain of $17 million related to
the fair value of the derivative liability associated with the Series A
Preferred Stock.
Other expense, net for fiscal 2020 of $8 million was primarily driven by
financing charges of $16 million. The financing charges included a $6 million
write-off of previously capitalized financing charges related to our repaid
euro-denominated term loan under our senior secured credit facilities and
redeemed 2024 Notes, and a $10 million premium on early redemption of the 2024
Notes. The loss was partially offset by a foreign currency gain of $3 million
and a derivative gain of $3 million related to the change in the fair value of
the derivative liability arising from the dividend adjustment mechanism of our
Series A Preferred Stock.
Provision for Income Taxes
Our provision for income taxes for the fiscal year ended June 30, 2021 was $130
million relative to earnings before income taxes of $715 million. Our provision
for income taxes for the fiscal year ended June 30, 2020 was $39 million
relative to earnings before income taxes of $260 million. The increased income
tax provision for the fiscal year ended June 30, 2021 over the prior-year was
largely the result of an increase in pretax income and a $56 million income tax
charge on the divestiture of the Blow-Fill-Seal Business. This increase was
partially offset by a $47 million income tax benefit for U.S. foreign tax
credits resulting from an amendment to a prior-year return and certain equity
compensation deductions. The provision for income taxes was also impacted by the
geographic distribution of our pretax income, the tax impact of permanent
differences, restructuring, special items, and other discrete tax items that may
have unique tax implications depending on the nature of the item.
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Segment Review
The below charts depict the percentage of net revenue from each of our four
reporting segments for the previous two years. Refer below for discussions
regarding the segments’ net revenue and EBITDA performance and to “-Non-GAAP
Metrics” for a discussion of our use of Segment EBITDA, a measure that is not
defined under U.S. GAAP.
[[Image Removed: ctlt-20210630_g5.jpg]]
Our results on a segment basis for the fiscal year ended June 30, 2021 compared
to the fiscal year ended June 30, 2020 were as follows:
Fiscal Year Ended Constant Currency
(Dollars in millions) June 30, FX Impact Increase (Decrease)
2021 2020 Change $ Change %
Biologics
Net revenue $ 1,928$ 1,021$ 31$ 876 86 %
Segment EBITDA 608 237 11 360 151 %
Softgel and Oral Technologies
Net revenue 1,012 1,062 27 (77) (7) %
Segment EBITDA 237 257 6 (26) (10) %
Oral and Specialty Delivery
Net revenue 686 676 21 (11) (2) %
Segment EBITDA 160 201 9 (50) (25) %
Clinical Supply Services
Net revenue 391 345 11 35 10 %
Segment EBITDA 108 91 5 12 13 %
Inter-segment revenue elimination (19) (10) (1) (8) (80) %
Unallocated Costs(1) 1 (146) (8) 155 107 %
Combined totals
Net revenue $ 3,998$ 3,094$ 89$ 815 26 %
EBITDA from operations $ 1,114$ 640$ 23$ 451 70 %
(1) Unallocated costs include restructuring and special items, stock-based
compensation, gain (loss) on sale of subsidiary, impairment charges, certain
other corporate-directed costs, and other costs that are not allocated to the
segments as follows:
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Fiscal Year Ended
June 30,
(Dollars in millions) 2021 2020
Impairment charges and gain (loss) on sale of assets $ (9)$ (5)
Stock-based compensation (51)
(48)
Restructuring and other special items (a) (31)
(42)
Gain (loss) on sale of subsidiary (b) 182
(1)
Other expense, net (c) (3)
(8)
Non-allocated corporate costs, net (87) (42)
Total unallocated costs $ 1$ (146)
(a) Restructuring and other special items during the fiscal year ended June 30,
2021 include (i) transaction costs for the sale of our Blow-Fill-Seal Business,
(ii) transaction and integration costs associated with the acquisition of our
facility in Anagni, Italy and the Acorda, Masthercell Global Inc.
(“MaSTherCell”), Delphi, Hepatic, Skeletal and SISE transactions, and (iii)
restructuring costs associated with the closure of our Clinical Supply Services
facility in Bolton, U.K. Restructuring and other special items during the fiscal
year ended June 30, 2020 include transaction and integration costs associated
with the Anagni facility, our cell and gene therapy acquisitions, the
divestiture of a facility in Australia, and other restructuring initiatives
across our network of sites.
(b) For the fiscal year ended June 30, 2021, gain on sale of subsidiary is due
to the divestiture of our Blow-Fill-Seal Business, which was part of our Oral
and Specialty Delivery segment. Loss on sale of subsidiary for the fiscal year
ended June 30, 2020 is due to the divestiture of the Australian facility that
was part of the Softgel and Oral Technologies segment.
(c) Refer to Note 15, Other Expense, net for details of financing charges and
foreign currency translation adjustments recorded within Other Expense, net in
our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
Fiscal Year Ended
June 30,
(Dollars in millions) 2021 2020
Net earnings $ 585$ 221
Depreciation and amortization 289 254
Interest expense, net 110 126
Income tax expense 130 39
EBITDA from operations $ 1,114$ 640
Biologics segment
2021 vs. 2020
Fiscal Year Ended
Year-Over-Year Change June 30,
Net Revenue Segment EBITDA
Organic 80 % 148 %
Impact of acquisitions 6 % 3 %
Constant currency change 86 % 151 %
Foreign exchange translation impact on reporting 3 % 5 %
Total % change 89 % 156 %
Net revenue in our Biologics segment increased by $876 million, or 86%, compared
to the fiscal year ended June 30, 2020, excluding the impact of foreign
exchange. The increase was driven across all segment offerings by robust
end-market demand for our global drug product, drug substance, and cell and gene
therapy offerings, primarily related to demand for COVID-19-related programs.
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Biologics Segment EBITDA increased by $360 million, or 151%, compared to the
fiscal year ended June 30, 2020, excluding the impact of foreign exchange. The
increase was driven across all segment offerings by robust end-market demand for
our global drug product, drug substance, and cell and gene therapy offerings,
primarily related to demand for COVID-19-related programs.
Several acquisitions contributed to the Biologics inorganic growth in fiscal
2021. Our Anagni, Italy facility, part of which operates within our Biologics
segment, and our MaSTherCell acquisition together increased net revenue and
Segment EBITDA on an inorganic basis by 6% and 3%, respectively, in the fiscal
year ended June 30, 2021, compared to the prior year.
Softgel and Oral Technologies segment
2021 vs. 2020
Fiscal Year Ended
Year-Over-Year Change June 30,
Net Revenue Segment EBITDA
Organic (6) % (10) %
Impact of divestitures (1) % – %
Constant currency change (7) % (10) %
Foreign exchange translation impact on reporting 2 % 2 %
Total % change (5) % (8) %
Net revenue in our Softgel and Oral Technologies segment decreased by $77
million, or 7%, compared to the fiscal year ended June 30, 2020, excluding the
impact of foreign exchange. The decrease primarily relates to reduced end-market
demand for prescription products within North America and Europe, as well as
lower demand in consumer health products, particularly in cough, cold, and
over-the-counter pain relief products attributable to the effects of the
COVID-19 pandemic. The net revenue decrease was partially offset by strong
development revenue growth.
Softgel and Oral Technologies Segment EBITDA decreased by $26 million, or 10%,
compared to the fiscal year ended June 30, 2020, excluding the impact of foreign
exchange. The decrease, similar to that of net revenue, was primarily driven by
a decrease in demand in both the prescription and consumer health portfolio of
products, offset in part by the margin generated from strong development revenue
growth.
Oral and Specialty Delivery segment
2021 vs. 2020
Fiscal Year Ended
Year-Over-Year Change June 30,
Net Revenue Segment EBITDA
Organic (3) % (24) %
Impact of acquisitions 7 % 7 %
Impact of divestitures (6) % (8) %
Constant currency change (2) % (25) %
Foreign exchange translation impact on reporting 3 % 5 %
Total % Change 1 % (20) %
Net revenue in our Oral and Specialty Delivery segment decreased by $11 million,
or 2%, compared to the fiscal year ended June 30, 2020, excluding the impact of
foreign exchange. Excluding the effect of acquisitions and divestitures, the
loss of volume resulting from the voluntary recall of a previously launched
product in our respiratory specialty platform and decreased demand for other
non-Zydis orally delivered commercial products were partially offset by
increased demand for the segment’s orally delivered Zydis commercial products
and early-phase development programs.
Oral and Specialty Delivery Segment EBITDA decreased by $50 million, or 25%,
compared to the fiscal year ended June 30, 2020, excluding the impact of foreign
exchange. Segment EBITDA without acquisitions and divestitures decreased 24%,
primarily driven by the loss of volume and voluntary recall impact of a
previously launched product in our respiratory specialty platform, inclusive of
charges of $32 million in the aggregate associated with the recall. Increased
demand for the segment’s orally delivered Zydis commercial products and
favorable manufacturing efficiencies within our respiratory specialty platform
partially offset the decrease.
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Our Anagni and Acorda transactions increased net revenue and Segment EBITDA on
an inorganic, constant-currency basis by 7% and 7%, respectively, in the fiscal
year ended June 30, 2021 compared to the prior year. We divested the
Blow-Fill-Seal Business in March 2021, which decreased net revenue and Segment
EBITDA on an inorganic, constant-currency basis by 6% and 8%, respectively, in
the fiscal year ended June 30, 2021 compared to the prior year.
Clinical Supply Services segment
2021 vs. 2020
Fiscal Year Ended
June 30,
Year-Over-Year Change Net Revenue Segment EBITDA
Organic 10 % 13 %
Constant currency change 10 % 13 %
Foreign exchange translation impact on reporting 3 % 5 %
Total % Change 13 % 18 %
Net revenue in our Clinical Supply Services segment increased by $35 million, or
10%, compared to the fiscal year ended June 30, 2020, excluding the impact of
foreign exchange. The increase was driven by strong demand in our manufacturing
and packaging and storage and distribution offerings in North America.
Clinical Supply Services Segment EBITDA increased by $12 million, or 13%,
compared to the fiscal year ended June 30, 2020, excluding the impact of foreign
exchange. The increase was driven primarily by strong global demand in our
manufacturing and packaging and storage and distribution offerings.
Liquidity and Capital Resources
Sources and use of Cash
Our principal source of liquidity has been cash flow generated from operations
and the net proceeds of capital market activities. The principal uses of cash
are to fund operating and capital expenditures, business or asset acquisitions,
interest payments on debt, 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 payment
on our debt. At the current stated value of the Series A Preferred Stock
outstanding as of June 30, 2021, the aggregate amount of each regular quarterly
dividend, if paid in cash, is $5 million. As of June 30, 2021, and following the
February 2021 execution of Amendment No. 5 (the “Fifth Amendment”) to the Credit
Agreement, we had available a $725 million Revolving Credit Facility that
matures in May 2024, the capacity of which is reduced by the amount of all
outstanding letters of credit issued under the senior secured credit facilities
and those short-term borrowings referred to as swing-line borrowings. At June
30, 2021, we had $6 million of outstanding letters of credit and no outstanding
borrowing under our Revolving Credit Facility.
On August 29, 2021, we entered into an agreement to acquire Bettera Holdings,
LLC (“Bettera”) for $1.00 billion. Bettera is a manufacturer of nutraceuticals
specializing in gummy, soft chew, and lozenge delivery systems. The transaction
is expected to close before December 31, 2021 and we plan to fund this all-cash
acquisition through a combination of additional borrowings under our existing
senior secured credit facilities, cash on hand and depending on market
conditions, new debt financing.
We nonetheless 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 remaining $50 million installment on the Catalent
Indiana deferred purchase consideration, our quarterly regular dividend on the
Series A Preferred Stock, if paid in cash, and the amounts expected to become
due with respect to our pending capital projects. We have no significant
maturity under any of our bank or note debt until the July 2027 maturity of our
2027 Notes.
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Cash Flows
Fiscal Year Ended June 30, 2021 Compared to the Fiscal Year Ended June 30, 2020
The following table summarizes our consolidated statements of cash flows for the
fiscal year ended June 30, 2021 compared with the fiscal year ended June 30,
2020:
Fiscal Year Ended
June 30,
(Dollars in millions) 2021 2020 Change $
Net cash provided by (used in):
Operating activities $ 433$ 440$ (7)
Investing activities $ (649)$ (827)$ 178
Financing activities $ 142$ 1,002$ (860)
Operating Activities
For the fiscal year ended June 30, 2021, cash provided by operating activities
was $433 million, a decrease of $7 million compared to $440 million for the
prior year. Cash flow provided by operating activities for the fiscal year ended
June 30, 2021 increased primarily due to an increase in operating earnings,
which increased from $394 million in fiscal 2020 to $828 million in fiscal 2021.
The increase in cash proceeds from higher operating earnings was partially
offset by an unfavorable working capital impact, which included an unfavorable
impact from inventory due to an increase of materials on-hand to assure adequate
supply during the COVID-19 pandemic, an increase in in-process inventory, and
unfavorable timing for the collection of trade accounts receivable.
Investing Activities
For the fiscal year ended June 30, 2021, cash used in investing activities was
$649 million, compared to $827 million during fiscal 2020. The decrease in cash
used in investing activities was attributable to a $266 million increase in
proceeds from the sale of subsidiaries and a $232 million decrease in payments
for acquisitions, which were partially offset by a $206 million increase in cash
used in purchases of property, plant, and equipment. In fiscal 2021, we received
$287 million in net proceeds from the divestiture of our Blow-Fill-Seal
Business.
In fiscal 2021, we paid $147 million of cash for the Skeletal, Delphi, and
Acorda acquisitions. In fiscal 2020, we paid $379 million of cash for the
MaSTherCell and Anagni acquisitions, net of cash acquired.
Financing Activities
For the fiscal year ended June 30, 2021, cash provided by financing activities
was $142 million, which decreased $860 million compared to cash provided by
financing activities of $1.00 billion during the fiscal year ended June 30,
2020. The decrease in cash provided by financing activities was primarily driven
by a $964 million decrease in net proceeds from equity offerings, which was
partially offset by a $38 million increase in cash received from the exercise of
stock options compared to the prior year.
Debt and Financing Arrangements
Senior Secured Credit Facilities and Fifth Amendment to the Credit Agreement
In February 2021, we completed the Fifth Amendment to the Credit Agreement.
Pursuant to the Fifth Amendment, we refinanced the existing $933 million
aggregate principal amount of U.S. dollar-denominated term loans (the “Term B-2
Loans”) with the proceeds of an equivalent amount of new U.S. dollar-denominated
term loans (the “Term B-3 Loans”), incurred an additional $67 million aggregate
principal amount of Term B-3 Loans, and obtained an additional $175 million of
revolving credit commitments (the “Incremental Revolving Credit Commitments”)
under the Revolving Credit Facility.
The Term B-3 Loans constitute a new class of term loans under the Credit
Agreement, with an interest rate of one-month LIBOR (subject to a floor of
0.50%) plus 2.00% per annum, a maturity date of February 2028, and quarterly
amortization of principal equal to 0.25%, with payments on the last business day
of March, June, September, and December. The proceeds of the Term B-3 Loans,
after payment of the offering fees and expenses, were used to repay in full the
existing Term B-2 Loans under the Credit Agreement, plus any accrued and unpaid
interest thereon, with the remainder available for general corporate purposes.
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The Incremental Revolving Credit Commitments constitute revolving credit
commitments under the Revolving Credit Facility. The applicable rate for all
revolving credit commitments under the Revolving Credit Facility is initially
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 maturity date for the Revolving Credit Facility is the earlier of (i)
May 17, 2024 and (ii) the 91st day prior to the maturity of the Term B-3 Loans.
In addition, pursuant to the Fifth Amendment, certain modifications were made to
the Credit Agreement in order to, among other things, provide for determination
of a benchmark replacement interest rate when LIBOR is no longer available.
The availability of capacity under the Revolving Credit Facility is reduced by
the aggregate value of all outstanding letters of credit under the Credit
Agreement. As of June 30, 2021, we had $719 million of unutilized capacity under
the Revolving Credit Facility due to $6 million of outstanding letters of
credit.
5.000% Senior Notes due 2027
In June 2019, Operating Company completed a private offering of the 2027 Notes.
The 2027 Notes are fully and unconditionally guaranteed, jointly and severally,
by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee
its senior secured credit facilities. The 2027 Notes were offered in the U.S. to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
and outside the U.S. only to non-U.S. investors pursuant to Regulation S under
the Securities Act. The 2027 Notes will mature on July 15, 2027 and bear
interest at the rate of 5.000% per annum. Interest is payable semi-annually in
arrears on January 15 and July 15 of each year, beginning on January 15, 2020.
The proceeds of the 2027 Notes after payment of the offering fees and expenses
were used to repay in full the outstanding borrowings under Operating Company’s
then-outstanding term loans under its senior secured credit facilities that
would otherwise have matured in May 2024.
2.375% Euro-denominated Senior Notes due 2028
In March 2020, Operating Company completed a private offering of the 2028 Notes.
The 2028 Notes are fully and unconditionally guaranteed, jointly and severally,
by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee
its senior secured credit facilities. The 2028 Notes were offered in the U.S. to
qualified institutional buyers in reliance on Rule 144A under the Securities Act
and outside the U.S. only to non-U.S. investors pursuant to Regulation S under
the Securities Act. The 2028 Notes will mature on March 1, 2028 and bear
interest at the rate of 2.375% per annum. Interest is payable semi-annually in
arrears on March 1 and September 1 of each year, beginning on September 1, 2020.
The proceeds of the 2028 Notes after payment of the offering fees and expenses
were used to repay in full the outstanding borrowings under Operating Company’s
euro-denominated term loans under its senior secured credit facilities, that
would otherwise have matured in May 2024, and repay in full the 2024 Notes,
which would otherwise have matured in December 2024, plus any accrued and unpaid
interest thereon, with the remainder available for general corporate purposes.
3.125% Senior Notes due 2029
In February 2021, Operating Company completed a private offering of the 2029
Notes. The 2029 Notes are fully and unconditionally guaranteed, jointly and
severally, by all of the wholly owned U.S. subsidiaries of Operating Company
that guarantee its senior secured credit facilities. The 2029 Notes will mature
on February 15, 2029 and bear interest at the rate of 3.125% per annum payable
semi-annually in arrears on February 15 and August 15 of each year, beginning on
August 15, 2021. The proceeds of the 2029 Notes after payment of the offering
fees and expenses were used to repay in full the outstanding borrowings under
the 2026 Notes, plus any accrued and unpaid interest thereon, with the remainder
available for general corporate purposes.
Deferred Purchase Consideration
Of the $950 million aggregate nominal purchase price for the Catalent Indiana
acquisition, $200 million was payable in four annual $50 million installments.
We made installment payments in October 2018, 2019 and 2020. The balance of the
deferred purchase consideration is due in October 2021, with the difference
between the remaining nominal amount and the fair value balance recorded at date
of acquisition treated as imputed interest.
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Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains covenants that, among other things, restrict,
subject to certain exceptions, Operating Company’s (and Operating Company’s
restricted subsidiaries’) ability to incur additional indebtedness or issue
certain preferred shares; create liens on assets; engage in mergers and
consolidations; sell assets; pay dividends and distributions or repurchase
capital stock; repay subordinated indebtedness; engage in certain transactions
with affiliates; make investments, loans, or advances; make certain
acquisitions; enter into sale and leaseback transactions; amend material
agreements governing Operating Company’s subordinated indebtedness; and change
Operating Company’s lines of business.
The Credit Agreement also contains change-of-control provisions and certain
customary affirmative covenants and events of default. The Revolving Credit
Facility requires compliance with a net leverage covenant when there is a 30% or
more draw outstanding at a period end. As of June 30, 2021, Operating Company
was in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Company
and its restricted subsidiaries to incur certain additional indebtedness,
including secured indebtedness. None of Operating Company’s non-U.S.
subsidiaries nor its dormant Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating Company’s ability to engage in certain
activities such as incurring certain additional indebtedness, making certain
investments, and paying certain dividends is tied to ratios based on Adjusted
EBITDA (which is defined as “Consolidated EBITDA” in the Credit Agreement).
Adjusted EBITDA is based on the definitions in the Credit Agreement, is not
defined under U.S. GAAP, and is subject to important limitations. See “-Non-GAAP
Metrics” for further details on Adjusted EBITDA.
As market conditions warrant, we may from time to time seek to purchase our
outstanding debt in privately negotiated or open-market transactions, by tender
offer or otherwise. Subject to any limitation contained in the Credit Agreement,
any purchase made by us may be funded by the use of cash on hand or the
incurrence of new secured or unsecured debt. The amount involved in any such
purchase transaction, individually or in the aggregate, may be material. Any
such purchase may involve a substantial amount of one particular class or series
of debt, with the attendant reduction in the trading liquidity of such class or
series.
The Senior Notes
The Indentures contain certain covenants that, among other things, limit the
ability of Operating Company and its restricted subsidiaries to incur or
guarantee more debt or issue certain preferred shares; pay dividends on,
repurchase, or make distributions in respect of their capital stock or make
other restricted payments; make certain investments; sell certain assets; create
liens; consolidate, merge, sell; or otherwise dispose of all or substantially
all of their assets; enter into certain transactions with their affiliates, and
designate their subsidiaries as unrestricted subsidiaries. These covenants are
subject to a number of exceptions, limitations, and qualifications as set forth
in the Indentures. The Indentures also contain customary events of default
including, but not limited to, nonpayment, breach of covenants, and payment or
acceleration defaults in certain other indebtedness of Operating Company or
certain of its subsidiaries. Upon an event of default, either the holders of at
least 30% in principal amount of each of the then-outstanding Senior Notes or
the applicable Trustee under the Indentures, may declare the applicable Senior
Notes immediately due and payable; or in certain circumstances, the applicable
Senior Notes will automatically become immediately due and payable. As of
June 30, 2021, Operating Company was in compliance with all material covenants
under the Indentures.
Liquidity in Foreign Subsidiaries
As of June 30, 2021 and 2020, the amounts of cash and cash equivalents held by
foreign subsidiaries were $351 million and $228 million, respectively, out of
total consolidated cash and cash equivalents of $896 million and $953 million,
respectively. These balances are dispersed across many international locations
around the world.
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Adjusted EBITDA and Adjusted Net Income per Share
The below tables summarize our fiscal 2021 and 2020 results with respect to
certain financial metrics we use to measure performance throughout the fiscal
year. Refer to “Non-GAAP Metrics” for further details regarding Adjusted EBITDA
and Adjusted net income per share.
[[Image Removed: ctlt-20210630_g6.jpg]]
A reconciliation between Adjusted EBITDA and net earnings, the most directly
comparable measure under U.S. GAAP, which also shows the adjustments from EBITDA
from operations, follows:
Fiscal Year Ended
(In millions) June 30, 2021 June 30, 2020
Net earnings $ 585 $ 221
Interest expense, net 110 126
Income tax expense 130 39
Depreciation and amortization 289 254
EBITDA from operations 1,114 640
Stock-based compensation 51 48
Impairment charges and (gain) loss on sale of assets 9 5
Financing-related expenses and other 18 16
Restructuring costs 10 6
Acquisition, integration, and other special items 21 37
(Gain) loss on sale of subsidiary (182) 1
Foreign exchange (gain) loss (included in other, net) (1) (4) 1
Other adjustments (2) (17) (3)
Adjusted EBITDA $ 1,020 $ 751
Favorable (unfavorable) FX impact
27
Adjusted EBITDA – constant currency $
993
(1) Foreign exchange gain of $4 million for the fiscal year ended June 30, 2021
includes: (a) $13 million of unrealized losses related to foreign trade
receivables and payables, (b) $3 million of unrealized losses on the unhedged
portion of our euro-denominated debt, and (c) $25 million of unrealized gains on
inter-company loans. The foreign exchange adjustment was also affected by the
exclusion of realized foreign currency exchange rate losses from the settlement
of inter-company loans of $5 million. Inter-company loans exist between our
subsidiaries and do not reflect the ongoing results of our trade operations.
Foreign exchange loss of $1 million for the fiscal year ended June 30, 2020
includes: (a) $5 million of unrealized losses related to foreign trade
receivables and payables, (b) $6 million of unrealized gains on the unhedged
portion of the euro-denominated debt, and (c) $5 million of unrealized losses on
inter-company loans. The foreign exchange adjustment was also affected by the
exclusion of realized foreign currency exchange rate gains from the
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settlement of inter-company loans of $3 million. Inter-company loans exist
between our subsidiaries and do not reflect the ongoing results of our trade
operations.
(2) Primarily represents the gain recorded on the change in the estimated fair
value of the derivative liability.
A reconciliation between Adjusted Net Income and net earnings, the most directly
comparable measure under U.S. GAAP, follows. The table also provides a
calculation of Adjusted Net Income per each basic share and each diluted share.
[[Image Removed: ctlt-20210630_g7.jpg]]
Fiscal Year Ended
(In millions, except per share data) June 30, 2021 June 30, 2020
Net earnings $ 585 $ 221
Amortization (1) 93 89
Stock-based compensation 51 48
Impairment charges and (gain) loss on sale of assets 9 5
Financing-related expenses 18 16
Restructuring costs 10 6
Acquisition, integration, and other special items 21 37
(Gain) loss on sale of subsidiary (182) 1
Foreign exchange (gain) loss (included in other, net) (2) (4) 1
Other adjustments (3) (17) (4)
Estimated tax effect of adjustments (4) 3 (47)
Discrete income tax benefit items (5) (38) (23)
Adjusted net income (ANI) $ 549 $ 350
ANI per share:
ANI per share – basic (6) $ 3.27 $ 2.34
ANI per share – diluted (7) $ 3.04 $ 2.11
(1) Represents the amortization attributable to purchase accounting for
previously completed business combinations.
(2) Foreign exchange gain of $4 million for the fiscal year ended June 30, 2021
includes: (a) $13 million of unrealized losses related to foreign trade
receivables and payables, (b) $3 million of unrealized losses on the unhedged
portion of the euro-denominated debt, and (c) $25 million of unrealized gains on
inter-company loans. The foreign exchange adjustment was also affected by the
exclusion of realized foreign currency exchange rate losses from the settlement
of inter-company loans of $5 million. Inter-company loans exist between our
subsidiaries and do not reflect the ongoing results of our trade operations.
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Foreign exchange loss of $1 million for the fiscal year ended June 30, 2020
includes: (a) $5 million of unrealized losses related to foreign trade
receivables and payables, (b) $6 million of unrealized gains on the unhedged
portion of the euro-denominated debt, and (c) $5 million of unrealized losses on
inter-company loans. The foreign exchange adjustment was also affected by the
exclusion of realized foreign currency exchange rate gains from the settlement
of inter-company loans of $3 million. Inter-company loans exist between our
subsidiaries and do not reflect the ongoing results of our trade operations.
(3) Primarily represents the gain recorded on the change in the estimated fair
value of the derivative liability.
(4) We computed the tax effect of adjustments to Adjusted Net Income by
applying the statutory tax rate in the relevant jurisdictions to the income or
expense items that are adjusted in the period presented. If a valuation
allowance exists, the rate applied is zero.
(5) Discrete period income tax expense (benefit) items are unusual or
infrequently occurring items, primarily including: changes in judgment related
to the realizability of deferred tax assets in future years, changes in
measurement of a prior year tax position, deferred tax impact of changes in tax
law, and purchase accounting.
(6) Represents Adjusted Net Income divided by the weighted average of Common
Stock outstanding. For the fiscal year ended June 30, 2021, and 2020, the
weighted average was 168 million and 150 million, respectively.
(7) Represents Adjusted Net Income divided by the weighted average sum of (a)
the number of shares of Common Stock outstanding, plus (b) the number of shares
of Common Stock that would be issued assuming exercise or vesting of all
potentially dilutive instruments, plus (c) the number of shares of Common Stock
equivalent to the shares of Series A Preferred Stock outstanding under the
“if-converted” method. For the fiscal year ended June 30, 2021 and 2020, the
weighted average was 180 million and 165 million, respectively.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate
fluctuations. We may use various hedging strategies and derivative financial
instruments to create an appropriate mix of fixed-and floating-rate assets and
liabilities. In February 2021, we replaced one interest-rate swap agreement with
Bank of America N.A. with another, and each acts or acted as a hedge against the
economic effect of a portion of the variable-interest obligation associated with
our U.S dollar-denominated term loans under our senior secured credit
facilities, so that the interest payable on that portion of the debt becomes
fixed at a certain rate, thereby reducing the impact of future interest-rate
changes on future interest expense. The applicable rate for the U.S.
dollar-denominated term loan under the Credit Agreement was LIBOR (subject to a
floor of 0.50%) plus 2.00% as of June 30, 2021; however, as a result of the
interest-rate swap agreement, the floating portion of the applicable rate on
$500 million of the term loan was effectively fixed at 0.9985% as of February
2021.
Currency Risk Management
We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our
investments in our foreign operations in Europe. While we do not actively hedge
against changes in foreign currency, we have mitigated the exposure of our
investments in our European operations by denominating a portion of our debt in
euros. At June 30, 2021, we had $984 million of euro-denominated debt
outstanding that qualifies as a hedge on a net investment in foreign operations.
Refer to Note 9, Derivative Instruments and Hedging Activities, to our
Consolidated Financial Statements for further discussion of net investment hedge
activity in the period.
From time to time, we may use forward currency exchange contracts to manage our
exposure to the variability of cash flows primarily related to the foreign
exchange rate changes of future foreign currency transaction costs. In addition,
we may use foreign currency forward contracts to protect the value of existing
foreign currency assets and liabilities. Currently, we do not use foreign
currency exchange contracts. We expect to continue to evaluate hedging
opportunities for foreign currency in the future.
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