Catalent, Inc. - Quarter Report: 2021 December (Form 10-Q)
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 December 31, 2021
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
001-36587
(Commission File Number)
![ctlt-20211231_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g1.jpg)
_____________________________
Catalent, Inc.
(Exact name of registrant as specified in its charter)
_____________________________
Delaware | 20-8737688 | |||||||||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||||||||
14 Schoolhouse Road, | Somerset | NJ | 08873 | |||||||||||||||||
(Address of principal executive offices) | (Zip code) |
(732) 537-6200
Registrant's telephone number, including area code
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ¨ | ||||||||||||||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | ||||||||||||||
Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbols(s) | Name of each exchange on which registered | ||||||
Common Stock | CTLT | New York Stock Exchange |
On January 25, 2022, there were 179,104,173 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.
CATALENT, INC.
Index to Form 10-Q
For the Three and Six Months Ended December 31, 2021
Item | Page | |||||||
Part I. | ||||||||
Item 1. | Financial Statements (unaudited) | |||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Part II. | ||||||||
Item 1. | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 3. | ||||||||
Item 4. | ||||||||
Item 5. | ||||||||
Item 6. | ||||||||
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Special Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, 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, 2021 (the “Fiscal 2021 10-K”) and others, which are summarized below:
Risks Relating to Our Business and the Industry in Which We Operate
•Our business, financial condition, and operations may be adversely affected by global health developments, including the pandemic resulting from the SARS-Co-V-2 strain of coronavirus and its variants (“COVID-19”).
•The continually evolving nature of the COVID-19 pandemic and the resulting public health response, including the changing demand for various COVID-19 vaccines and treatments from both patients and governments around the world, may affect sales of our products and services, including the COVID-19 products we manufacture.
•We participate in a highly competitive market, and increased competition may adversely affect our business.
•The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products.
•We are subject to product and other liability risks that could exceed our anticipated costs or adversely affect our results of operations, financial condition, liquidity, and cash flows.
•We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly and may adversely impact our business.
•Any failure to implement fully, monitor, and improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability, and adverse publicity.
•If we cannot keep pace with rapid technological advances, our services may become uncompetitive or obsolete.
•Any failure to protect or maintain our intellectual property may adversely affect our competitive edge and result in loss of revenue and reputation.
•Future price fluctuations, material shortages of raw materials, or changes in healthcare policies may have an adverse effect on our results of operations and financial conditions.
•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
•We may be unable to attract or retain key personnel.
•We may be unsuccessful in integrating our acquisitions, and we may expend substantial amounts of cash and incur debt in making acquisitions.
•Our global operations are subject to economic and political risks, which could affect the profitability of our operations or require costly changes to our procedures.
•As a global enterprise, fluctuations in the exchange rate of the United States ("U.S.") dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.
•Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.
•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
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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.
•Cell and gene therapies are relatively new modes of treatment and subject to changing public opinion, continuing research, and increased regulatory scrutiny, each of which may affect our customers' ability to conduct their business, or obtain approvals for their therapies, and thereby adversely affect our cell or gene therapy offerings.
Risks Relating to Our Indebtedness
•Our substantial leverage could limit our ability to operate our business and to finance future operations or acquisitions that would enhance our growth.
•Our debt agreements contain restrictions that may limit our flexibility in conducting certain current and future operations.
•We may not be able to pay our indebtedness when it becomes due.
•Our current and potential future use of derivative financial instruments may expose us to economic losses in the event of price or currency fluctuations.
Risks Relating to Ownership of Our Common Stock
•Our stock price has historically been and may continue to be volatile.
•Because we have no plan to pay cash dividends on our common stock, par value $0.01 (the “Common Stock”) for the foreseeable future, receiving a return on an investment in our Common Stock may require a sale for a net price greater than was paid for it.
•Provisions in our organizational documents could delay or prevent a change of control.
We caution you that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We use our website (catalent.com), our corporate Facebook page (https://facebook.com/CatalentPharmaSolutions), and our corporate Twitter account (@catalentpharma) as channels for the distribution of information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Catalent, Inc.
Consolidated Statements of Operations
(Unaudited; dollars in millions, except per share data)
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net revenue | $ | 1,217 | $ | 911 | $ | 2,242 | $ | 1,757 | |||||||||||||||
Cost of sales | 812 | 613 | 1,513 | 1,210 | |||||||||||||||||||
Gross margin | 405 | 298 | 729 | 547 | |||||||||||||||||||
Selling, general, and administrative expenses | 228 | 165 | 411 | 330 | |||||||||||||||||||
Gain on sale of subsidiary | — | — | (1) | — | |||||||||||||||||||
Other operating expense | 16 | 6 | 20 | 9 | |||||||||||||||||||
Operating earnings | 161 | 127 | 299 | 208 | |||||||||||||||||||
Interest expense, net | 32 | 26 | 58 | 51 | |||||||||||||||||||
Other expense (income), net | 14 | (8) | 23 | (19) | |||||||||||||||||||
Earnings before income taxes | 115 | 109 | 218 | 176 | |||||||||||||||||||
Income tax expense | 18 | 21 | 28 | 5 | |||||||||||||||||||
Net earnings | 97 | 88 | 190 | 171 | |||||||||||||||||||
Less: Net earnings attributable to preferred shareholders | (4) | (11) | (13) | (26) | |||||||||||||||||||
Net earnings attributable to common shareholders | $ | 93 | $ | 77 | $ | 177 | $ | 145 | |||||||||||||||
Earnings per share: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Net earnings | $ | 0.53 | $ | 0.46 | $ | 1.02 | $ | 0.88 | |||||||||||||||
Diluted | |||||||||||||||||||||||
Net earnings | $ | 0.52 | $ | 0.45 | $ | 1.01 | $ | 0.87 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited; dollars in millions)
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net earnings | $ | 97 | $ | 88 | $ | 190 | $ | 171 | |||||||||||||||
Other comprehensive (loss) income, net of tax | |||||||||||||||||||||||
Foreign currency translation adjustments | (18) | 39 | (32) | 55 | |||||||||||||||||||
Pension and other post-retirement adjustments | — | 1 | 1 | 1 | |||||||||||||||||||
Net change in marketable securities | (1) | — | (1) | — | |||||||||||||||||||
Derivatives and hedges | 3 | — | 4 | 1 | |||||||||||||||||||
Other comprehensive (loss) income, net of tax | (16) | 40 | (28) | 57 | |||||||||||||||||||
Comprehensive income | $ | 81 | $ | 128 | $ | 162 | $ | 228 | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Balance Sheets
(Unaudited; in millions, except share and per share data)
December 31, 2021 | June 30, 2021 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 849 | $ | 896 | |||||||
Trade receivables, net of allowance for credit losses of $23 and $12, respectively | 871 | 1,012 | |||||||||
Inventories | 688 | 563 | |||||||||
Prepaid expenses and other | 500 | 376 | |||||||||
Marketable securities | 66 | 71 | |||||||||
Total current assets | 2,974 | 2,918 | |||||||||
Property, plant, and equipment, net of accumulated depreciation of $1,255 and $1,179, respectively | 2,727 | 2,524 | |||||||||
Other assets: | |||||||||||
Goodwill | 3,026 | 2,519 | |||||||||
Other intangibles, net | 1,132 | 817 | |||||||||
Deferred income taxes | 65 | 66 | |||||||||
Other long-term assets | 279 | 268 | |||||||||
Total assets | $ | 10,203 | $ | 9,112 | |||||||
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Current portion of long-term obligations and other short-term borrowings | $ | 29 | $ | 75 | |||||||
Accounts payable | 363 | 385 | |||||||||
Other accrued liabilities | 653 | 736 | |||||||||
Total current liabilities | 1,045 | 1,196 | |||||||||
Long-term obligations, less current portion | 4,191 | 3,166 | |||||||||
Pension liability | 127 | 137 | |||||||||
Deferred income taxes | 189 | 164 | |||||||||
Other liabilities | 170 | 175 | |||||||||
Commitment and contingencies (see Note 15) | — | — | |||||||||
Total liabilities | 5,722 | 4,838 | |||||||||
Redeemable preferred stock, $0.01 par value; 0 and 1 million shares authorized at December 31 and June 30, 2021, respectively; 0 and 0.4 million shares issued and outstanding at December 31 and June 30, 2021, respectively | — | 359 | |||||||||
Shareholders' equity: | |||||||||||
Common stock, $0.01 par value; 1.00 billion shares authorized at December 31 and June 30, 2021; 179 million and 171 million issued and outstanding at December 31 and June 30, 2021, respectively | 2 | 2 | |||||||||
Preferred stock, $0.01 par value; 100 million shares and 99 million shares authorized at December 31 and June 30, 2021, respectively; 0 shares issued and outstanding at December 31 and June 30, 2021 | — | — | |||||||||
Additional paid in capital | 4,615 | 4,205 | |||||||||
Retained earnings | 209 | 25 | |||||||||
Accumulated other comprehensive loss | (345) | (317) | |||||||||
Total shareholders' equity | 4,481 | 3,915 | |||||||||
Total liabilities, redeemable preferred stock, and shareholders' equity | $ | 10,203 | $ | 9,112 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)
Three Months Ended December 31, 2021
Shares of Common Stock | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | Redeemable Preferred Stock | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 171,033 | $ | 2 | $ | 4,234 | $ | 114 | $ | (329) | $ | 4,021 | $ | 359 | ||||||||||||||||||||||||||||
Share issuances related to stock- based compensation | 199 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Conversion of redeemable preferred stock | 7,818 | — | 362 | — | — | 362 | (359) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 11 | — | — | 11 | — | ||||||||||||||||||||||||||||||||||
Cash paid, in lieu of equity, for tax withholding | — | — | (5) | — | — | (5) | — | ||||||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 11 | — | — | 11 | — | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | — | — | 2 | — | — | 2 | — | ||||||||||||||||||||||||||||||||||
Preferred dividend ($12.50 per share of redeemable preferred stock) | — | — | — | (2) | — | (2) | — | ||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 97 | — | 97 | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | (16) | (16) | — | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 179,050 | $ | 2 | $ | 4,615 | $ | 209 | $ | (345) | $ | 4,481 | $ | — |
Three Months Ended December 31, 2020
Shares of Common Stock | Common Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | Redeemable Preferred Stock | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 164,567 | $ | 2 | $ | 3,901 | $ | (461) | $ | (370) | $ | 3,072 | $ | 607 | ||||||||||||||||||||||||||||
Share issuances related to stock- based compensation | 174 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Conversion of redeemable preferred stock | 5,392 | — | 253 | — | — | 253 | (248) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 12 | — | — | 12 | — | ||||||||||||||||||||||||||||||||||
Cash paid, in lieu of equity, for tax withholding | — | — | (7) | — | — | (7) | — | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | — | — | 2 | — | — | 2 | — | ||||||||||||||||||||||||||||||||||
Preferred dividend ($12.50 per share of redeemable preferred stock) | — | — | — | (4) | — | (4) | — | ||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 88 | — | 88 | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 40 | 40 | — | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 170,133 | $ | 2 | $ | 4,161 | $ | (377) | $ | (330) | $ | 3,456 | $ | 359 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)
Six months ended December 31, 2021
Shares of Common Stock | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | Redeemable Preferred Stock | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 170,549 | $ | 2 | $ | 4,205 | $ | 25 | $ | (317) | $ | 3,915 | $ | 359 | ||||||||||||||||||||||||||||
Share issuances related to stock- based compensation | 683 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Conversion of redeemable preferred stock | 7,818 | — | 362 | — | — | 362 | (359) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 32 | — | — | 32 | — | ||||||||||||||||||||||||||||||||||
Cash paid, in lieu of equity, for tax withholding | — | — | (9) | — | — | (9) | — | ||||||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 19 | — | — | 19 | — | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | — | — | 6 | — | — | 6 | — | ||||||||||||||||||||||||||||||||||
Preferred dividend ($12.50 per share of redeemable preferred stock) | — | — | — | (6) | — | (6) | — | ||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 190 | — | 190 | — | ||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (28) | (28) | — | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 179,050 | $ | 2 | $ | 4,615 | $ | 209 | $ | (345) | $ | 4,481 | $ | — |
Six Months Ended December 31, 2020
Shares of Common Stock | Common Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | Redeemable Preferred Stock | |||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 162,788 | $ | 2 | $ | 3,819 | $ | (535) | $ | (387) | $ | 2,899 | $ | 607 | ||||||||||||||||||||||||||||
Equity offering, sale of common stock | 1,163 | — | 82 | — | — | 82 | — | ||||||||||||||||||||||||||||||||||
Share issuances related to stock- based compensation | 790 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Conversion of redeemable preferred stock | 5,392 | — | 253 | — | — | 253 | (248) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 30 | — | — | 30 | — | ||||||||||||||||||||||||||||||||||
Cash paid, in lieu of equity, for tax withholding | — | — | (27) | — | — | (27) | — | ||||||||||||||||||||||||||||||||||
Employee stock purchase plan | — | — | 4 | — | — | 4 | — | ||||||||||||||||||||||||||||||||||
Preferred dividend ($12.50 per share of redeemable preferred stock) | — | — | — | (13) | — | (13) | — | ||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 171 | — | 171 | — | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 57 | 57 | — | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 170,133 | $ | 2 | $ | 4,161 | $ | (377) | $ | (330) | $ | 3,456 | $ | 359 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statements of Cash Flows
(Unaudited; dollars in millions)
Six Months Ended December 31, | |||||||||||
2021 | 2020 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net earnings | $ | 190 | $ | 171 | |||||||
Adjustments to reconcile net earnings to net cash from operations: | |||||||||||
Depreciation and amortization | 179 | 140 | |||||||||
Non-cash foreign currency transaction loss (gain), net | 25 | (12) | |||||||||
Amortization of debt issuance costs | 4 | 3 | |||||||||
Impairments charges and loss (gain) on sale of assets | 19 | 2 | |||||||||
Gain on sale of subsidiary | (1) | — | |||||||||
Financing-related charges | 4 | — | |||||||||
Gain on derivative instrument | (2) | (16) | |||||||||
Stock-based compensation | 32 | 30 | |||||||||
Provision for (benefit from) deferred income taxes | 1 | (5) | |||||||||
Provision for bad debts and inventory | 9 | 18 | |||||||||
Change in operating assets and liabilities: | |||||||||||
Decrease in trade receivables | 131 | 88 | |||||||||
Increase in inventories | (148) | (140) | |||||||||
Increase in accounts payable | 3 | 14 | |||||||||
Other assets/accrued liabilities, net—current and non-current | (214) | (69) | |||||||||
Net cash provided by operating activities | 232 | 224 | |||||||||
CASH FLOWS USED IN INVESTING ACTIVITIES: | |||||||||||
Acquisition of property, equipment, and other productive assets | (277) | (339) | |||||||||
Proceeds from maturity of marketable securities | 4 | — | |||||||||
Settlement on sale of subsidiaries, net | (3) | — | |||||||||
Payment for acquisitions, net of cash acquired | (1,020) | (14) | |||||||||
Payment made for investments | (3) | (1) | |||||||||
Net cash used in investing activities | (1,299) | (354) | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Proceeds from borrowings | 1,100 | 2 | |||||||||
Payments related to long-term obligations | (64) | (55) | |||||||||
Financing fees paid | (15) | — | |||||||||
Dividends paid | (4) | (13) | |||||||||
Proceeds from sale of common stock, net | — | 82 | |||||||||
Cash paid, in lieu of equity, for tax-withholding obligations | (9) | (27) | |||||||||
Exercise of stock options | 19 | — | |||||||||
Other financing activities | 6 | 4 | |||||||||
Net cash provided by (used in) financing activities | 1,033 | (7) | |||||||||
Effect of foreign currency exchange on cash and cash equivalents | (13) | 17 | |||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (47) | (120) | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 896 | 953 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 849 | $ | 833 | |||||||
SUPPLEMENTARY CASH FLOW INFORMATION: | |||||||||||
Interest paid | $ | 50 | $ | 52 | |||||||
Income taxes paid, net | $ | 27 | $ | 19 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. (“Catalent” or the “Company”) directly and wholly owns PTS Intermediate Holdings LLC (“Intermediate Holdings”). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. (“Operating Company”). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the year ending June 30, 2022. The consolidated balance sheet at June 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021 filed with the Securities and Exchange Commission (the “SEC”).
Foreign Currency Translation
The financial statements of the Company’s operations are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of operations outside the U.S. into U.S. dollars are accumulated as a component of other comprehensive income utilizing period-end exchange rates. Since July 1, 2018, the Company has accounted for its Argentine operations as highly inflationary.
Depreciation
Depreciation expense was $64 million and $48 million for the three months ended December 31, 2021 and 2020, respectively. Depreciation expense was $122 million and $94 million for the six months ended December 31, 2021 and 2020, respectively. Depreciation expense includes amortization of assets related to finance leases. The Company charges repairs and maintenance costs to expense as incurred.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development costs amounted to $6 million and $5 million for the three months ended December 31, 2021 and 2020, respectively. Research and development costs amounted to $12 million for the six months ended December 31, 2021 and 2020.
Marketable Securities
The Company classifies its marketable securities as available-for-sale, because it may sell certain of its marketable securities prior to the stated maturity for various reasons, including management of liquidity, credit risk, duration, relative return, and asset allocation. The Company determines the fair value of each marketable security in its portfolio at each period end and recognizes gains and losses in the portfolio in other comprehensive income. As of December 31, 2021, the amortized cost basis of marketable securities approximates fair value and all outstanding marketable securities mature within one year.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the incremental approach for intra-period allocation, deferred tax recognition requirement for changes in
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equity method investments and non-U.S. subsidiaries, and methodology for calculating income taxes in an interim period. The guidance also simplifies certain aspects of the accounting for franchise taxes, the accounting for step-up in the tax basis of goodwill, and accounting for the change in the enacted change in tax laws or rates. The Company adopted the guidance on July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plan, which removes certain disclosures and added additional disclosures around weighted-average interest crediting rates for cash balance plans and explanation for significant gains and losses related to change in the benefit obligation for the period. The Company adopted the guidance on July 1, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Standards Not Adopted as of December 31, 2021
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. The expedients and exceptions provided by the guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The Company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.
The following tables allocate revenue for the three and six months ended December 31, 2021 and 2020, by type of activity and reporting segment (in millions):
Three Months Ended December 31, 2021 | Biologics | Softgel and Oral Technologies | Oral and Specialty Delivery | Clinical Supply Services | Total | ||||||||||||||||||||||||
Manufacturing & commercial product supply | $ | 169 | $ | 289 | $ | 96 | $ | — | $ | 554 | |||||||||||||||||||
Development services | 469 | 40 | 60 | — | 569 | ||||||||||||||||||||||||
Clinical supply services | — | — | — | 99 | 99 | ||||||||||||||||||||||||
Total | $ | 638 | $ | 329 | $ | 156 | $ | 99 | $ | 1,222 | |||||||||||||||||||
Inter-segment revenue elimination | (5) | ||||||||||||||||||||||||||||
Combined net revenue | $ | 1,217 |
Three Months Ended December 31, 2020 | Biologics | Softgel and Oral Technologies | Oral and Specialty Delivery | Clinical Supply Services | Total | ||||||||||||||||||||||||
Manufacturing & commercial product supply | $ | 124 | $ | 214 | $ | 114 | $ | — | $ | 452 | |||||||||||||||||||
Development services | 280 | 33 | 56 | — | 369 | ||||||||||||||||||||||||
Clinical supply services | — | — | — | 93 | 93 | ||||||||||||||||||||||||
Total | $ | 404 | $ | 247 | $ | 170 | $ | 93 | $ | 914 | |||||||||||||||||||
Inter-segment revenue elimination | (3) | ||||||||||||||||||||||||||||
Combined net revenue | $ | 911 |
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Six Months Ended December 31, 2021 | Biologics | Softgel and Oral Technologies | Oral and Specialty Delivery | Clinical Supply Services | Total | ||||||||||||||||||||||||
Manufacturing & commercial product supply | $ | 303 | $ | 496 | $ | 184 | $ | — | $ | 983 | |||||||||||||||||||
Development services | 881 | 76 | 118 | — | 1,075 | ||||||||||||||||||||||||
Clinical supply services | — | — | — | 195 | 195 | ||||||||||||||||||||||||
Total | $ | 1,184 | $ | 572 | $ | 302 | $ | 195 | $ | 2,253 | |||||||||||||||||||
Inter-segment revenue elimination | (11) | ||||||||||||||||||||||||||||
Combined net revenue | $ | 2,242 |
Six Months Ended December 31, 2020 | Biologics | Softgel and Oral Technologies | Oral and Specialty Delivery | Clinical Supply Services | Total | ||||||||||||||||||||||||
Manufacturing & commercial product supply | $ | 214 | $ | 405 | $ | 217 | $ | — | $ | 836 | |||||||||||||||||||
Development services | 567 | 63 | 111 | — | 741 | ||||||||||||||||||||||||
Clinical supply services | — | — | — | 186 | 186 | ||||||||||||||||||||||||
Total | $ | 781 | $ | 468 | $ | 328 | $ | 186 | $ | 1,763 | |||||||||||||||||||
Inter-segment revenue elimination | (6) | ||||||||||||||||||||||||||||
Combined net revenue | $ | 1,757 |
The following table allocates revenue by the location where the goods were made or the service performed:
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
United States | $ | 793 | $ | 535 | $ | 1,423 | $ | 1,052 | ||||||||||||||||||
Europe | 370 | 326 | 722 | 610 | ||||||||||||||||||||||
Other | 83 | 72 | 155 | 139 | ||||||||||||||||||||||
Elimination of revenue attributable to multiple locations | (29) | (22) | (58) | (44) | ||||||||||||||||||||||
Total | $ | 1,217 | $ | 911 | $ | 2,242 | $ | 1,757 |
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Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. The contract liabilities balance (current and non-current) as of December 31, 2021 and June 30, 2021 are as follows:
(Dollars in millions) | ||||||||
Balance at June 30, 2021 | $ | 321 | ||||||
Balance at December 31, 2021 | $ | 289 | ||||||
Revenue recognized in the period from amounts included in contracts liability at the beginning of the period: | $ | 182 |
Contract liabilities that will be recognized within 12 months of December 31, 2021 are accounted for in Other accrued liabilities and those that will be recognized longer than 12 months after December 31, 2021 are accounted for within Other liabilities.
Contract Assets
Contract assets primarily relate to the Company's conditional right to receive consideration for services that have been performed for customers as of December 31, 2021 relating to the Company's development services but had not yet been invoiced as of December 31, 2021. Contract assets are transferred to trade receivables, net when the Company’s right to receive the consideration becomes unconditional. Contract assets totaled $308 million and $181 million as of December 31, 2021 and June 30, 2021, respectively. Contract assets are included in prepaid expenses and other in the consolidated balance sheets.
3. BUSINESS COMBINATIONS AND DIVESTITURES
Skeletal Cell Therapy Support SA Acquisition
In November 2020, the Company acquired 100% of the equity interest in Skeletal Cell Therapy Support SA (“Skeletal”) for $15 million, as well as related supply agreements with the seller. Skeletal operates a cell therapy manufacturing facility in Gosselies, Belgium. The operations were assigned to the Company’s Biologics segment, expanding the Company’s cell therapy capacity for clinical and commercial supply. The acquisition, when combined with the Company's other European-based facilities and capabilities in cell therapy, has created an integrated European center of excellence in cell therapy.
The Company accounted for the Skeletal acquisition using the acquisition method in accordance with ASC 805, Business Combinations. The Company funded the entire purchase price with cash on hand and allocated the purchase price among the acquired assets, recognizing goodwill of $9 million. The Company allocated the remainder of the purchase price to trade receivables, property, plant, and equipment, and other current and non-current assets and liabilities assumed in the acquisition. Results for the three and six months ended December 31, 2021 were not material to the Company’s statement of operations, financial position, or cash flows.
Acorda Therapeutics, Inc. Acquisition
In February 2021, the Company acquired the manufacturing and packaging operations of the Acorda Therapeutics, Inc. (“Acorda”) dry powder inhaler and spray dry manufacturing business, including its manufacturing facility located near Boston, Massachusetts, for $83 million, subject to customary adjustments. In connection with the purchase, Acorda and the Company entered into a long-term supply agreement, under which the Company will continue the manufacture and packaging of an Acorda product at the facility. The facility and operations became part of the Company’s Oral and Specialty Delivery segment. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the three and six months ended December 31, 2021.
The Company accounted for the Acorda transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and preliminarily allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $79 million, inventory of $2 million, and goodwill of $2 million. The remainder of the purchase price was preliminarily allocated to other current and non-current assets and liabilities assumed in the acquisition.
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The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to goodwill and inventory are preliminary and subject to finalization. The Company expects to finalize its allocation within one year from the acquisition date.
Delphi Genetics SA Acquisition
In February 2021, the Company acquired 100% of the equity interest in Delphi Genetics SA (“Delphi”) for $50 million, subject to customary adjustments. Delphi is a plasmid DNA (pDNA) cell and gene therapy contract development and manufacturing organization based in Gosselies, Belgium. The facility and operations acquired became part of the Company’s Biologics segment. Results of the business acquired were not material to the Company's statement of operations, financial position, or cash flows for the three and six months ended December 31, 2021.
The Company accounted for the Delphi transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and allocated the purchase price among the acquired assets, recognizing property, plant, and equipment of $4 million, intangible assets of $7 million, other current assets of $3 million, assumed debt of $6 million, other current liabilities of $1 million, and goodwill of $43 million.
Hepatic Cell Therapy Support SA Asset Acquisition
In April 2021, the Company acquired 100% of the equity interest in Hepatic Cell Therapy Support SA (“Hepatic”) for approximately $15 million, net of cash acquired and debt assumed. Hepatic operates a manufacturing facility at the same location where Skeletal operates a cell therapy manufacturing facility in Gosselies, Belgium. The acquired facility expands the Company’s cell therapy capacity for clinical and commercial supply in its Biologics segment.
The Company accounted for the Hepatic transaction as an asset acquisition in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and allocated the purchase price to the assets acquired and liabilities assumed, recognizing property, plant, and equipment of $13 million, other current and non-current assets of $3 million, and assumed debt of $1 million.
RheinCell Therapeutics GmbH Acquisition
In August 2021, the Company acquired 100% of the equity interest in RheinCell Therapeutics GmbH (“RheinCell”) for approximately $26 million, net of cash acquired. RheinCell is a developer and manufacturer of induced pluripotent stem cells (“iPSCs”), including iPSCs meeting current good manufacturing practices (“CGMP”) standards, based in Lagenfeld, Germany. The operations became part of the Company’s Biologics segment and builds upon Catalent’s existing custom cell therapy process development and manufacturing capabilities with proprietary CGMP cell lines for iPSC-based therapies.
The Company accounted for the RheinCell transaction using the acquisition method in accordance with ASC 805. The Company funded the entire purchase price with cash on hand and preliminarily allocated the purchase price among the assets acquired, recognizing of $2 million of current assets, $3 million of other assets, $4 million of current liabilities, $5 million of other liabilities, $14 million of intangible assets, and goodwill of $16 million. Results of this business were not material to the Company's statement of operations, financial position, or cash flows for the three and six months ended December 31, 2021.
The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to goodwill and income taxes are preliminary and subject to finalization. The Company expects to finalize its allocation over the next several months, but, in any event, within one year from the acquisition date.
Bettera Holdings, LLC Acquisition
In October 2021, the Company acquired 100% of the equity interest in Bettera Holdings, LLC (“Bettera”) for approximately $1 billion, subject to customary adjustments. Bettera is a manufacturer of nutraceuticals and nutritional supplements in gummy, soft chew, and lozenge delivery formats.
The Company accounted for the Bettera transaction using the acquisition method in accordance with ASC 805. The Company estimated fair values at the date of acquisition for the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed. The Company has not completed its analysis regarding the assets acquired and liabilities assumed. Therefore, the allocation to current liabilities, property, plant, and equipment, intangible assets, goodwill, and income taxes are preliminary and subject to finalization. During the measurement period ending no later than one year after the acquisition date, the Company will continue to obtain information to assist in finalizing the fair values of the net assets acquired, which may differ materially from these preliminary estimates. 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.
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The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction, subject to finalization, is as follows:
(Dollars in millions) | Preliminary Purchase Price Allocation | ||||
Cash and cash equivalents | $ | 23 | |||
Trade receivables, net | 16 | ||||
Inventories | 32 | ||||
Other current assets | 4 | ||||
Property, plant, and equipment | 73 | ||||
Other intangibles, net (1) | 361 | ||||
Other assets | 1 | ||||
Current liabilities | (21) | ||||
Goodwill | 528 | ||||
Total assets acquired and liabilities assumed | $ | 1,017 |
(1) Other intangibles, net includes core technology of $338 million and customer relationships of $23 million.
The carrying value of trade receivables, inventory, and trade payables, as well as certain other current and non-current assets and liabilities, generally represented the fair value at the date of acquisition.
Property, plant, and equipment was valued using the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional, and economic factors. The Company then determined the remaining useful life based on the anticipated life of the asset and Company policy for similar assets.
Core technology intangible assets of $338 million were valued using the multi-period, excess-earnings method, a method that values the intangible asset using the present value of the after-tax cash flows attributable to the intangible asset only. The significant assumptions used in developing the valuation included the estimated annual net cash flows (including application of an appropriate margin to forecasted revenue, selling and marketing costs, return on working capital, contributory asset charges, and other factors), the discount rate that appropriately reflects the risk inherent in each future cash flow stream, and an assessment of the asset’s life cycle, as well as other factors. The assumptions used in the financial forecasts were based on historical data, supplemented by current and anticipated growth rates, management plans, and market-comparable information. Fair-value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. Preliminary assumptions may change and may result in significant changes to the final valuation. The core technology intangible asset has a weighted average useful life of 10 years.
Goodwill has been allocated to the Softgel and Oral Technologies segment as shown in Note 4, Goodwill. Goodwill is mainly comprised of the growth from an expected increase in capacity utilization and potential new customers. The goodwill resulting from the Bettera acquisition is deductible for tax purposes.
Results of the business acquired were not material to the Company's consolidated statement of operations, financial position, or cash flows for the three months ended December 31, 2021.
Blow-Fill-Seal Divestiture
In March 2021, the Company sold 100% of the shares of Catalent USA Woodstock, Inc. and certain related assets (collectively, the “Blow-Fill-Seal Business”) to a subsidiary of SK Capital Partners, LP for $300 million cash, a $50 million note receivable (estimated fair value of $47 million) as well as potential additional contingent consideration (up to $50 million) dependent upon the performance of aspects of the Blow-Fill-Seal Business. The Blow-Fill-Seal Business was part of the Oral and Specialty Delivery segment. The carrying value of the net assets sold was $149 million, which included goodwill of $54 million. As a result of the sale, the Company realized a gain from sale of subsidiary of $182 million, net of transaction costs, for the fiscal year ended June 30, 2021.
During the six months ended December 31, 2021, the Company settled a post-closing purchase price adjustment, which resulted in a gain on sale of subsidiary of $1 million.
All consideration received was measured at its divestiture date fair value. The Company valued the total consideration received from divestiture of the Blow-Fill-Seal Business as follows:
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(Dollars in millions) | Fair value of consideration received | ||||
Cash, gross | $ | 300 | |||
Note receivable (1) | 47 | ||||
Contingent consideration (2) | — | ||||
Other (3) | (16) | ||||
Total | $ | 331 |
(1) The note receivable, which provides for interest at a rate of 5.0% paid in kind, had an estimated fair value of $47 million, which is the $50 million aggregate principal amount less a $3 million discount determined using a discounted cash flow model with the market interest rate as a significant input.
(2) The Company determined that the estimated fair value of the contingent consideration from the sale of the Blow-Fill-Seal Business at December 31, 2021 is zero, and therefore, no contingent consideration was recorded as a result of the divestiture of the Blow-Fill-Seal Business. If any contingent consideration is subsequently received, it will be recorded in the period in which it is received. The Company has elected an accounting policy to recognize increases in the carrying amount of the contingent consideration asset using the gain contingency guidance in ASC 450, Contingencies.
(3) Other includes $8 million of transaction expenses, a working capital adjustment of $6 million, and a $2 million assumption of liabilities to create cumulative net cash proceeds of $284 million.
4. GOODWILL
The following table summarizes the changes between June 30, 2021 and December 31, 2021 in the carrying amount of goodwill in total and by segment:
(Dollars in millions) | Biologics | Softgel and Oral Technologies | Oral and Specialty Delivery | Clinical Supply Services | Total | ||||||||||||||||||||||||
Balance at June 30, 2021 | $ | 1,531 | $ | 516 | $ | 316 | $ | 156 | $ | 2,519 | |||||||||||||||||||
Additions(1) | 14 | 528 | — | — | 542 | ||||||||||||||||||||||||
Foreign currency translation adjustments | (17) | (11) | (4) | (3) | (35) | ||||||||||||||||||||||||
Balance at December 31, 2021 | $ | 1,528 | $ | 1,033 | $ | 312 | $ | 153 | $ | 3,026 |
(1) The additions to goodwill arise from the Bettera (Softgel and Oral Technologies) and RheinCell and Delphi (Biologics) acquisitions. For further details, see Note 3, Business Combinations and Divestitures.
The Company recorded no impairment charge to goodwill in the current period.
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5. OTHER INTANGIBLES, NET
The details of other intangibles as of December 31, 2021 and June 30, 2021 are as follows:
(Dollars in millions) | Weighted Average Life | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
December 31, 2021 | |||||||||||||||||||||||
Amortized intangibles: | |||||||||||||||||||||||
Core technology | 11 years | $ | 487 | $ | (104) | $ | 383 | ||||||||||||||||
Customer relationships | 13 years | 1,037 | (337) | 700 | |||||||||||||||||||
Product relationships | 8 years | 249 | (209) | 40 | |||||||||||||||||||
Other | 5 years | 19 | (10) | 9 | |||||||||||||||||||
Total other intangibles | $ | 1,792 | $ | (660) | $ | 1,132 |
(Dollars in millions) | Weighted Average Life | Gross Carrying Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
June 30, 2021 | |||||||||||||||||||||||
Amortized intangibles: | |||||||||||||||||||||||
Core technology | 19 years | $ | 140 | $ | (94) | $ | 46 | ||||||||||||||||
Customer relationships | 14 years | 1,024 | (306) | 718 | |||||||||||||||||||
Product relationships | 11 years | 281 | (237) | 44 | |||||||||||||||||||
Other | 5 years | 17 | (8) | 9 | |||||||||||||||||||
Total other intangibles | $ | 1,462 | $ | (645) | $ | 817 |
Amortization expense related to other intangible assets was $34 million and $57 million for the three and six months ended December 31, 2021, respectively, and $23 million and $46 million for the three and six months ended December 31, 2020, respectively.
Future amortization expense related to other intangible assets for the next five fiscal years is estimated to be:
(Dollars in millions) | Remainder Fiscal 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||||||||||||||||||
Amortization expense | $ | 66 | $ | 132 | $ | 132 | $ | 129 | $ | 122 | $ | 105 |
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6. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consisted of the following at December 31, 2021 and June 30, 2021:
(Dollars in millions) | Maturity | December 31, 2021 | June 30, 2021 | ||||||||||||||
Senior secured credit facilities | |||||||||||||||||
Term loan facility B-3 | February 2028 | $ | 1,440 | $ | 997 | ||||||||||||
5.000% senior notes due 2027 | July 2027 | 500 | 500 | ||||||||||||||
2.375% euro senior notes due 2028(1) | March 2028 | 933 | 984 | ||||||||||||||
3.125% senior notes due 2029 | February 2029 | 550 | 550 | ||||||||||||||
3.500% senior notes due 2030 | April 2030 | 650 | — | ||||||||||||||
Deferred purchase consideration | — | 50 | |||||||||||||||
Financing lease obligations | 2022 to 2038 | 188 | 193 | ||||||||||||||
Other obligations | 2022 to 2028 | 3 | 3 | ||||||||||||||
Unamortized discount and debt issuance costs | (44) | (36) | |||||||||||||||
Total debt | $ | 4,220 | $ | 3,241 | |||||||||||||
Less: current portion of long-term obligations and other short-term borrowings | 29 | 75 | |||||||||||||||
Long-term obligations, less current portion | $ | 4,191 | $ | 3,166 |
(1) The decrease in euro-denominated debt was primarily due to large fluctuations in foreign currency exchange rates.
Senior Secured Credit Facilities and Sixth Amendment to the Credit Agreement
In September 2021, Operating Company entered into Amendment No. 6 (the "Sixth Amendment") to its Amended and Restated Credit Agreement, dated May 20, 2014 (as subsequently amended, the "Credit Agreement"). Pursuant to the Sixth Amendment, Operating Company incurred an additional $450 million aggregate principal amount of U.S. dollar-denominated term loans (the "Incremental Term B-3 Loans") and amended the quarterly amortization from 0.25% to 0.2506% for the Incremental Term B-3 Loans and all of the remaining U.S. dollar-denominated term loans outstanding (together with the Incremental Term B-3 Loans, the “Term B-3 Loans”). The Incremental Term B-3 Loans otherwise feature the same principal terms as the existing Term B-3 Loans, with an interest rate of one-month LIBOR (subject to a floor of 0.50%) plus 2.00% per annum and a maturity date of February 2028. The proceeds of the Incremental Term B-3 Loans, after payment of the offering fees and expenses, were used in part to fund a portion of the consideration paid at the closing of the Bettera acquisition.
3.500% Senior Notes due 2030
In September 2021, Operating Company completed a private offering of $650 million aggregate principal amount of 3.500% Senior Notes due 2030 (the "2030 Notes"). The 2030 Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The 2030 Notes were offered in the U.S. to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and outside the U.S. only to non-U.S. investors pursuant to Regulation S under the Securities Act. The 2030 Notes will mature on April 1, 2030 and bear interest at the rate of 3.500% per annum payable semi-annually in arrears on April 1 and October 1 of each year, beginning on April 1, 2022. The proceeds of the 2030 Notes, after payment of the offering fees and expenses, were used to fund a portion of the consideration paid at the closing of the Bettera acquisition.
Deferred Purchase Consideration
In connection with the acquisition of Catalent Indiana, LLC in October 2017, $200 million of the $950 million aggregate nominal purchase price was payable in $50 million installments on each of the first four anniversaries of the closing date. The Company made the first three installment payments in October 2018, October 2019, and October 2020, and the final installment payment in October 2021.
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Measurement of the Estimated Fair Value of Debt
The estimated fair value of the Company’s senior secured credit facilities and other senior indebtedness is classified as a Level 2 determination (see Note 11, Fair Value Measurements, for a description of the method by which fair value classifications are determined) in the fair-value hierarchy and is calculated by using a discounted cash flow model with a market interest rate as a significant input. The carrying amounts and the estimated fair values of the Company’s principal categories of debt as of December 31, 2021 and June 30, 2021 are as follows:
December 31, 2021 | June 30, 2021 | ||||||||||||||||||||||||||||
(Dollars in millions) | Fair Value Measurement | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | ||||||||||||||||||||||||
5.000% senior notes due 2027 | Level 2 | $ | 500 | $ | 531 | $ | 500 | $ | 539 | ||||||||||||||||||||
2.375% Euro senior notes due 2028 | Level 2 | 933 | 936 | 984 | 993 | ||||||||||||||||||||||||
3.125% senior notes due 2029 | Level 2 | 550 | 541 | 550 | 524 | ||||||||||||||||||||||||
3.500% senior notes due 2030 | Level 2 | 650 | 639 | — | — | ||||||||||||||||||||||||
Senior secured credit facilities & other | Level 2 | $ | 1,631 | $ | 1,608 | $ | 1,243 | $ | 1,209 | ||||||||||||||||||||
Subtotal | $ | 4,264 | $ | 4,255 | $ | 3,277 | $ | 3,265 | |||||||||||||||||||||
Unamortized discount and debt issuance costs | (44) | — | (36) | — | |||||||||||||||||||||||||
Total debt | $ | 4,220 | $ | 4,255 | $ | 3,241 | $ | 3,265 |
7. EARNINGS PER SHARE
The Company computes earnings per share 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, Equity, Redeemable Preferred Stock, and Accumulated Other Comprehensive Loss). Diluted net earnings 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 earnings per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company’s equity incentive plans are reflected in diluted earnings per share by application of the treasury stock method. The Company applies the if-converted method to compute the potentially dilutive effect of the Series A Preferred Stock. The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the three and six months ended December 31, 2021 and 2020, respectively, are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(In millions except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Net earnings | $ | 97 | $ | 88 | $ | 190 | $ | 171 | |||||||||||||||
Less: Net earnings attributable to preferred shareholders | (4) | (11) | (13) | $ | (26) | ||||||||||||||||||
Net earnings attributable to common shareholders | $ | 93 | $ | 77 | $ | 177 | $ | 145 | |||||||||||||||
Weighted average shares outstanding - basic | 175 | 167 | 173 | 166 | |||||||||||||||||||
Weighted average dilutive securities issuable - stock plans | 2 | 2 | 2 | 2 | |||||||||||||||||||
Weighted average shares outstanding - diluted | 177 | 169 | 175 | 168 | |||||||||||||||||||
Earnings per share: | |||||||||||||||||||||||
Basic | $ | 0.53 | $ | 0.46 | $ | 1.02 | $ | 0.88 | |||||||||||||||
Diluted | $ | 0.52 | $ | 0.45 | $ | 1.01 | $ | 0.87 |
The Company's Series A Preferred Stock was deemed a participating security, meaning that it has the right to participate in undistributed earnings with the Company's Common Stock. On November 23, 2020 (the “Partial Conversion Date”), the holders of Series A Preferred Stock converted 265,223 shares of Series A Preferred Stock and $2 million of unpaid accrued dividends into shares of Common Stock (the “Partial Conversion”). These holders received 20.33 shares of Common Stock for
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each converted share of Series A Preferred Stock, resulting in the aggregate issuance of 5,392,280 shares of Common Stock by the Company. On November 18, 2021 (the “Final Conversion Date”), the holders of Series A Preferred Stock converted the remaining 384,777 shares of Series A Preferred Stock and $2 million of unpaid accrued dividends into shares of Common Stock (the “Final Conversion”). These holders received 20.32 shares of Common Stock for each converted share of Series A Preferred Stock, resulting in the aggregate issuance of 7,817,554 shares of Common Stock by the Company. See Note 14, Equity, Redeemable Preferred Stock and Accumulated Other Comprehensive Loss for further details.
The diluted weighted average number of shares outstanding as of December 31, 2021 did not include the following shares of Common Stock associated with the Series A Preferred Stock or the shares associated with the following types of outstanding equity grants due to their antidilutive effect:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(share counts in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Stock options | — | — | — | — | |||||||||||||||||||
Time-based restricted stock units | — | — | — | — | |||||||||||||||||||
Performance-based restricted stock units | — | — | — | — | |||||||||||||||||||
Series A Preferred Stock | — | 8 | — | 8 |
8. OTHER EXPENSE (INCOME), NET
The components of other expense (income), net for the three and six months ended December 31, 2021 and 2020 are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Debt financing costs (1) | $ | — | $ | — | $ | 4 | $ | — | |||||||||||||||
Foreign currency losses (gains) (2) | 15 | — | 24 | (1) | |||||||||||||||||||
Other (3) | (1) | (8) | (5) | (18) | |||||||||||||||||||
Total other expense (income), net | $ | 14 | $ | (8) | $ | 23 | $ | (19) |
(1) Debt financing costs for the six months ended December 31, 2021 includes $4 million of financing charges related to the Company’s Incremental Term B-3 Loans.
(2) Foreign currency remeasurement losses (gains) include both cash and non-cash transactions.
(3) Other, for the six months ended December 31, 2021, includes a gain of $2 million related to the fair value of the derivative liability associated with the Series A Preferred Stock. Other, for the three and six months ended December 31, 2020, includes a total unrealized gain of $7 million and $16 million, respectively, related to the fair value of the derivative liability associated with the Series A Preferred Stock.
9. 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 equipment relocation costs and costs associated with planned facility expansions and closures to streamline Company operations.
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During the fiscal year ended June 30, 2021, the Company adopted a plan to reduce costs and optimize its infrastructure in Europe by closing its Clinical Supply Services facility in Bolton, United Kingdom (“U.K.”) In connection with this restructuring plan, the Company reduced its headcount by approximately 180 employees and incurred cumulative charges of $8 million, primarily associated with employee severance benefits. For the three months and six months ended December 31, 2021, restructuring charges associated with the Bolton facility closure were $1 million and $2 million, respectively.
Total restructuring charges, inclusive of the charges associated with the Bolton facility closure, were $1 million and $5 million for the three months ended December 31, 2021 and 2020, respectively. Total restructuring charges, inclusive of the charges associated with the Bolton facility closure, were $2 million and $6 million for the six months ended December 31, 2021 and 2020, respectively.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the currency exchange rates applicable to its investments in 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 December 31, 2021, the Company had euro-denominated debt outstanding of $933 million (U.S. dollar equivalent), which is designated and qualifies as a hedge against its net investment in its European operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of translation gains or losses are reported in accumulated other comprehensive 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 six months ended December 31, 2021 and 2020.
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Unrealized foreign exchange gain (loss) within other comprehensive income | $ | 40 | $ | (45) | $ | 62 | $ | (78) | |||||||||||||||
Unrealized foreign exchange loss within statement of operations | $ | (8) | $ | (3) | $ | (11) | $ | (4) |
The net accumulated gain on the instrument designated as a hedge as of December 31, 2021 within other comprehensive loss was approximately $68 million. Amounts are reclassified out of accumulated other comprehensive loss into earnings when the entity to which the gains and losses relate is either sold or substantially liquidated.
Preferred Stock Derivative Liability
As discussed in Note 14, Equity, Redeemable Preferred Stock, and Accumulated Other Comprehensive Loss, in May 2019, the Company issued shares of Series A Preferred Stock in exchange for net proceeds of $646 million after taking into account the $4 million issuance cost.
The dividend rate used to determine the amount of the quarterly dividend payable on shares of the Series A Preferred Stock was subject to adjustment so as to provide holders of 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 recorded a total gain of $0 million and $7 million on the change in the estimated fair value of the derivative liability for the three months ended December 31, 2021 and 2020, respectively, which is reflected as other expense (income), net in the consolidated statements of operations.
A portion of the derivative liability was settled on the Partial Conversion Date due to the Partial Conversion. The fair value of the derivative liability as of the Partial Conversion Date was $9 million, of which $4 million was related to the converted portion of the outstanding shares of Series A Preferred Stock. The remainder of the derivative liability was settled on the Final Conversion Date due to the Final Conversion. The fair value of the derivative liability as of the Final Conversion Date
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was $1 million. See Note 14, Equity, Redeemable Preferred Stock, and Accumulated Other Comprehensive Loss for details of the Partial and Final Conversion.
Interest-Rate Swap
In April 2020, pursuant to its interest rate and risk management strategy, the Company entered into an interest-rate swap agreement with Bank of America N.A. (the “2020 Rate Swap”) as a hedge against the economic effect of a portion of the variable interest obligation associated with its U.S. dollar-denominated term loans under its senior secured credit facilities. The 2020 Rate Swap effectively fixed the rate of interest payable on that portion of the debt, thereby reducing the impact of future interest rate changes on future interest expense.
In February 2021, in connection with an amendment to the Credit Agreement, the Company paid $2 million in cash to Bank of America N.A to settle the 2020 Rate Swap. This loss is deferred in stockholders’ equity, net of income taxes, as a component of accumulated other comprehensive loss, and amortized as an adjustment to interest expense, net over the original term of the formerly outstanding term loans. The net amount of deferred losses on cash flow hedges that is expected to be reclassified from accumulated other comprehensive loss into interest expense, net within the next twelve months is not material.
In February 2021, the Company entered into a new interest-rate swap agreement with Bank of America N.A. (the “2021 Rate Swap”) as a hedge against the economic effect of a portion of the variable interest obligation associated with its Term B-3 Loans. The 2021 Rate Swap effectively fixed the rate of interest payable on that portion of the Term B-3 Loans, thereby reducing the impact of future interest rate changes on future interest expense. As a result of the 2021 Rate Swap, the variable portion of the applicable interest rate on $500 million of the Term B-3 Loans is now effectively fixed at 0.9985%.
The 2021 Rate Swap qualifies for and is designated as a cash-flow hedge. The Company evaluates hedge effectiveness at the inception of the hedge and on an ongoing basis. The cash flows associated with the 2021 Rate Swap is reported in cash provided by operating activities in the consolidated statements of cash flows. The unrealized gain or loss from marking the 2021 Rate Swap to market during the three and six months ended December 31, 2021 was immaterial in each period.
A summary of the estimated fair value of the 2021 Rate Swap reported in the consolidated balance sheets is stated in the table below:
December 31, 2021 | June 30, 2021 | ||||||||||||||||||||||
(Dollars in millions) | Balance Sheet Classification | Estimated Fair Value | Balance Sheet Classification | Estimated Fair Value | |||||||||||||||||||
Interest-rate swap | Other long-term assets | $ | 7 | Other long-term assets | $ | 2 |
11. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement, defines fair value as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which Level 1 and Level 2 are considered observable and Level 3 is considered unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses of the Company approximate fair value based on the short maturities of these instruments.
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The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification as of the end of each reporting period. The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis and the fair value measurement for such assets and liabilities at December 31, 2021 and June 30, 2021, respectively:
(Dollars in millions) | Basis of Fair Value Measurement | |||||||||||||||||||||||||
December 31, 2021 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Marketable securities | $ | 66 | $ | 66 | $ | — | $ | — | ||||||||||||||||||
Interest-rate swap | 7 | — | 7 | — | ||||||||||||||||||||||
Trading securities | 2 | 2 | — | — | ||||||||||||||||||||||
June 30, 2021 | ||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Marketable securities | $ | 71 | $ | 71 | $ | — | $ | — | ||||||||||||||||||
Interest-rate swap | 2 | — | 2 | — | ||||||||||||||||||||||
Trading securities | 1 | 1 | — | — | ||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Series A Preferred Stock derivative liability | 3 | — | — | 3 | ||||||||||||||||||||||
The fair value of the 2021 Rate Swap is determined at the end of each reporting period based on valuation models that use interest rate yield curves and discount rates as inputs. The discount rates are based on U.S. deposit or U.S. Treasury rates. The significant inputs used in the valuation models are readily available in public markets or can be derived from observable market transactions, and the valuation is therefore classified as Level 2 in the fair-value hierarchy.
The estimated fair value of the Series A Preferred Stock derivative was determined using an option pricing methodology, specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporated the terms and conditions of the preferred stock arrangement, historical stock price volatility, the risk-free interest rate, a credit spread based on the yield indexes of high-yield bonds, and the trading price of shares of Common Stock. The calculation of the estimated fair value of the derivative liability was highly sensitive to changes in unobservable inputs, such as the expected volatility and the Company’s credit spread. The estimated fair value of the Series A Preferred Stock derivative liability was classified as Level 3 in the fair-value hierarchy due to the significant management judgment required to make the assumptions underlying the calculation of value.
The following table sets forth a summary of changes in the estimated fair value of the Series A Preferred Stock derivative liability from June 30, 2021 to December 31, 2021:
(Dollars in millions) | Fair Value Measurements of Series A Preferred Stock Derivative Liability Using Significant Unobservable Inputs (Level 3) | |||||||
Balance at June 30, 2021 | $ | 3 | ||||||
Change in estimated fair value of Series A Preferred Stock derivative liability | (2) | |||||||
Settlement of derivative liability upon Final Conversion | (1) | |||||||
Balance at December 31, 2021 | $ | — |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-lived assets, goodwill, and other intangible assets are subject to non-recurring fair value measurement for the evaluation of potential impairment. Other than the fair value estimates disclosed in Note 3, Business Combinations and Divestitures, there was no non-recurring fair value measurement during the six months ended December 31, 2021 and 2020.
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12. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Generally, fluctuations in the effective tax rate are due to changes in relative amounts of U.S. and non-U.S. pretax income, the tax impact of special items, and other discrete tax items. Discrete items include, but are not limited to, changes in non-U.S. statutory tax rates, amortization of certain assets, changes in the Company’s reserve for uncertain tax positions, and 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 major jurisdictions as the U.S., Germany, and the U.K. The Company is no longer subject to examinations by any relevant tax authority for years prior to fiscal year 2009. The Company is presently under audit in select jurisdictions in the United States and in Europe, but no material impact is expected to the financial results once these audits are completed.
ASC 740 provides guidance for the accounting of uncertain income tax positions recognized in the Company's tax filings. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolution of any related appeal or litigation process. As of December 31, 2021 and June 30, 2021, the Company's reserve against uncertain income tax positions remained substantially unchanged at approximately $5 million. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
The Company recorded a provision for income taxes for the three months ended December 31, 2021 of $18 million relative to earnings before income taxes of $115 million. The Company recorded a provision for income taxes for the three months ended December 31, 2020 of $21 million relative to earnings before income taxes of $109 million. The decrease in income tax provision relative to the prior-year period was largely the result of a shift in pretax income in international tax jurisdictions with favorable tax rates. Generally, fluctuations in the effective tax rate are due to changes in the geographic distribution of our pretax income resulting from our business mix, changes in the tax impact of permanent differences, restructuring, special items, certain equity related compensation, and other discrete tax items that may have unique tax implications depending on the nature of the item.
The Company recorded a provision for income taxes for the six months ended December 31, 2021 of $28 million relative to earnings before income taxes of $218 million. The Company recorded a provision for income taxes for the six months ended December 31, 2020 of $5 million relative to earnings before income taxes of $176 million. The increase in the provision relative to the prior-year period was the result of a decrease in non-U.S. tax credits claimed on an amended U.S. federal income tax filing compared to the prior-year period. The provision for income taxes in each of these periods was also impacted by the relative amount and mix of permanent tax adjustments included in the income tax computation and other discrete tax items recognized in the periods.
13. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of the Company’s net periodic benefit costs are as follows:
Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||||||
Selling, general, and administrative expenses: | |||||||||||||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | |||||||||||||||
Other expense (income), net: | |||||||||||||||||||||||
Interest cost | 1 | 1 | 2 | 2 | |||||||||||||||||||
Expected return on plan assets | (3) | (2) | (5) | (5) | |||||||||||||||||||
Amortization (1) | 1 | — | 2 | 2 | |||||||||||||||||||
Net amount recognized | $ | — | $ | — | $ | 1 | $ | 1 |
(1) Amount represents the amortization of unrecognized actuarial 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 million as of December 31, 2021 and June 30,
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2021, and is included within pension liability on the consolidated balance sheets. The annual cash impact associated with the Company’s obligations in such plan is approximately $2 million.
14. EQUITY, REDEEMABLE PREFERRED STOCK, AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Description of Capital Stock
The Company is authorized to issue 1.00 billion shares of its Common Stock and 100 million shares of preferred stock, par value $0.01 per share. In accordance with the Company’s amended and restated certificate of incorporation, each share of Common Stock has one vote, and the Common Stock votes together as a single class.
Redeemable Preferred Stock
In May 2019, the Company designated 1 million shares of its preferred stock, par value $0.01, as its Series A Convertible Preferred Stock (the “Series A Preferred Stock”), pursuant to a certificate of designation of preferences, rights, and limitations (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 million, to affiliates of Leonard Green & Partners, L.P., each share having an initial stated value of $1,000 (as such value may be adjusted in accordance with the terms of the Certificate of Designation). The Series A Preferred Stock ranked senior to the Company’s Common Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company.
Proceeds from the offering of the Series A Preferred Stock, net of stock issuance costs, were $646 million, $40 million of which was allocated to the dividend-adjustment feature at its issuance and separately accounted for as a derivative liability. Any change in the fair value of derivative liability during a fiscal quarter is recorded as a non-operating expense in the consolidated statement of operations.
As described in Note 7, Earnings Per Share, on the Partial Conversion Date, holders of Series A Preferred Stock converted 265,223 shares (approximately 41% of their holdings) and $2 million of unpaid accrued dividends into shares of Common Stock. These holders received 20.33 shares of Common Stock for each converted share of Series A Preferred Stock, resulting in the issuance of 5,392,280 shares of Common Stock by the Company. There was no gain or loss recognized upon the Partial Conversion as it occurred in accordance with the terms of the Certificate of Designation.
As a result of the Partial Conversion, additional paid in capital increased $253 million, which includes $4 million related to the fair value of the portion of the derivative liability that was settled upon the Partial Conversion and $2 million related to an unpaid accrued dividend.
On the Final Conversion Date, holders of Series A Preferred Stock converted the remaining 384,777 shares and $2 million of unpaid accrued dividends into shares of Common Stock. These holders received 20.32 shares of Common Stock for each converted share of Series A Preferred Stock, resulting in the issuance of 7,817,554 shares of Common Stock by the Company. There was no gain or loss recognized upon the Final Conversion as it occurred in accordance with the terms of the Certificate of Designation. See Note 10, Derivative Instruments and Hedging Activities, for detail concerning the change in fair value of the derivative during the six months ended December 31, 2021.
As a result of the Final Conversion, additional paid in capital increased $362 million, which includes $1 million related to the fair value of the portion of the derivative liability that was settled upon the Final Conversion and $2 million related to an unpaid accrued dividend.
Following the Final Conversion, no share of the Series A Preferred Stock remains outstanding, and the Company has re-assigned all of the authorized shares of Series A Preferred Stock as undesignated shares of preferred stock, par value $0.01.
Accumulated Other Comprehensive Loss
The components of the changes in the cumulative translation adjustment, derivatives and hedges, minimum pension liability, and marketable securities for the three and six months ended December 31, 2021 and 2020 are presented below.
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Three Months Ended December 31, | Six Months Ended December 31, | ||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||||||||
Net investment hedge | $ | 40 | $ | (45) | $ | 62 | $ | (78) | |||||||||||||||
Long-term intercompany loans | (4) | 16 | (7) | 23 | |||||||||||||||||||
Translation adjustments | (45) | 59 | (73) | 94 | |||||||||||||||||||
Total foreign currency translation adjustment, pretax | (9) | 30 | (18) | 39 | |||||||||||||||||||
Tax expense (benefit) | 9 | (9) | 14 | (16) | |||||||||||||||||||
Total foreign currency translation adjustment, net of tax | $ | (18) | $ | 39 | $ | (32) | $ | 55 | |||||||||||||||
Net change in derivatives and hedges: | |||||||||||||||||||||||
Net gain recognized during the period | $ | 4 | $ | — | $ | 5 | $ | 1 | |||||||||||||||
Total derivatives and hedges, pretax | 4 | — | 5 | 1 | |||||||||||||||||||
Tax expense | 1 | — | 1 | — | |||||||||||||||||||
Net change in derivatives and hedges, net of tax | $ | 3 | $ | — | $ | 4 | $ | 1 | |||||||||||||||
Net change in minimum pension liability: | |||||||||||||||||||||||
Net gain recognized during the period | $ | — | $ | 1 | $ | 1 | $ | 1 | |||||||||||||||
Total pension liability, pretax | — | 1 | 1 | 1 | |||||||||||||||||||
Tax benefit | — | — | — | — | |||||||||||||||||||
Net change in minimum pension liability, net of tax | $ | — | $ | 1 | $ | 1 | $ | 1 | |||||||||||||||
Net change in marketable securities: | |||||||||||||||||||||||
Net loss recognized during the period | $ | (1) | $ | — | $ | (1) | $ | — | |||||||||||||||
Total available for sale investment, pretax | (1) | — | (1) | — | |||||||||||||||||||
Tax benefit | — | — | — | — | |||||||||||||||||||
Net change in marketable securities, net of tax | $ | (1) | $ | — | $ | (1) | $ | — | |||||||||||||||
For the three months ended December 31, 2021, the changes in accumulated other comprehensive loss, net of tax by component are as follows:
(Dollars in millions) | Foreign Exchange Translation Adjustments | Pension and Liability Adjustments | Derivatives and Hedges | Marketable Securities | Other | Total | |||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | (282) | $ | (46) | $ | 1 | $ | (1) | $ | (1) | $ | (329) | |||||||||||||||||||||||
Other comprehensive (loss) income before reclassifications | (18) | — | 3 | (1) | — | (16) | |||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (18) | — | 3 | (1) | — | (16) | |||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | (300) | $ | (46) | $ | 4 | $ | (2) | $ | (1) | $ | (345) |
For the six months ended December 31, 2021, the changes in accumulated other comprehensive loss, net of tax by component are as follows:
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(Dollars in millions) | Foreign Exchange Translation Adjustments | Pension and Liability Adjustments | Derivatives and Hedges | Marketable Securities | Other | Total | |||||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | (268) | $ | (47) | $ | — | $ | (1) | $ | (1) | $ | (317) | |||||||||||||||||||||||
Other comprehensive (loss) income before reclassifications | (32) | — | 4 | (1) | — | (29) | |||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (32) | 1 | 4 | (1) | — | (28) | |||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | (300) | $ | (46) | $ | 4 | $ | (2) | $ | (1) | $ | (345) |
15. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s consolidated financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, the Company receives subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. The Company expects to incur costs in future periods in connection with future requests.
16. SEGMENT INFORMATION
The Company conducts its business within the following operating segments: Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services. The Company evaluates the performance of its segments based on segment earnings before other (expense) income, impairments, restructuring costs, interest expense, income tax expense (benefit), and depreciation and amortization (“Segment EBITDA”).
Segment EBITDA is subject to important limitations. These consolidated financial statements include information concerning Segment EBITDA (a) because Segment EBITDA is an operational measure used by management in the assessment of the operating segments, the allocation of resources to the segments, and the setting of strategic goals and annual goals for the segments, and (b) in order to provide supplemental information that the Company considers relevant for the readers of the consolidated financial statements. The Company’s presentation of Segment EBITDA may not be comparable to similarly titled measures used by other companies.
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The following tables include net revenue and Segment EBITDA for each of the Company's current reporting segments during the three and six months ended December 31, 2021 and 2020:
(Dollars in millions) | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Net revenue: | |||||||||||||||||||||||
Biologics | $ | 638 | $ | 404 | $ | 1,184 | $ | 781 | |||||||||||||||
Softgel and Oral Technologies | 329 | 247 | 572 | 468 | |||||||||||||||||||
Oral and Specialty Delivery | 156 | 170 | 302 | 328 | |||||||||||||||||||
Clinical Supply Services | 99 | 93 | 195 | 186 | |||||||||||||||||||
Inter-segment revenue elimination | (5) | (3) | (11) | (6) | |||||||||||||||||||
Total net revenue | $ | 1,217 | $ | 911 | $ | 2,242 | $ | 1,757 |
(Dollars in millions) | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Segment EBITDA reconciled to net earnings: | |||||||||||||||||||||||
Biologics | $ | 197 | $ | 136 | $ | 363 | $ | 242 | |||||||||||||||
Softgel and Oral Technologies | 78 | 46 | 119 | 83 | |||||||||||||||||||
Oral and Specialty Delivery | 44 | 44 | 77 | 66 | |||||||||||||||||||
Clinical Supply Services | 27 | 25 | 53 | 50 | |||||||||||||||||||
Sub-Total | $ | 346 | $ | 251 | $ | 612 | $ | 441 | |||||||||||||||
Reconciling items to net earnings | |||||||||||||||||||||||
Unallocated costs (1) | (101) | (45) | (157) | (74) | |||||||||||||||||||
Depreciation and amortization | (98) | (71) | (179) | (140) | |||||||||||||||||||
Interest expense, net | (32) | (26) | (58) | (51) | |||||||||||||||||||
Income tax expense | (18) | (21) | (28) | (5) | |||||||||||||||||||
Net earnings | $ | 97 | $ | 88 | $ | 190 | $ | 171 |
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
(Dollars in millions) | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Impairment charges and gain (loss) on sale of assets (a) | $ | (16) | $ | (1) | $ | (19) | $ | (2) | |||||||||||||||
Stock-based compensation | (11) | (11) | (32) | (30) | |||||||||||||||||||
Restructuring and other special items (b) | (23) | (15) | (31) | (20) | |||||||||||||||||||
Gain on sale of subsidiary (c) | — | — | 1 | — | |||||||||||||||||||
Other (expense) income, net (d) | (14) | 8 | (23) | 19 | |||||||||||||||||||
Unallocated corporate costs, net | (37) | (26) | (53) | (41) | |||||||||||||||||||
Total unallocated costs | $ | (101) | $ | (45) | $ | (157) | $ | (74) |
(a) Impairment charges and gain (loss) on sale of assets during the three and six months ended December 31, 2021 include fixed asset impairment charges associated with a product in our respiratory and specialty platform.
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(b) Restructuring and other special items during the three months ended December 31, 2021 include (i) transaction and integration costs primarily associated with the Bettera acquisition and (ii) restructuring costs associated with the closure of the Bolton facility. Restructuring and other special items during the six months ended December 31, 2021 include (i) transaction and integration costs associated with the Delphi, Hepatic, RheinCell, and Bettera acquisitions and (ii) restructuring costs associated with the closure of the Bolton facility.
Restructuring and other special items during the three and six months ended December 31, 2020 include (i) transaction costs associated with the sale of the Blow-Fill-Seal Business and (ii) restructuring costs associated with the closure of the Bolton facility. Restructuring and other special items during the six months ended December 31, 2020 also include transaction and integration costs associated with acquisitions of facilities in Italy and Belgium, the disposal of a site in Australia, and other restructuring initiatives across the Company's network of sites.
(c) Gain on sale of subsidiary for the six months ended December 31, 2021 was due to the sale of the Blow-Fill-Seal Business.
(d) Refer to Note 8, Other Expense (Income), Net for details of financing charges and foreign currency translation adjustments recorded within other expense (income), net.
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated financial statements.
(Dollars in millions) | December 31, 2021 | June 30, 2021 | |||||||||
Assets: | |||||||||||
Biologics | $ | 5,208 | $ | 4,973 | |||||||
Softgel and Oral Technologies | 2,591 | 1,604 | |||||||||
Oral and Specialty Delivery | 1,210 | 1,269 | |||||||||
Clinical Supply Services | 465 | 483 | |||||||||
Corporate and eliminations | 729 | 783 | |||||||||
Total assets | $ | 10,203 | $ | 9,112 |
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17. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at December 31, 2021 and June 30, 2021 is detailed in the following tables.
Inventories
Work-in-process and inventories include raw materials, labor, and overhead. Total inventories consist of the following:
(Dollars in millions) | December 31, 2021 | June 30, 2021 | |||||||||
Raw materials and supplies | $ | 592 | $ | 469 | |||||||
Work-in-process | 153 | 151 | |||||||||
Total inventories, gross | 745 | 620 | |||||||||
Inventory cost adjustment | (57) | (57) | |||||||||
Total inventories | $ | 688 | $ | 563 |
Prepaid expenses and other
Prepaid expenses and other consist of the following:
(Dollars in millions) | December 31, 2021 | June 30, 2021 | |||||||||
Prepaid expenses | $ | 54 | $ | 46 | |||||||
Contract assets | 308 | 181 | |||||||||
Spare parts supplies | 21 | 30 | |||||||||
Prepaid income tax | 21 | 22 | |||||||||
Non-U.S. value-added tax | 35 | 50 | |||||||||
Other current assets | 61 | 47 | |||||||||
Total prepaid expenses and other | $ | 500 | $ | 376 |
Other accrued liabilities
Other accrued liabilities consist of the following:
(Dollars in millions) | December 31, 2021 | June 30, 2021 | |||||||||
Accrued employee-related expenses | $ | 136 | $ | 184 | |||||||
Operating lease liabilities | 14 | 16 | |||||||||
Restructuring accrual | 1 | 4 | |||||||||
Accrued interest | 33 | 27 | |||||||||
Contract liabilities | 271 | 305 | |||||||||
Accrued income tax | 20 | 30 | |||||||||
Other | 178 | 170 | |||||||||
Total other accrued liabilities | $ | 653 | $ | 736 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
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 U.S. Food and Drug Administration (the “FDA”) in
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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.
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 new and existing business continuity plans when needed. Our existing procedures, which are consistent with current good manufacturing practices 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
We continue to assess any impact the COVID-19 pandemic may have on our business and results of operations. We have 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, and Anagni, Italy, as well as our commercial-scale viral vector manufacturing facility in Maryland. 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
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concentration of revenue from certain COVID-19 vaccine products enhances our operational risk with respect to quality, security, regulatory inspections and business disruption resulting from any unforeseen event that affects any of the facilities and communities in which we manufacture COVID-19 vaccines. Because some of our work on COVID-19 vaccines is performed under subcontracts to U.S. government contracts, new regulations affecting U.S. federal government prime and subcontractors may affect our operations, efficiency, and ability to deliver on our obligations to customers for COVID-19 vaccines, other COVID-19 related products, and other unrelated products and services. We have implemented various mechanisms to protect our customers, their material and product, and our business continuity, such as enhanced security measures at certain facilities and heightened cybersecurity controls.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Management made certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the consolidated financial statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the consolidated financial statements than others.
There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 2021 10-K, other than recently adopted accounting principles disclosed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Consolidated Financial Statements”), which adoptions had no material impact on our financial condition or results of operations.
Non-GAAP Metrics
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense (benefit) for income taxes, and depreciation and amortization, adjusted for the income or loss attributable to non-controlling interests (“EBITDA from operations”). EBITDA from operations is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for the readers of our Consolidated Financial Statements, and such information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from operations defined under U.S. GAAP is net earnings. 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 interests, other expense (income), impairments, restructuring costs, interest expense, income tax expense (benefit), and depreciation and amortization (“Segment EBITDA”).
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a
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constant-currency basis as excluding the impact of foreign currency exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency exchange, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance with U.S. GAAP. These measures, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Three Months Ended December 31, 2021 Compared to the Three Months Ended December 31, 2020
The below tables summarize several financial metrics we use to measure performance for the three months ended December 31, 2021 and three months ended December 31, 2020. Refer to the discussions below regarding performance and use of key financial metrics.
![ctlt-20211231_g2.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g2.jpg)
![ctlt-20211231_g3.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g3.jpg)
Results for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 were as follows:
Three Months Ended December 31, | FX Impact | Constant Currency Increase (Decrease) | |||||||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | Change $ | Change % | |||||||||||||||||||||||||
Net revenue | $ | 1,217 | $ | 911 | $ | (13) | $ | 319 | 35 | % | |||||||||||||||||||
Cost of sales | 812 | 613 | (8) | 207 | 34 | % | |||||||||||||||||||||||
Gross margin | 405 | 298 | (5) | 112 | 38 | % | |||||||||||||||||||||||
Selling, general, and administrative expenses | 228 | 165 | (1) | 64 | 38 | % | |||||||||||||||||||||||
Other operating expense | 16 | 6 | (1) | 11 | 185 | % | |||||||||||||||||||||||
Operating earnings | 161 | 127 | (3) | 37 | 30 | % | |||||||||||||||||||||||
Interest expense, net | 32 | 26 | — | 6 | 24 | % | |||||||||||||||||||||||
Other expense (income), net | 14 | (8) | (2) | 24 | (292) | % | |||||||||||||||||||||||
Earnings before income taxes | 115 | 109 | (1) | 7 | 6 | % | |||||||||||||||||||||||
Income tax expense | 18 | 21 | — | (3) | (14) | % | |||||||||||||||||||||||
Net earnings | $ | 97 | $ | 88 | $ | (1) | $ | 10 | 11 | % |
Change % calculations are based on amounts prior to rounding
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Net Revenue
2021 vs. 2020 | |||||
Year-Over-Year Change | Three Months Ended December 31, | ||||
Net Revenue | |||||
Organic | 32 | % | |||
Impact of acquisitions | 6 | % | |||
Impact of divestitures | (3) | % | |||
Constant-currency change | 35 | % | |||
Foreign currency translation impact on reporting | (1) | % | |||
Total % change | 34 | % |
Net revenue increased $319 million, or 35%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. Net revenue decreased 3% inorganically principally due to the sale of Catalent USA Woodstock, Inc. and certain related assets (collectively, the “Blow-Fill-Seal Business”) in March 2021. Net revenue increased 32% organically on a constant-currency basis, primarily due to (i) broad-based strength across our Biologics segment in part related to demand for COVID-19-related programs, and (ii) increased demand for our customers' prescription products, a continued rebound in our consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and growth in development services in our Softgel and Oral Technologies segment.
Gross Margin
Gross margin increased $112 million, or 38%, compared to the three months ended December 31, 2020, excluding the impact of foreign exchange, primarily as a result of the strong margin profile on broad-based offerings in our Biologics segment, in part for COVID-19 related programs, a favorable impact from the decline in recall charges in our Oral and Specialty Delivery segment, and increased demand for our prescription products and development growth in our Softgel and Oral Technologies segment, partially offset by a $13 million increase in depreciation and amortization expense. On a constant-currency basis, gross margin, as a percentage of revenue, increased 60 basis points to 33.3% in the three months ended December 31, 2021, compared to 32.7% in the prior-year period, primarily due to the factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $64 million, or 38%, compared to the three months ended December 31, 2020, excluding the impact of foreign exchange, which includes $15 million in net incremental expenses from acquired and divested companies. The year-over-year increase in selling, general, and administrative expenses was primarily due to an $18 million increase in employee-related costs principally incurred for wages and bonuses, $13 million in transaction and integration costs primarily associated with our acquisition of Bettera Holdings, LLC (“Bettera”), $5 million of amortization and depreciation, and $4 million of bad debt expense.
Other Operating Expense
Other operating expense for the three months ended December 31, 2021 increased by $11 million, or 185%, compared to the three months ended December 31, 2020, when excluding the impact of foreign exchange. The year-over-year increase was primarily due to a $15 million increase in fixed asset impairment charges primarily associated with a product in our respiratory and specialty platform.
Interest Expense, net
Interest expense, net of $32 million for the three months ended December 31, 2021 increased $6 million, or 24%, compared to the three months ended December 31, 2020, excluding the impact of foreign exchange. The savings from repayment of our formerly outstanding term loans and 4.875% senior notes due 2026 were offset by increases in interest expense due to our most recent tranche of term loans, 3.125% senior notes due 2029 (the “2029 Notes”), and 3.500% senior notes due 2030 (the “2030 Notes”).
For additional information concerning our debt and financing arrangements, including the changing mix of debt and equity in our capital structure, see “Liquidity and Capital Resources” and Note 6, Long-Term Obligations and Short-Term Borrowings to our Consolidated Financial Statements.
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Other Expense (Income), net
Other expense, net of $14 million for the three months ended December 31, 2021 was primarily driven by $15 million of foreign currency losses.
Other income, net of $8 million for the three months ended December 31, 2020 was primarily driven by a gain of $7 million related to the change in fair value of the derivative liability arising from the dividend-adjustment mechanism of our formerly outstanding Series A convertible preferred stock, par value $0.01 (the “Series A Preferred Stock”).
Income Tax Expense
Our provision for income taxes for the three months ended December 31, 2021 was $18 million relative to earnings before taxes of $115 million. Our provision for income taxes for the three months ended December, 31, 2020 was $21 million relative to earnings before taxes of $109 million. The decrease in income tax provision was primarily the result of a shift in pretax income in international tax jurisdictions with favorable tax rates.
Segment Review
The following charts depict the percentages of net revenue from each of our four reporting segments for the three months ended December 31, 2021 compared to the three months ended December 31, 2020. Refer below for discussions regarding each segment’s net revenue and EBITDA performance and to “Non-GAAP Metrics” for a discussion of our use of Segment EBITDA, a measure that is not defined under U.S. GAAP.
![ctlt-20211231_g4.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g4.jpg)
Our results on a segment basis for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 were as follows:
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Three Months Ended December 31, | FX Impact | Constant Currency Increase (Decrease) | |||||||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | Change $ | Change % | |||||||||||||||||||||||||
Biologics | |||||||||||||||||||||||||||||
Net revenue | $ | 638 | $ | 404 | $ | (6) | $ | 240 | 60 | % | |||||||||||||||||||
Segment EBITDA | 197 | 136 | (2) | 63 | 47 | % | |||||||||||||||||||||||
Softgel and Oral Technologies | |||||||||||||||||||||||||||||
Net revenue | 329 | 247 | (6) | 88 | 36 | % | |||||||||||||||||||||||
Segment EBITDA | 78 | 46 | (1) | 33 | 73 | % | |||||||||||||||||||||||
Oral and Specialty Delivery | |||||||||||||||||||||||||||||
Net revenue | 156 | 170 | — | (14) | (8) | % | |||||||||||||||||||||||
Segment EBITDA | 44 | 44 | — | — | — | % | |||||||||||||||||||||||
Clinical Supply Services | |||||||||||||||||||||||||||||
Net revenue | 99 | 93 | (2) | 8 | 7 | % | |||||||||||||||||||||||
Segment EBITDA | 27 | 25 | (1) | 3 | 9 | % | |||||||||||||||||||||||
Inter-segment revenue elimination | (5) | (3) | 1 | (3) | (61) | % | |||||||||||||||||||||||
Unallocated Costs (1) | (101) | (45) | 2 | (58) | (130) | % | |||||||||||||||||||||||
Combined totals | |||||||||||||||||||||||||||||
Net revenue | $ | 1,217 | $ | 911 | $ | (13) | $ | 319 | 35 | % | |||||||||||||||||||
EBITDA from operations | $ | 245 | $ | 206 | $ | (2) | $ | 41 | 20 | % |
Change % calculations are based on amounts prior to rounding
(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 December 31, | |||||||||||
(Dollars in millions) | 2021 | 2020 | |||||||||
Impairment charges and gain (loss) on sale of assets (a) | $ | (16) | $ | (1) | |||||||
Stock-based compensation | (11) | (11) | |||||||||
Restructuring and other special items (b) | (23) | (15) | |||||||||
Other (expense) income, net (c) | (14) | 8 | |||||||||
Unallocated corporate costs, net | (37) | (26) | |||||||||
Total unallocated costs | $ | (101) | $ | (45) |
(a) Impairment charges and gain (loss) on sale of assets during the three months ended December 31, 2021 include fixed asset impairment charges associated with a product in our respiratory and specialty platform.
(b) Restructuring and other special items during the three months ended December 31, 2021 include (i) transaction and integration costs primarily associated with the acquisition of Bettera, (ii) restructuring costs associated with the closure of our Clinical Supply Services facility in Bolton, U.K. Restructuring and other special items during the three months ended December 31, 2020 include transaction costs for the sale of our Blow-Fill-Seal Business, and restructuring costs associated with the closure of our Bolton facility.
(c) Refer to Note 8, Other Expense (Income), Net for details of financing charges and foreign currency translation adjustments recorded within other expense (income), net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
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Three Months Ended December 31, | |||||||||||
(Dollars in millions) | 2021 | 2020 | |||||||||
Net earnings | $ | 97 | $ | 88 | |||||||
Depreciation and amortization | 98 | 71 | |||||||||
Interest expense, net | 32 | 26 | |||||||||
Income tax expense (benefit) | 18 | 21 | |||||||||
EBITDA from operations | $ | 245 | $ | 206 |
Biologics segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Three Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 59 | % | 48 | % | |||||||
Impact of acquisitions | 1 | % | (1) | % | |||||||
Constant-currency change | 60 | % | 47 | % | |||||||
Foreign exchange translation impact on reporting | (2) | % | (2) | % | |||||||
Total % change | 58 | % | 45 | % |
Biologics net revenue increased by $240 million, or 60%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The increase was driven by robust end-market demand for our drug product, drug substance and gene therapy offerings, in part related to demand for COVID-19 related programs.
Biologics Segment EBITDA increased by $63 million, or 47%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The increase was driven by robust end-market demand for our drug product, drug substance and gene therapy offerings, in part related to demand for COVID-19 related programs.
Softgel and Oral Technologies segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Three Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 14 | % | 43 | % | |||||||
Impact of acquisitions | 22 | % | 30 | % | |||||||
Constant-currency change | 36 | % | 73 | % | |||||||
Foreign currency translation impact on reporting | (3) | % | (3) | % | |||||||
Total % change | 33 | % | 70 | % |
Softgel and Oral Technologies net revenue increased by $88 million, or 36%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The increase in organic revenue was driven by strong end-market demand for prescription products, a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and growth in development services.
Softgel and Oral Technologies Segment EBITDA increased $33 million, or 73%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The organic portion of the increase, similar to that of net revenue, was driven by an increase in end-market demand in prescription products, a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and growth in development services.
We completed the Bettera acquisition in October 2021, which increased net revenue and Segment EBITDA on an inorganic basis by 22% and 30%, respectively, in the three months ended December 31, 2021, compared to the corresponding prior-year period.
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Oral and Specialty Delivery segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Three Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 5 | % | 24 | % | |||||||
Impact of acquisitions | 2 | % | (7) | % | |||||||
Impact of divestitures | (15) | % | (17) | % | |||||||
Constant currency change | (8) | % | — | % | |||||||
Foreign currency translation impact on reporting | — | % | — | % | |||||||
Total % change | (8) | % | — | % |
Oral and Specialty Delivery net revenue decreased by $14 million, or 8%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. Net revenue increased 5%, compared to the three months ended December 31, 2020, excluding the impact of acquisitions and divestitures, primarily driven by demand for early-phase development programs and orally delivered Zydis commercial products.
Oral and Specialty Delivery Segment EBITDA remained unchanged, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. Segment EBITDA increased 24%, compared to the three months ended December 31, 2020, excluding the impact of acquisitions and divestitures. The increase in Segment EBITDA from the prior-year period was primarily driven by the increased demand for commercial products and a favorable impact from prior year recall costs in our respiratory and specialty platform.
We completed the acquisition of the manufacturing and packaging operations of the Acorda Therapeutics, Inc. (“Acorda”) dry powder inhaler and spray dry manufacturing business in February 2021. For the three months ended December 31, 2021, this acquisition increased our net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 2% and 7%, respectively, compared to the corresponding prior-year period.
We completed the Blow-Fill-Seal Business divestiture in March 2021. For the three months ended December 31, 2021, this divestiture decreased our net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 15% and 17%, respectively, compared to the corresponding prior-year period.
Clinical Supply Services segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Three Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 7 | % | 9 | % | |||||||
Constant currency change | 7 | % | 9 | % | |||||||
Foreign currency translation impact on reporting | — | % | (1) | % | |||||||
Total % change | 7 | % | 8 | % |
Clinical Supply Services net revenue increased by $8 million, or 7%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The increase was driven by growth in our manufacturing and packaging and storage and distribution offerings in North America.
Clinical Supply Services Segment EBITDA increased $3 million, or 9%, excluding the impact of foreign exchange, compared to the three months ended December 31, 2020. The increase was driven by demand in our manufacturing and packaging and storage and distribution offerings in North America.
Six Months Ended December 31, 2021 Compared to the Six Months Ended December 31, 2020
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The below tables summarize several financial metrics we use to measure performance for the six months ended December 31, 2021 and six months ended December 31, 2020. Refer to the discussions below regarding performance and use of key financial metrics.
![ctlt-20211231_g5.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g5.jpg)
![ctlt-20211231_g6.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g6.jpg)
Results for the six months ended December 31, 2021 compared to the six months ended December 31, 2020 were as follows:
Six Months Ended December 31, | FX Impact | Constant Currency Increase (Decrease) | |||||||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | Change $ | Change % | |||||||||||||||||||||||||
Net revenue | $ | 2,242 | $ | 1,757 | $ | (6) | $ | 491 | 28 | % | |||||||||||||||||||
Cost of sales | 1,513 | 1,210 | (4) | 307 | 25 | % | |||||||||||||||||||||||
Gross margin | 729 | 547 | (2) | 184 | 34 | % | |||||||||||||||||||||||
Selling, general, and administrative expenses | 411 | 330 | — | 81 | 24 | % | |||||||||||||||||||||||
Gain on sale of subsidiary | (1) | — | — | (1) | * | ||||||||||||||||||||||||
Other operating expense | 20 | 9 | (1) | 12 | 138 | % | |||||||||||||||||||||||
Operating earnings | 299 | 208 | (1) | 92 | 44 | % | |||||||||||||||||||||||
Interest expense, net | 58 | 51 | 1 | 6 | 12 | % | |||||||||||||||||||||||
Other expense (income), net | 23 | (19) | (1) | 43 | (223) | % | |||||||||||||||||||||||
Earnings before income taxes | 218 | 176 | (1) | 43 | 24 | % | |||||||||||||||||||||||
Income tax expense | 28 | 5 | — | 23 | 400 | % | |||||||||||||||||||||||
Net earnings | $ | 190 | $ | 171 | $ | (1) | $ | 20 | 11 | % | |||||||||||||||||||
Change % calculations are based on amounts prior to rounding
*Percentage not meaningful
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Net Revenue
2021 vs. 2020 | |||||
Year-Over-Year Change | Six Months Ended December 31, | ||||
Net Revenue | |||||
Organic | 27 | % | |||
Impact of acquisitions | 4 | % | |||
Impact of divestitures | (3) | % | |||
Constant currency change | 28 | % | |||
Foreign currency translation impact on reporting | — | % | |||
Total % change | 28 | % |
Net revenue increased by $491 million, or 28%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020. Net revenue increased 4% inorganically as a result of acquisitions, which was partially offset by a 3% decrease in net revenue due to the sale of our Blow-Fill-Seal Business. We acquired Skeletal Cell Therapy Support (“Skeletal”) in November 2020, Delphi Genetics SA (“Delphi”) and the manufacturing and packaging assets of Acorda in February 2021, and Bettera in October 2021. Net revenue increased 27% organically on a constant-currency basis, primarily related to (i) robust demand across all our Biologics offerings, in particular demand for our drug product and drug substance offerings for COVID-19-related programs, (ii) increased demand for our customers' prescription products, a continued rebound in our consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and growth in development services in our Softgel and Oral Technologies segment.
Gross Margin
Gross margin increased by $184 million, or 34%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange, primarily due to the strong margin profile for all Biologics segment offerings, including demand across our drug product and drug substance offerings for COVID-19 related programs. Additional factors for such growth included an increased demand for prescription products and continued rebound in consumer health products in our Softgel and Oral Technologies segment and a favorable impact from the decline in recall charges in our Oral and Specialty Delivery segment. Margin growth was offset in part by a $23 million increase in depreciation and amortization expense. On a constant-currency basis, gross margin, as a percentage of revenue, increased 140 basis points to 32.5% in the six months ended December 31, 2021, compared to 31.1% in the corresponding prior-year period.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $81 million, or 24%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange, which includes $16 million in net incremental expenses from acquired and divested companies. The year-over-year increase in selling, general and administrative expenses was primarily due to $28 million for employee-related costs principally incurred for wages and bonuses, $16 million in transaction and integration costs primarily associated with our Bettera acquisition, $6 million of incremental depreciation and amortization expense, a $6 million increase in information technology spend associated with additional cyber security initiatives, and $4 million of bad debt expense, partially offset by $4 million in cost savings associated with employee health and welfare costs.
Other Operating Expense
Other operating expense of $20 million for the six months ended December 31, 2021 increased by $12 million, or 138%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange. The year-over-year increase was primarily due to a $15 million increase in fixed asset impairment charges associated with a product in our respiratory and specialty platform.
Interest Expense, net
Interest expense, net of $58 million for the six months ended December 31, 2021 increased by $6 million, or 12%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange. The savings from repayment of our formerly outstanding term loans and 4.875% senior notes due 2026 were offset by increases in interest expense due to our most recent tranche of term loans, the 2029 Notes, and the 2030 Notes. The savings also includes a $3 million reduction in capitalized interest costs for the six months ended December 31, 2021.
Other Expense (Income), net
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Other expense, net of $23 million for the six months ended December 31, 2021 was primarily driven by $24 million of foreign currency losses, $4 million of financing charges related to our outstanding term loans, partially offset by a $2 million gain related to the change in fair value of the derivative liability arising from the dividend-adjustment mechanism of our formerly outstanding Series A Preferred Stock.
Other income, net for the six months ended December 31, 2020 of $19 million was primarily driven by a gain of $16 million related to the change in fair value of the derivative liability arising from the dividend-adjustment mechanism of our Series A Preferred Stock.
Income Tax Expense
Our provision for income taxes for the six months ended December 31, 2021 was $28 million relative to earnings before income taxes of $218 million. Our provision for income taxes for the six months ended December 31, 2020 of $5 million relative to earnings before income taxes of $176 million. The increase in the provision was the result of a decrease in non-U.S. tax credits claimed on an amended U.S. federal income tax filing compared to the prior-year period. The provision for income taxes in each of these periods was also impacted by the relative amount and mix of permanent tax adjustments included in the income tax computation and other discrete tax items recognized in the periods.
Segment Review
The below charts depict the percentage of revenue for each of our four segments for the six months ended December 31, 2021 compared to the six months ended December 31, 2020. Refer below for discussions regarding each segment's revenue and EBITDA performance.
![ctlt-20211231_g7.jpg](https://www.sec.gov/Archives/edgar/data/0001596783/000159678322000027/ctlt-20211231_g7.jpg)
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Our results on a segment basis for the six months ended December 31, 2021 compared to the six months ended December 31, 2020 were as follows:
Six Months Ended December 31, | FX Impact | Constant Currency Increase/(Decrease) | |||||||||||||||||||||||||||
(Dollars in millions) | 2021 | 2020 | Change $ | Change % | |||||||||||||||||||||||||
Biologics | |||||||||||||||||||||||||||||
Net revenue | $ | 1,184 | $ | 781 | $ | (5) | $ | 408 | 52 | % | |||||||||||||||||||
Segment EBITDA | 363 | 242 | (1) | 122 | 50 | % | |||||||||||||||||||||||
Softgel and Oral Technologies | |||||||||||||||||||||||||||||
Net revenue | 572 | 468 | (4) | 108 | 23 | % | |||||||||||||||||||||||
Segment EBITDA | 119 | 83 | (1) | 37 | 44 | % | |||||||||||||||||||||||
Oral and Specialty Delivery | |||||||||||||||||||||||||||||
Net revenue | 302 | 328 | 4 | (30) | (9) | % | |||||||||||||||||||||||
Segment EBITDA | 77 | 66 | 2 | 9 | 15 | % | |||||||||||||||||||||||
Clinical Supply Services | |||||||||||||||||||||||||||||
Net revenue | 195 | 186 | — | 9 | 5 | % | |||||||||||||||||||||||
Segment EBITDA | 53 | 50 | — | 3 | 5 | % | |||||||||||||||||||||||
Inter-segment revenue elimination | (11) | (6) | (1) | (4) | (67) | % | |||||||||||||||||||||||
Unallocated Costs (1) | (157) | (74) | — | (83) | (114) | % | |||||||||||||||||||||||
Combined totals | |||||||||||||||||||||||||||||
Net revenue | $ | 2,242 | $ | 1,757 | $ | (6) | $ | 491 | 28 | % | |||||||||||||||||||
EBITDA from operations | $ | 455 | $ | 367 | $ | — | $ | 88 | 24 | % |
Change % calculations are based on amounts prior to rounding
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
Six Months Ended December 31, | |||||||||||
(Dollars in millions) | 2021 | 2020 | |||||||||
Impairment charges and gain (loss) on sale of assets (a) | $ | (19) | $ | (2) | |||||||
Equity compensation | (32) | (30) | |||||||||
Restructuring and other special items (b) | (31) | (20) | |||||||||
Gain on sale of subsidiary (c) | 1 | — | |||||||||
Other expense (income), net (d) | (23) | 19 | |||||||||
Non-allocated corporate costs, net | (53) | (41) | |||||||||
Total unallocated costs | $ | (157) | $ | (74) |
(a) Impairment charges and gain (loss) on sale of assets during the six months ended December 31, 2021 include fixed asset impairment charges associated with a product in our respiratory and specialty platform.
(b) Restructuring and other special items during the six months ended December 31, 2021 include (i) transaction and integration costs associated with the acquisitions of Delphi, Hepatic Cell Therapy Support SA, RheinCell Therapeutics GmbH, and Bettera and, (ii) restructuring costs associated with the closure of the Bolton facility. Restructuring and other special items during the six months ended December 31, 2020 include transaction costs for the sale of our Blow-Fill-Seal Business, acquisitions of facilities in Italy and Belgium, disposal of a site in Australia, restructuring costs associated with the closure of the Bolton facility and other restructuring initiatives across our network of sites.
(c) For the six months ended December 31, 2021, gain on sale of subsidiary was due to the divestiture of our Blow-Fill-Seal Business.
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(d) Refer to Note 8, Other expense (income), 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:
Six Months Ended December 31, | |||||||||||
(Dollars in millions) | 2021 | 2020 | |||||||||
Net earnings | $ | 190 | $ | 171 | |||||||
Depreciation and amortization | 179 | 140 | |||||||||
Interest expense, net | 58 | 51 | |||||||||
Income tax expense | 28 | 5 | |||||||||
EBITDA from operations | $ | 455 | $ | 367 |
Biologics segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Six Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 52 | % | 51 | % | |||||||
Impact of acquisitions | — | % | (1) | % | |||||||
Constant-currency change | 52 | % | 50 | % | |||||||
Foreign exchange translation impact on reporting | — | % | — | % | |||||||
Total % change | 52 | % | 50 | % | |||||||
Net revenue in our Biologics segment increased by $408 million, or 52%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020. The increase was driven across all segment offerings with robust end-market demand for our drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $122 million, or 50%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020. Segment EBITDA increased 51%, compared to the six months ended December 31, 2020, excluding the impact of acquisitions. The increase was driven across all segment offerings with robust end-market demand for our drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Softgel and Oral Technologies segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Six Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 12 | % | 28 | % | |||||||
Impact of acquisitions | 11 | % | 16 | % | |||||||
Constant-currency change | 23 | % | 44 | % | |||||||
Foreign exchange translation impact on reporting | (1) | % | (2) | % | |||||||
Total % change | 22 | % | 42 | % |
Softgel and Oral Technologies net revenue increased $108 million, or 23%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020. Net revenue increased 12%, compared to the six months ended December 31, 2020, excluding the impact of acquisitions. The increase in organic revenue primarily relates to strong end-market demand for prescription products, a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, and growth in development services within North America
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Softgel and Oral Technologies Segment EBITDA increased $37 million, or 44%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020. Segment EBITDA increased 28% compared to the six months ended December 31, 2020, excluding the impact of acquisitions. The organic portion of the increase, similar to that of net revenue, was primarily driven by an increase in demand in both the prescription and consumer health portfolio of products, as well as the margin generated from strong development revenue growth.
We completed the Bettera acquisition in October 2021, which increased net revenue and Segment EBITDA on an inorganic basis by 11% and 16%, respectively, in the six months ended December 31, 2021, compared to the corresponding prior-year period.
Oral and Specialty Delivery segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Six Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 4 | % | 50 | % | |||||||
Impact of acquisitions | 1 | % | (12) | % | |||||||
Impact of divestitures | (14) | % | (23) | % | |||||||
Constant-currency change | (9) | % | 15 | % | |||||||
Foreign exchange translation impact on reporting | 1 | % | 3 | % | |||||||
Total % change | (8) | % | 18 | % |
Net revenue in our Oral and Specialty Delivery segment decreased by $30 million, or 9%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange. Net revenue increased 4%, compared to the six months ended December 31. 2020, excluding the impact of acquisitions and divestitures, primarily driven by demand for the segment’s orally delivered Zydis commercial products and early-phase development programs.
Oral and Specialty Delivery’s Segment EBITDA increased by $9 million, or 15%, compared to the six months ended December 31, 2020, excluding the impact of foreign exchange. Segment EBITDA increased 50% compared to the six months ended December 31, 2020, excluding the impact of acquisitions and divestitures. The organic portion of the increase from the corresponding prior-year period was primarily driven by increased demand for the segment’s orally delivered Zydis commercial products and a favorable impact from prior year recall costs in our respiratory and specialty platform.
Clinical Supply Services segment
2021 vs. 2020 | |||||||||||
Year-Over-Year Change | Six Months Ended December 31, | ||||||||||
Net Revenue | Segment EBITDA | ||||||||||
Organic | 5 | % | 5 | % | |||||||
Constant-currency change | 5 | % | 5 | % | |||||||
Foreign exchange translation impact on reporting | — | % | 1 | % | |||||||
Total % change | 5 | % | 6 | % |
Clinical Supply Services’ net revenue increased by $9 million, or 5%, compared to the six months ended December 31, 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 $3 million, or 5%, excluding the impact of foreign exchange, compared to the six months ended December 31, 2020, primarily due to strong demand in our manufacturing and packaging and storage and distribution offering in North America.
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Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have been cash flows generated from operations and occasional capital market activities. The principal uses of cash are to fund operating and capital expenditures, business or asset acquisitions, interest payments on debt, and any mandatory or discretionary principal payment on our debt. As of December 31, 2021, Catalent Pharma Solutions, Inc., our principal operating subsidiary (“Operating Company”), following the September 2021 execution of Amendment No. 6 to the amended and restated credit agreement, dated as of May 20, 2014, governing our senior secured credit facilities (as amended, the “Credit Agreement”), had available a $725 million revolving credit facility that matures in May 2024, the capacity of which was reduced by $5 million in letters of credit outstanding as of December 31, 2021. The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as swing-line borrowings.
On October 1, 2021, we acquired Bettera, a manufacturer of nutraceuticals specializing in gummy, soft chew, and lozenge delivery systems paying approximately $1.00 billion in cash. We funded this acquisition through a combination of additional borrowings under our senior secured credit facilities and the net proceeds of the 2030 Notes.
We believe that our cash on hand, cash from operations, and available borrowings under our revolving credit facility will be adequate to meet our liquidity needs for at least the next 12 months, 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 July 2027 maturity of our 5.000% senior notes due 2027 (the "2027 Notes”).
Cash Flows
The following table summarizes our consolidated statements of cash flows:
Six Months Ended December 31, | |||||||||||||||||
(Dollars in millions) | 2021 | 2020 | $ Change | ||||||||||||||
Net cash provided by (used in): | |||||||||||||||||
Operating activities | $ | 232 | $ | 224 | $ | 8 | |||||||||||
Investing activities | $ | (1,299) | $ | (354) | $ | (945) | |||||||||||
Financing activities | $ | 1,033 | $ | (7) | $ | 1,040 |
Operating Activities
For the six months ended December 31, 2021, cash provided by operating activities was $232 million, compared to $224 million for the corresponding prior-year period. This increase in cash flow from operating activities was primarily due to an increase in operating earnings, which increased from $208 million in the corresponding prior-year period to $299 million for the six months ended December 31, 2021, and a favorable impact from the timing of collection of trade receivables, which was primarily offset by an unfavorable impact from the increase in contract assets.
Investing Activities
For the six months ended December 31, 2021, cash used in investing activities was $1.30 billion, compared to $354 million for the six months ended December 31, 2020. The increase in cash used in investing activities was primarily driven by a $1.00 billion increase in cash used for business acquisition activities, partially offset by a $62 million decrease in cash used for purchases of property, plant, and equipment.
Financing Activities
For the six months ended December 31, 2021, cash provided by financing activities was $1.03 billion, compared to cash used in financing activities of $7 million for the six months ended December 31, 2020. Cash provided by financing activities was primarily driven by the $1.1 billion in net cash received from the issuance of the 2030 Notes and incurrence of our most recent tranche of term loans.
Cash used in financing activities for the six months ended December 31, 2020 was primarily driven by an annual installment on the deferred purchase consideration for the acquisition of Catalent Indiana, LLC and cash paid, in lieu of equity, for tax withholdings partially offset by the July 2020 exercise of an over-allotment option on 1.2 million additional shares by the underwriter for the equity offering in June 2020, resulting in net proceeds of $82 million.
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Guarantees and Security
The Senior Notes
All obligations under Operating Company's 2027 Notes, 2.375% euro-denominated senior notes due 2028, 2029 Notes, and 2030 Notes (collectively, the "Senior Notes") are general, unsecured, and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all of our wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by either PTS Intermediate Holdings LLC or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our (and our 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 our subordinated indebtedness; and change our 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 December 31, 2021, we were in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits us and our restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of our non-U.S. subsidiaries or our Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, our 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.
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, or in related adverse tax consequences to us.
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The Senior Notes
The several indentures governing each series of the Senior Notes (collectively, the “Indentures”) contain certain covenants that, among other things, limit our ability to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding series of Senior Notes, or the applicable Trustee under the Indentures, may declare the applicable Senior Notes immediately due and payable; or in certain circumstances, the applicable Senior Notes will become automatically immediately due and payable. As of December 31, 2021, Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As of December 31, 2021 and June 30, 2021, our non-U.S. subsidiaries held cash and cash equivalents of $360 million and $351 million, respectively, out of the total consolidated cash and cash equivalents of $849 million and $896 million, respectively. These balances are dispersed across many locations around the world.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate fluctuations. We may use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed- and floating-rate assets and liabilities. In 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 December 31, 2021; however, as a result of the current interest-rate swap agreement, the variable 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 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 December 31, 2021, we had $933 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in European operations. Refer to Note 10, Derivative Instruments and Hedging Activities, to our Consolidated Financial Statements for further discussion of net investment hedge activity in the period.
From time to time, we may use forward 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 continue to evaluate hedging opportunities for foreign currency in the future.
Off-Balance Sheet Arrangements
Other than short-term operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangement as of December 31, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our quantitative and qualitative disclosures about market risks, see the section titled Quantitative and Qualitative Disclosures About Market Risks in our Fiscal 2021 10-K. As of December 31, 2021, there has been no material change in this information.
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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 Chief Executive Officer and our Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any control or procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and our Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Senior Vice President and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change that materially affected, or is reasonably likely to materially affect, Catalent’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. We intend to vigorously defend ourselves against any such litigation and do not currently believe that the outcome of any such litigation will have a material adverse effect on our consolidated financial statements. In addition, the healthcare industry is highly regulated, and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, we receive subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. We generally respond to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. We expect to incur costs in future periods in connection with future requests.
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” in our Fiscal 2021 10-K, which could materially affect our business, financial condition, or future results. The risks described in such report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
Other than what was disclosed in the Special Note Regarding Forward-Looking Statements, there has been no material change to the risk factors disclosed in our Fiscal 2021 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.
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ITEM 6. EXHIBITS
Exhibits:
Fourth Amended and Restated Certificate of Incorporation of Catalent, Inc., as filed with the Secretary of State of the State of Delaware on October 28, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 2, 2021). | ||||||||
Bylaws of Catalent, Inc., effective October 28, 2021 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on November 2, 2021). | ||||||||
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | ||||||||
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | ||||||||
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | ||||||||
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | ||||||||
101 | The following financial information from Catalent, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021 formatted in inline XBRL: (i) Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2021 and 2020; (ii) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2021 and 2020 (iii) Consolidated Balance Sheets as of December 31, 2021 and June 30, 2021; (iv) Consolidated Statement of Changes in Shareholders’ Equity as of December 31, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2021 and 2020; and (vi) Notes to Unaudited Consolidated Financial Statements. | |||||||
104 | The cover page of this Quarterly Report on Form 10-Q, formatted as Inline XBRL and contained in Exhibit 101. |
* | Filed herewith | |||||||
** | Furnished herewith | |||||||
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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.
CATALENT, INC. (Registrant) | ||||||||||||||
Date: | February 1, 2022 | By: | /s/ RICKY HOPSON | |||||||||||
Ricky Hopson | ||||||||||||||
Vice President, Chief Accounting Officer |
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