Notes to 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 primarily comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
On July 31, 2014, the Company commenced an initial public offering (the “IPO”) of its common stock, par value $0.01 (the “Common Stock”), in which it sold a total of 48.9 million shares at a price of $20.50 per share, before underwriting discounts and commissions. The Common Stock began trading on the New York Stock Exchange (the “NYSE”) under the symbol “CTLT” as of the IPO.
The Company is the leading global provider of advanced delivery technologies and development solutions for drugs, biologics, and consumer health products. Its oral, injectable, gene therapy, and respiratory delivery technologies address the full diversity of the pharmaceutical industry, including small molecules, protein and gene therapy biologics and consumer health products. Through its extensive capabilities and deep expertise in product development, it helps its customers take products to market faster, including nearly half of new drug products approved by the U.S. Food and Drug Administration (the “FDA”) in the last decade. Its advanced delivery technology platforms, its proven formulation, manufacturing, and regulatory expertise, and its broad and deep intellectual property enable its customers to develop more products and better treatments for patients and consumers. Across both development and delivery, its commitment to reliably supply its customers’ and their patients’ needs is the foundation for the value it provides; annually, it produces approximately 73 billion doses for nearly 7,000 customer products, or approximately 1 in every 20 doses of such products taken each year by patients and consumers around the world. The Company believes that through its investments in growth-enabling capacity and capabilities, its ongoing focus on operational and quality excellence, the sales of existing customer products, the introduction of new customer products, its innovation activities and patents, and its entry into new markets, it will continue to benefit from attractive and differentiated margins and realize the growth potential from these areas.
Reportable Segments
In fiscal 2018, the Company engaged in a business reorganization to better align its internal business unit structure with its “Follow the Molecule” strategy and the increased focus on its biologics-related offerings. Under the revised structure, the Company created two operating segments from the former Drug Delivery Solutions segment:
•Biologics and Specialty Drug Delivery, which encompasses biologic cell-line development and manufacturing, development and manufacturing services for blow-fill-seal unit doses, prefilled syringes, vials, and cartridges; analytical development and testing services for large molecules; and development and manufacturing for inhaled products for delivery via metered dose inhalers, dry powder inhalers, and intra-nasal sprays; and
•Oral Drug Delivery, which encompasses comprehensive formulation, development, manufacturing, and analytical development capabilities using advanced processing technologies such as bioavailability enhancement, controlled release, particle size engineering, and taste-masking for solid oral-dose forms.
Each of these two segments reports through a separate management team and ultimately reports to the Company's Chief Executive Officer who is designated as the Chief Operating Decision Maker (“CODM”) for segment reporting purposes. The Company's operating segments are the same as its reporting segments. All prior-period comparative segment information has been restated to reflect the current reportable segments in accordance with Accounting Standards Codification (“ASC”) 280 Segment Reporting, promulgated by the Financial Accounting Standards Board (the “FASB”). The Company's offerings and services are summarized below by reporting segment.
Softgel Technologies
Through its Softgel Technologies segment, the Company provides formulation, development and manufacturing services for soft capsules, or “softgels,” which the Company’s predecessor first commercialized in the 1930s and which have continually been enhanced. The Company is the market leader in overall softgel development and manufacturing and holds the leading market position in the prescription arena. The Company’s principal softgel technologies include traditional softgel capsules, in which the shell is made of animal-derived gelatin, and Vegicaps and OptiShell capsules, in which the shell is made from plant-derived materials. Softgel capsules are used in a broad range of customer products, including prescription drugs, over-the-
counter medications, dietary supplements, unit-dose cosmetics, and animal health medicinal preparations. Softgel capsules encapsulate liquid, paste or oil-based active compounds in solution or suspension within an outer shell. In the manufacturing process, the capsules are formed, filled, and sealed simultaneously. The Company typically performs encapsulation for a product within one of its softgel facilities, with active ingredients provided by customers or sourced directly by the Company. Softgels have historically been used to solve formulation challenges or technical issues for a specific drug, to help improve the clinical performance of compounds, to provide important market differentiation, particularly for over-the-counter medications, and to provide safe handling of hormonal, potent and cytotoxic drugs. The Company also participates in the softgel vitamin, mineral and supplement business in selected regions around the world. With the 2001 introduction of the Company’s plant-derived softgel shell, Vegicaps capsules, consumer health customers have been able to extend the softgel dose form to a broader range of active ingredients and serve patient/consumer populations that were previously inaccessible due to religious, dietary or cultural preferences. In recent years, the Company has extended this platform to pharmaceutical products via its OptiShell capsule offering. The Company’s Vegicaps and OptiShell capsules are protected by patents in most major global markets. Physician and patient studies the Company has conducted have demonstrated a preference for softgels versus traditional tablet and hard capsule dose forms in terms of ease of swallowing, real or perceived speed of delivery, ability to remove or eliminate unpleasant odor or taste and, for physicians, perceived improved patient adherence with dosing regimens. Representative customers of Softgel Technologies include Pfizer, Novartis, Bayer, GlaxoSmithKline, Teva, Johnson & Johnson, Procter & Gamble, and Allergan.
Biologics and Specialty Drug Delivery
The Company’s Biologics and Specialty Drug Delivery segment provides drug substance development and manufacturing, drug product clinical and commercial manufacturing, integrated clinical and commercial supply solutions for protein and gene therapy biologics and specialty small molecules administered via injection, inhalation and ophthalmic routes, using both traditional and advanced delivery technologies. The business has expertise in development as well as scale up and commercial manufacturing. Representative customers of Biologics and Specialty Drug Delivery include Eli Lilly, Teva, Mylan, Roche, Novartis, Sarepta, and Genentech, along with multiple innovative small and mid-tier pharmaceutical and biologics customers.
The Company’s growing biologics offering includes cell-line development based on its advanced and patented GPEx technology, which is used to develop stable, high-yielding mammalian cell lines for both innovator and biosimilar biologic compounds. GPEx technology can provide rapid cell-line development, high biologics production yields, flexibility, and versatility. The Company’s development and manufacturing facility in Madison, Wisconsin has the capability and capacity to produce biologics drug substance from 250L to 4000L scale in single-use reactors, using current good manufacturing practices (“cGMP”) as defined by the FDA and other health regulatory agencies to provide maximum efficiency and flexibility. The fiscal 2018 acquisition of Cook Pharmica LLC (now Catalent Indiana LLC, “Catalent Indiana”) added a biologics-focused contract development and manufacturing organization with capabilities across biologics development, clinical, and commercial drug substance manufacturing, formulation, finished-dose manufacturing, and packaging. In fiscal 2019, the Company continued to expand production capacity in both Madison and Bloomington, starting construction on a fourth drug substance suite at its facility in Madison, Wisconsin and new drug product manufacturing and packaging capacity at its facility in Bloomington, Indiana. The Company’s SMARTag next-generation antibody-drug conjugate technology enables development of antibody-drug conjugates and other protein conjugates with improved efficacy, safety, and manufacturability. In fiscal 2019, the Company launched its OneBio Suite, which provides customers the potential to seamlessly integrate drug substance, drug product, and clinical supply management for products in development, and for integrated commercial supply across both drug substance and product. Combined with offerings from the Company’s other businesses, the Company provides the broadest range of technologies and services supporting the development and launch of new biologic entities, biosimilars, and biobetters to bring a product from gene to commercialization, faster.
The Company’s range of injectable manufacturing offerings includes filling drugs or biologics into pre-filled syringes, cartridges, and vials, with flexibility to accommodate other formats within our existing network, increasingly focused on complex pharmaceuticals and biologics. With the Company’s range of technologies, the segment is able to meet a wide range of specifications, timelines, and budgets. The Company believes that the complexity of the manufacturing process, the importance of experience and know-how, regulatory compliance, and high start-up capital requirements provide it with a substantial competitive advantage in the market. For example, blow-fill-seal is an advanced aseptic processing technology, which uses a continuous process to form, fill with drug or biologic, and seal a plastic container in a sterile environment. Blow-fill-seal units are currently used for a variety of pharmaceuticals in liquid form, such as respiratory, ophthalmic, and otic products. The Company’s sterile blow-fill-seal manufacturing has significant capacity and flexibility in manufacturing configurations. This business provides flexible and scalable solutions for unit-dose delivery of complex formulations such as suspensions and emulsions. Further, the business provides formulation, engineering and manufacturing solutions related to complex containers. The Company’s regulatory expertise can lead to decreased time to commercialization, and its dedicated development production lines support feasibility, stability, and clinical runs. The Company plans to continue to expand its product line in
existing and new markets, and in higher margin specialty products with additional respiratory, ophthalmic, injectable, and nasal applications.
The segment also offers analytical development and testing services for large molecules, including cGMP release and stability testing. The Company’s respiratory product capabilities include development and manufacturing services for inhaled products for delivery via metered dose inhalers, dry powder inhalers and intra-nasal sprays. Across multiple complex dosage forms, the segment provides drug and biologic solutions from early-stage development and clinical support all the way through to scale up and commercialization.
On May 17, 2019, as described below in Note 3, Business Combinations, the Company acquired Paragon Bioservices, Inc. (“Paragon”), which is focused on the development and manufacture of cutting-edge biopharmaceuticals, including viral vectors used in gene therapies. Paragon partners with biotech and pharma companies to develop and manufacture products based on transformative technologies, including gene therapies based on adeno-associated viruses (“AAV”) and other modalities, next-generation vaccines, oncology immunotherapies (oncolytic viruses and CAR-T cell therapies), therapeutic proteins, and other complex biologics. Paragon brings specialized expertise in AAV vectors, the most commonly used delivery system for gene therapy, as well as capabilities in plasmids and lentivirus vectors manufactured using cGMP and differentiated scientific, development, and manufacturing capabilities that will enhance the Company’s biologics business and end-to-end integrated biopharmaceutical solutions for customers. In June 2019, Paragon agreed to acquire two additional laboratory and manufacturing facilities located in southern Maryland from Novavax, Inc. The Novavax transaction closed in late July 2019.
Oral Drug Delivery
The Company’s Oral Drug Delivery segment provides various advanced formulation development and manufacturing technologies, and related integrated solutions including: clinical development and commercial manufacturing of a broad range of oral dose forms, including our proprietary fast-dissolve Zydis tablets and both conventional immediate and controlled release tablets, capsules, and sachet products. Representative customers of Oral Drug Delivery include Pfizer, Johnson & Johnson, Bayer, Novartis, and Perrigo.
The segment provides comprehensive pre-formulation, development, and cGMP manufacturing at both clinical and commercial scales for traditional and advanced complex oral solid-dose formats, including coated and uncoated tablets, pellet/bead/powder-filled two-piece hard capsules, granulated powders, and other forms of immediate and modified release branded prescription, generic, and consumer products. The Company has substantial experience developing and scaling up products requiring accelerated development timelines, bioavailability or solubility enhancement, specialized handling (e.g., potent or DEA-regulated materials), complex technology transfers, and specialized manufacturing processes. The Company also provides micronization and particle engineering services, which may enhance a drug’s manufacturability or clinical performance. The Company offers comprehensive analytical testing and scientific services and stability testing for small molecules, both to support integrated development programs and on a fee-for-service basis. The Company provides global regulatory and support services for its customers’ clinical strategies during all stages of development. In recent years, the Company has expanded its network of development sites focused on earlier phase compounds, to engage with more customer molecules, earlier, with the intent to provide later stage manufacturing and supporting services as those molecules progress towards commercial approval and beyond. Demand for the segment’s offerings is driven by the need for scientific expertise and depth and breadth of services offered, as well as by the reliability of its supply, including quality, execution, and performance.
The Company launched its orally dissolving tablet business in 1986 with the introduction of Zydis tablets, a unique proprietary freeze-dried tablet that typically dissolves in the mouth, without water, in less than three seconds. Most often used for drugs and patient groups that can benefit from rapid oral disintegration, the Company can adapt the Zydis technology to a wide range of products and indications, including treatments for a variety of central nervous system-related conditions such as migraines, Parkinson’s disease, and schizophrenia, and consumer healthcare products targeting indications such as pain and allergy relief. The Company continues to develop Zydis tablets in different ways with its customers as it extends the application of the technology to new therapeutic categories, including immunotherapy, vaccines, and biologic molecule delivery.
In August 2018, the Company acquired Juniper Pharmaceuticals, Inc. (“Juniper”), which extends to the U.K. the geographic reach of the early-development and spray-dry dispersion capabilities it gained through its September 2016 acquisition of Pharmatek Laboratories, Inc. (“Pharmatek”).
Clinical Supply Services
The Company’s Clinical Supply Services segment provides manufacturing, packaging, storage, distribution, and inventory management for drugs and biologics in clinical trials. The segment offers customers flexible solutions for clinical supplies production and provides distribution and inventory management support for both simple and complex clinical trials. This includes over-encapsulation where needed; supplying placebos, comparator drug procurement, and clinical packages and kits for physicians and patients; inventory management; investigator kit ordering and fulfillment; and return supply
reconciliation and reporting. The segment supports trials in all regions of the world through its facilities and distribution network. In fiscal 2018, the Company completed the second phase of its expansion program in our Kansas City, Missouri facility. Further, in fiscal 2016 and again in fiscal 2018, the Company expanded its Singapore facility by building additional flexible cGMP space, and the Company introduced clinical supply services at its existing 100,000 square foot facility in Japan, expanding its Asia Pacific capabilities. Additionally, in fiscal 2013, the Company established its first clinical supply services facility in China as a joint venture and assumed full ownership in fiscal 2015. The Company opened a second Clinical Supply Services facility in China in fiscal 2019. The Company is the leading provider of integrated development solutions and one of the leading providers of clinical trial supplies. Representative customers of Clinical Supply Services include Merck KGaA, IQVIA, Eli Lilly, AbbVie, and Incyte Corporation.
Basis of Presentation
These financial statements include all of the Company’s subsidiaries, including those operating outside the United States (“U.S.”) and are prepared in accordance with U.S. GAAP. All significant transactions among the Company’s businesses have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, allowance for doubtful accounts, inventory and long-lived asset valuation, goodwill and other intangible asset valuation and impairment, equity-based compensation, income taxes, derivative valuation, and pension plan asset and liability valuation. Actual amounts may differ from these estimated amounts.
Foreign Currency Translation
The financial statements of the Company’s operations outside the U.S. are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of the foreign operations into U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. In June 2018, as a result of the three-year cumulative consumer price index exceeding 100%, Argentina was classified as a highly inflationary economy. Beginning on July 1, 2018, the Company accounts for its Argentine operations as highly inflationary, but this change has not had a material effect on the consolidated financial statements.
The currency fluctuation related to certain long-term inter-company loans deemed to not be repayable in the foreseeable future have been recorded within the cumulative translation adjustment, a component of other comprehensive income/(loss). In addition, the currency fluctuation associated with the portion of the Company’s euro-denominated debt designated as a net investment hedge is included as a component of other comprehensive income/(loss). Foreign currency transaction gains and losses calculated by utilizing weighted average exchange rates for the period are included in the statements of operations in “other (income)/expense, net.” Such foreign currency transaction gains and losses include inter-company loans that are repayable in the foreseeable future.
Cash and Cash Equivalents
All liquid investments purchased with original maturities of three months or less are considered to be cash and equivalents. The carrying value of these cash equivalents approximates fair value.
Receivables and Allowance for Doubtful Accounts
Trade receivables are primarily comprised of amounts owed to the Company through its operating activities and are presented net of an allowance for doubtful accounts. The Company monitors past due accounts on an ongoing basis and establishes appropriate reserves to cover probable losses. An account is considered past due on the first day after its due date. The Company makes judgments as to its ability to collect outstanding receivables and provides allowances when it concludes that all or a portion of the receivable will not be collected. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the specific customer’s ability to pay its obligation to the Company, and the condition of the general economy and the customer’s industry.
Concentrations of Credit Risk and Major Customers
Concentration of credit risk, with respect to accounts receivable, is limited due to the large number of customers and their dispersion across different geographic areas. The customers are primarily concentrated in the pharmaceutical and healthcare industry. The Company normally does not require collateral or any other security to support credit sales. The Company performs ongoing credit evaluations of its customers’ financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company’s expectations. No single customer exceeded 10% of revenue during the fiscal years ended 2019, 2018, and 2017 or 10% of accounts receivable as of the years ended 2019 and 2018.
Inventories
Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) method. The Company provides for cost adjustments for excess, obsolete, or slow-moving inventory based on changes in customer demand, technology developments or other economic factors. Inventory consists of costs associated with raw material, labor, and overhead.
Goodwill
The Company accounts for purchased goodwill and intangible assets with indefinite lives in accordance with ASC 350 Goodwill, Intangible and Other Assets. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. The Company performs an impairment evaluation of goodwill annually during the fourth quarter of its fiscal year or when circumstances otherwise indicate an evaluation should be performed.
The evaluation may begin with a qualitative assessment for each reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. Factors considered in a qualitative assessment include, among other things, macroeconomic conditions, industry and market considerations, financial performance of the respective reporting unit and other relevant entity and reporting-unit specific considerations. If the qualitative assessment does not generate a positive response, or if no qualitative assessment is performed, a quantitative assessment, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates, and macroeconomic, industry, and market conditions. In fiscal 2017 and 2018, the Company proceeded immediately to the quantitative assessment, but in fiscal 2019 the Company began its impairment evaluation as of April 1, 2019 with the qualitative assessment.
Based on its qualitative assessments conducted as of April 1, 2019, the Company determined for each reporting unit with goodwill that it was more likely than not that its respective fair value exceeded its carrying value, indicating there was no impairment. For more information regarding goodwill balances at June 30, 2019, see Note 4, Goodwill.
Property and Equipment and Other Definite-Lived Intangible Assets
Property and equipment are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, including leasehold improvements and capital lease assets that are amortized over the shorter of their useful lives or the terms of the respective leases. The Company generally uses the following range of useful lives for its property and equipment categories: buildings and improvements—5 to 50 years; machinery and equipment—3 to 10 years; and furniture and fixtures—3 to 7 years. Depreciation expense was $140.4 million for the fiscal year ended June 30, 2019, $127.5 million for the fiscal year ended June 30, 2018, and $102.2 million for the fiscal year ended June 30, 2017. Depreciation expense includes amortization of assets related to capital leases. The Company charges repairs and maintenance costs to expense as incurred. The amount of capitalized interest was immaterial for all periods presented.
Intangible assets with finite lives, including customer relationships, patents, and trademarks, are amortized over their useful lives. The Company also capitalizes certain computer software and development costs in other intangibles, net, when incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized over the estimated useful lives of the software, which generally range from 3 to 5 years. The Company evaluates the recoverability of its other long-lived assets, including amortizing intangible assets, if circumstances indicate impairment may have occurred pursuant to ASC 360 Property, Plant and Equipment. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an un-discounted basis, to be generated from such assets. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the consolidated statements of operations. Fair value is determined based on assumptions the Company believes marketplace participants would utilize and comparable marketplace information in similar arm’s length transactions. The Company recorded impairment charges related to definite-lived intangible assets and property, plant, and equipment of $5.1 million, $8.7 million, and $9.8 million, for the fiscal years ended June 30, 2019, 2018, and 2017, respectively.
Post-Retirement and Pension Plans
The Company sponsors various retirement and pension plans, including defined benefit retirement plans and defined contribution retirement plans. The measurement of the related benefit obligations and the net periodic benefit costs recorded each year are based upon actuarial computations, which require management’s judgment as to certain assumptions. These assumptions include the discount rates used in computing the present value of the benefit obligations and the net periodic benefit costs, the expected future rate of salary increases (for pay-related plans) and the expected long-term rate of return on plan assets (for funded plans). The Company uses the corridor approach to amortize actuarial gains and losses.
Effective June 30, 2016, the approach used to estimate the service and interest components of net periodic benefit cost for benefit plans was changed to provide a more precise measurement of such costs. Historically, the Company estimated these service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, the Company has elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. The Company has accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly has accounted for it prospectively.
The expected long-term rate of return on plan assets is based on the target asset allocation and the average expected rate of growth for the asset classes invested. The average expected rate of growth is derived from a combination of historic returns, current market indicators, and the expected risk premium for each asset class. The Company uses a measurement date of June 30 for all its retirement and postretirement benefit plans.
Derivative Instruments, Hedging Activities, and Fair Value
Derivative Instruments and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest-rate, liquidity, and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not net any of its derivative positions under master netting arrangements.
Specifically, the Company is exposed to fluctuations in the euro-U.S. dollar exchange rate on its investments in foreign operations in Europe. While the Company does not actively hedge against changes in foreign currency, it has mitigated the exposure of investments in its European operations through a net-investment hedge by denominating a portion of its debt in euros. In addition, as discussed in Note 9, Derivative Instruments and Hedging Activities, the Company has determined that an aspect of the dividend-rate adjustment feature of the Company’s convertible Series A Preferred Stock (as defined below, see Note 13, Redeemable Preferred Stock—Series A Preferred) should be accounted for as a derivative liability.
Fair Value
The Company is required to measure certain assets and liabilities at fair value, either upon initial measurement or for subsequent accounting or reporting. The Company uses fair value extensively in the initial measurement of net assets acquired in a business combination and when accounting for and reporting on certain financial instruments. The Company estimates fair value using an exit price approach, which requires, among other things, that it determine the price that would be received to sell an asset or paid to transfer a liability in an orderly market. The determination of an exit price is considered from the perspective of market participants, considering the highest and best use of assets and, for liabilities, assuming the risk of non-performance will be the same before and after the transfer. A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. When estimating fair value, depending on the nature and complexity of the assets or liability, the Company may use one or all of the following approaches:
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities.
•Cost approach, which is based on the cost to acquire or construct comparable assets less an allowance for functional and/or economic obsolescence.
•Income approach, which is based on the present value of the future stream of net cash flows.
These fair value methodologies depend on the following types of inputs:
•Quoted prices for identical assets or liabilities in active markets (called Level 1 inputs).
•Quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are directly or indirectly observable (called Level 2 inputs).
•Unobservable inputs that reflect estimates and assumptions (called Level 3 inputs).
Certain investments that are measured at fair value using the net asset value (“NAV”) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
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Self-Insurance
The Company is partially self-insured for certain employee health benefits and partially self-insured for property losses and casualty claims. The Company accrues for losses based upon experience and actuarial assumptions, including provisions for losses incurred but not reported.
Accumulated Other Comprehensive Income/(Loss)
Accumulated other comprehensive income, which is reported in the accompanying consolidated statements of changes in shareholders’ equity, consists of net earnings, foreign currency translation, and defined benefit pension plan changes.
Research and Development Costs
The Company expenses research and development costs as incurred. It records costs incurred in connection with the development of new offerings and manufacturing process improvements within selling, general, and administrative expenses. Such research and development costs amounted to $3.3 million, $6.3 million, and $7.0 million for the fiscal years ended June 30, 2019, June 30, 2018, and June 30, 2017, respectively. The Company records within cost of sales the costs it incurred in connection with the research and development services that it provided to customers and services it performed for customers in support of the commercial manufacturing process. This second type of research and development costs amounted to $51.2 million, $46.2 million, and $45.8 million for the fiscal years ended June 30, 2019, June 30, 2018, and June 30, 2017, respectively.
Earnings/(Loss) Per Share
The Company reports net earnings per share in accordance with ASC 260 Earnings per Share. The Company computes basic earnings per share for the Common Stock using the two-class method by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. The Series A Preferred Stock, due to its convertible feature, is participating in nature; accordingly, the outstanding shares of Series A Preferred Stock are included in the two-class method. Diluted earnings per common share measures the performance of the Company over the reporting period while giving effect to all potential common shares that were dilutive and outstanding during the period. The denominator includes the weighted average number of basic shares and the number of additional common shares that would have been outstanding if the potential common shares that were dilutive had been issued, and is calculated using either the two-class, treasury stock or if-converted method, whichever is more dilutive.
Income Taxes
In accordance with ASC 740 Income Taxes, the Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company’s assets and liabilities. The Company measures deferred tax assets and liabilities using enacted tax rates in the respective jurisdictions in which it operates. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that the Company will be able to realize some or all of the deferred tax assets. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in each of its tax jurisdictions. The number of years with open tax audits varies by tax jurisdiction. A number of years may lapse before a particular matter is audited and finally resolved. The Company applies ASC 740 to determine the accounting for uncertain tax positions. This standard clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before the Company may recognize the position in its financial statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Equity-Based Compensation
The Company accounts for its equity-based compensation in accordance with ASC 718 Compensation—Stock Compensation. Under ASC 718, companies recognize compensation expense using a fair-value-based method for costs related to share-based payments, including stock options and restricted stock units. The expense is measured based on the grant date fair value of the awards, and the expense is recorded over the applicable requisite service period. Forfeitures are recognized as and when they occur. In the absence of an observable market price for a share-based award, the fair value is based upon a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price based on peer companies, the expected dividends on the underlying shares and the risk-free interest rate.
The terms of the Company’s equity-based compensation plans permit an employee holding vested stock options or restricted stock units to elect to have the Company withhold a portion of the shares otherwise issuable upon the employee’s exercise of the option or grant, a so-called “net settlement transaction,” as a means of paying the exercise price, meeting tax withholding requirements, or both.
Marketable Securities
Marketable securities consist of investments that have a readily determinable fair value based on quoted market price of the investment, which is considered a Level 1 fair value measurement. Under ASC 321, Investments—Equity Securities, these investments are classified as available-for-sale and are reported at fair value in other assets on the Company’s consolidated balance sheets. Unrealized holding gains and losses are reported within other expense, net on the Company’s consolidated statements of operations.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which was codified as ASC 606 and superseded nearly all existing revenue-recognition guidance. The guidance’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, the guidance creates a five-step model that requires a company to exercise judgment when considering the terms of the contracts and all relevant facts and circumstances. The five steps require a company to identify customer contracts, identify the separate performance obligations, determine the transaction price, allocate the transaction price to the separate performance obligations, and recognize revenue when or as each performance obligation is satisfied. The guidance allows for either full retrospective adoption, where the standard is applied to all periods presented, or modified retrospective adoption, where the standard is applied only to the most current period presented in the financial statements. The Company adopted the guidance as of July 1, 2018 using the modified retrospective approach applied to contracts that were not completed as of that date. The Company recorded a cumulative effect adjustment to the fiscal 2019 opening balance of its accumulated deficit upon adoption of this guidance, which decreased beginning accumulated deficit by $15.1 million.
The following table provides the impact of adopting the guidance on the Company’s financial statements:
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Year Ended June 30, 2019
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(Dollars in millions)
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As Reported
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Effects of Change
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Amount without Adoption of ASC 606
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Net revenue
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$
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2,518.0
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$
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79.9
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$
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2,597.9
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Cost of sales
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1,712.9
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91.3
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1,804.2
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Gross margin
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805.1
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(11.4)
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793.7
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Earnings from operations before income taxes
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160.3
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(11.4)
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148.9
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Income tax expense
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|
|
|
|
|
22.9
|
|
(5.9)
|
|
17.0
|
Net earnings/(loss)
|
|
|
|
|
|
|
$
|
137.4
|
|
$
|
(5.5)
|
|
$
|
131.9
|
|
|
|
|
|
|
|
|
|
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The principal impact of ASC 606 on the Company’s consolidated balance sheets is the decrease in accumulated deficit described above.
The adoption of ASC 606 resulted in three primary changes as compared to the previous revenue recognition guidance: (a) revenue from commercial product supply is recognized following successful completion of the required quality assurance process where it was previously recognized upon shipment of the product to the customer; (b) earlier recognition of revenue
from certain commercial supply contract cancellations is recognized as variable consideration as the Company’s performance obligations are satisfied rather than only upon agreement of the amount with the customer; and (c) revenue from sourcing comparator drug product for clinical supply services is recorded net of the cost of procuring it rather than at full value with a corresponding expense. Refer to Note 2, Revenue Recognition for further discussion of the Company’s revenue recognition policy.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities to report the service cost component of the net periodic benefit cost in the same income statement line as other compensation costs arising from services rendered by employees during the reporting period. The other components of the net benefit costs will be presented in the income statement separately from the service cost and below the income from operations subtotal. The Company adopted this guidance as of July 1, 2018, on a retrospective basis, which had an effect on the consolidated statement of operations for fiscal 2018. The following table summarizes the Company’s As Previously Reported and As Adjusted changes to the consolidated statement of operations for fiscal 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2018
|
|
|
|
|
|
|
(Dollars in millions)
|
As Previously Reported
|
|
As Adjusted
|
|
|
|
|
Selling, general, and administrative expenses
|
$
|
462.6
|
|
$
|
464.8
|
|
|
|
|
Operating earnings
|
271.1
|
|
268.9
|
|
|
|
|
Other expense, net
|
$
|
7.7
|
|
$
|
5.5
|
|
|
|
|
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which permits an entity to reclassify to retained earnings the stranded tax effects caused by the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on items within accumulated other comprehensive income/(loss). The ASU will be effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. The Company adopted this guidance and elected not to reclassify the income tax effects stranded in accumulated other comprehensive income to retained earnings and, as a result, there was no impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which reduces the complexity of and simplifies the application of hedge accounting by issuers. The ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted. The Company early adopted this guidance as of July 1, 2018 on a prospective basis. The adoption of this guidance was not material to the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when an entity will apply modification accounting for changes to stock-based compensation arrangements. Modification accounting applies if the value, vesting conditions, or classification of an award changes. The Company adopted this guidance prospectively at the beginning of fiscal 2019. The adoption of this guidance was not material to the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides additional guidance on the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The Company adopted this guidance prospectively at the beginning of fiscal 2019. The adoption of this guidance was not material to the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which changes the accounting for equity investments and financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The ASU requires equity investments with readily determinable fair values to be measured at fair value and to recognize change in fair value in net earnings. The ASU is not applicable to equity investments accounted for under the equity method of accounting or those that result in consolidation of the investee. The Company adopted this guidance at the beginning of fiscal 2019. The adoption of this guidance was not material to the Company’s consolidated financial statements.
New Accounting Standards Not Adopted as of June 30, 2019
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments, which clarifies certain hedge accounting
guidance. The ASU will be effective for the Company in fiscal 2020. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transaction between participants in a collaboration arrangement should be accounted for under ASC 606 when the counterparty is a customer. The guidance also precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and should be applied retrospectively. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and allow for either a retrospective or prospective application. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plan, which removes certain disclosures and added additional disclosures around weighted-average interest crediting rates for cash balance plans and explanation for significant gains and losses related to change in the benefit obligation for the period. The ASU will be effective for fiscal years beginning after December 15, 2020 with a retrospective application for all periods presented. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new accounting model known as Credit Expected Credit Losses (“CECL”). CECL requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaces the multiple existing impairment models in current GAAP, which generally require that a loss be incurred before it is recognized. The new standard will also apply to receivables arising from revenue transactions such as contract assets and accounts receivables. The ASU will be effective for fiscal years beginning after December 15, 2019. The Company does not expect the adoption of the guidance to have a material impact to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will supersede ASC 840 Leases. The new guidance requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for public reporting entities in annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The guidance is required to be adopted using the modified retrospective approach. The Company adopted the guidance on July 1, 2019, and anticipates that most of its operating leases will result in the recognition of additional assets and corresponding liabilities on its consolidated balance sheets. The Company elected the transition method that allows for the application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company has selected a lease accounting tool and made progress in validating lease data for contracts that are in the Company’s current lease portfolio and continues to assess the impact. The Company expects the additional assets and liabilities it will recognize on its balance sheet as a result of the adoption of this standard to be approximately 1% of total assets and liabilities, respectively.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The Company’s customer contracts generally include provisions entitling the Company to a termination penalty when the customer invokes its contractual right to terminate prior to the contract’s nominal end date. The termination penalties in the customer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and
obligations throughout the stated duration of the contract. The Company accounts for a contract cancellation as a contract modification in the period in which the customer invokes the termination provision. The determination of the contract termination penalty is based on the terms stated in the related customer agreement. As of the modification date, the Company updates its estimate of the transaction price using the expected value method, subject to constraints, and recognizes the amount over the remaining performance period.
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 table reflects revenue for the twelve months ended June 30, 2019 by type of activity and reporting segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Softgel Technologies
|
|
Biologics & Specialty Drug Delivery
|
|
Oral Drug Delivery
|
|
Clinical Supply Services
|
|
Total
|
Manufacturing & commercial product supply
|
$
|
806.1
|
|
$
|
379.5
|
|
$
|
403.0
|
|
$
|
—
|
|
$
|
1,588.6
|
Development services
|
66.0
|
|
362.6
|
|
216.9
|
|
—
|
|
645.5
|
Clinical supply services
|
—
|
|
—
|
|
—
|
|
321.4
|
|
321.4
|
Total
|
$
|
872.1
|
|
$
|
742.1
|
|
$
|
619.9
|
|
$
|
321.4
|
|
$
|
2,555.5
|
|
|
|
Inter-segment revenue elimination
|
|
|
|
|
|
(37.5)
|
|
|
|
|
|
Combined net revenue
|
|
|
|
$
|
2,518.0
|
The following table allocates revenue by the location where the goods were made or the service performed:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Twelve Months Ended
June 30, 2019
|
|
|
|
United States
|
|
$
|
1,317.3
|
Europe
|
|
842.1
|
Other international locations
|
|
433.8
|
Elimination of revenue attributable to multiple locations
|
|
(75.2)
|
Total
|
|
$
|
2,518.0
|
Development Services Revenue
Development services contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include biologic cell-line development, performing formulation, analytical stability, or other services related to product development, and providing manufacturing services for products that are under development or otherwise not intended for commercial sale. The transaction prices for these arrangements are fixed and include amounts stated in the contracts for each promised service, and each service is generally considered to be a separate performance obligation. The Company recognizes revenue over time because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date.
The Company measures progress toward the completion of its performance obligations satisfied over time based on the nature of the services to be performed. For certain types of arrangements related to biologic cell-line development, revenue is recognized over time and measured using an output method based on the completion of tasks and activities that are performed to satisfy a performance obligation. For all other types of arrangements, revenue is recognized over time and measured using an input method based on effort expended. Each of these methods provides an appropriate depiction of the Company’s progress toward fulfilling its performance obligations for its respective arrangement. In certain development services arrangements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability.
The Company allocates consideration to each performance obligation using the “relative standalone selling price” as defined under ASC 606. Generally, the Company utilizes observable standalone selling prices in its allocations of consideration. If observable standalone selling prices are not available, the Company estimates the applicable standalone selling price using an adjusted market assessment approach, representing the amount that the Company believes the market is willing to pay for the applicable service. Payment is typically due 30 to 90 days following the completion of services provided to the customer, based on the payment terms set forth in the applicable customer agreement.
Manufacturing & Commercial Product Supply Revenue
Manufacturing and commercial product supply revenue consists of revenue earned by manufacturing products supplied to customers under long-term commercial supply arrangements. In these arrangements, the customer typically owns and supplies the active pharmaceutical ingredient, or API, that is used in the manufacturing process. The contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of the Company’s business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. The transaction price is generally stated in the agreement as a fixed price per unit, with no contractual provision for a refund or price concession. Control is transferred to the customer over time, creating a corresponding right to recognize the related revenue, because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date. Progress is measured based on the units of product that have successfully completed the contractually required product quality assurance process, as the conclusion of that process generally defines the time when the applicable contract and the related regulatory requirements permit the customer to exercise control over the product’s disposition. The customer is typically responsible for arranging the shipping and handling of product following quality assurance.
Payment is typically due 30 to 90 days after the goods are shipped as requested by the customer, based on the payment terms set forth in the applicable customer agreement.
Clinical Supply Services Revenue
Clinical supply services contracts generally take the form of fee-for-service arrangements. Performance obligations for clinical supply services revenue typically include a combination of the following services: the manufacturing, packaging, storage, distribution, destruction, and inventory management of customer clinical trials materials. Performance obligations can also include the sourcing of comparator drug products on behalf of customers to be used in clinical trials to compare performance with the drug under clinical investigation. In certain arrangements, the Company recognizes revenue over time when the Company satisfies performance obligations. Satisfaction of the performance obligations is measured using an input method measure of progress based on effort expended by the Company. In other arrangements, revenue is recognized at the point in time when control transfers, which occurs upon either the delivery of the related output of the service to the customer or the completion of quality testing with respect to the product, and the Company has an enforceable right to payment based on the terms of the arrangement. Payment is typically due 30 to 90 days following the completion of services provided to the customer based on the payment terms set forth in the applicable customer agreement.
The Company records revenue for comparator sourcing arrangements on a net basis because it is acting as an agent that does not control the product or service before it is transferred to the customer. Payment for comparator sourcing activity is typically received in advance at the commencement of the contract and is initially recorded as a contract liability.
Licensing Revenue
The Company occasionally enters into arrangements with its customers that include licenses of functional intellectual property, including patents, or other intangible property (“out-licensing”). Revenue from such arrangements are within the scope of ASC 606. The Company does not have any material license arrangement that contains more than one performance obligation. The terms of such out-licensing arrangements include the license of functional intellectual or intangible property (primarily drug formulae) and typically provide for payment by the licensee of one or more of the following: non-refundable, up-front license fees or royalties on net sales of licensed products. The Company recognizes revenue from nonrefundable, up-front license fees when the licensed intellectual property is made available for the customer’s use and benefit, which is generally at the inception of the arrangement. Royalty payments from such arrangements are recognized when subsequent sale or usage of an item subject to the royalty occurs and the performance obligation to which royalty relates is satisfied.
Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. Changes in the contractual liabilities balance during the twelve months ended June 30, 2019 are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
100.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019
|
|
$
|
177.4
|
Revenue recognized in the period from:
|
|
|
Amounts included in contracts liability at the beginning of the period
|
|
$
|
55.6
|
3. BUSINESS COMBINATIONS
Paragon Bioservices, Inc. Acquisition Transaction Overview
On May 17, 2019, the Company acquired 100% of the equity interest in Paragon for an aggregate nominal purchase price of $1,192.1 million, subject to adjustment, in order to enhance the Company’s end-to-end integrated biopharmaceutical solutions. Paragon is a leading contract development and manufacturing organization (“CDMO”) focused on the development and manufacturing of cutting-edge biopharmaceuticals, including viral vectors used in gene therapies.
The Company accounted for the transaction using the acquisition method of accounting for business combinations, in accordance with ASC 805 Business Combinations. The total consideration was (in millions):
|
|
|
|
|
|
Cash paid at closing
|
$
|
1,182.1
|
Non-cash consideration
|
10.0
|
Total consideration
|
$
|
1,192.1
|
The operating results of Paragon have been included in the Company’s consolidated financial statements for the period following the acquisition date. For the period from the acquisition date through June 30, 2019, Paragon’s net revenue was $28.9 million and pre-tax earnings were $1.1 million. Transaction costs incurred as a result of the acquisition of $10.0 million are included in selling, general, and administrative expenses for the fiscal year ended June 30, 2019.
Paragon Valuation Assumptions and Preliminary Purchase Price Allocation
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. 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. Amounts subject to finalization include working capital adjustments and income taxes. If any measurement period adjustment is material, the Company will record such adjustment, including any related impact on net income, in the reporting period in which the adjustment is determined.
The preliminary purchase price allocation to assets acquired and liabilities assumed in the transaction is (in millions):
|
|
|
|
|
|
Property, plant, and equipment
|
$
|
163.2
|
Identifiable intangible assets
|
392.3
|
Other net assets
|
(63.0)
|
Deferred revenue
|
(73.2)
|
Deferred income taxes
|
(42.5)
|
Total identifiable net assets
|
376.8
|
Goodwill
|
815.3
|
Total assets acquired and liabilities assumed
|
$
|
1,192.1
|
The carrying value of trade receivables, raw materials 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.
Customer-relationship intangible assets of $389.0 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 customer relationship intangible asset has a weighted average useful life of 13 years.
Goodwill has preliminarily been allocated to our Biologics and Specialty Drug Delivery segment as shown in Note 4, Goodwill. Goodwill is mainly comprised of the following: growth from an expected increase in capacity utilization, potential new customers, and advanced gene therapy development and manufacturing capabilities. Goodwill is not deductible for tax purposes.
Paragon Pro Forma Results
The following table provides pro forma results for the Company, prepared in accordance with ASC 805, for the fiscal years ended June 30, 2019 and June 30, 2018, as if the Company had acquired Paragon as of July 1, 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,638.8
|
|
$
|
2,535.1
|
Net earnings
|
|
116.0
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma financial information was prepared based on the historical information of Catalent and Paragon. In order to reflect the acquisition on July 1, 2017, the pro forma financial information includes the impact of incremental stock-based compensation expenses attributable to the acquisition, incremental amortization expense to be incurred based on the fair values of the intangible assets acquired, the incremental depreciation expense related to the fair-value adjustments associated with Paragon's property, plant, and equipment, the additional interest expense associated with the issuance of debt to finance the acquisition, the shares issued to finance the acquisition, the acquisition, integration, and financing-related costs incurred, and income tax-related adjustments for the fiscal years ended June 30, 2019 and 2018, respectively. The results do not include any anticipated cost savings or other effects associated with integrating Paragon into the rest of the Company. Pro forma amounts are not necessarily indicative of results had the acquisition occurred on July 1, 2017 or of future results.
Juniper Pharmaceuticals Acquisition
On August 14, 2018, Operating Company acquired Juniper through a tender offer and back-end merger, pursuant to the terms of an agreement and plan of merger (the “Juniper Merger Agreement”), and Juniper became a wholly owned subsidiary of Operating Company. Under the terms of the Juniper Merger Agreement, all outstanding options to purchase Juniper shares were canceled in exchange for cash equal to the product of the number of Juniper shares subject to the option and the difference between the price per share paid in the tender offer and the exercise price. Similarly, all outstanding restricted stock units in respect of Juniper shares were canceled in exchange for cash equal to the product of the number of units and the price per share paid in the tender offer. Juniper has expertise in formulation development and supply and augments the Company's pre-existing portfolio of solid-state screening, pre-formulation, formulation, analytical, and bioavailability enhancement solutions, including the development of drug products produced using spray-dried dispersion, with integrated development, analytical, and clinical manufacturing. Juniper also owns the ex-U.S. rights to and supplies for sale to its licensee of such rights CRINONE®, a reproductive therapy. The primary operations of the acquired business are located in an owned facility aggregating 38,000 square feet in Nottingham, U.K., and Juniper has been included in the results of the Oral Drug Delivery segment since the acquisition.
The aggregate purchase consideration, net of cash acquired, of $127.5 million was funded by cash on hand. As a result of the preliminary fair value allocations, the Company recognized intangible assets of $69.0 million and $11.0 million for product relationships and customer relationships, respectively. The remainder of the fair value was allocated to tangible assets acquired and goodwill.
Pending Acquisitions as of June 30, 2019
On June 15, 2019, Operating Company and Bristol-Myers Squibb S.r.l. (“BMS”), entered into a Sale and Purchase Agreement for the acquisition of BMS’s oral solid, biologics, and sterile product manufacturing and packaging facility in Anagni, Italy (“Anagni”) for consideration of €45.0 million, subject to adjustment, plus the value of initiating certain services to aid the transition from BMS to Company ownership. At the closing of this acquisition, BMS will enter into a five-year agreement with respect to the continuing supply by the Company of certain products currently produced at the Anagni facility.
Adding Anagni to the Company’s global network will expand its biologics drug product offering in Europe, which the Company expects will enable it to both capture a larger segment of the biologics market in that region and complement its existing European sterile fill/finish capabilities. The acquisition will also add oral solid manufacturing and packaging capacity to augment the Company's current capabilities in Europe.
The Anagni acquisition is expected to close during the second quarter of fiscal 2020.
On June 26, 2019, Paragon and Novavax Inc. (“Novavax”) entered into agreements pursuant to which Paragon obtained the right to acquire, for $18.0 million plus the value of certain inventory, Novavax’s rights under two facility leases in southern Maryland, equipment needed to operate those facilities, related other assets, including certain raw material inventory, and the right to assume the employment of more than 100 Novavax employees located at those facilities in the areas of operations, quality, and product development, among other things. Novavax also entered into an agreement for Paragon to provide services from these facilities to Novavax. The transactions contemplated by these agreements closed in late July 2019. The Novavax facility acquisition will expand Paragon’s early-development capabilities and supplement Paragon’s pool of experienced biologics operatives to support its growth.
4. GOODWILL
The following table summarizes the changes from June 30, 2017, to June 30, 2018 and then to June 30, 2019 in the carrying amount of goodwill in total and by reporting segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Softgel Technologies
|
|
Drug Delivery Solutions
|
|
Biologics and Specialty Drug Delivery
|
|
Oral Drug Delivery
|
|
Clinical Supply Services
|
|
Total
|
Balance at June 30, 2017
|
$
|
415.2
|
|
$
|
477.2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
151.7
|
|
$
|
1,044.1
|
Additions
|
0.4
|
|
—
|
|
341.9
|
|
—
|
|
—
|
|
342.3
|
Reallocation
|
—
|
|
(477.2)
|
|
163.8
|
|
313.4
|
|
—
|
|
—
|
Divestitures
|
(0.9)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(0.9)
|
Foreign currency translation adjustments
|
0.5
|
|
—
|
|
—
|
|
6.5
|
|
4.7
|
|
11.7
|
Balance at June 30, 2018
|
415.2
|
|
—
|
|
505.7
|
|
319.9
|
|
156.4
|
|
1,397.2
|
Additions
|
—
|
|
—
|
|
815.3
|
|
25.3
|
|
—
|
|
840.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(6.0)
|
|
—
|
|
(1.0)
|
|
(4.9)
|
|
(5.0)
|
|
(16.9)
|
Balance at June 30, 2019
|
$
|
409.2
|
|
$
|
—
|
|
$
|
1,320.0
|
|
$
|
340.3
|
|
$
|
151.4
|
|
$
|
2,220.9
|
The increase in goodwill in fiscal 2019 in the Biologics and Specialty Drug Delivery and Oral Drug Delivery segments relates to the Paragon and Juniper acquisitions, respectively. See Note 1, Basis of Presentation and Summary of Significant Accounting Policies and Note 3, Business Combinations.
5. DEFINITE-LIVED LONG-LIVED ASSETS
The Company’s definite-lived long-lived assets include property, plant, and equipment as well as certain categories of intangible assets with definite lives. Refer to Note 18, Supplemental Balance Sheet Information for details related to property, plant, and equipment.
The details of other intangible assets subject to amortization as of June 30, 2019 and June 30, 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
168.2
|
|
$
|
(105.6)
|
|
$
|
62.6
|
Customer relationships
|
14 years
|
|
981.1
|
|
(182.5)
|
|
798.6
|
Product relationships
|
11 years
|
|
275.5
|
|
(213.9)
|
|
61.6
|
Other
|
4 years
|
|
9.3
|
|
(1.3)
|
|
8.0
|
Total intangible assets
|
|
|
$
|
1,434.1
|
|
$
|
(503.3)
|
|
$
|
930.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
170.8
|
|
$
|
(85.3)
|
|
$
|
85.5
|
Customer relationships
|
14 years
|
|
587.0
|
|
(140.9)
|
|
446.1
|
Product relationships
|
12 years
|
|
210.5
|
|
(197.2)
|
|
13.3
|
Total intangible assets
|
|
|
$
|
968.3
|
|
$
|
(423.4)
|
|
$
|
544.9
|
Amortization expense was $88.2 million, $62.6 million, and $44.3 million for the fiscal years ended June 30, 2019, 2018, and 2017, respectively. Future amortization expense for the next five fiscal years is estimated to be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Amortization expense
|
$
|
86.8
|
|
$
|
86.7
|
|
$
|
85.9
|
|
$
|
85.6
|
|
$
|
85.3
|
The Company impaired definite-lived intangible assets of $0.0 million, $0.6 million and $3.4 million in the fiscal years ended June 30, 2019, 2018 and 2017, respectively. During the fiscal year ended June 30, 2019, the Company recorded $12.3 million of accelerated amortization related to an intangible property licensing right.
6. RESTRUCTURING AND OTHER COSTS
Restructuring Costs
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. Facility exit and other costs consist of accelerated depreciation, equipment relocation costs and costs associated with planned changes to the Company's facilities to streamline its operations.
Other Costs/(Income)
Other costs include settlement charges for claim amounts that the Company deemed to be both probable and reasonably estimable, but where the Company is not currently in a position to record under U.S. GAAP any insurance recovery with respect to such costs. The claims relate to a former temporary suspension of operations at a softgel manufacturing facility.
The following table summarizes the costs recorded within restructuring and other costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
Restructuring costs:
|
|
|
|
|
|
Employee-related reorganization
|
$
|
14.1
|
|
$
|
11.9
|
|
$
|
7.9
|
Facility exit and other costs
|
—
|
|
0.4
|
|
(1.7)
|
Total restructuring costs
|
$
|
14.1
|
|
$
|
12.3
|
|
$
|
6.2
|
Other - Temporary suspension customer claims (recoveries)
|
$
|
—
|
|
$
|
(2.1)
|
|
$
|
1.8
|
Total restructuring and other costs
|
$
|
14.1
|
|
$
|
10.2
|
|
$
|
8.0
|
7. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consist of the following at June 30, 2019 and June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Maturity as of June 30, 2019
|
|
June 30, 2019
|
|
June 30, 2018
|
Senior Secured Credit Facilities
|
|
|
|
|
|
Term loan facility incremental dollar term B-2
|
May 2026
|
|
$
|
936.2
|
|
$
|
—
|
Term loan facility U.S. dollar-denominated
|
May 2024
|
|
—
|
|
1,228.4
|
Term loan facility euro-denominated
|
May 2024
|
|
346.8
|
|
358.9
|
Revolving credit facility
|
May 2024
|
|
—
|
|
—
|
Euro-denominated 4.75% Senior Notes due 2024
|
December 2024
|
|
428.3
|
|
438.4
|
U.S. dollar-denominated 4.875% Senior Notes due 2026
|
January 2026
|
|
444.6
|
|
443.8
|
U.S. dollar-denominated 5.00% Senior Notes due 2027
|
July 2027
|
|
492.1
|
|
—
|
Deferred purchase consideration
|
October 2021
|
|
143.9
|
|
188.9
|
|
|
|
|
|
|
Capital lease obligations
|
2020 to 2044
|
|
167.3
|
|
60.8
|
Other obligations
|
2019 to 2020
|
|
0.1
|
|
2.1
|
Total
|
|
|
2,959.3
|
|
2,721.3
|
Less: Current portion of long-term obligations and other short-term
borrowings
|
|
|
76.5
|
|
71.9
|
Long-term obligations, less current portion
|
|
|
$
|
2,882.8
|
|
$
|
2,649.4
|
Senior Secured Credit Facilities and Fourth Amendment
In May 2019, Operating Company completed a fourth amendment (the “Fourth Amendment”) to its Amended and Restated Credit Agreement, dated as of May 20, 2014 (as amended through the Fourth Amendment, the “Credit Agreement”). As part of the Fourth Amendment, Operating Company borrowed $950 million aggregate principal amount of incremental term B loans (the “Incremental Dollar Term B-2 Loans”) and replaced the existing revolving credit commitments of $200 million with new revolving credit commitments of $550 million (the “Incremental Revolving Credit Commitments”). The Incremental Dollar Term B-2 Loans constitute a new class of U.S. dollar-denominated term loans under the Credit Agreement with the same principal terms as the then-existing U.S. dollar-denominated term loans. The proceeds of the Incremental Dollar Term B-2 Loans were used to pay the fees and expenses related to the Fourth Amendment, a voluntary prepayment of $300 million principal amount of outstanding U.S. dollar-denominated term loans under the Credit Agreement, and a portion of the consideration for the Paragon acquisition due at its closing. The Incremental Dollar Term B-2 Loans will mature at the earlier of (1) May 17, 2026 and (2) the 91st day prior to the maturity of Operating Company’s 4.75% senior unsecured notes due 2024 (the “Euro Notes”) or a permitted refinancing thereof, if on such 91st day any of the Euro Notes remain outstanding. There is a prepayment premium of 1.00% to any principal amount of the Incremental Dollar Term B-2 Loans that is subject to a repricing event during the first six-month period after the Fourth Amendment effective date. The Incremental Revolving Credit Commitments constitute revolving credit commitments under the Credit Agreement with the same principal terms as the previously existing revolving credit commitments under the Credit Agreement. The maturity date for the revolving loans is now the earlier of (1) May 17, 2024 and (2) the 91st day prior to the maturity of any dollar term loans or euro term loans under the Credit Agreement, or any permitted refinancing thereof, if on such 91st day any of such dollar term loans or euro term loans remain outstanding. Under the Credit Agreement, the applicable rate for U.S. dollar-denominated term loans, including the Incremental Dollar Term B-2 is LIBOR (the London Interbank Offered Rate, subject to a floor of 1.00%) plus 2.25%, and the applicable rate for euro-denominated term loans is Euribor (the Euro Interbank Offered Rate published by the European Money Markets Institute, subject to a floor of 1.00%) plus 1.75%. The applicable rate for the revolving loans is initially LIBOR plus 2.25%, and such rate can additionally be reduced to LIBOR plus 2.00% in future periods based on a measure of Operating Company's total leverage ratio. The euro-denominated term loans will mature in May 2024.
In July 2018, the Company completed the 2018 Equity Offering (as defined in Note 12, Equity and Accumulated Other Comprehensive Income/(Loss)) and used the net proceeds of $445.5 million and cash on hand to repay $450.0 million of the borrowings then-outstanding under the U.S. dollar-denominated term loans.
As of June 30, 2019, the Company has $543.4 million of un-utilized capacity and $6.6 million of outstanding letters of credit under the $550 million revolving credit facility.
Euro-denominated 4.75% Senior Notes due 2024
In December 2016, Operating Company completed a private offering of €380.0 million aggregate principal amount of the Euro Notes. The Euro Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The Euro Notes were offered in the 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 Euro Notes will mature on December 15, 2024, bear interest at the rate of 4.75% per annum and are payable semi-annually in arrears on June 15 and December 15 of each year.
U.S. dollar-denominated 4.875% Senior Notes due 2026
In October 2017, Operating Company completed a private offering of $450.0 million aggregate principal amount of 4.875% Senior Notes due 2026 (the “USD 2026 Notes”). The USD 2026 Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The USD 2026 Notes were offered in the U.S to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S only to non-U.S. investors pursuant to Regulation S under the Securities Act. The USD 2026 Notes will mature on January 15, 2026, bear interest at the rate of 4.875% per annum, and are payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The net proceeds of the USD 2026 Notes offering, after payment of the initial purchasers' discount and related fees and expenses, were used to fund a portion of the consideration for the Catalent Indiana acquisition due at its closing.
U.S. dollar-denominated 5.00% Senior Notes due 2027
In June 2019, Operating Company completed a private offering of $500.0 million aggregate principal amount of 5.00% Senior Notes due 2027 (the “USD 2027 Notes” and, together with the USD 2026 Notes, the “USD Notes”; and the USD Notes and Euro Notes together, the “Senior Notes”). The USD 2027 Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The USD 2027 Notes were offered in the U.S to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the U.S only to non-U.S. investors pursuant to Regulation S under the Securities Act. The USD 2027 Notes will mature on July 15, 2027, bear interest at the rate of 5.00% per annum, and are payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The net proceeds of the USD 2027 Notes, after payment of the initial purchasers' discount and related fees and expenses, were used to repay in full the outstanding borrowings under Operating Company's U.S. dollar-denominated term loans that mature in May 2024 under its senior secured credit facilities, plus any accrued and unpaid interest thereon, and provide cash on its balance sheet for general corporate purposes.
Bridge Loan Facility
In September 2017, contemporaneous with the Company entering into the agreement to acquire Catalent Indiana, Operating Company entered into a debt commitment letter with several financial institutions, as commitment parties. Pursuant to the debt commitment letter and subject to its terms and conditions, the commitment parties agreed to provide a senior unsecured bridge loan facility (the “Bridge Facility”) of up to $700.0 million in the aggregate for the purpose of providing any back-up financing necessary to fund a portion of the consideration to be paid in the acquisition and related fees, costs, and expenses (the “Bridge Loan Commitment”). In connection with entering into the Bridge Facility, Operating Company incurred $6.1 million of associated fees. Operating Company did not draw on the Bridge Facility to fund the acquisition, and the Bridge Facility was closed. The Company expensed the $6.1 million in the second quarter of fiscal 2018.
Deferred Purchase Consideration
In connection with the acquisition of Catalent Indiana in October 2017, $200.0 million of the $950.0 million aggregate nominal purchase price is payable in $50.0 million installments, on each of the first four anniversaries of the closing date. The Company paid the first installment in October 2018. The balance of the deferred purchase consideration is recorded at fair value as of the date of acquisition, with the difference between the remaining nominal amount and the fair value treated as imputed interest.
Long-Term and Other Obligations
Other obligations consist primarily of capital leases for buildings and other loans for business and working capital needs. Maturities of long-term obligations, including capital leases of $167.3 million, and other short-term borrowings for future fiscal years are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Total
|
Maturities of long-term and other obligations
|
$
|
65.0
|
66.4
|
67.9
|
18.8
|
351.8
|
2,421.1
|
$
|
2,991.0
|
Debt Issuance Costs
Debt issuance costs associated with the Credit Agreement (other than its revolving credit facility component) and the Senior Notes are presented as a reduction to the carrying value of the related debt, while debt issuance costs associated with the revolving credit facility are capitalized within prepaid expenses and other assets on the balance sheet. All debt issuance costs are amortized over the life of the related obligation through charges to interest expense in the consolidated statements of operations. The unamortized total of debt issuance costs were $34.6 million and $16.0 million as of June 30, 2019 and 2018, respectively. Amortization of debt issuance costs totaled $3.8 million and $2.5 million for the fiscal years ended June 30, 2019 and 2018, respectively.
Guarantees and Security
Senior Secured Credit Facilities
All obligations under the Credit Agreement, and the guarantees of those obligations, are secured by substantially all of the following assets of Operating Company and each guarantor (Operating Company's parent entity, PTS Intermediate Holdings LLC (“PTS Intermediate”), and each of Operating Company's material domestic subsidiaries), subject to certain exceptions:
•a pledge of 100% of the capital stock of Operating Company and 100% of the equity interests directly held by Operating Company and each guarantor in any wholly owned material subsidiary of Operating Company or any guarantor (which pledge, in the case of any non-U.S. subsidiary of a U.S. subsidiary, will not include more than 65% of the voting stock of such non-U.S. subsidiary); and
•a security interest in, and mortgages on, substantially all tangible and intangible assets of Operating Company and of each guarantor, subject to certain limited exceptions.
The Senior Notes
All obligations under the Senior Notes are general, unsecured and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all of Operating Company's wholly owned U.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by either PTS Intermediate or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, Operating Company’s (and Operating Company’s restricted subsidiaries’) ability to incur additional indebtedness or issue certain preferred shares; create liens on assets; engage in mergers and consolidations; sell assets; pay dividends and distributions or repurchase capital stock; repay subordinated indebtedness; engage in certain transactions with affiliates; make investments, loans or advances; make certain acquisitions; enter into sale and leaseback transactions; amend material agreements governing Operating Company's subordinated indebtedness and change Operating Company's lines of business.
The Credit Agreement also contains change of control provisions and certain customary affirmative covenants and events of default. The revolving credit facility requires compliance with a net leverage covenant when there is a 30% or more draw outstanding at a period end. As of June 30, 2019, the Company was in compliance with all material covenants related to the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company’s non-U.S. subsidiaries nor its dormant Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, Operating Company’s ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments and paying certain dividends is tied to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA” in the Credit Agreement). Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under U.S. GAAP, and is subject to important limitations.
The Senior Notes
The various indentures governing the Senior Notes (collectively, the “Indentures”) contain covenants that, among other things, limit the ability of Operating Company and its restricted subsidiaries to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding Senior Notes or the applicable Trustee under the Indentures may declare the applicable notes immediately due and payable; or in certain circumstances, the applicable notes will become automatically immediately due and payable. As of June 30, 2019, Operating Company was in compliance with all material covenants under the Indentures.
Fair Value of Debt Measurements
The estimated fair value of the senior secured credit facilities and Senior Notes, is classified as Level 2 in the fair value hierarchy and is calculated by using a discounted cash flow model with market interest rate as a significant input. The carrying amounts and the estimated fair values of financial instruments as of June 30, 2019 and June 30, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
|
June 30, 2018
|
|
|
(Dollars in millions)
|
Fair Value Measurement
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
Euro-denominated 4.75% Senior Notes
|
Level 2
|
$
|
428.3
|
|
$
|
454.2
|
|
$
|
438.4
|
|
$
|
457.6
|
U.S. Dollar-denominated 4.875% Senior Notes
|
Level 2
|
444.6
|
|
457.0
|
|
443.8
|
|
428.3
|
U.S. Dollar-denominated 5.00% Senior Notes
|
Level 2
|
492.1
|
|
509.0
|
|
—
|
|
—
|
Senior Secured Credit Facilities & Other
|
Level 2
|
1,594.3
|
|
1,526.0
|
|
1,839.1
|
|
1,768.0
|
Total
|
|
$
|
2,959.3
|
|
$
|
2,946.2
|
|
$
|
2,721.3
|
|
$
|
2,653.9
|
8. EARNINGS PER SHARE
The Company computes earnings per share (“EPS”) of the Common Stock using the two-class method required due to the participating nature of the Series A Preferred Stock (as noted in Note 12, Equity and Accumulated Other Comprehensive Income/(Loss)). Diluted net income per share is computed using the weighted-average number of shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive instruments. Dilutive securities having an anti-dilutive effect on diluted net income per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company’s equity incentive plans (see Note 14, Equity-Based Compensation) are reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of the Series A Preferred
Stock is computed by applying the if-converted method. The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the fiscal years ended June 30, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
(Dollars in millions, except per share data)
|
2019
|
|
2018
|
|
2017
|
Net earnings
|
$
|
137.4
|
|
$
|
83.6
|
|
$
|
109.8
|
Less: Net earnings attributable to participating securities
|
5.4
|
|
—
|
|
—
|
Net earnings attributable to common shareholders
|
$
|
132.0
|
|
$
|
83.6
|
|
$
|
109.8
|
|
|
|
|
|
|
Weighted average shares outstanding
|
144,245,956
|
|
131,226,110
|
|
124,954,248
|
Weighted average dilutive securities issuable-stock plans
|
1,708,519
|
|
1,975,106
|
|
1,783,537
|
Total weighted average diluted shares outstanding
|
145,954,475
|
|
133,201,216
|
|
126,737,785
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$
|
0.92
|
|
$
|
0.64
|
|
$
|
0.88
|
Diluted
|
$
|
0.90
|
|
$
|
0.63
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
The computations of diluted earnings per share for the fiscal years ended June 30, 2019, 2018, and 2017 exclude the effect of shares potentially issuable under pre-IPO employee stock options totaling 0.0 million, 0.4 million, and 0.4 million options, respectively, because the vesting provisions of those awards specify performance or market-based conditions that had not been met as of the period end. Further, the computation of diluted earnings per share for the year ended June 30, 2019 excludes the effect of approximately 1.6 million “if-converted” shares of Common Stock, on a weighted average basis, potentially issuable on the conversion of Series A Preferred Stock, as those shares would be anti-dilutive.
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the currency exchange rates applicable to its investments in foreign operations. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated the exposure arising from its investments in its European operations by denominating a portion of its debt in euros. At June 30, 2019, the Company had euro-denominated debt outstanding of $775.1 million, which qualifies as a hedge of a net investment in foreign operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of the translation gains or losses are reported in accumulated other comprehensive income/(loss) as part of the cumulative translation adjustment. The unhedged portions of the translation gains or losses are reported in the consolidated statements of operations. The following table includes net investment hedge activity during the fiscal years ended June 30, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30, 2019
|
|
June 30, 2018
|
Unrealized foreign exchange gain/(loss) within Other Comprehensive Income
|
$
|
12.2
|
|
$
|
(12.5)
|
Unrealized foreign exchange gain/(loss) within the Consolidated Statements of Operations
|
$
|
7.6
|
|
$
|
(11.8)
|
The net accumulated gain of this net investment as of June 30, 2019 within accumulated other comprehensive income/(loss) was $59.8 million. Amounts are reclassified out of accumulated other comprehensive income/(loss) into earnings when the entity in which the gains and losses reside is either sold or substantially liquidated.
2019 Derivative Liability
As discussed in Note 13, Redeemable Preferred Stock—Series A Preferred, in May 2019, the Company issued shares of Series A Preferred Stock in exchange for net proceeds of $646.3 million after taking into account the $3.7 million issuance cost.
The dividend rate used to determine the amount of the quarterly dividend payable on shares of the Series A Preferred Stock is subject to adjustment so as to provide holders of shares of Series A Preferred Stock with certain protections against a decline in the trading price of shares of Common Stock. The Company determined that this feature should be accounted for as a derivative liability, since the feature fluctuates inversely to changes in the trading price and is also linked to the performance of the S&P 500 stock index. Accordingly, the Company bifurcated the adjustable dividend feature from the remainder of the Series A Preferred Stock and accounted for this feature as a derivative liability at fair value. Changes in the fair value of the
derivative liability will be recognized in the consolidated statements of operations for each reporting period. The fair value was based on option pricing methodology specifically both a Monte Carlo simulation and a binomial lattice model. The methodology incorporates the terms and conditions of the preferred stock arrangement, historical stock price volatility, the risk-free interest rate, a credit spread based on the yield indexes of high-yield bonds and the trading price of shares of the Common Stock. The calculation of the estimated fair value of the derivative liability is highly sensitive to changes in the unobservable inputs, such as the expected volatility and the Company's specific credit spread.
The Company recorded a gain of $12.9 million on the change in the estimated fair value of the derivative liability from issuance through June 30, 2019, which is reflected as a non-operating expense in the consolidated statements of operations. The fair value of the derivative liability as of June 30, 2019 was $26.8 million.
The fair value is classified as Level 3 in the fair value hierarchy due to the significant management judgment required for the assumptions underlying the calculation of value. The following table sets forth a summary of changes in the estimated fair value of the derivative liability:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Fair Value Measurements of
Series A Preferred Stock
Derivative Liability
Using Significant
Unobservable Inputs (Level 3)
|
Balance at July 1, 2018
|
|
$
|
—
|
Series A Preferred Stock at issuance
|
|
39.7
|
Change in estimated fair value of Series A Preferred Stock derivative liability
|
|
(12.9)
|
Balance at June 30, 2019
|
|
$
|
26.8
|
10. INCOME TAXES
Earnings from operations before income taxes are as follows for fiscal 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
U.S. operations
|
$
|
36.1
|
|
$
|
13.3
|
|
$
|
5.0
|
Non-U.S. operations
|
124.2
|
|
138.7
|
|
130.6
|
|
$
|
160.3
|
|
$
|
152.0
|
|
$
|
135.6
|
The provision /(benefit) for income taxes consists of the following for fiscal 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
2.4
|
|
$
|
14.1
|
|
$
|
2.1
|
State and local
|
0.3
|
|
0.1
|
|
(0.4)
|
Non-U.S.
|
25.8
|
|
24.9
|
|
22.7
|
Total current
|
$
|
28.5
|
|
$
|
39.1
|
|
$
|
24.4
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
3.6
|
|
$
|
24.2
|
|
$
|
1.9
|
State and local
|
(11.6)
|
|
(1.0)
|
|
1.4
|
Non-U.S.
|
2.4
|
|
6.1
|
|
(1.9)
|
Total deferred
|
$
|
(5.6)
|
|
$
|
29.3
|
|
$
|
1.4
|
|
|
|
|
|
|
Total provision
|
$
|
22.9
|
|
$
|
68.4
|
|
$
|
25.8
|
A reconciliation of the provision/(benefit) starting from the tax computed at the federal statutory income tax rate to the tax computed at the Company’s effective income tax rate is as follows for the fiscal years ended 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
Provision at U.S. federal statutory tax rate
|
$
|
33.7
|
|
$
|
42.7
|
|
$
|
47.4
|
State and local income taxes
|
(0.3)
|
|
(2.5)
|
|
(1.7)
|
Foreign tax rate differential
|
(3.0)
|
|
(15.4)
|
|
(25.7)
|
Global intangible low tax income
|
3.4
|
|
—
|
|
—
|
Other permanent items
|
4.9
|
|
2.7
|
|
2.9
|
Unrecognized tax positions
|
1.1
|
|
(2.4)
|
|
(0.3)
|
Tax valuation allowance
|
(11.3)
|
|
7.2
|
|
5.6
|
Foreign tax credit
|
(4.2)
|
|
—
|
|
—
|
Withholding tax and other foreign taxes
|
1.1
|
|
1.3
|
|
(0.2)
|
Change in tax rate
|
0.8
|
|
(3.6)
|
|
(0.3)
|
|
|
|
|
|
|
R&D tax credit
|
(2.3)
|
|
(2.4)
|
|
(1.2)
|
Impact of U.S. tax reform
|
—
|
|
42.5
|
|
—
|
Other
|
(1.0)
|
|
(1.7)
|
|
(0.7)
|
|
$
|
22.9
|
|
$
|
68.4
|
|
$
|
25.8
|
The income tax provision for the fiscal year ended June 30, 2019 is not comparable to the provision in the prior year due to changes in pretax income over many jurisdictions and the impact of discrete items. Generally, fluctuations in the effective tax rate are primarily due to changes in the geographic mix of pretax income and changes in the tax impact of permanent differences and other discrete tax items, which may have unique tax implications depending on the nature of the item. The effective tax rate for the fiscal year ended June 30, 2019 reflects a reduction to the state valuation allowance, and the impact of permanent differences, including “global intangible low-taxed income” (“GILTI”), offset by the benefit of an increase in foreign earnings taxed at rates lower than the U.S. statutory rate. The effective tax rate for the fiscal year ended June 30, 2018 reflects the impact of U.S. tax reform, an increase in the valuation allowance, and the impact of permanent differences, offset by the benefit of an increase in foreign earnings taxed at rates lower than the U.S. statutory rate.
As of June 30, 2019, for purposes of ASC 740-10-25-3, the Company had $62.9 million of undistributed earnings from non-U.S. subsidiaries that are intended to be permanently reinvested in the Company's non-U.S. operations. As these ASC 740-10-25-3 earnings are considered permanently reinvested, no tax provision has been accrued. It is not feasible to estimate the amount of tax that might be payable on the eventual remittance of such earnings. The Company intends to repatriate foreign earnings previously taxed as a result of the changes wrought by the 2017 Tax Act and it recorded the income tax consequences of this repatriation in fiscal 2018.
Deferred income taxes arise from temporary differences between the financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the Company's deferred income tax assets and liabilities are as follows at June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
Accrued liabilities
|
$
|
23.3
|
|
$
|
19.9
|
Equity compensation
|
35.9
|
|
12.9
|
Loss and tax credit carryforwards
|
150.0
|
|
118.9
|
Foreign currency
|
10.8
|
|
9.5
|
Pension
|
30.7
|
|
29.4
|
Property-related
|
9.7
|
|
9.7
|
Intangibles
|
16.6
|
|
22.5
|
Other
|
7.3
|
|
1.9
|
Euro-denominated debt
|
6.0
|
|
11.5
|
Total deferred income tax assets
|
$
|
290.3
|
|
$
|
236.2
|
Valuation allowance
|
(76.3)
|
|
(86.2)
|
Net deferred income tax assets
|
$
|
214.0
|
|
$
|
150.0
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
Deferred income tax liabilities:
|
|
|
|
Accrued liabilities
|
$
|
(1.2)
|
|
$
|
(0.8)
|
|
|
|
|
Foreign currency
|
(0.8)
|
|
(0.9)
|
Property-related
|
(47.4)
|
|
(50.2)
|
Goodwill and other intangibles
|
(194.6)
|
|
(95.6)
|
Other
|
(5.8)
|
|
(2.1)
|
|
|
|
|
Total deferred income tax liabilities
|
$
|
(249.8)
|
|
$
|
(149.6)
|
|
|
|
|
Net deferred tax asset/(liability)
|
$
|
(35.8)
|
|
$
|
0.4
|
Deferred tax assets and liabilities in the preceding table are in the following captions in the consolidated balance sheets at June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
Non-current deferred tax asset
|
$
|
38.6
|
|
$
|
32.9
|
Non-current deferred tax liability
|
74.4
|
|
32.5
|
Net deferred tax asset/(liability)
|
$
|
(35.8)
|
|
$
|
0.4
|
At June 30, 2019, the Company had federal net operating loss (“NOL”) carryforwards of $240.9 million, all of which are subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Of this amount, $0.3 million of NOL carryforwards were generated in years prior to April 10, 2007, when the Company was owned by Cardinal Health, Inc. (“Cardinal”). The remaining carryforwards are limited as a result of the Company's acquisition of Pharmatek, Juniper, and Paragon. The Company's federal NOL carryforwards will expire in fiscal years 2023 through 2037.
At June 30, 2019, the Company has state tax NOL carryforwards of $459.1 million. Approximately $49.4 million of these losses are state tax losses generated in periods ending on or before April 10, 2007. Substantially all state carryforwards have a twenty-year carryforward period. At June 30, 2019, the Company had international tax NOL carryforwards of $119.7 million. Substantially all of these carryforwards are available for at least three years or have an indefinite carryforward period.
The Company had valuation allowances of $76.3 million and $86.2 million as of June 30, 2019 and 2018, respectively, against its deferred tax assets. The Company considered all available evidence, both positive and negative, in assessing the need
for a valuation allowance for deferred tax assets. Four possible sources of taxable income were evaluated when assessing the realization of deferred tax assets:
•carrybacks of existing NOLs (if permitted under the tax law);
•future reversals of existing taxable temporary differences;
•tax planning strategies; and
•future taxable income exclusive of reversing temporary differences and carryforwards.
The Company considered the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that the Company would realize the value of its deferred tax assets based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law. During the year ended June 30, 2019, the Company released $12.1 million of its valuation allowance related to certain U.S. combined states, primarily as a result of the deferred tax liability recorded related to the Paragon acquisition. Of the $12.1 million released, $0.5 million relates to state NOL carryforwards, which expire over a number of years beginning in 2028, and the remaining $11.6 million related to other state deferred taxes.
While the valuation allowance related to certain U.S. combined states was partially released in year end June 30, 2019, a state valuation allowance of $35.1 million was maintained on state NOLs and temporary differences for the separate and remaining combined states. The Company retained the remaining state valuation allowance due to its separate state history of tax losses, anticipated loss utilization rates and the difference in application of allocated and apportioned income rules for separate states versus combined states.
In the normal course of business, the Company's income taxes are subject to audits by federal, state, and foreign tax authorities, some of which are ongoing and may result in proposed assessments. Among the foreign jurisdictions where the Company has substantial tax positions are Germany, the U.K., and France. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal 2009. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. The Company assesses its income tax positions and recorded benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions for which it is more likely than not that a tax benefit will be sustained, the Company records the amount that has a greater than 50% likelihood of being realized upon resolution with a taxing authority that has full knowledge of all relevant information based on the technical merits. Interest and penalties are accrued, where applicable.
As of June 30, 2019, the Company had a total of $3.8 million of unrecognized tax benefits. A reconciliation of unrecognized tax benefits, excluding accrued interest, for June 30, 2019, 2018, and 2017 is as follows:
|
|
|
|
|
|
(Dollars in millions)
|
|
Balance at June 30, 2016
|
$
|
61.5
|
Additions based on tax positions related to the current year
|
3.3
|
Additions for tax positions of prior years
|
0.1
|
Reductions for tax positions of prior years
|
(6.8)
|
Settlements
|
(5.4)
|
Lapse of the applicable statute of limitations
|
(0.2)
|
Balance at June 30, 2017
|
$
|
52.5
|
Additions based on tax positions related to the current year
|
0.1
|
Additions for tax positions of prior years
|
—
|
Reductions for tax positions of prior years
|
(2.7)
|
Settlements
|
(47.5)
|
Lapse of the applicable statute of limitations
|
(0.2)
|
Balance at June 30, 2018
|
$
|
2.2
|
Additions based on tax positions related to the current year
|
—
|
Additions for tax positions of prior years
|
3.0
|
Reductions for tax positions of prior years
|
(0.1)
|
Settlements
|
—
|
Lapse of the applicable statute of limitations
|
(1.3)
|
Balance at June 30, 2019
|
$
|
3.8
|
Of this amount, $3.8 million and $2.2 million represent the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate as of June 30, 2019 and 2018, respectively.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2019, the Company has $1.4 million of accrued interest related to uncertain tax positions, a decrease of $0.6 million from the prior year, the majority of which relates to lapses of the applicable statute of limitations with respect to the imposition of such interest. The Company had $2.0 million and $5.0 million of accrued interest related to uncertain tax positions as of June 30, 2018 and 2017, respectively. The portion of such interest and penalties subject to indemnification by Cardinal is $1.3 million as of June 30, 2019, a decrease of $0.2 million from the prior year.
11. EMPLOYEE RETIREMENT BENEFIT PLANS
The Company sponsors various retirement plans, including defined benefit pension plans and defined contribution plans. Substantially all of the Company’s domestic non-union employees are eligible to participate in employer-sponsored retirement savings plans, which include plans created under Section 401(k) of the Internal Revenue Code that provide for the Company to match a portion of employee contributions. The Company’s contributions to the plans are discretionary but are subject to certain minimum requirements as specified in the plans. The Company uses a measurement date of June 30 for all of its retirement and postretirement benefit plans.
The Company recorded obligations related to its withdrawal from one multi-employer pension plan related to three former sites. Its withdrawal has been classified as a mass withdrawal under the Multiemployer Pension Plan Amendments Act of 1980, as amended, and the Pension Protection Act of 2006 and resulted in the recognition of liabilities associated with the Company’s long-term obligations in prior-year periods not presented, which were primarily recorded as an expense within discontinued operations. The estimated discounted value of the projected contributions related to these plans is $38.8 million and $39.0 million as of June 30, 2019 and 2018, respectively. The annual cash impact associated with the Company’s long-term obligation arising from this plan is $1.7 million per year.
The following table provides a reconciliation of the change in projected benefit obligation and fair value of plan assets for the defined benefit retirement and other retirement plans, excluding the multi-employer pension plan liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Accumulated Benefit Obligation
|
$
|
341.7
|
|
$
|
322.7
|
|
$
|
2.9
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
331.1
|
|
330.6
|
|
2.8
|
|
2.8
|
Company service cost
|
3.6
|
|
3.5
|
|
—
|
|
—
|
Interest cost
|
7.5
|
|
7.3
|
|
0.1
|
|
—
|
Employee contributions
|
0.3
|
|
0.3
|
|
—
|
|
—
|
Plan amendments
|
—
|
|
—
|
|
—
|
|
—
|
Curtailments
|
—
|
|
—
|
|
—
|
|
—
|
Settlements
|
—
|
|
(0.2)
|
|
—
|
|
—
|
Special termination benefits
|
—
|
|
—
|
|
—
|
|
—
|
Divestitures
|
—
|
|
—
|
|
—
|
|
—
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
Benefits paid
|
(11.5)
|
|
(14.8)
|
|
(0.2)
|
|
(0.2)
|
Actual expenses
|
(0.1)
|
|
—
|
|
—
|
|
—
|
Actuarial (gain)/loss
|
27.5
|
|
(4.5)
|
|
0.2
|
|
0.2
|
Exchange rate gain/(loss)
|
(8.7)
|
|
8.9
|
|
—
|
|
—
|
Benefit obligation at end of year
|
$
|
349.7
|
|
$
|
331.1
|
|
$
|
2.9
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
258.1
|
|
244.6
|
|
—
|
|
—
|
Actual return on plan assets
|
23.2
|
|
10.6
|
|
—
|
|
—
|
Company contributions
|
9.7
|
|
11.2
|
|
0.2
|
|
0.2
|
Employee contributions
|
0.3
|
|
0.3
|
|
—
|
|
—
|
Settlements
|
—
|
|
(0.2)
|
|
—
|
|
—
|
Special company contributions to fund termination benefits
|
—
|
|
—
|
|
—
|
|
—
|
Divestitures
|
—
|
|
—
|
|
—
|
|
—
|
Other
|
—
|
|
—
|
|
—
|
|
—
|
Benefits paid
|
(11.5)
|
|
(14.8)
|
|
(0.2)
|
|
(0.2)
|
Actual expenses
|
(0.1)
|
|
—
|
|
—
|
|
—
|
Exchange rate gain/(loss)
|
(7.4)
|
|
6.4
|
|
—
|
|
—
|
Fair value of plan assets at end of year
|
$
|
272.3
|
|
$
|
258.1
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
Funded status at end of year
|
(77.4)
|
|
(73.0)
|
|
(2.9)
|
|
(2.8)
|
Employer contributions between measurement date and reporting date
|
—
|
|
—
|
|
—
|
|
—
|
Net pension asset (liability)
|
$
|
(77.4)
|
|
$
|
(73.0)
|
|
$
|
(2.9)
|
|
$
|
(2.8)
|
The following table provides a reconciliation of the net amount recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amounts Recognized in Statement of Financial Position
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
25.8
|
|
$
|
18.0
|
|
$
|
—
|
|
$
|
—
|
Current liabilities
|
(0.8)
|
|
(0.8)
|
|
(0.3)
|
|
(0.3)
|
Noncurrent liabilities
|
(102.4)
|
|
(90.2)
|
|
(2.6)
|
|
(2.5)
|
Total asset/(liability)
|
(77.4)
|
|
(73.0)
|
|
(2.9)
|
|
(2.8)
|
|
|
|
|
|
|
|
|
Amounts Recognized in Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
—
|
|
—
|
|
—
|
Prior service cost
|
(0.5)
|
|
(0.5)
|
|
—
|
|
—
|
Net (gain)/loss
|
65.7
|
|
53.0
|
|
(0.8)
|
|
(1.1)
|
Total accumulated other comprehensive income at the end of the year
|
65.2
|
|
52.5
|
|
(0.8)
|
|
(1.1)
|
|
|
|
|
|
|
|
|
Additional Information for Plan with ABO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
174.6
|
|
157.8
|
|
2.9
|
|
2.8
|
Accumulated benefit obligation
|
168.4
|
|
152.1
|
|
2.9
|
|
2.8
|
Fair value of plan assets
|
71.5
|
|
66.7
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Additional Information for Plan with PBO in Excess of Plan Assets
|
|
|
|
|
|
|
|
Projected benefit obligation
|
174.6
|
|
157.8
|
|
2.9
|
|
2.8
|
Accumulated benefit obligation
|
168.4
|
|
152.1
|
|
2.9
|
|
2.8
|
Fair value of plan assets
|
71.5
|
|
66.7
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Service cost
|
3.6
|
|
3.5
|
|
—
|
|
—
|
Interest cost
|
7.5
|
|
7.3
|
|
0.1
|
|
—
|
Expected return on plan assets
|
(11.5)
|
|
(11.9)
|
|
—
|
|
—
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
—
|
|
—
|
|
—
|
|
—
|
Prior service cost
|
—
|
|
—
|
|
—
|
|
—
|
Net (gain)/loss
|
2.5
|
|
2.4
|
|
(0.1)
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
2.1
|
|
$
|
1.3
|
|
$
|
—
|
|
$
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
|
|
|
|
|
|
|
Net (gain)/loss arising during the year
|
$
|
15.8
|
|
$
|
(3.1)
|
|
$
|
0.2
|
|
$
|
0.2
|
Prior service cost (credit) during the year
|
—
|
|
—
|
|
—
|
|
—
|
Transition asset/(obligation) recognized during the year
|
—
|
|
—
|
|
—
|
|
—
|
Prior service cost recognized during the year
|
—
|
|
—
|
|
—
|
|
—
|
Net gain/(loss) recognized during the year
|
(2.5)
|
|
(2.4)
|
|
0.1
|
|
0.1
|
Exchange rate gain/(loss) recognized during the year
|
(0.6)
|
|
0.3
|
|
—
|
|
—
|
Total recognized in other comprehensive income
|
$
|
12.7
|
|
$
|
(5.2)
|
|
$
|
0.3
|
|
$
|
0.3
|
Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
14.8
|
|
$
|
(3.9)
|
|
$
|
0.3
|
|
$
|
0.3
|
Estimated Amounts to be Amortized from Accumulated Other Comprehensive Income into Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
Transition (asset)/obligation
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Prior service cost/(credit)
|
—
|
|
—
|
|
—
|
|
—
|
Net (gain)/loss
|
4.5
|
|
2.6
|
|
(0.1)
|
|
(0.1)
|
Financial Assumptions Used to Determine Benefit Obligations at the Balance Sheet Date
|
|
|
|
|
|
|
|
Discount rate (%)
|
1.90
|
%
|
|
2.50
|
%
|
|
2.96
|
%
|
|
3.79
|
%
|
Rate of compensation increases (%)
|
2.03
|
%
|
|
2.03
|
%
|
|
n/a
|
|
n/a
|
Financial Assumptions Used to Determine Net Periodic Benefit Cost for Financial Year
|
|
|
|
|
|
|
|
Discount rate (%)
|
2.50
|
%
|
|
2.49
|
%
|
|
3.79
|
%
|
|
3.28
|
%
|
Rate of compensation increases (%)
|
2.03
|
%
|
|
2.04
|
%
|
|
n/a
|
|
n/a
|
Expected long-term rate of return (%)
|
4.70
|
%
|
|
5.09
|
%
|
|
n/a
|
|
n/a
|
Expected Future Contributions
|
|
|
|
|
|
|
|
Fiscal year 2020
|
$
|
11.3
|
|
$
|
9.4
|
|
$
|
0.3
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Expected Future Benefit Payments
|
|
|
|
|
|
|
|
Financial year
|
|
|
|
|
|
|
|
2020
|
$
|
12.8
|
|
$
|
11.0
|
|
$
|
0.3
|
|
$
|
0.3
|
2021
|
12.1
|
|
12.2
|
|
0.3
|
|
0.3
|
2022
|
12.4
|
|
11.8
|
|
0.3
|
|
0.3
|
2023
|
13.3
|
|
12.3
|
|
0.3
|
|
0.3
|
2024
|
14.1
|
|
13.2
|
|
0.2
|
|
0.2
|
2025-2029
|
77.5
|
|
77.7
|
|
1.0
|
|
1.0
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
17.6
|
%
|
|
22.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Government bonds
|
29.8
|
%
|
|
28.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate bonds
|
15.2
|
%
|
|
14.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.6
|
%
|
|
2.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance contracts
|
11.0
|
%
|
|
9.3
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
23.8
|
%
|
|
22.6
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
Actual Asset Allocation (Amount)
|
|
|
|
|
|
|
|
Equities
|
$
|
47.9
|
|
$
|
58.7
|
|
$
|
—
|
|
$
|
—
|
Government bonds
|
80.8
|
|
74.5
|
|
—
|
|
—
|
Corporate bonds
|
41.4
|
|
36.4
|
|
—
|
|
—
|
Property
|
7.2
|
|
6.2
|
|
—
|
|
—
|
Insurance contracts
|
30.0
|
|
24.0
|
|
—
|
|
—
|
Other
|
65.0
|
|
58.3
|
|
—
|
|
—
|
Total
|
$
|
272.3
|
|
$
|
258.1
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Target Asset Allocation (%)
|
|
|
|
|
|
|
|
Equities
|
21.4
|
%
|
|
22.8
|
%
|
|
—
|
%
|
|
—
|
%
|
Government bonds
|
30.2
|
%
|
|
29.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Corporate bonds
|
13.8
|
%
|
|
13.6
|
%
|
|
—
|
%
|
|
—
|
%
|
Property
|
2.9
|
%
|
|
2.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Insurance contracts
|
11.2
|
%
|
|
10.1
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
20.5
|
%
|
|
20.9
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
|
—
|
%
|
The Company employs a building-block approach in determining the long-term rate of return for plan assets, with proper consideration of diversification and rebalancing. Historical markets are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. Peer data are reviewed to check for reasonability and appropriateness.
Plan assets are recognized and measured at fair value in accordance with the accounting standards regarding fair value measurements. The following are valuation techniques used to determine the fair value of each major category of assets:
•Short-term investments, equity securities, fixed-income securities, and real estate are valued using quoted market prices or other valuation methods, and thus are classified within Level 1 or Level 2.
•Insurance contracts and other types of investments include investments with some observable and unobservable prices that are adjusted by cash contributions and distributions, and thus are classified within Level 2 or Level 3.
•Other assets as of June 30, 2019 and June 30, 2018, including $24.3 million and $26.9 million of investments in hedge funds related to the Company's U.K. pension plan, are classified as Level 2.
The following table provides a summary of plan assets that are measured in fair value as of June 30, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments Measured at Net Asset Value
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
1.8
|
|
$
|
46.0
|
|
$
|
—
|
|
$
|
—
|
|
$
|
47.8
|
Debt securities
|
0.1
|
|
122.2
|
|
—
|
|
—
|
|
122.3
|
Real estate
|
0.4
|
|
4.9
|
|
—
|
|
1.9
|
|
7.2
|
Other
|
0.6
|
|
73.4
|
|
21.0
|
|
—
|
|
95.0
|
Total
|
$
|
2.9
|
|
$
|
246.5
|
|
$
|
21.0
|
|
$
|
1.9
|
|
$
|
272.3
|
Level 3 other assets consist of an insurance contract in the U.K. to fulfill the benefit obligations for a portion of the participant benefits. The value of this commitment is determined using the same assumptions and methods used to value the U.K. Retirement & Death Benefit Plan pension liability. Level 3 other assets also include the partial funding of a pension liability relating to current and former employees of the Company’s Eberbach, Germany facility through a Company promissory note or loan with an annual rate of interest of 5%. The value of this commitment fluctuates due to contributions and benefit payments in addition to loan interest.
The following table provides a summary of plan assets that are measured in fair value as of June 30, 2018, aggregated by the level in the fair value hierarchy within which those measurements fall:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments Measured at Net Asset Value
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
$
|
1.8
|
|
$
|
56.9
|
|
$
|
—
|
|
$
|
—
|
|
$
|
58.7
|
Debt securities
|
0.1
|
|
110.8
|
|
—
|
|
—
|
|
110.9
|
Real estate
|
0.4
|
|
3.9
|
|
—
|
|
1.9
|
|
6.2
|
Other
|
0.7
|
|
60.7
|
|
20.9
|
|
—
|
|
82.3
|
Total
|
$
|
3.0
|
|
$
|
232.3
|
|
$
|
20.9
|
|
$
|
1.9
|
|
$
|
258.1
|
Level 3 other assets consist of an insurance contract in the U.K. to fulfill the benefit obligations for a portion of the participant benefits. The value of this commitment is determined using the same assumptions and methods used to value the U.K. Retirement & Death Benefit Plan pension liability. Level 3 other assets also include the partial funding of a pension liability relating to current and former employees of the Company’s Eberbach, Germany facility through a Company promissory note or loan with an annual rate of interest of 5%. The value of this commitment fluctuates due to contributions and benefit payments in addition to loan interest.
The following table provides a reconciliation of the beginning and ending balances of level 3 assets as well as the changes during the period attributable to assets held and those purchases, sales, settlements, contributions and benefits that were paid:
Asset Category Allocations - June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using Significant Unobservable Inputs Total (Level 3)
|
|
Fair Value Measurement Using Significant Unobservable Inputs Insurance Contracts
|
|
Fair Value Measurement Using Significant Unobservable Inputs Other
|
Total (Level 3)
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
Beginning Balance at June 30, 2018
|
$
|
20.9
|
|
$
|
2.9
|
|
$
|
18.0
|
Actual return on plan assets:
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
0.8
|
|
0.4
|
|
0.4
|
Relating to assets sold during the period
|
—
|
|
—
|
|
—
|
Purchases, sales, settlements, contributions and benefits paid
|
(1.8)
|
|
(0.2)
|
|
(1.6)
|
Transfers in and/or out of Level 3
|
1.1
|
|
—
|
|
1.1
|
Ending Balance at June 30, 2019
|
$
|
21.0
|
|
$
|
3.1
|
|
$
|
17.9
|
The investment policy reflects the long-term nature of the plans’ funding obligations. The assets are invested to provide the opportunity for both income and growth of principal. This objective is pursued as a long-term goal designed to provide required benefits for participants without undue risk. It is expected that this objective can be achieved through a well-diversified asset portfolio. All equity investments are made within the guidelines of quality, marketability, and diversification mandated by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (for plans subject to ERISA) and other relevant legal requirements. Investment managers are directed to maintain equity portfolios at a risk level approximately equivalent to that of the specific benchmark established for that portfolio. Assets invested in fixed income securities and pooled fixed-income portfolios are managed actively to pursue opportunities presented by changes in interest rates, credit ratings, or maturity premiums.
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Assumed Healthcare Cost Trend Rates at the Balance Sheet Date
|
|
|
|
Healthcare cost trend rate – initial (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
19.86
|
%
|
|
(1.42)
|
%
|
Healthcare cost trend rate – ultimate (%)
|
|
|
|
Pre-65
|
n/a
|
|
|
n/a
|
|
Post-65
|
4.83
|
%
|
|
4.83
|
%
|
Year in which ultimate rates are reached
|
|
|
|
Pre-65
|
n/a
|
|
n/a
|
Post-65
|
2026
|
|
2026
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate up 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
117,555
|
|
$
|
120,821
|
on total service and interest cost
|
3,640
|
|
3,118
|
Effect of 1% Change in Healthcare Cost Trend Rate
|
|
|
|
Healthcare cost trend rate down 1%
|
|
|
|
on APBO at balance sheet date
|
$
|
(106,088)
|
|
$
|
(108,873)
|
on total service and interest cost
|
(3,284)
|
|
(2,804)
|
|
|
|
|
Expected Future Contributions
|
|
|
|
Fiscal year 2020
|
$
|
319,469
|
|
$
|
311,318
|
12. EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Description of Capital Stock
The Company is authorized to issue 1,000,000,000 shares of its Common Stock and 100,000,000 shares of preferred stock, par value $0.01 per share. In accordance with the Company’s amended and restated certificate of incorporation, each share of Common Stock has one vote, and the Common Stock votes together as a single class.
Recent Public Offerings of its Common Stock
On July 27, 2018, the Company completed a public offering of its Common Stock (the “2018 Equity Offering”) pursuant to which the Company sold 11.4 million shares, including shares sold pursuant to an exercise of the underwriters' over-allotment option, at a price of $40.24 per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company's proceeds from the 2018 Equity Offering, including the over-allotment exercise, totaled $445.5 million. The net proceeds of the 2018 Equity Offering were used to repay a corresponding portion of the outstanding borrowings under Operating Company's U.S. dollar-denominated term loans.
On September 29, 2017, the Company completed a public offering of its Common Stock (the “2017 Equity Offering”), pursuant to which the Company sold 7.4 million shares, including shares sold pursuant to an exercise of the underwriters' over-allotment option, at a price of $39.10 per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company's proceeds from the 2017 Equity Offering, including the over-allotment exercise, totaled $277.8 million. The net proceeds of the 2017 Equity Offering were used to fund a portion of the consideration for the Catalent Indiana acquisition due at its closing.
Outstanding Common Stock
Shares outstanding of Common Stock include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was 0.7 million shares as of June 30, 2019. Shares of unvested restricted stock are excluded from the calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding.
Stock Repurchase Program
On October 29, 2015, the Company’s board of directors authorized a share repurchase program to use up to $100.0 million to repurchase shares of outstanding Common Stock. Under the program, the Company is authorized to repurchase shares through open market purchases, privately negotiated transactions, or otherwise as permitted by applicable federal securities laws. There has been no purchase pursuant to this program as of June 30, 2019.
Accumulated Other Comprehensive Income/(Loss)
Accumulated other comprehensive income/(loss) by component and changes for the fiscal years ended June 30, 2019, 2018, and 2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign Currency Translation Adjustment
|
|
Available for Sale Investment Adjustments
|
|
|
|
Pension Liability Adjustments
|
|
Other Comprehensive Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
$
|
(248.8)
|
|
$
|
—
|
|
|
|
$
|
(56.9)
|
|
$
|
(305.7)
|
Activity, net of tax
|
(31.9)
|
|
10.5
|
|
|
|
13.0
|
|
(8.4)
|
Balance at June 30, 2017
|
(280.7)
|
|
10.5
|
|
|
|
(43.9)
|
|
(314.1)
|
Activity, net of tax
|
(4.4)
|
|
(11.6)
|
|
|
|
4.3
|
|
(11.7)
|
Balance at June 30, 2018
|
(285.1)
|
|
(1.1)
|
|
|
|
(39.6)
|
|
(325.8)
|
Activity, net of tax
|
(18.6)
|
|
—
|
|
|
|
(9.5)
|
|
(28.1)
|
Balance at June 30, 2019
|
$
|
(303.7)
|
|
$
|
(1.1)
|
|
|
|
$
|
(49.1)
|
|
$
|
(353.9)
|
The Company held an investment in a specialty pharmaceutical company, which was treated as a cost method investment prior to the second quarter of fiscal 2017. In the second quarter of fiscal 2017, the specialty pharmaceutical company became publicly traded after an initial public offering, and, as a result, the Company recognized an initial unrealized gain on the investment of $15.3 million, net of tax. The Company recorded an other-than-temporary impairment in the fourth quarter of fiscal 2018, and the investment has been fully impaired. This amount is reflected in accumulated other comprehensive income.
The components of the changes in the cumulative translation adjustment, minimum pension liability, and available for sale investment for the fiscal years ended June 30, 2019, 2018, and 2017 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
(Dollars in millions)
|
2019
|
|
2018
|
|
2017
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Net investment hedge
|
$
|
12.2
|
|
$
|
(12.5)
|
|
$
|
(21.3)
|
Long term inter-company loans
|
(12.8)
|
|
9.3
|
|
(14.3)
|
Translation adjustments
|
(15.8)
|
|
(10.1)
|
|
(3.8)
|
Total foreign currency translation adjustments, pretax
|
$
|
(16.4)
|
|
$
|
(13.3)
|
|
$
|
(39.4)
|
Tax expense/(benefit)
|
2.2
|
|
(8.9)
|
|
(7.5)
|
Total foreign currency translation adjustments, net of tax
|
$
|
(18.6)
|
|
$
|
(4.4)
|
|
$
|
(31.9)
|
|
|
|
|
|
|
Net change in minimum pension liability
|
|
|
|
|
|
Net gain/(loss) arising during the year
|
$
|
16.0
|
|
$
|
2.9
|
|
$
|
13.9
|
Net (gain)/loss recognized during the year
|
(2.4)
|
|
2.3
|
|
4.3
|
Foreign exchange translation and other
|
(0.6)
|
|
(0.3)
|
|
0.5
|
Total minimum pension liability, pretax
|
$
|
13.0
|
|
$
|
4.9
|
|
$
|
18.7
|
Tax expense/(benefit)
|
3.5
|
|
0.6
|
|
5.7
|
Net change in minimum pension liability, net of tax
|
$
|
9.5
|
|
$
|
4.3
|
|
$
|
13.0
|
|
|
|
|
|
|
Net change in available for sale investment:
|
|
|
|
|
|
Net gain/(loss) arising during the year
|
$
|
—
|
|
$
|
(16.2)
|
|
$
|
16.2
|
Net (gain)/loss recognized during the year
|
—
|
|
—
|
|
—
|
Foreign exchange translation and other
|
—
|
|
—
|
|
—
|
Total change in available for sale investment, pretax
|
$
|
—
|
|
$
|
(16.2)
|
|
$
|
16.2
|
Tax expense/(benefit)
|
|
|
(4.6)
|
|
5.7
|
Net change in available for sale investment, net of tax
|
$
|
—
|
|
$
|
(11.6)
|
|
$
|
10.5
|
13. REDEEMABLE PREFERRED STOCK — SERIES A PREFERRED
During May 2019, the Company designated 1,000,000 shares of its preferred stock, par value $0.01, as its “Series A Convertible Preferred Stock” (the “Series A Preferred Stock”), pursuant to a certificate of designation of preferences, rights, and limitations (the “Certificate of Designation”) filed with the Delaware Secretary of State, and issued and sold 650,000 shares of the Series A Preferred Stock for an aggregate purchase price of $650.0 million, to affiliates of Leonard Green & Partners, L.P. (the “Series A Investors”), each share having an initial stated value of $1,000 (as such value may be adjusted in accordance with the terms of the Certificate of Designation, the “Stated Value”). The Series A Preferred Stock ranks senior to the Company’s Common Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company.
The holders of Series A Preferred Stock are entitled to vote with the holders of the Common Stock as a single class on an “as-converted” basis and, for so long as the Series A Investors or their successors have the right to designate a nominee for election to the board pursuant to their stockholders’ agreement with the Company, have the right to elect one board member voting as a separate class. They also have veto rights over certain amendments to the Company’s organizational documents that would have an adverse effect on the rights of the Series A Preferred Stock; issuance of senior or pari passu securities; or the incurrence of indebtedness above certain leverage ratios, as set forth in the Certificate of Designation.
Holders of Series A Preferred Stock have the right under the Certificate of Designation to receive a liquidation preference entitling them to be paid out of our assets available for distribution to stockholders before any payment may be made to holders of any other class or series of capital stock, the value of which preference is equal to the greater of (a) the Stated Value plus all accrued and unpaid dividends or (b) the amount that such holders would have been entitled to receive upon the Company’s liquidation, dissolution, and winding up if all outstanding shares of Series A Preferred Stock had been converted into shares of Common Stock immediately prior to such liquidation, dissolution, or winding up.
Holders of Series A Preferred Stock are also entitled (a) to receive a cumulative annual dividend equal to 5.0% of the Stated Value, payable quarterly in arrears in cash, by increasing the Stated Value, or in a combination thereof at Catalent’s election, with such rate subject to an increase to 6.5% or 8.0% depending on the price of the Common Stock at the fourth (or in certain cases fifth) anniversary of the initial issuance, as set forth in the Certificate of Designation, and (b) to participate in the distribution of any ordinary dividend on the Common Stock calculated on an as-converted basis.
The Series A Preferred Stock is subject to conversion or redemption under various circumstances, including the right of holders to convert some or all of their shares into shares of Common Stock after twelve months at a fixed price of $49.54 (the “Conversion Price”) and the Company’s right to (x) convert all outstanding shares of Series A Preferred Stock at any time after the third anniversary of the initial issuance if the price of the Common Stock exceeds 150% of the Conversion Price or (y) redeem all outstanding shares of Series A Preferred Stock at any time after the fifth anniversary of the initial issuance at a price per share equal to the Stated Value, plus accrued and unpaid dividends, for cash, shares of Common Stock, or a combination of these. The Conversion Price is subject to customary anti-dilution and other adjustments. In addition, holders of shares of Series A Preferred Stock are eligible to demand redemption of their shares in the event of a change of control. Due to these various rights, privileges, and preferences, the Company has classified the Series A Preferred Stock as temporary (mezzanine) equity on its consolidated balance sheets.
Proceeds from the offering of the Series A Preferred Stock, net of stock issuance costs, were $646.3 million, which were used to fund a portion of the consideration for the Paragon acquisition due at its closing. Of the net proceeds, $39.7 million was allocated to the dividend adjustment feature at its issuance and separately accounted for as a derivative liability, as disclosed in Note 9, Derivative Instruments and Hedging Activities; thus, the proceeds of the issuance were allocated as follows:
|
|
|
|
|
|
(Dollars in millions)
|
|
Balance at July 1, 2018
|
$
|
—
|
Issuance of Series A Preferred Stock
|
650.0
|
Stock issuance costs
|
(3.7)
|
Net of stock issuance costs
|
646.3
|
Derivative liability (see Note 9)
|
(39.7)
|
Net proceeds from Series A Preferred Stock issuance at June 30, 2019
|
$
|
606.6
|
14. EQUITY-BASED COMPENSATION
The Company’s stock-based compensation is comprised of stock options, restricted stock units, and restricted stock.
2007 Stock Incentive Plan
Awards issued under the Company’s pre-IPO incentive compensation plan, known as the 2007 PTS Holdings Corp. Stock Incentive Plan, as amended (the “2007 Plan”), were generally issued for the purpose of retaining key employees and directors. Certain awards remain outstanding under the 2007 Plan, but it is no longer possible to issue new awards.
2014 and 2018 Omnibus Incentive Plans
In connection with the IPO, the Company’s Board of Directors adopted, and the holder of a majority of the shares approved, the 2014 Omnibus Incentive Plan effective July 31, 2014 (the “2014 Plan”). The 2014 Plan provided certain members of management, employees, and directors of the Company and its subsidiaries with the opportunity to obtain various incentives, including grants of stock options, restricted stock units (defined below), and restricted stock. In October 2018, the Company’s shareholders approved the 2018 Omnibus Incentive Plan (the “2018 Plan”), and as a result, new awards may no longer be issued under the 2014 Plan, although it remains in effect as to any previously granted award. The 2018 Plan is substantially similar to the 2014 Plan, except that (a) a total of 15,600,000 shares of Common Stock (subject to adjustment) may be issued under the 2018 Plan, (b) each share of Common Stock issuable under the 2018 Plan pursuant to a restricted stock or restricted stock unit award will reduce the number of reserved shares by 2.25 shares, and (c) the 2018 Plan imposes a limit on the value awards that may be made in a single year to a non-employee director.
Stock Compensation Expense
Stock compensation expense recognized in the consolidated statements of operations was $33.3 million, $27.2 million, and $20.9 million in fiscal 2019, 2018, and 2017, respectively. Stock compensation expense is classified in selling, general, and administrative expenses as well as cost of sales. The Company has elected to account for forfeitures as they occur.
Stock Options
The Company adopted two forms of non-qualified stock option agreement (each, a “Form Option Agreement”) for awards granted under the 2007 Plan. Under the Company’s Form Option Agreement adopted in 2009, a portion of the stock option awards vest in equal annual installments over a five-year period contingent solely upon the participant’s continued employment with the Company, or one of its subsidiaries, another portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time, and the remaining portion of the stock option awards vest upon realization of certain internal rates of return or multiple of investment goals. Under the Company’s other Form Option Agreement, adopted in 2013, a portion of the stock option awards vest over a specified performance period upon achievement of pre-determined operating performance targets over time while the other portion of the stock option awards vest upon realization of a specified multiple of investment goal. The Form Option Agreements include certain forfeiture provisions upon a participant’s separation from service with the Company. Following the IPO, the Company decided not to grant any further award under the 2007 Plan; however, all outstanding awards granted prior to the IPO remained outstanding in accordance with the terms of the 2007 Plan.
Stock options granted under the 2014 Plan or 2018 Plan, as applicable, during fiscal 2019, 2018, and 2017 had an intrinsic value of $24.0 million, $2.3 million, and $5.3 million, respectively, which represents approximately 1,179,000, 442,000, and 516,000 shares of Common Stock, respectively. Each stock option granted under the 2014 Plan or 2018 Plan vests in equal annual installments over a four-year period from the date of grant, contingent upon the participant’s continued employment with the Company, except for a small number of grants that vest based on the achievement of operating performance targets set forth in the award documents.
Methodology and Assumptions
All outstanding stock options have an exercise price per share equal to the fair market value of one share of Common Stock on the date of grant. All outstanding stock options have a contractual term of 10 years, subject to forfeiture under certain conditions upon separation of employment. The grant-date fair value, adjusted for estimated forfeitures, is recognized as expense on a graded-vesting basis over the vesting period. The fair value of stock options is determined using the Black-Scholes-Merton option pricing model for service and performance-based awards, and an adaptation of the Black-Scholes-Merton option valuation model, which takes into consideration the internal rate of return thresholds, for market-based awards. This model adaptation is essentially equivalent to the use of a path dependent-lattice model.
The weighted average of assumptions used in estimating the fair value of stock options granted during each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Expected volatility
|
22% - 24%
|
|
|
24% - 27%
|
|
|
25% - 27%
|
|
Expected life (in years)
|
6.25
|
|
|
6.25
|
|
|
6.25
|
|
Risk-free interest rates
|
2.2% - 2.8%
|
|
|
1.9% - 2.1%
|
|
|
1.2% - 1.3%
|
|
Dividend yield
|
None
|
|
None
|
|
None
|
Public trading of the Common Stock commenced only in July 2014, and, as a result, there is only available limited relevant historical volatility experience; therefore, the expected volatility assumption is based on the historical volatility of the closing share prices of a comparable peer group. The Company selected peer companies from the pharmaceutical industry with similar characteristics, including market capitalization, number of employees and product focus. In addition, since the Company does not have a pattern of exercise behavior of option holders, the Company used the simplified method to determine the expected life of each option, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest-rate for the expected life of the option is based on the comparable U.S. Treasury yield curve in effect at the time of grant. The weighted-average grant-date fair value of stock options in fiscal 2019, 2018, and 2017 was $9.49 per share, $10.39 per share and $7.13 per share, respectively.
The following table summarizes stock option activity and shares subject to outstanding options for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
|
|
|
Performance
|
|
|
Market
|
|
|
|
Weighted Average Exercise Price
|
Number of Shares
|
Weighted Average Contractual Term
|
Aggregate Intrinsic Value
|
Number of Shares
|
Weighted Average Contractual Term
|
Aggregate Intrinsic Value
|
Number of Shares
|
Weighted Average Contractual Term
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2018
|
$
|
23.57
|
1,712,836
|
7.01
|
$
|
27,418,051
|
550,623
|
4.79
|
$
|
13,052,439
|
117,467
|
3.35
|
$
|
3,154,413
|
Granted
|
$
|
33.38
|
1,096,501
|
—
|
—
|
82,990
|
—
|
—
|
—
|
—
|
—
|
Exercised
|
$
|
19.14
|
(576,259)
|
—
|
13,210,249
|
(205,621)
|
—
|
5,533,365
|
(80,065)
|
—
|
2,301,861
|
Forfeited
|
$
|
21.03
|
(53,264)
|
—
|
—
|
(300,258)
|
—
|
—
|
—
|
—
|
—
|
Expired / Canceled
|
$
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Outstanding as of June 30, 2019
|
$
|
30.55
|
2,179,814
|
7.56
|
51,739,617
|
127,734
|
7.68
|
2,369,291
|
37,402
|
3.52
|
1,373,525
|
Vest and expected to vest as of June 30, 2019
|
$
|
30.37
|
2,179,814
|
7.56
|
22,851,430
|
127,734
|
7.68
|
2,369,291
|
37,402
|
3.52
|
1,373,525
|
Vested and exercisable as of June 30, 2019
|
$
|
18.63
|
780,875
|
5.61
|
$
|
27,741,047
|
44,744
|
1.26
|
$
|
1,635,659
|
37,402
|
3.52
|
$
|
1,373,525
|
In fiscal 2019, participants exercised options to purchase approximately 283,000 net settled shares, resulting in $8.9 million of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal 2019 was $21.0 million. The total fair value of options vested during the period was $3.6 million. As part of the time-based options granted, there were 230,093 shares granted in consideration for the acquisition of Paragon. Excluding this grant, the Weighted Average Exercise Price for fiscal 2019 would have been $41.47.
In fiscal 2018, participants exercised options to purchase approximately 240,000 net settled shares, resulting in $5.5 million of cash paid on behalf of participants for withholding taxes. The intrinsic value of the options exercised in fiscal 2018 was $15.3 million. The total fair value of options vested during the period was $3.6 million.
As of June 30, 2019, $6.5 million of unrecognized compensation cost related to granted and not forfeited stock options is expected to be recognized as expense over a weighted-average period of approximately 2.6 years.
Restricted Stock and Restricted Stock Units
The Company may grant to employees and members of its board of directors under the 2018 Plan (and formerly granted under the 2014 Plan) shares of restricted stock and units each representing the right to one share of Common Stock (“restricted stock units”). Since the IPO, the Company has granted to employees and directors restricted stock units and restricted stock that vest over specified periods of time as well as restricted stock units and restricted stock that have certain performance-related vesting requirements (“performance share units” and “performance shares,” respectively). The restricted stock and restricted stock units granted during fiscal 2019 and 2018 had grant date fair values aggregating $47.6 million and $44.6 million, respectively, which represent approximately 1,066,000 and 1,275,000 shares of Common Stock, respectively. Under the 2014 Plan or 2018 Plan, as appropriate, the performance shares and performance share units vest upon achieving Company financial performance metrics established at the outset of the three-year performance period associated with each grant. The metrics for the fiscal 2016 performance share unit grant were based on performance against a mix of cumulative revenue and cumulative Adjusted EBITDA targets, and these grants vested in fiscal 2018 based on achievement against those targets. Note that Adjusted EBITDA (which is called “Consolidated EBITDA” in the Credit Agreement) is calculated based on the definition in the Credit Agreement, is not defined under U.S. GAAP, and is subject to important limitations. The metrics for the fiscal 2017, 2018, and 2019 performance share and performance share unit grants were based on performance against a mix of adjusted EPS targets and relative total shareholder return (“RTSR”) targets. Note that adjusted EPS is calculated as a quotient of tax-effected Adjusted EBITDA by the weighted average number of fully diluted shares, is not defined under U.S. GAAP, and is subject to important limitations. The performance shares and performance share units vest following the end of their respective three-year performance periods upon a determination of achievement relative to the targets. Each quarter during the period in which the performance shares and performance share units are outstanding, the Company estimates the likelihood of such achievement by the end of the performance period in order to determine the probability of vesting. The number of shares actually earned at the end of the three-year period for the fiscal 2017, 2018 and 2019 grants will vary, based only on actual performance, from 0% to 200%, or from 0% to 150%, of the target number of performance shares or performance share units specified on the date of grant, in the case of adjusted EPS and RTSR grants, respectively. Time-based restricted stock units and restricted stock generally vest on the second or third anniversary of the date of grant, subject to the participant’s continued employment with the Company.
Methodology and Assumptions - Expense Recognition and Grant Date Fair Value
The fair values of (a) time-based restricted stock units and restricted stock are recognized as expense on a cliff-vesting schedule over the applicable vesting period and (b) performance shares and performance share units are re-assessed quarterly as discussed above.
The grant date fair values of both time-based and performance-based shares and units are determined based on the number of shares subject to the grants and the fair value of the Common Stock on the dates of the grants, as determined by the closing market prices.
Time-Based Restricted Stock Units and Restricted Stock
The following table summarizes activity in unvested time-based restricted stock units and restricted stock for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Units and Shares
|
|
Weighted Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2018
|
1,004,236
|
|
$
|
31.81
|
Granted
|
681,702
|
|
44.16
|
Vested
|
196,973
|
|
31.90
|
Forfeited
|
94,115
|
|
36.32
|
Unvested as of June 30, 2019
|
1,394,850
|
|
$
|
37.53
|
Adjusted EPS and Other Performance Share Units and Performance Shares
The following table summarizes activity in unvested performance share units and performance shares for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Units and Shares
Performance-Based Units and Shares
|
|
Weighted Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2018
|
577,856
|
|
$
|
30.30
|
Granted
|
213,730
|
|
43.81
|
Vested
|
93,082
|
|
31.77
|
Forfeited
|
54,049
|
|
40.68
|
Unvested as of June 30, 2019
|
644,455
|
|
$
|
33.70
|
RTSR Performance Shares and Performance Share Units
The fair value of the RTSR performance share units and performance shares is determined using the Monte Carlo pricing model because the number of shares to be awarded is subject to a market condition. The Monte Carlo simulation is a generally accepted statistical technique used to simulate a range of possible future outcomes. Because the valuation model considers a range of possible outcomes, compensation cost is recognized regardless of whether the market condition is actually satisfied.
The assumptions used in estimating the fair value of the RTSR performance share units and performance shares granted during each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2019
|
|
2018
|
Expected volatility
|
30% - 33%
|
|
32% - 33%
|
Expected life (in years)
|
2.4 - 3.0
|
|
2.4 - 2.9
|
Risk-free interest rates
|
2.5% - 3.0%
|
|
1.4% - 2.1%
|
Dividend yield
|
None
|
|
None
|
The following table summarizes activity in unvested RTSR performance share units and performance shares for the year ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
RTSR Units and Shares
|
|
Weighted Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2018
|
483,097
|
|
$
|
32.47
|
Granted
|
170,969
|
|
47.64
|
Vested
|
98,373
|
|
40.01
|
Forfeited
|
30,437
|
|
36.76
|
Unvested as of June 30, 2019
|
525,256
|
|
$
|
35.75
|
In fiscal 2019, participants vested and settled 262,000 net settled shares, resulting in $5.4 million of cash paid on behalf of participants for withholding taxes. In fiscal 2018, participants vested and settled 420,000 net settled shares, resulting in $8.2 million of cash paid on behalf of participants for withholding taxes.
As of June 30, 2019, $39.1 million of unrecognized compensation cost related to restricted stock and restricted stock units is expected to be recognized as expense over a weighted-average period of approximately 1.8 years. The weighted-average grant-date fair value of restricted stock and restricted stock units in fiscal 2019, 2018, and 2017 was $44.65, $34.99, and $25.20, respectively. The fair value of restricted stock units vested in fiscal 2019, 2018, and 2017 was $13.2 million, $13.6 million, and $1.1 million, respectively.
15. OTHER (INCOME)/EXPENSE, NET
The components of other (income)/expense, net for the twelve months ended June 30, 2019, 2018, and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
June 30,
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Other (income)/expense, net
|
|
|
|
|
|
|
|
|
|
Debt refinancing costs (1)
|
|
|
|
|
$
|
15.8
|
|
$
|
11.8
|
|
$
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency (gains) and losses (2)
|
|
|
|
|
(0.5)
|
|
(4.6)
|
|
4.2
|
Other (3)
|
|
|
|
|
(12.6)
|
|
(1.7)
|
|
—
|
Total other (income)/expense
|
|
|
|
|
$
|
2.7
|
|
$
|
5.5
|
|
$
|
8.5
|
(1) The expense in the twelve months ended June 30, 2019 includes $15.8 million of financing charges related to the offering of the USD 2027 Notes. The expense in the twelve months ended June 30, 2018 includes $11.8 million of financing charges related to the offering of the USD 2026 Notes and an amendment to the Credit Agreement, which included a $6.1 million charge for commitment fees paid during the first quarter of fiscal 2018 on the Bridge Facility. The twelve months ended June 30, 2017 include financing charges of $4.3 million related to the December 2016 offering of the Euro Notes and repricing and partial paydown of the Company's term loans under its senior secured credit facilities.
(2) Foreign currency (gains) and losses include both cash and non-cash transactions.
(3) Included within Other are realized derivative instrument gains of $12.9 million during the fiscal year ended June 30, 2019.
16. COMMITMENTS AND CONTINGENCIES
Contingent Losses
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will
have a material adverse effect on the Company’s financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
From time to time, the Company receives subpoenas or requests for information relating to the business practices and activities of customers or suppliers from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties engaged in patent infringement, antitrust, tort, and other litigation. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred. The Company expects to incur costs in future periods in connection with future requests.
Rental Payments and Expense
The future minimum rental payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year at June 30, 2019 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
Total
|
Minimum rental payments
|
$
|
12.2
|
$
|
10.0
|
$
|
9.2
|
$
|
8.5
|
$
|
7.4
|
$
|
10.9
|
$
|
58.2
|
Rental expense relating to operating leases was $18.0 million, $16.4 million, and $13.2 million for the fiscal years ended June 30, 2019, 2018, and 2017, respectively. Sublease rental income was not material for any period presented.
17. SEGMENT AND GEOGRAPHIC INFORMATION
As discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, the Company conducts its business within the following segments: Softgel Technologies, Biologics and Specialty Drug Delivery, Oral Drug Delivery, and Clinical Supply Services. The Company evaluates the performance of its segments based on segment revenue and segment earnings before non-controlling interest, other (income)/expense, impairments, restructuring costs, interest expense, income tax (benefit)/expense, and depreciation and amortization (“Segment EBITDA”). The Company considers its reporting segments' results in the context of a similar Company-wide measure: EBITDA from operations, which the Company defines as consolidated earnings from operations before interest expense, income tax (benefit)/expense, depreciation and amortization, adjusted for the income or loss attributable to non-controlling interest. Neither Segment EBITDA nor EBITDA from operations is defined under U.S. GAAP, and neither is a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP. Each of these non-GAAP measures is subject to important limitations. This Note to the consolidated financial statements includes information concerning Segment EBITDA and EBITDA from operations (a) because Segment EBITDA and EBITDA from operations are operational measures 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, but such information is not meant to replace or supersede U.S. GAAP measures. The Company’s presentation of Segment EBITDA and EBITDA from operations may not be comparable to similarly titled measures used by other companies. The most directly comparable U.S. GAAP measure to EBITDA from operations is earnings/(loss) from operations. Included in this Note is a reconciliation of earnings/(loss) from operations to EBITDA from operations.
The following tables include net revenue and Segment EBITDA for each of the Company's current reporting segments during the fiscal years ended June 30, 2019, 2018, and 2017 (restated in accordance with ASC 280):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net revenue:
|
|
|
|
|
|
Softgel Technologies
|
$
|
872.1
|
|
$
|
917.3
|
|
$
|
855.3
|
Biologics and Specialty Drug Delivery
|
742.1
|
|
601.9
|
|
350.8
|
Oral Drug Delivery
|
619.9
|
|
573.9
|
|
561.6
|
Clinical Supply Services
|
321.4
|
|
430.4
|
|
348.8
|
Inter-segment revenue elimination
|
(37.5)
|
|
(60.1)
|
|
(41.1)
|
Net revenue
|
$
|
2,518.0
|
|
$
|
2,463.4
|
|
$
|
2,075.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Segment EBITDA reconciled to earnings from operations:
|
|
|
|
|
|
Softgel Technologies
|
$
|
191.2
|
|
$
|
196.4
|
|
$
|
190.5
|
Biologics and Specialty Drug Delivery
|
180.4
|
|
146.8
|
|
63.4
|
Oral Drug Delivery
|
186.7
|
|
172.9
|
|
179.0
|
Clinical Supply Services
|
84.4
|
|
76.2
|
|
54.9
|
Sub-Total
|
$
|
642.7
|
|
$
|
592.3
|
|
$
|
487.8
|
Reconciling items to earnings from operations
|
|
|
|
|
|
Unallocated costs (1)
|
(142.9)
|
|
(138.8)
|
|
(115.6)
|
Depreciation and amortization
|
(228.6)
|
|
(190.1)
|
|
(146.5)
|
Interest expense, net
|
(110.9)
|
|
(111.4)
|
|
(90.1)
|
Income tax expense
|
(22.9)
|
|
(68.4)
|
|
(25.8)
|
|
|
|
|
|
|
Earnings from operations
|
$
|
137.4
|
|
$
|
83.6
|
|
$
|
109.8
|
(1) Unallocated costs include restructuring and special items, equity-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Impairment charges and gain/(loss) on sale of assets
|
$
|
(5.1)
|
|
$
|
(8.7)
|
|
$
|
(9.8)
|
Equity compensation
|
(33.3)
|
|
(27.2)
|
|
(20.9)
|
Restructuring and other special items (a)
|
(57.7)
|
|
(54.4)
|
|
(33.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net (b)
|
(2.7)
|
|
(5.5)
|
|
(8.5)
|
Non-allocated corporate costs, net
|
(44.1)
|
|
(43.0)
|
|
(42.9)
|
Total unallocated costs
|
$
|
(142.9)
|
|
$
|
(138.8)
|
|
$
|
(115.6)
|
(a) Restructuring and other special items during fiscal 2019 include transaction and integration costs associated with the acquisitions of Juniper and Paragon. Restructuring and other special items during fiscal 2018 include transaction and integration costs associated with the acquisitions of Catalent Indiana. Restructuring and other special items during fiscal 2017 include transaction and integration costs associated with the acquisitions of Pharmatek and Accucaps Industries Limited.
(b) Refer to Note 15, Other (income)/expense, net, for details of financing charges and foreign currency translation adjustments recorded within other income/(expense), net.
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated balance sheets.
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30, 2019
|
|
June 30, 2018
|
Softgel Technologies
|
$
|
1,196.1
|
|
$
|
1,139.8
|
Biologics and Specialty Drug Delivery
|
3,104.8
|
|
1,615.4
|
Oral Drug Delivery
|
1,210.0
|
|
999.5
|
Clinical Supply Services
|
463.2
|
|
452.7
|
Corporate and eliminations
|
209.9
|
|
323.7
|
Total assets
|
$
|
6,184.0
|
|
$
|
4,531.1
|
The following tables include depreciation and amortization expense and capital expenditures for the fiscal years ended June 30, 2019, 2018, and 2017 for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated statements of operations:
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Softgel Technologies
|
$
|
39.0
|
|
$
|
43.9
|
|
$
|
38.4
|
Biologics and Specialty Drug Delivery
|
76.7
|
|
54.7
|
|
25.2
|
Oral Drug Delivery
|
73.5
|
|
54.4
|
|
50.1
|
Clinical Supply Services
|
18.8
|
|
19.5
|
|
18.7
|
Corporate
|
20.6
|
|
17.6
|
|
14.1
|
Total depreciation and amortization expense
|
$
|
228.6
|
|
$
|
190.1
|
|
$
|
146.5
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Fiscal Year Ended
June 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Softgel Technologies
|
$
|
50.6
|
|
$
|
41.3
|
|
$
|
27.6
|
Biologics and Specialty Drug Delivery
|
88.9
|
|
55.2
|
|
40.8
|
Oral Drug Delivery
|
51.5
|
|
40.2
|
|
42.7
|
Clinical Supply Services
|
2.9
|
|
11.5
|
|
7.2
|
Corporate
|
24.2
|
|
28.3
|
|
21.5
|
Total capital expenditures
|
$
|
218.1
|
|
$
|
176.5
|
|
$
|
139.8
|
The following table presents long-lived assets(1) by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
United States
|
|
|
|
|
|
|
$
|
1,066.0
|
|
$
|
849.9
|
Europe
|
|
|
|
|
|
|
344.4
|
|
304.9
|
International Other
|
|
|
|
|
|
|
126.3
|
|
115.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
1,536.7
|
|
$
|
1,270.6
|
(1) Long-lived assets include property, plant, and equipment, net of accumulated depreciation.
18. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at June 30, 2019 and June 30, 2018 is detailed in the following tables.
Inventories
Work-in-process and finished goods inventories include raw materials, labor, and overhead. Total inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
Raw materials and supplies
|
$
|
161.6
|
|
$
|
137.1
|
Work-in-process & finished goods
|
115.0
|
|
90.6
|
|
|
|
|
Total inventory, gross
|
276.6
|
|
227.7
|
Inventory cost adjustment
|
(19.4)
|
|
(18.6)
|
Inventories
|
$
|
257.2
|
|
$
|
209.1
|
Prepaid expenses and other
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
Prepaid expenses
|
$
|
18.7
|
|
$
|
19.2
|
Spare parts supplies
|
8.1
|
|
11.1
|
Prepaid income tax
|
10.0
|
|
7.2
|
Non-U.S. value-added tax
|
16.4
|
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
23.6
|
|
15.2
|
Prepaid expenses and other
|
$
|
76.8
|
|
$
|
65.2
|
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
Land, buildings, and improvements
|
$
|
1,049.4
|
|
$
|
928.1
|
Machinery, equipment, and capitalized software
|
1,104.9
|
|
988.1
|
Furniture and fixtures
|
16.9
|
|
14.9
|
Construction in progress
|
278.9
|
|
166.8
|
Property and equipment, at cost
|
2,450.1
|
|
2,097.9
|
Accumulated depreciation
|
(913.4)
|
|
(827.3)
|
Property, plant, and equipment, net
|
$
|
1,536.7
|
|
$
|
1,270.6
|
Other assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
|
|
|
|
Deferred compensation investments
|
$
|
21.9
|
|
$
|
20.1
|
Pension asset
|
25.8
|
|
18.0
|
Deferred long-term debt financing costs
|
3.0
|
|
1.1
|
Other
|
10.5
|
|
6.0
|
Total other assets
|
$
|
61.2
|
|
$
|
45.2
|
Other accrued liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
Accrued employee-related expenses
|
$
|
103.9
|
|
$
|
104.3
|
Restructuring accrual
|
8.2
|
|
9.4
|
|
|
|
|
Accrued interest
|
11.7
|
|
16.5
|
|
|
|
|
Deferred revenue and fees
|
155.2
|
|
100.9
|
Accrued income tax
|
8.5
|
|
25.9
|
Other accrued liabilities and expenses
|
50.9
|
|
55.9
|
Other accrued liabilities
|
$
|
338.4
|
|
$
|
312.9
|
Allowance for doubtful accounts
Trade receivables allowance for doubtful accounts activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 30,
2019
|
|
June 30,
2018
|
|
June 30,
2017
|
|
|
|
|
|
|
Beginning balance
|
$
|
6.0
|
|
$
|
4.0
|
|
$
|
3.9
|
Charged to cost and expenses (recoveries)
|
3.1
|
|
1.7
|
|
1.0
|
Deductions
|
(3.0)
|
|
0.3
|
|
(0.9)
|
Impact of foreign exchange
|
—
|
|
—
|
|
|
Closing balance
|
$
|
6.1
|
|
$
|
6.0
|
|
$
|
4.0
|
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the Company’s unaudited quarterly results of operation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share data)
|
Fiscal 2019, By Quarters
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
551.8
|
|
$
|
623.0
|
|
$
|
617.5
|
|
$
|
725.7
|
Gross margin
|
148.5
|
|
201.4
|
|
198.7
|
|
256.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
$
|
(14.4)
|
|
$
|
49.0
|
|
$
|
31.7
|
|
$
|
71.1
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
$
|
(0.10)
|
|
$
|
0.34
|
|
$
|
0.22
|
|
$
|
0.45
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings/(loss)
|
$
|
(0.10)
|
|
$
|
0.33
|
|
$
|
0.22
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share data)
|
Fiscal 2018, By Quarters
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenue
|
$
|
543.9
|
|
$
|
606.3
|
|
$
|
627.9
|
|
$
|
685.3
|
Gross margin
|
140.1
|
|
187.4
|
|
191.7
|
|
233.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
3.8
|
|
$
|
(21.9)
|
|
$
|
19.0
|
|
$
|
82.7
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.03
|
|
$
|
(0.16)
|
|
$
|
0.14
|
|
$
|
0.62
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
0.03
|
|
$
|
(0.16)
|
|
$
|
0.14
|
|
$
|
0.61
|