Notes to Unaudited Consolidated Financial Statements
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1
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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Business
Catalent, Inc. ("Catalent" or the "Company") directly and wholly owns PTS Intermediate Holdings LLC ("Intermediate Holdings"). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. ("Operating Company"). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three months ended September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending June 30,
2019
. The consolidated balance sheet at June 30,
2018
has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30,
2018
filed with the Securities and Exchange Commission (the "SEC").
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 new operating segments from the former Drug Delivery Solutions segment:
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•
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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
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•
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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.
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Each of the two new 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 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
.
Foreign Currency Translation
The financial statements of the Company’s operations outside the U.S. are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign operations into U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. In June 2018, as a result of the three-year cumulative consumer price index exceeding 100%, Argentina was classified as having a highly inflationary economy. Beginning on July 1, 2018, the Company accounts for its Argentine operations as highly inflationary.
Research and Development Costs
The Company expenses research and development costs as incurred. Costs incurred in connection with the development of new offerings and manufacturing process improvements are recorded within selling, general, and administrative expenses. Such research and development costs included in selling, general, and administrative expenses amounted to
$0.5 million
and
$1.8 million
for the
three months ended September 30, 2018
and 2017, respectively. Costs incurred in connection with research and development services the Company provides to customers and services performed in support of the
commercial manufacturing process for customers are recorded within cost of sales. Such research and development costs included in cost of sales amounted to
$11.3 million
and
$10.0 million
for the
three months ended September 30, 2018
and 2017, respectively.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In May 2014, the Financial Accounting Standard Board ("FASB") issued
Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers
, which was codified as
Accounting Standards Codification 606
("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 guidance is effective for the Company in fiscal 2019. The Company has 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
$15.1 million
.
The following table provides the impact of adopting the guidance on the Company’s financial statements:
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Consolidated Statement of Operations - Three months ended September 30, 2018
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(Dollars in millions)
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As Reported
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Effects of Change
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Amount without Adoption of ASC 606
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Net revenue
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$
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551.8
|
|
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$
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14.2
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|
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$
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566.0
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Cost of sales
|
403.3
|
|
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11.7
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|
|
415.0
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Gross margin
|
148.5
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2.5
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151.0
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Earnings/(loss) from operations, before income taxes
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(13.4
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)
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2.5
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(10.9
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)
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Income tax expense
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1.0
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0.2
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1.2
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Net earnings/(loss)
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$
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(14.4
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)
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$
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2.3
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$
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(12.1
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)
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The impact of ASC 606 on the Company's consolidated balance sheet is immaterial.
The adoption of ASC 606
resulted in three primary changes in the first quarter 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
for the Company's revenue recognition policy.
In March 2017, the FASB issued
ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires entities to report the service cost component of the net periodic benefit cost in the same income statement line as other compensation 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 ASU will be effective for public reporting entities in fiscal years beginning after December 15, 2017 and interim periods within those years. The Company adopted this guidance as of July 1, 2018, on a retrospective basis, which had an effect on the consolidated statement of operations for the three months period ended September 30, 2017. The following table summarizes the Company's As Previously Reported and As Adjusted changes to the consolidated statement of operations for the three months ended September 30, 2017:
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Three Months Ended September 30, 2017
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(Dollars in millions)
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As Previously Reported
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As Adjusted
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Selling, general, and administrative expenses
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$
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107.0
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$
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107.5
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Operating earnings
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31.9
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31.4
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Other expense/(income), net
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5.7
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5.2
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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 ASU is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. 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 ASU is effective for public reporting entities in fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. 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. It is effective for public reporting entities in fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. 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 September 30, 2018
In August 2018, the FASB issued
ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and allows for either a retrospective or prospective application. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
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
, which permits an entity to reclassify to retained earnings the stranded tax effects caused by the Tax Cuts and Jobs Act of 2017 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 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 Credit Expected Credit Losses model ("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 is currently evaluating the impact of adopting this guidance on 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 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 continues to evaluate the impact of adopting this guidance on its consolidated financial statements.
The Company recognizes revenue in accordance with ASC 606. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.
The following table allocates revenue for the
three months ended September 30, 2018
by type of activity and reporting segment (in millions):
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Softgel Technologies
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Biologics & Specialty Drug Delivery
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Oral Drug Delivery
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Clinical Supply Services
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Total
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Manufacturing & commercial product supply
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$
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184.4
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$
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73.8
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$
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81.7
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$
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—
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$
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339.9
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Development services
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14.8
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80.8
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48.4
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—
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144.0
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Clinical supply services
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—
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—
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—
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77.7
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77.7
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Total
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$
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199.2
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$
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154.6
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$
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130.1
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$
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77.7
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$
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561.6
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Inter-segment revenue elimination
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(9.8
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)
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Combined net revenue
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$
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551.8
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The following table allocates revenue by the location where the goods were made or the service performed:
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(Dollars in millions)
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Three months ended September 30, 2018
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United States
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$
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264.4
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Europe
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196.4
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International Other
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107.6
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Elimination of revenue attributable to multiple locations
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(16.6
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)
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Total
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$
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551.8
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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. The Company recognizes revenue for manufacturing and supplying commercial products as control is transferred to the customer, which is measured based on product that has successfully completed contractually required quality assurance process. Revenue is measured based on the amount of consideration the Company expects to receive in exchange for providing these products and services. The contractual performance obligation generally includes manufacture and the completion of product quality release testing procedures specified in the contract. These activities are interdependent and thus are considered to be a single combined performance obligation. Payment is typically due 30 to 90 days after the goods are shipped to the customer based on the payment terms set forth in the applicable customer agreement.
Development Services Revenue
Development services contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include (1) the delivery of a formulation report, analytical and stability testing report, or other report on product- or molecule-based studies or (2) the manufacture of products under development or otherwise not intended for commercial sale. The transaction prices for these arrangements include fixed consideration of the amounts stated in the contracts for each promised good or service, which are generally considered to be separate performance obligations. The Company recognizes revenue when or as control of each individual performance obligation is transferred to the customer and exercises judgment in determining the timing of revenue recognition by analyzing the point in time or period over which the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the arrangement. Control generally transfers to the customer when services have been completed or the customer has accepted the product or service deliverable and the Company has right to payment based on the terms of the agreement.
In certain arrangements, the Company recognizes revenue over time as the Company satisfies performance obligations. Satisfaction of the performance obligations is measured using an output method measure of progress based on the deliverables provided by or effort expended by the Company. In other arrangements, revenue is recognized when the customer has taken legal title to or accepted the product or service deliverable and the Company has a right to payment based on the terms of the arrangement.
Development services contracts may also include certain success-based milestone payments for completed performance obligations, such as regulatory approval and product validation prior to the commencement of commercial supply. Revenue associated with developmental milestones is considered variable consideration and is typically recognized when the success-based milestone is achieved, and no significant revenue reversal is anticipated.
The Company allocates consideration to each performance obligation based on the relative selling price. Payment is typically due 30 to 90 days following the completion of services provided to the customer based on the payment terms set forth in the applicable customer agreement. Certain development service arrangements require a portion of the contract consideration to be received in advance at the commencement of the contract and is initially recorded as a contract liability.
Clinical Supply Services Revenue
Clinical supply services contracts generally take the form of short-term, fee-for-service arrangements with duration of less than one year. 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 output method measure of progress based on deliverables provided by or effort expended by the Company. In other arrangements, revenue is recognized when the customer has taken legal title or accepted the product or service deliverable and the Company has 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.
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
three months ended September 30, 2018
are as follows:
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(Dollars in millions)
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Contract liability
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Balance at June 30, 2018
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$
|
100.9
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Balance at September 30, 2018
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|
$
|
105.7
|
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Revenue recognized in the period from:
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Amounts included in contracts liability at the beginning of the period
|
|
$
|
41.0
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Remaining Performance Obligations
For the Softgel Technologies, Biologics and Specialty Drug Delivery, and Oral Drug Delivery segments, remaining performance obligations represent firm orders for manufacturing and commercial product supply, including minimum volume commitments and future development services, for which there are incomplete performance obligations. For the Clinical Supply Services segment, remaining performance obligations represent estimated future service revenues from work not yet completed under signed contracts. The remaining performance obligations as of September 30, 2018 were
$1,115.9 million
, including approximately
$301.5 million
related to our Clinical Supply Services segment. We expect to recognize approximately
72%
of the remaining performance obligations in existence as of September 30, 2018 over the next nine months, with the remaining recognized thereafter.
Juniper Pharmaceuticals Acquisition
On August 14, 2018, Operating Company acquired
Juniper Pharmaceuticals, Inc.
, a Delaware corporation ("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 owned facilities aggregating 38,000 square feet in Nottingham, U.K. and is now included in the Oral Drug Delivery segment. Results of this segment include the results of Juniper for the period since the acquisition.
The aggregate purchase consideration, net of cash acquired, is
$127.5 million
, which was funded by cash on hand. As a result of the preliminary fair value allocations, the Company recognized intangible assets of
$75.0 million
and
$11.0 million
of product relationships and customer relationships, respectively. The remainder of the preliminary fair value was allocated to tangible assets acquired and goodwill. The fair value allocation is expected to be completed upon finalization of an independent appraisal over the next several months, but no later than one year from the acquisition date.
Catalent Indiana Acquisition
On October 23, 2017, the Company acquired
100%
of the equity interest in
Cook Pharmica LLC
(now doing business as Catalent Indiana, LLC, "Catalent Indiana") for an aggregate nominal purchase price of
$950 million
, subject to adjustment. Catalent Indiana is a biologics-focused contract development and manufacturing organization with capabilities across biologics development, clinical, and commercial cell culture manufacturing, formulation, finished-dose manufacturing, and packaging.
The following table summarizes the changes between
June 30, 2018
and
September 30, 2018
in the carrying amount of goodwill in total and by reporting segment:
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(Dollars in millions)
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Softgel Technologies
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|
Biologics and Specialty Drug Delivery
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|
Oral Drug Delivery
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|
Clinical Supply Services
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Total
|
Balance at June 30, 2018
|
$
|
415.2
|
|
|
$
|
505.7
|
|
|
$
|
319.9
|
|
|
$
|
156.4
|
|
|
$
|
1,397.2
|
|
Additions
|
—
|
|
|
—
|
|
|
40.3
|
|
|
—
|
|
|
40.3
|
|
Foreign currency translation adjustments
|
(1.7
|
)
|
|
0.4
|
|
|
(0.5
|
)
|
|
(0.7
|
)
|
|
(2.5
|
)
|
Balance at September 30, 2018
|
$
|
413.5
|
|
|
$
|
506.1
|
|
|
$
|
359.7
|
|
|
$
|
155.7
|
|
|
$
|
1,435.0
|
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The increase in goodwill in the Oral Drug Delivery reporting segment relates to the Juniper acquisition. The Company recorded no impairment charge in the current period.
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5.
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DEFINITE-LIVED LONG-LIVED ASSETS
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The Company’s definite-lived long-lived assets include property, plant, and equipment as well as intangible assets with definite lives. Refer to Note
16
,
Supplemental Balance Sheet Information
for details related to property, plant, and equipment.
The details of other intangibles, net as of
September 30, 2018
and
June 30, 2018
are as follows:
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|
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(Dollars in millions)
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
September 30, 2018
|
|
|
|
|
|
|
|
Amortized intangibles:
|
|
|
|
|
|
|
|
Core technology
|
18 years
|
|
$
|
170.5
|
|
|
$
|
(87.6
|
)
|
|
$
|
82.9
|
|
Customer relationships
|
14 years
|
|
596.9
|
|
|
(150.7
|
)
|
|
446.2
|
|
Product relationships
|
11 years
|
|
285.2
|
|
|
(202.4
|
)
|
|
82.8
|
|
Total intangible assets
|
|
|
$
|
1,052.6
|
|
|
$
|
(440.7
|
)
|
|
$
|
611.9
|
|
The increases in customer relationships and product relationships as of September 30, 2018 are associated with the acquisition of Juniper in August 2018.
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|
|
|
|
(Dollars in millions)
|
Weighted Average Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
June 30, 2018
|
|
|
|
|
|
|
|
Amortized intangibles:
|
|
|
|
|
|
|
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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
$18.2 million
and
$11.4 million
for the three months ended September 30, 2018 and 2017, respectively. Future amortization expense for the next five fiscal years is estimated to be:
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|
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|
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|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Remainder
Fiscal 2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Amortization expense
|
$
|
52.6
|
|
|
$
|
57.8
|
|
|
$
|
57.8
|
|
|
$
|
57.8
|
|
|
$
|
57.8
|
|
|
$
|
57.7
|
|
|
|
6
.
|
LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
|
Long-term obligations and short-term borrowings consist of the following at
September 30, 2018
and
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Maturity as of September 30, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
Senior Secured Credit Facilities
|
|
|
|
|
|
Term loan facility U.S. dollar-denominated
|
May 2024
|
|
$
|
779.3
|
|
|
$
|
1,228.4
|
|
Term loan facility euro-denominated
|
May 2024
|
|
361.1
|
|
|
358.9
|
|
Euro-denominated 4.75% Senior Notes due 2024
|
December 2024
|
|
442.3
|
|
|
438.4
|
|
U.S. dollar-denominated 4.875% Senior Notes due 2026
|
January 2026
|
|
444.0
|
|
|
443.8
|
|
Deferred purchase consideration
|
October 2021
|
|
190.4
|
|
|
188.9
|
|
$200 million revolving credit facility
|
May 2022
|
|
—
|
|
|
—
|
|
Capital lease obligations
|
2020 to 2032
|
|
60.1
|
|
|
60.8
|
|
Other obligations
|
2018 to 2019
|
|
1.9
|
|
|
2.1
|
|
Total
|
|
|
2,279.1
|
|
|
2,721.3
|
|
Less: Current portion of long-term obligations and other short-term
borrowings
|
|
|
73.4
|
|
|
71.9
|
|
Long-term obligations, less current portion
|
|
|
$
|
2,205.7
|
|
|
$
|
2,649.4
|
|
Senior Secured Credit Facilities and Third Amendment
On October 18, 2017, Operating Company completed Amendment No. 3 (the "Third Amendment") to its Amended and Restated Credit Agreement, dated as of May 20, 2014 (as subsequently amended, the "Credit Agreement"), governing the senior secured credit facilities that provide U.S. dollar, denominated term loans, euro-denominated term loans, and a revolving credit facility. The Third Amendment lowered the interest rate on U.S. dollar-denominated and euro-denominated term loans and the revolving credit facility and extended the maturity dates on the senior secured credit facilities by three years. From the Third Amendment, the applicable rate for U.S. dollar-denominated term loans 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 was initially set at LIBOR plus
2.25%
, and such rate can additionally be reduced to LIBOR plus
2.00%
in future periods based on a measure of Operating Company's total leverage ratio. The term loans and revolving loans will now mature in May 2024 and May 2022, respectively.
On July 27, 2018, the Company completed an underwritten public equity offering (the "2018 Equity Offering") and used the net proceeds coupled with cash on hand to repay
$450.0 million
of the outstanding borrowings under its U.S. dollar-denominated term loans on July 31, 2018.
Euro-denominated 4.75% Senior Notes due 2024
On December 9, 2016, Operating Company completed a private offering of
€380.0 million
aggregate principal amount of 4.75% Senior Notes due 2024 (the "Euro Notes"). The Euro Notes are fully and unconditionally guaranteed, jointly and severally, by all of the wholly owned U.S. subsidiaries of Operating Company that guarantee its senior secured credit facilities. The Euro Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and outside the United States 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
On October 18, 2017, Operating Company completed a private offering (the "Debt Offering") of
$450.0 million
aggregate principal amount of 4.875% Senior Notes due 2026 (the "USD Notes"). The USD 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 Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act and outside the United States only to non-U.S. investors pursuant to Regulation S under the Securities Act. The USD 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 Debt 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.
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 million
installments, on each of the first four anniversaries of the closing date. The deferred purchase consideration was initially recorded at fair value and included a component of imputed interest.
Bridge Loan Facility
On September 18, 2017, contemporaneous with the Company entering into the agreement to acquire Catalent Indiana, Operating Company entered into a debt commitment letter with Morgan Stanley Senior Funding, Inc., JP Morgan Chase Bank, N.A., Royal Bank of Canada, RBC Capital Markets, Bank of America, N.A., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as commitment parties. Pursuant to the debt commitment letter and subject to its terms and conditions, the commitment parties agreed to provide a senior unsecured bridge loan facility (the "Bridge Facility") of up to
$700.0 million
in the aggregate for the purpose of providing any back-up financing necessary to fund a portion of the consideration to be paid in the acquisition and related fees, costs, and expenses (the "Bridge Loan Commitment"). In connection with entering into the Bridge Facility, Operating Company incurred
$6.1 million
of associated fees, which was recorded in prepaid expenses and other in the consolidated balance sheet as of September 30, 2017. Operating Company did not draw on it to fund the acquisition and the Company expensed the
$6.1 million
in the second quarter of fiscal 2018 as part of other income and expense and the facility was closed.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, Operating Company’s (and Operating Company’s restricted subsidiaries’) ability to incur additional indebtedness or issue certain preferred shares; create liens on assets; engage in mergers and consolidations; sell assets; pay dividends and distributions or repurchase capital stock; repay subordinated indebtedness; engage in certain transactions with affiliates; make investments, loans, or advances; make certain acquisitions; enter into sale and leaseback transactions; amend material agreements governing Operating Company’s subordinated indebtedness; and change Operating Company’s lines of business.
The Credit Agreement also contains change-of-control provisions and certain customary affirmative covenants and events of default. The revolving credit facility requires compliance with a net leverage covenant when there is a 30% or more draw outstanding at a period end. As of
September 30, 2018
, Operating Company was in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits Operating Company and its restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of Operating Company’s non-U.S. subsidiaries or Puerto Rico subsidiaries is a guarantor of the loans.
Under the Credit Agreement, Operating Company’s ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and paying certain dividends is tied to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA” in the Credit Agreement). Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under GAAP, and is subject to important limitations.
The Euro Notes and the USD Notes
The Indentures governing the Euro Notes and the USD Notes (the "Indentures") contain certain covenants that, among other things, limit the ability of Operating Company and its restricted subsidiaries to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other
restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding Euro Notes or the then-outstanding USD Notes, or either of the Trustees 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
September 30, 2018
, Operating Company was in compliance with all material covenants under the Indentures.
Fair Value of Debt Instruments
The estimated fair value of the senior secured credit facility, a Level 2 fair-value estimate, is based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same remaining maturities and considers collateral, if any. The estimated fair value of the Euro and USD Notes, a Level 1 fair-value estimate, is based on the quoted market prices of the instruments. The carrying amounts and the estimated fair values of financial instruments as of
September 30, 2018
and
June 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
June 30, 2018
|
(Dollars in millions)
|
Fair Value Measurement
|
Carrying
Value
|
|
Estimated Fair
Value
|
|
Carrying
Value
|
|
Estimated Fair
Value
|
Euro-denominated 4.75% Senior Notes
|
Level 1
|
$
|
442.3
|
|
|
$
|
466.1
|
|
|
$
|
438.4
|
|
|
$
|
457.6
|
|
U.S. Dollar-denominated 4.875% Senior Notes
|
Level 1
|
444.0
|
|
|
425.1
|
|
|
443.8
|
|
|
428.3
|
|
Senior Secured Credit Facilities & Other
|
Level 2
|
1,392.8
|
|
|
1,361.0
|
|
|
1,839.1
|
|
|
1,768.0
|
|
Total
|
|
$
|
2,279.1
|
|
|
$
|
2,252.2
|
|
|
$
|
2,721.3
|
|
|
$
|
2,653.9
|
|
The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the
three months ended September 30, 2018
and
2017
, respectively, are as follows (in millions, except share and per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2018
|
|
2017
|
Net earnings/(loss)
|
$
|
(14.4
|
)
|
|
$
|
3.8
|
|
|
|
|
|
Weighted average shares outstanding
|
142,149,315
|
|
|
125,713,246
|
|
Dilutive securities issuable-stock plans
|
—
|
|
|
2,071,275
|
|
Total weighted average diluted shares outstanding
|
142,149,315
|
|
|
127,784,521
|
|
|
|
|
|
Earnings/(loss) per share:
|
|
|
|
|
Basic
|
$
|
(0.10
|
)
|
|
$
|
0.03
|
|
Diluted
|
$
|
(0.10
|
)
|
|
$
|
0.03
|
|
The computation of diluted earnings per share for the
three months ended September 30, 2018
excludes the maximum effect of the potential common shares issuable under the employee stock option plan of approximately
2.4 million
shares, and excludes restricted share awards of
2.3 million
share, because the Company had a net loss for the period and the effect would therefore be anti-dilutive. The computation of diluted earnings per share for the
three months ended September 30, 2017
excludes the effect of
0.3 million
shares potentially issuable pursuant to awards granted under the 2007 Stock Incentive Plan, 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
three months ended September 30, 2017
excludes the effect of shares potentially issuable under employee-held stock options and restricted stock units of approximately
0.5 million
because they are anti-dilutive.
|
|
8
.
|
OTHER EXPENSE/(INCOME), NET
|
The components of other expense/(income), net for the
three months ended September 30, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Other expense/(income), net
|
|
|
|
Debt refinancing costs
(1)
|
$
|
4.2
|
|
|
$
|
—
|
|
Foreign currency (gains) and losses
(2)
|
1.7
|
|
|
5.7
|
|
Other
|
(0.2
|
)
|
|
(0.5
|
)
|
Total other expense/(income), net
|
$
|
5.7
|
|
|
$
|
5.2
|
|
(1) The expense in the
three months ended September 30, 2018
includes a write-off of
$4.2 million
of previously capitalized financing charges related to the Company's U.S. dollar term loan under its senior secured credit facility.
(2) Foreign currency remeasurement (gains) and losses include both cash and non-cash transactions.
|
|
9.
|
RESTRUCTURING AND OTHER COSTS
|
Restructuring Costs
From time to time, the Company has implemented plans to restructure certain operations, both domestically and internationally. The restructuring plans focused on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount and aligning operations in a strategic and more cost-efficient structure. In addition, the Company may incur restructuring charges in the future in cases where a material change in the scope of operation with its business occurs. Employee-related costs consist primarily of severance costs and also include outplacement services provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods. Facility exit and other costs consist of accelerated depreciation, equipment relocation costs and costs associated with planned facility expansions and closures to streamline Company operations.
Other Costs/(Income)
Other costs/(income) includes settlement charges, net of any insurance recoveries, related to the probable resolution of certain customer claims related to a previous temporary suspension of operations at a softgel manufacturing facility.
The following table summarizes the significant costs recorded within restructuring and other costs:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Restructuring costs:
|
|
|
|
Employee-related reorganization
|
$
|
9.7
|
|
|
$
|
1.7
|
|
Facility exit and other costs
|
—
|
|
|
0.6
|
|
Total restructuring costs
|
$
|
9.7
|
|
|
$
|
2.3
|
|
Other - customer claims net of insurance recoveries
|
—
|
|
|
(1.1
|
)
|
Total restructuring and other costs
|
$
|
9.7
|
|
|
$
|
1.2
|
|
|
|
10
.
|
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
|
The Company is exposed to fluctuations in the applicable exchange rate on its investments in foreign operations. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated its exposure from its investments in its European operations by denominating a portion of its debt in euros. At
September 30, 2018
, the Company had euro-denominated debt outstanding of
$803.4 million
that is designated and qualifies as a hedge of a net investment in foreign operations. For non-derivatives designated and qualifying as net investment hedges, the translation gains or losses are reported in accumulated other comprehensive income/(loss) as part of the cumulative translation adjustment. The non-hedge portions of the translation gains or losses are reported in the statement of operations. The following table includes net investment hedge activity during the
three months ended September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Unrealized foreign exchange gain/(loss) within other
comprehensive income
|
$
|
(4.2
|
)
|
|
$
|
(17.6
|
)
|
Unrealized foreign exchange gain/(loss) within statement
of operations
|
$
|
(2.5
|
)
|
|
$
|
(13.4
|
)
|
The net accumulated gain of the instrument designated as a hedge as of
September 30, 2018
within other comprehensive income/(loss) was approximately
$43.4 million
. Amounts are reclassified out of accumulated other comprehensive income/(loss) into earnings when the entity to which the gains and losses relate is either sold or substantially liquidated.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the "2017 Tax Act"). The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from
35%
to
21%
, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income ("GILTI"), (2) the Foreign Derived Intangible Income ("FDII") deduction, and (3) the Base Erosion Anti-Abuse Tax ("BEAT"), and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses, and certain employee expenses. While the impact of the mandatory one-time transition tax was recognized in fiscal 2018, the remaining provisions are effective for fiscal years after 2018.
ASC 740, Income Taxes
("ASC 740") requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which allows companies to record the tax effects of the 2017 Tax Act on a provisional basis based on a reasonable estimate and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment. For the
three months ended September 30, 2018
, there has been no change to the estimates recorded during fiscal 2018.
The new GILTI tax is effective in fiscal 2019. Because of its complexity, the Company continues to evaluate this aspect of the 2017 Tax Act and the corresponding application of ASC 740. In accordance with ASC 740, the Company will consider an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules depends, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, the related expected impact. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company's current structure and estimated future results in each jurisdiction where it operates but also its intent and ability to modify its current structure. Applying the interim period rules of ASC 740, the impact of the GILTI tax on future U.S. inclusions is immaterial to the quarter. The Company is still evaluating its policy decision regarding whether to record deferred tax on GILTI to the extent such deferred tax is material in future periods.
The Company continues to evaluate the potential impact of all other provisions, including but not limited to the BEAT, FDII, the limitation on the deductibility of interest expense, certain employee expense deductions, and the state tax impact of these provision of the 2017 Tax Act. To the extent these provisions are applicable, the impact of each of these provisions is not material to the Company's three month ended September 30, 2018 results. However, the Company will continue analyzing the effects of all these provisions as additional guidance is expected from the U.S. Treasury Department, the effects of the 2017 Tax Act will be finalized when all information available or no later than the end of the second quarter of fiscal 2019.
Other Tax Matters
The Company accounts for income taxes in accordance with ASC 740. Generally, fluctuations in the effective tax rate are primarily due to changes in U.S. and non-U.S. pretax income resulting from the Company’s business mix and changes in the tax impact of special items and other discrete tax items, which may have unique tax implications depending on the nature of the item. Such discrete items include, but are not limited to, changes in foreign statutory tax rates, the amortization of certain assets, and the tax impact of changes in its ASC 740 unrecognized tax benefit reserves. In the normal course of business, the Company is subject to examination by taxing authorities around the world, including such major jurisdictions as the United States, Germany, France, and the United Kingdom. The Company is no longer subject to examinations by the relevant tax authorities for years prior to fiscal year 2009. Under the terms of the 2007 purchase agreement by which the stockholders at that time acquired their interest in the Company, the Company is indemnified by its former owner for tax liabilities that may arise after the 2007 purchase that relate to tax periods prior to April 10, 2007. The indemnification agreement applies to, among other taxes, any and all federal, state, and international income-based taxes as well as related interest and penalties. As of
September 30, 2018
and
June 30, 2018
, approximately
$0.7 million
and
$0.7 million
, respectively, of unrecognized tax benefit are subject to indemnification by the Company's former owner.
ASC 740 includes guidance on the accounting for uncertainty in income taxes recognized in the financial statements. This standard provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeal or litigation process, based on the technical merits. As of
September 30, 2018
, the Company had a total of
$2.2 million
of unrecognized tax benefits, which is unchanged from the reserve as of
June 30, 2018
.
As of
September 30, 2018
and
June 30, 2018
, the Company had a total of
$4.2 million
and
$4.1 million
, respectively, of uncertain tax positions (including accrued interest and penalties). As of these dates,
$2.2 million
and
$2.2 million
, respectively, represent the amount of unrecognized tax benefits, which, if recognized, would favorably affect the effective income tax rate. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of
September 30, 2018
and
June 30, 2018
, the Company has approximately
$2.0 million
and
$2.0 million
, respectively, of accrued interest and penalties related to uncertain tax positions. As of these dates, the portion of such interest and penalties subject to indemnification by its former owner is
$1.6 million
and
$1.6 million
, respectively.
|
|
12.
|
EMPLOYEE RETIREMENT BENEFIT PLANS
|
Components of the Company’s net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Components of net periodic benefit cost:
|
|
|
|
Service cost
|
$
|
0.9
|
|
|
$
|
0.9
|
|
Interest cost
|
1.9
|
|
|
1.8
|
|
Expected return on plan assets
|
(2.6
|
)
|
|
(2.9
|
)
|
Amortization
(1)
|
0.6
|
|
|
0.6
|
|
Net amount recognized
|
$
|
0.8
|
|
|
$
|
0.4
|
|
|
|
(1)
|
Amount represents the amortization of unrecognized actuarial gains/(losses).
|
As previously disclosed, the Company notified the trustees of a multi-employer pension plan of its withdrawal from participation in such plan in fiscal 2012. The actuarial review process administered by the plan trustees ended in fiscal 2015. The liability reported reflects the present value of the Company's expected future long-term obligations. The estimated discounted value of the projected contributions related to such plans was
$39.0 million
and
$39.0 million
as of
September 30, 2018
and
June 30, 2018
, respectively, and is included within pension liability on the consolidated balance sheets. The annual cash impact associated with the Company's obligations in such plan is approximately
$1.7 million
per year.
|
|
13.
|
EQUITY AND ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
|
Description of Capital Stock
The Company is authorized to issue
1,000,000,000
shares of common stock, par value
$0.01
per share, and
100,000,000
shares of preferred stock, par value
$0.01
per share. In accordance with the Company's second amended and restated certificate of incorporation, each share of common stock has one vote, and the common stock votes together as a single class.
Public Stock Offering
On July 27, 2018, the Company completed the 2018 Equity Offering, which was a public offering through which the Company sold
11.4 million
shares, including the underwriters' over-allotment, of its common stock, par value
$0.01
("Common Stock"), at a price of
$40.24
per share, before underwriting discounts and commissions. Net of these discounts and commissions and other offering expenses, the Company obtained total net proceeds from the 2018 Equity Offering, including the over-allotment exercise, of
$445.5 million
. The net proceeds of the 2018 Equity Offering were used to repay a corresponding portion of the outstanding borrowings under its U.S. dollar-denominated term loans.
On September 29, 2017, the Company completed a public offering (the "2017 Equity Offering"), pursuant to which the Company sold
7.4 million
shares of Common Stock, 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 obtained total net proceeds from the 2017 Equity Offering, including the over-allotment exercise, of
$277.8 million
. The net proceeds of the 2017 Equity Offering were used to fund a portion of the consideration for the Catalent Indiana acquisition due at its closing.
Outstanding Stock
Shares outstanding include shares of unvested restricted stock. Unvested restricted stock included in reportable shares outstanding was
0.5 million
shares as of
September 30, 2018
. Shares of unvested restricted stock are excluded from our calculation of basic weighted average shares outstanding, but their dilutive impact is added back in the calculation of diluted weighted average shares outstanding, except when the effect would be anti-dilutive.
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 its 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
September 30, 2018
.
Accumulated Other Comprehensive Income/(loss)
The components of the changes in the cumulative translation adjustment, minimum pension liability, and available for sale investment for the
three months ended September 30, 2018
and 2017 are presented below.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Foreign currency translation adjustments:
|
|
|
|
Net investment hedge
|
$
|
(4.2
|
)
|
|
$
|
(17.6
|
)
|
Long-term intercompany loans
|
(3.3
|
)
|
|
13.5
|
|
Translation adjustments
|
(2.8
|
)
|
|
36.1
|
|
Total foreign currency translation adjustment, pretax
|
(10.3
|
)
|
|
32.0
|
|
Tax expense/(benefit)
|
(1.5
|
)
|
|
(6.1
|
)
|
Total foreign currency translation adjustment, net of tax
|
$
|
(8.8
|
)
|
|
$
|
38.1
|
|
|
|
|
|
Net change in minimum pension liability
|
|
|
|
Net gain/(loss) recognized during the period
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Total pension liability, pretax
|
0.6
|
|
|
0.6
|
|
Tax expense/(benefit)
|
0.2
|
|
|
0.2
|
|
Net change in minimum pension liability, net of tax
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
|
|
|
Net change in available for sale investment:
|
|
|
|
Net gain/(loss) recognized during the period
|
$
|
—
|
|
|
$
|
(5.2
|
)
|
Total available for sale investment, pretax
|
—
|
|
|
(5.2
|
)
|
Tax expense/(benefit)
|
—
|
|
|
(1.8
|
)
|
Net change in available for sale investment, net of tax
|
$
|
—
|
|
|
$
|
(3.4
|
)
|
|
|
|
|
For the
three months ended September 30, 2018
, the changes in accumulated other comprehensive income/(loss), net of tax by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Foreign Exchange Translation Adjustments
|
|
Pension and Liability Adjustments
|
|
Available for Sale Investment Adjustments
|
|
Total
|
Balance at June 30, 2018
|
$
|
(285.1
|
)
|
|
$
|
(39.6
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(325.8
|
)
|
Other comprehensive income/(loss) before reclassifications
|
(8.8
|
)
|
|
—
|
|
|
—
|
|
|
(8.8
|
)
|
Amounts reclassified from accumulated other comprehensive income/(loss)
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Net current period other comprehensive income/(loss)
|
(8.8
|
)
|
|
0.4
|
|
|
—
|
|
|
(8.4
|
)
|
Balance at September 30, 2018
|
$
|
(293.9
|
)
|
|
$
|
(39.2
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(334.2
|
)
|
|
|
14
.
|
COMMITMENTS AND CONTINGENCIES
|
SEC inquiry into Juniper Pharmaceuticals, Inc.
On August 14, 2018, Operating Company acquired Juniper pursuant to the Juniper Merger Agreement. On November 14, 2016, Juniper filed with the SEC restated audited consolidated financial statements for the fiscal years ended December 31, 2013 through December 31, 2015, including the unaudited consolidated financial information for each quarterly period within the fiscal years ended December 31, 2014 and 2015, and restated unaudited consolidated financial statements for the quarters ended March 31, 2016 and June 30, 2016 and the related quarters in 2015, in order to correct certain timing errors regarding how it recognized revenue from a supply contract with an affiliate of Merck KGaA. On January 24, 2017, Juniper received a
subpoena from the SEC requesting information concerning these restatements and related issues. Juniper responded to the subpoena and is cooperating with the SEC’s inquiry, including the taking of testimony from former Juniper employees and others. The Company understands that the inquiry is ongoing but does not believe the outcome of the investigation will be material to it; nonetheless, the Company cannot provide any assurance regarding that outcome.
Other
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company’s 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.
The Company conducts its business within the following operating 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 earnings before other (expense)/income, impairments, restructuring costs, interest expense, income tax expense/(benefit), and depreciation and amortization ("Segment EBITDA"). "EBITDA from operations" is consolidated earnings from operations before interest expense, income tax expense/(benefit), and depreciation and amortization. Segment EBITDA and EBITDA from operations are not defined in GAAP and may not be comparable to similarly titled measures used by other companies.
The following tables include net revenue and Segment EBITDA during the
three months ended September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Softgel Technologies
|
|
|
|
Net revenue
|
$
|
199.2
|
|
|
$
|
219.7
|
|
Segment EBITDA
|
$
|
33.3
|
|
|
$
|
35.1
|
|
Biologics and Specialty Drug Delivery
|
|
|
|
Net revenue
|
154.6
|
|
|
91.7
|
|
Segment EBITDA
|
26.5
|
|
|
8.7
|
|
Oral Drug Delivery
|
|
|
|
Net revenue
|
130.1
|
|
|
134.6
|
|
Segment EBITDA
|
27.4
|
|
|
38.7
|
|
Clinical Supply Services
|
|
|
|
Net revenue
|
77.7
|
|
|
109.7
|
|
Segment EBITDA
|
20.2
|
|
|
16.7
|
|
Inter-segment revenue elimination
|
(9.8
|
)
|
|
(11.8
|
)
|
Unallocated costs
(1)
|
(39.8
|
)
|
|
(34.0
|
)
|
Combined totals:
|
|
|
|
Net revenue
|
$
|
551.8
|
|
|
$
|
543.9
|
|
|
|
|
|
EBITDA from operations
|
$
|
67.6
|
|
|
$
|
65.2
|
|
(1) Unallocated costs include restructuring and special items, equity-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Impairment charges and gain/(loss) on sale of assets
|
$
|
(2.9
|
)
|
|
$
|
—
|
|
Stock-based compensation
|
(10.0
|
)
|
|
(7.0
|
)
|
Restructuring and other special items
(a)
|
(13.2
|
)
|
|
(12.3
|
)
|
Other income/(expense), net
(b)
|
(5.7
|
)
|
|
(5.2
|
)
|
Non-allocated corporate costs, net
|
(8.0
|
)
|
|
(9.5
|
)
|
Total unallocated costs
|
$
|
(39.8
|
)
|
|
$
|
(34.0
|
)
|
(a) Restructuring and other special items include transaction and integration costs associated primarily with the acquisitions of Catalent Indiana and Juniper.
(b) Amounts for the
three months ended September 30, 2018
include a write-off of
$4.2 million
of previously capitalized financing charges related to the Company's U.S. dollar term loan under its senior secured credit facility and for the
three months ended September 30, 2017
were primarily driven by foreign currency remeasurement losses. Refer to Note
8
,
Other Expense/(Income)
.
Provided below is a reconciliation between net earnings/(loss) and EBITDA from operations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollars in millions)
|
2018
|
|
2017
|
Net earnings/(loss)
|
$
|
(14.4
|
)
|
|
$
|
3.8
|
|
Depreciation and amortization
|
52.9
|
|
|
39.0
|
|
Interest expense, net
|
28.1
|
|
|
24.3
|
|
Income tax expense/(benefit)
|
1.0
|
|
|
(1.9
|
)
|
EBITDA from operations
|
$
|
67.6
|
|
|
$
|
65.2
|
|
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated financial statements:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2018
|
|
June 30,
2018
|
Assets
|
|
|
|
Softgel Technologies
|
$
|
1,398.3
|
|
|
$
|
1,402.0
|
|
Biologics and Specialty Drug Delivery
|
1,798.0
|
|
|
1,739.7
|
|
Oral Drug Delivery
|
1,241.5
|
|
|
1,074.2
|
|
Clinical Supply Services
|
617.3
|
|
|
613.0
|
|
Corporate and eliminations
|
(555.3
|
)
|
|
(297.8
|
)
|
Total assets
|
$
|
4,499.8
|
|
|
$
|
4,531.1
|
|
|
|
16
.
|
SUPPLEMENTAL BALANCE SHEET INFORMATION
|
Supplemental balance sheet information at
September 30, 2018
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)
|
September 30,
2018
|
|
June 30,
2018
|
Raw materials and supplies
|
$
|
158.2
|
|
|
$
|
137.1
|
|
Work-in-process
|
47.5
|
|
|
42.3
|
|
Finished goods
|
49.8
|
|
|
48.3
|
|
Total inventories, gross
|
255.5
|
|
|
227.7
|
|
Inventory cost adjustment
|
(19.7
|
)
|
|
(18.6
|
)
|
Inventories
|
$
|
235.8
|
|
|
$
|
209.1
|
|
Prepaid expenses and other
Prepaid expenses and other consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2018
|
|
June 30,
2018
|
Prepaid expenses
|
$
|
24.4
|
|
|
$
|
19.2
|
|
Spare parts supplies
|
10.9
|
|
|
11.1
|
|
Prepaid income tax
|
10.0
|
|
|
7.2
|
|
Non-U.S. value added tax
|
17.0
|
|
|
12.5
|
|
Other current assets
|
15.9
|
|
|
15.2
|
|
Prepaid expenses and other
|
$
|
78.2
|
|
|
$
|
65.2
|
|
Property, plant, and equipment, net
Property, plant, and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2018
|
|
June 30,
2018
|
Land, buildings, and improvements
|
$
|
946.1
|
|
|
$
|
928.1
|
|
Machinery, equipment, and capitalized software
|
1,020.5
|
|
|
988.1
|
|
Furniture and fixtures
|
15.2
|
|
|
14.9
|
|
Construction in progress
|
170.4
|
|
|
166.8
|
|
Property, plant, and equipment, at cost
|
2,152.2
|
|
|
2,097.9
|
|
Accumulated depreciation
|
(864.0
|
)
|
|
(827.3
|
)
|
Property, plant, and equipment, net
|
$
|
1,288.2
|
|
|
$
|
1,270.6
|
|
Depreciation expense was
$34.7 million
and
$27.6 million
for the
three months ended September 30, 2018
and 2017, respectively. Depreciation expense includes amortization of assets related to capital leases. The Company charges repairs and maintenance costs to expense as incurred. The amount of capitalized interest was immaterial for all periods presented.
Other accrued liabilities
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
September 30,
2018
|
|
June 30,
2018
|
Accrued employee-related expenses
|
$
|
81.9
|
|
|
$
|
104.3
|
|
Restructuring accrual
|
13.6
|
|
|
9.4
|
|
Accrued interest
|
11.1
|
|
|
16.5
|
|
Contract liability
|
105.7
|
|
|
100.9
|
|
Accrued income tax
|
11.9
|
|
|
25.9
|
|
Other accrued liabilities and expenses
|
49.8
|
|
|
55.9
|
|
Other accrued liabilities
|
$
|
274.0
|
|
|
$
|
312.9
|
|