ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
We are the leading global provider of advanced delivery technologies, development, and manufacturing solutions for drugs, protein, nucleic acid, cell, and gene therapy biologics, and consumer health products. Our oral, injectable, cell and gene therapy, and respiratory delivery technologies address the full diversity of the pharmaceutical industry, including small molecules; protein, cell, and gene therapy biologics; and consumer health products. Through our extensive capabilities and deep expertise in product development, we help our customers take products to market faster, including nearly half of new drug products approved by the U.S. Food and Drug Administration in the last decade. Our advanced delivery technology platforms, which include those in our Softgel and Oral Technologies, Biologics, and Oral and Specialty Delivery segments, our proven formulation, manufacturing, and regulatory expertise, and our broad and deep intellectual property enable our customers to develop more products and better treatments for patients and consumers. Across both development and delivery, our commitment to reliably supply our customers’ and their patients' needs is the foundation for the value we provide; annually, we produce approximately 74 billion doses for nearly 7,000 customer products, or approximately 1 in every 20 doses of such product taken each year by patients and consumers around the world. We believe that, through our investments in growth-enabling capacity and capabilities, our ongoing focus on operational and quality excellence, the sales of existing and introduction of new customer products, our innovation activities and patents, and our entry into new markets, we will continue to benefit from attractive and differentiated margins and realize the growth potential from these areas.
The COVID-19 Pandemic
The COVID-19 pandemic has spread across the globe and is affecting economic activity worldwide, including in the countries in which we, our customers, our suppliers, and our other business partners conduct business. Governments in affected regions have implemented, and may continue to implement, measures to protect public health, including quarantines, travel restrictions, business closures, cancellations of public gatherings, and measures that affect the flow of goods, services, and people between different regions. We have taken and continue to take steps to avoid or reduce infection or contamination and otherwise protect our employees and our business, in line with guidelines issued by the U.S. Centers for Disease Control and Prevention (CDC), the World Health Organization (WHO), and local authorities where we operate, to re-emphasize good hygiene practices, severely restrict non-employee access to our sites, reorganize our workflows where permitted to maximize social distancing, limit employee travel (where permitted by local law), facilitate safer alternatives to travel to and from work, and employ remote-working strategies. In addition, to address the multiple dimensions of the pandemic, senior, multi-disciplinary teams reporting directly to our Chief Executive Officer have been continuously monitoring the global situation, executing mitigation activities whenever and wherever required, and planning for a phased and structured return to our facilities as circumstances permit for those employees who have been remote-working.
We have reviewed and will continue to analyze our supply chain to identify any risk, delay, or concern that may have an impact on our ability to deliver our services and products. To date, we have not identified any significant risk, delay, or concern that would have a substantial effect on such delivery. We have adopted various procedures to minimize and manage any future disruption to our ongoing operations. These include procuring expanded safety stocks of raw materials and personal protective equipment across our network, as well as ongoing monitoring of our suppliers’ stock levels to assure future deliveries. Our existing procedures, which are consistent with cGMP and other regulatory standards, are intended to assure the integrity of our supply, including against any contamination. We have a detailed response plan to manage any impact of the virus on employee health, site operations, and product supply, including immediate assessment of the health of employees reporting symptoms, comprehensive risk assessment of any impact to quality, additional cleaning protocols, and alternative shift patterns to compensate should fewer employees be available.
The COVID-19 pandemic has not had a material adverse impact on our business, financial condition, or results of operations to date, but, at this point, the extent to which the COVID-19 pandemic may affect our future financial condition or results of operations remains uncertain and will depend on future developments that are uncertain, including the duration of the pandemic, new information that may emerge concerning the severity and longevity of the pandemic conditions created by the virus, and the actions governments, the pharmaceutical industry, competitors, suppliers, customers, patients, and others may take to contain or address its direct and indirect effects. The COVID-19 pandemic and associated mitigation measures may also have an adverse impact on healthcare systems, global economic conditions, or economic conditions in one or more regions where we, our suppliers, or our customers operate, which could have an adverse effect on our business and financial condition. We have observed some increases in customer delays and cancellations, occasional increases in absenteeism of production employees in our facilities in certain affected regions, and a small percentage of our customers expecting a reduction in demand and a larger percentage expecting an increase in demand, in each case due to circumstances relating to the COVID-19 pandemic and the responsive measures. We have also seen revenue increases and the potential for further revenue increases in some of our
reporting segments related to projects seeking to address the COVID-19 pandemic or its effects. Future financial periods may reflect greater effects of the pandemic on the results of our operations, but the duration and extent of future revenues from such COVID-19 related projects are uncertain.
See also “Risk Factors — Risks Related to Our Business and Industry — Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic” in our Fiscal 2020 10-K.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Management made certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the consolidated financial statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the consolidated financial statements than others.
There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 2020 10-K, other than recently adopted accounting principles disclosed in Note 1 to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (the “Consolidated Financial Statements”), which adoptions had no material impact on net earnings.
Non-GAAP Metrics
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense (benefit) for income taxes, and depreciation and amortization, adjusted for the income or loss attributable to non-controlling interests (“EBITDA from operations”). EBITDA from operations is not defined under U.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance with U.S. GAAP, and is subject to important limitations.
We believe that the presentation of EBITDA from operations enhances an investor’s understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for the readers of our Consolidated Financial Statements, and such information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from operations defined under U.S. GAAP is net earnings. Included in this Management’s Discussion and Analysis is a reconciliation of net earnings to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before non-controlling interests, other (income) expense, impairments, restructuring costs, interest expense, income tax expense (benefit), and depreciation and amortization (“Segment EBITDA”).
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may
not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations and include revenue from licensing related activities entered into within the year. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance with U.S. GAAP. These measures, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
The below tables summarize several financial metrics we use to measure performance for the three months ended March 31, 2021 and three months ended March 31, 2020. Refer to the discussions below regarding performance and use of key financial metrics.
Results for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 were as follows:
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Three Months Ended
March 31,
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FX Impact
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Constant Currency Increase/(Decrease)
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(Dollars in millions)
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2021
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2020
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Change $
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Change %
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Net revenue
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$
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1,053.3
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$
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760.6
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$
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26.6
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$
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266.1
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35
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%
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Cost of sales
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687.7
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521.8
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16.7
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149.2
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29
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%
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Gross margin
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365.6
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238.8
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9.9
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116.9
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49
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%
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Selling, general, and administrative expenses
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172.7
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136.1
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2.3
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34.3
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25
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%
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Impairment charges and (gain) loss on sale of assets
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5.3
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0.6
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0.1
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4.6
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767
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%
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Restructuring and other costs
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3.0
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1.3
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—
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1.7
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131
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%
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Gain on sale of subsidiary
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(184.0)
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—
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—
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(184.0)
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*
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Operating earnings
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368.6
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100.8
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7.5
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260.3
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258
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%
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Interest expense, net
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26.9
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34.4
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0.5
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(8.0)
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(23)
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%
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Other expense, net
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24.6
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36.7
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1.8
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(13.9)
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(38)
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%
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Earnings before income taxes
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317.1
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29.7
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5.2
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282.2
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950
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%
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Income tax expense
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85.3
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8.8
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0.4
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76.1
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865
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%
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Net earnings
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$
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231.8
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$
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20.9
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$
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4.8
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$
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206.1
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986
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%
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Net Revenue
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2021 vs. 2020
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Year-Over-Year Change
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Three Months Ended March 31,
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Net Revenue
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Organic
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35
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%
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Constant currency change
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35
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%
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Foreign currency translation impact on reporting
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3
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%
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Total % change
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38
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%
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Net revenue increased $266.1 million, or 35%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. We acquired Skeletal Cell Therapy Support SA ("Skeletal") in November 2020, Delphi Genetics ("Delphi") in February 2021 and manufacturing and packaging assets from Acorda Therapeutics, Inc. ("Acorda") in February 2021. Net revenue increased 35% organically on a constant-currency basis, primarily due to robust demand across all Biologics offerings, in particular demand for our drug product and drug substance offerings for COVID-19-related programs, offset in part by the loss of volume following the voluntary recall of a previously launched product in the respiratory and ophthalmic platform in our Oral and Specialty Delivery segment and decreased demand for our customers' prescription and consumer health products in our Softgel and Oral Technologies segment.
Gross Margin
Gross margin increased $116.9 million, or 49%, compared to the three months ended March 31, 2020, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for all Biologics segment offerings, including demand across our drug product and drug substance offerings for COVID-19 related programs, offset by voluntary recall impacts from our respiratory and ophthalmic specialty platform in our Oral and Specialty Delivery segment and decreased demand for our prescription and consumer health products in our Softgel and Oral Technologies segment. On a constant-currency basis, gross margin, as a percentage of revenue, increased 320 basis points to 34.6% in the three months ended March 31, 2021, compared to 31.4% in the prior-year period, primarily due to the factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $34.3 million, or 25%, compared to the three months ended March 31, 2020, excluding the impact of foreign exchange, which includes $0.7 million in incremental expenses from acquired companies. The year-over-year increase in selling, general, and administrative expenses was primarily due to a $22.4 million increase in employee-related costs primarily incurred for wages and bonuses, which was partially offset by $2.3 million in cost savings associated with health and welfare and $3.2 million in cost savings associated with travel and entertainment.
Additionally, selling, general, and administrative expenses were further increased by $11.7 million related to increases in information technology expenses associated with headcount increases, additional cyber security initiatives, insurance premium increases, certain market research initiatives, and COVID-19-related spend for personal protective equipment and test kits for our employees.
Restructuring and Other Costs
Restructuring and other costs of $3.0 million for the three months ended March 31, 2021 increased by $1.7 million, compared to the three months ended March 31, 2020. Restructuring charges vary period-to-period based on site consolidation efforts and other efforts to further streamline the business. In the three months ended December 31, 2020, we adopted a plan to reduce costs and optimize our Clinical Supply Services infrastructure in Western Europe by closing our facility in Bolton, U.K. and moving services to other locations in the region. For the three months ended March 31, 2021, we recognized $0.9 million of restructuring charges in association with the Bolton facility closure.
Interest Expense, net
Interest expense, net of $26.9 million for the three months ended March 31, 2021 decreased by $8.0 million, or 23%, compared to the three months ended March 31, 2020, excluding the impact of foreign exchange, driven by savings from repayment of our formerly outstanding dollar-denominated term loans, euro-denominated term loans, euro-denominated 4.75% senior notes due 2024 (the "2024 Notes"), and 4.875% senior notes due 2026 (the "2026 Notes"), partially offset by interest expenses on our euro-denominated 2.375% senior notes due 2028 (the “2028 Notes”), the new tranche of dollar-denominated term loans and our 3.125% senior notes due 2029 (the "2029 Notes"). The savings also includes $5.0 million of capitalized interest costs for the three months ended March 31, 2021.
For additional information concerning our debt and financing arrangements, including the changing mix of debt and equity in our capital structure, see “Liquidity and Capital Resources” and Note 6, Long-Term Obligations and Short-Term Borrowings to our Consolidated Financial Statements.
Other Expense, net
Other expense, net of $24.6 million for the three months ended March 31, 2021 was primarily driven by a $11.0 million premium on early redemption of the 2026 Notes, a write-off of $4.4 million of previously capitalized financing charges related to our repaid term loans and our redeemed 2026 Notes, $1.8 million of financing charges related to our outstanding term loans, and $6.9 million of non-cash foreign currency translation losses.
Other expense, net of $36.7 million for the three months ended March 31, 2020 was primarily driven by a loss of $26.3 million related to the change in fair value of the derivative liability arising from the dividend-adjustment mechanism of our series A convertible preferred stock, par value $0.01 per share (the "Series A Preferred Stock"), a write-off of $6.0 million of previously capitalized financing charges related to our repaid euro-denominated term loans under our senior secured credit facilities and our redeemed 2024 Notes, and a $10.0 million premium on early redemption of the 2024 Notes. The loss was partially offset by non-cash foreign currency translation gains of $5.3 million.
Income Tax Expense
Our provision for income taxes for the three months ended March 31, 2021 was $85.3 million relative to earnings before income taxes of $317.1 million. Our provision for income taxes for the three months ended March 31, 2020 was $8.8 million relative to earnings before income taxes of $29.7 million. The increased income tax provision for the current period was largely the result of an increase in pretax income across several jurisdictions and a $57.4 million income tax charge on the divestiture of our blow-fill-seal manufacturing business, including 100% of the shares of Catalent USA Woodstock, Inc. (collectively, the “Blow-Fill-Seal Business”), during the quarter. This was partially offset by an increase in discrete benefit items including certain equity compensation deductions. The provision for income taxes was also impacted by the geographic distribution of our pretax income resulting from our business mix, changes in the tax impact of permanent differences, restructuring, special items, and other discrete tax items that may have unique tax implications depending on the nature of the item.
Segment Review
The following charts depict the percentages of net revenue from each of our four reporting segments for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Refer below for discussions regarding each segment’s net revenue and EBITDA performance and to “Non-GAAP Metrics” for a discussion of our use of Segment EBITDA, a measure that is not defined under U.S. GAAP.
Our results on a segment basis for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 were as follows:
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Three Months Ended
March 31,
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FX Impact
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Constant Currency Increase/(Decrease)
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(Dollars in millions)
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2021
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2020
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Change $
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Change %
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Biologics
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Net revenue
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$
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543.7
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$
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250.0
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$
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10.2
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$
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283.5
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113
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%
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Segment EBITDA
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179.9
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51.9
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4.3
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123.7
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238
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%
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Softgel and Oral Technologies
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Net revenue
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243.7
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242.3
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7.4
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(6.0)
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(2)
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%
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Segment EBITDA
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59.6
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60.1
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1.3
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(1.8)
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(3)
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%
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Oral and Specialty Delivery
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Net revenue
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171.7
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181.4
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5.9
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(15.6)
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(9)
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%
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Segment EBITDA
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30.7
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56.2
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2.3
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(27.8)
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(49)
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%
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Clinical Supply Services
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Net revenue
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100.0
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88.9
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3.1
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8.0
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9
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%
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Segment EBITDA
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27.1
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24.6
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1.4
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1.1
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4
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%
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Inter-segment revenue elimination
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(5.8)
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(2.0)
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—
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(3.8)
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(190)
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%
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Unallocated Costs (1)
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122.6
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(63.9)
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(2.0)
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188.5
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295
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%
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Combined totals
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Net revenue
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$
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1,053.3
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$
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760.6
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$
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26.6
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$
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266.1
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35
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%
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EBITDA from operations
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$
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419.9
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$
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128.9
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$
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7.3
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$
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283.7
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220
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%
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(1) Unallocated costs include restructuring and special items, stock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
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Three Months Ended
March 31,
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(Dollars in millions)
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2021
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2020
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Impairment charges and gain (loss) on sale of assets
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$
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(5.3)
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$
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(0.6)
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Stock-based compensation
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(8.4)
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(8.6)
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Restructuring and other special items (a)
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(3.3)
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(8.9)
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Gain on sale of subsidiary (b)
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184.0
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—
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Other expense, net (c)
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(24.6)
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(36.7)
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Unallocated corporate costs, net
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(19.8)
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(9.1)
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Total unallocated costs
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$
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122.6
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$
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(63.9)
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(a) Restructuring and other special items during the three months ended March 31, 2021 include (i) transaction and integration costs associated with the acquisitions of Delphi, Acorda, and Skeletal, and (ii) restructuring costs associated with the closure of our Clinical Supply Services facility in Bolton, U.K. Restructuring and other special items during the three months ended March 31, 2020 include transaction and integration costs associated with our cell and gene therapy acquisitions, the disposal of a facility in Australia, and other restructuring initiatives across our network of sites.
(b) For the three months ended March 31, 2021, gain on sale of subsidiary is affiliated with divestiture of the Blow-Fill-Seal Business.
(c) Refer to Note 8, Other Expense, Net for details of financing charges and foreign currency translation adjustments recorded within other expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
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Three Months Ended
March 31,
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(Dollars in millions)
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2021
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2020
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Net earnings
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$
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231.8
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$
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20.9
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Depreciation and amortization
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75.9
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|
64.8
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Interest expense, net
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26.9
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|
34.4
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Income tax expense
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85.3
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8.8
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EBITDA from operations
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$
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419.9
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$
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128.9
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Biologics segment
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2021 vs. 2020
|
|
Year-Over-Year Change
|
Three Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
113
|
%
|
|
239
|
%
|
|
Impact of acquisitions
|
—
|
%
|
|
(1)
|
%
|
|
Constant currency change
|
113
|
%
|
|
238
|
%
|
|
Foreign exchange fluctuation
|
4
|
%
|
|
9
|
%
|
|
Total % change
|
117
|
%
|
|
247
|
%
|
Biologics net revenue increased by $283.5 million, or 113%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. Acquisitions did not impact net revenue growth the for the three months ended March 31, 2020. The increase was driven across all of our Biologics segment offerings, with robust end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $123.7 million, or 238%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. Segment EBITDA increased 239%, compared to the three months ended March 31, 2020, excluding the impact of acquisitions. The increase was driven across all of our Biologics segment offerings, with robust end-market demand for our global drug product, drug substance, cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Since March 31, 2020, we have acquired Skeletal and Delphi, which together decreased Segment EBITDA on an inorganic basis in our Biologics segment by 1% in the three months ended March 31, 2021 compared to the corresponding prior-year period.
Softgel and Oral Technologies segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Three Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
(2)
|
%
|
|
(3)
|
%
|
|
|
|
|
|
|
Constant currency change
|
(2)
|
%
|
|
(3)
|
%
|
|
Foreign currency translation impact on reporting
|
3
|
%
|
|
2
|
%
|
|
Total % change
|
1
|
%
|
|
(1)
|
%
|
Softgel and Oral Technologies net revenue decreased by $6 million, or 2%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. The decrease primarily relates to reduced end-market demand for prescription products within Europe, as well as lower demand in consumer health products, particularly in cough, cold, and over-the-counter pain relief products attributable to effects of the COVID-19 pandemic. The net revenue decrease is partially offset by strong development revenue growth.
Softgel and Oral Technologies Segment EBITDA decreased $1.8 million, or 3%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. The decrease, similar to that of net revenue, is primarily driven
by a decrease in demand in both the prescription and consumer health portfolio of products, offset in part by the margin generated from strong development revenue growth.
Oral and Specialty Delivery segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Three Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
(10)
|
%
|
|
(48)
|
%
|
|
Impact of acquisitions
|
1
|
%
|
|
(1)
|
%
|
|
|
|
|
|
|
Constant currency change
|
(9)
|
%
|
|
(49)
|
%
|
|
Foreign currency translation impact on reporting
|
4
|
%
|
|
4
|
%
|
|
Total % change
|
(5)
|
%
|
|
(45)
|
%
|
Oral and Specialty Delivery net revenue decreased by $15.6 million, or 9%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. Net revenue decreased 10%, compared to the three months ended March 31, 2020, excluding the impact of acquisitions. The decrease from prior-year period was primarily driven by the loss of volume following a voluntary recall of a previously launched product in our respiratory and ophthalmic platform and decreased demand for other non-Zydis orally delivered commercial products.
Oral and Specialty Delivery Segment EBITDA decreased by $27.8 million, or 49%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. Segment EBITDA decreased 48%, compared to the three months ended March 31, 2020, excluding the impact of acquisitions. The decrease from prior-year period was primarily driven by the loss of volume and voluntary recall impact of a previously launched product in our respiratory and ophthalmic platform, inclusive of charges totaling $15.0 million, associated with the recall.
We completed the Acorda acquisition in February 2021, which increased net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 1% and 1%, respectively, in the three months ended March 31, 2021, compared to the corresponding prior-year period.
Clinical Supply Services segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Three Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
9
|
%
|
|
4
|
%
|
|
|
|
|
|
|
Constant currency change
|
9
|
%
|
|
4
|
%
|
|
Foreign currency translation impact on reporting
|
3
|
%
|
|
6
|
%
|
|
Total % change
|
12
|
%
|
|
10
|
%
|
Clinical Supply Services net revenue increased by $8.0 million, or 9%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. The increase was driven by strong demand in our manufacturing and packaging and storage and distribution offerings in North America.
Clinical Supply Services Segment EBITDA increased by $1.1 million, or 4%, excluding the impact of foreign exchange, compared to the three months ended March 31, 2020. The increase was driven by strong demand in our manufacturing and packaging and storage and distribution offerings in North America, partially offset by an unfavorable sales mix in Europe.
Nine Months Ended March 31, 2021 Compared to the Nine Months Ended March 31, 2020
The below tables summarize several financial metrics we use to measure performance for the nine months ended March 31, 2021 and nine months ended March 31, 2020. Refer to the discussions below regarding performance and use of key financial metrics.
Results for the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
FX Impact
|
|
Constant Currency Increase/(Decrease)
|
|
(Dollars in millions)
|
2021
|
|
2020
|
|
|
|
Change $
|
|
Change %
|
|
Net revenue
|
$
|
2,809.8
|
|
|
$
|
2,146.7
|
|
|
$
|
54.2
|
|
|
$
|
608.9
|
|
|
28
|
%
|
|
Cost of sales
|
1,897.1
|
|
|
1,498.0
|
|
|
33.4
|
|
|
365.7
|
|
|
24
|
%
|
|
Gross margin
|
912.7
|
|
|
648.7
|
|
|
20.8
|
|
|
243.2
|
|
|
37
|
%
|
|
Selling, general, and administrative expenses
|
502.9
|
|
|
419.9
|
|
|
4.8
|
|
|
78.2
|
|
|
19
|
%
|
|
Impairment charges and (gain) loss on sale of assets
|
7.7
|
|
|
1.0
|
|
|
0.1
|
|
|
6.6
|
|
|
660
|
%
|
|
Restructuring and other costs
|
9.4
|
|
|
2.5
|
|
|
0.1
|
|
|
6.8
|
|
|
272
|
%
|
|
(Gain) loss on sale of subsidiary
|
(184.0)
|
|
|
1.1
|
|
|
—
|
|
|
(185.1)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
576.7
|
|
|
224.2
|
|
|
15.8
|
|
|
336.7
|
|
|
150
|
%
|
|
Interest expense, net
|
78.1
|
|
|
105.6
|
|
|
0.9
|
|
|
(28.4)
|
|
|
(27)
|
%
|
|
Other expense, net
|
5.1
|
|
|
37.2
|
|
|
5.1
|
|
|
(37.2)
|
|
|
*
|
|
Earnings before income taxes
|
493.5
|
|
|
81.4
|
|
|
9.8
|
|
|
402.3
|
|
|
494
|
%
|
|
Income tax expense
|
90.9
|
|
|
14.9
|
|
|
1.0
|
|
|
75.0
|
|
|
503
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
402.6
|
|
|
$
|
66.5
|
|
|
$
|
8.8
|
|
|
$
|
327.3
|
|
|
492
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Percentage not meaningful
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Nine Months Ended
March 31,
|
|
|
|
|
Net Revenue
|
|
|
|
Organic
|
24
|
%
|
|
|
|
Impact of acquisitions
|
5
|
%
|
|
|
|
Impact of divestitures
|
(1)
|
%
|
|
|
|
Constant currency change
|
28
|
%
|
|
|
|
Foreign currency translation impact on reporting
|
3
|
%
|
|
|
|
Total % change
|
31
|
%
|
|
|
Net revenue increased by $608.9 million, or 28%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020. Net revenue increased 5% as a result of acquisitions, which was partially offset by a 1% decrease in net revenue due to a facility divestiture. We acquired Skeletal in November 2020, and Delphi and the manufacturing and packaging assets of Acorda in February 2021, and we divested a facility in Australia in October 2019. Net revenue increased 24%
organically on a constant-currency basis, primarily related to robust demand across all our Biologics offerings, in particular demand for our drug product and drug substance offerings for COVID-19-related programs, offset in part due to the loss of volume and voluntary recall impact of a previously launched product in the respiratory and ophthalmic specialty platform in our Oral and Specialty Delivery segment and demand decreases attributable to the COVID-19 pandemic on Softgel and Oral Technologies' net revenue.
Gross Margin
Gross margin increased by $243.2 million, or 37%, compared to the nine months ended March 31, 2020, excluding the impact of foreign exchange, primarily as a result of the strong margin profile for all Biologics segment offerings, including demand across our drug product and drug substance offerings for COVID-19 related programs. Growth was offset in part by voluntary recall impacts from our respiratory and ophthalmic specialty platform in our Oral and Specialty Delivery segment and decreased demand for our prescription and consumer health products in our Softgel and Oral Technologies segment. On a constant-currency basis, gross margin, as a percentage of revenue, increased 220 basis points to 32.4% in the nine months ended March 31, 2021, compared to 30.2% in the corresponding prior-year period, primarily due to recent acquisitions.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $78.2 million, or 19%, compared to the nine months ended March 31, 2020, excluding the impact of foreign exchange, driven by additional selling, general and administrative expenses from acquired companies of $11.9 million, including $2.2 million of incremental depreciation and amortization expense, $3.9 million for employee-related costs and $3.6 million related to various transitional services. An additional $48.3 million of employee-related cost primarily incurred for wages and bonuses, was partially offset by $9.5 million in cost savings associated with health and welfare and $9.7 million in savings related to travel and entertainment expenses.
The year-over-year increase in selling, general, and administrative expenses was also due to a $28.9 million increase in information technology spend associated with headcount increases, additional cyber security initiatives, insurance premium increases, certain market research initiatives and COVID-19-related spend for personal protective equipment and test kits for our employees.
Restructuring and Other Costs
Restructuring and other costs of $9.4 million for the nine months ended March 31, 2021 increased by $6.9 million, compared to the nine months ended March 31, 2020. Restructuring charges vary period-to-period based on site consolidation efforts and other efforts to further streamline the business. In the three months ended December 31, 2020, we adopted a plan to reduce costs and optimize our infrastructure in Western Europe by closing our Clinical Supply Services facility in Bolton, U.K. For the nine months ended March 31, 2021, we recognized $4.9 million of restructuring charges in association with the Bolton facility closure.
Interest Expense, net
Interest expense, net of $78.1 million for the nine months ended March 31, 2021 decreased by $27.5 million, or 26%, compared to the nine months ended March 31, 2020, driven by savings from repayment of our formerly outstanding dollar-denominated term loans, euro-denominated term loans, the 2024 Notes, and the 2026 Notes, partially offset by interest expenses on our 2028 Notes, new tranche of dollar-denominated term loans and the 2029 Notes. The savings also includes $15.2 million of capitalized interest costs for the nine months ended March 31, 2021.
Other Expense, net
Other expense, net of $5.1 million for the nine months ended March 31, 2021 was primarily driven by a $11.0 million premium on early redemption of the 2026 Notes, a write-off of $4.4 million of previously capitalized financing charges related to our repaid term loans and our redeemed 2026 Notes, $1.8 million of financing charges related to our outstanding term loans and a net foreign currency translation loss of $6.1 million.
Other expense, net for the nine months ended March 31, 2020 of $37.2 million was primarily driven by a loss of $24.9 million related to the change in the fair value of the derivative liability arising from the dividend adjustment mechanism of our Series A Preferred Stock, a write-off of $6.0 million of previously capitalized financing charges related to our recently repaid euro-denominated term loans under our senior secured credit facilities and our redeemed 2024 Notes, and a $10.0 million premium on early redemption of the 2024 Notes. The loss was partially offset by a foreign currency gain of $1.7 million.
Income Tax Expense
Our provision for income taxes for the nine months ended March 31, 2021 was $90.9 million relative to earnings before income taxes of $493.5 million. Our provision for income taxes for the nine months ended March 31, 2020 was $14.9 million relative to earnings before income taxes of $81.4 million. The increased income tax provision for the current nine-month period over the prior-year period was largely the result of an increase in pretax income and a $57.4 million income tax charge on the divestiture of the Blow-Fill-Seal Business during the three months ended March 31, 2021. This increase was partially offset by a $22.2 million income tax benefit for U.S. foreign tax credits resulting from an amendment to a prior-year return recognized in the three months ended September 30, 2020 and certain equity compensation deductions. The provision for income taxes was also impacted by the geographic distribution of the Company's pretax income, the tax impact of permanent differences, restructuring, special items, and other discrete tax items that may have unique tax implications depending on the nature of the item.
Segment Review
The below charts depict the percentage of revenue for each of our four segments for the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020. Refer below for discussions regarding each segment's revenue and EBITDA performance.
Our results on a segment basis for the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
FX Impact
|
|
Constant Currency Increase/(Decrease)
|
|
(Dollars in millions)
|
2021
|
|
2020
|
|
|
|
Change $
|
|
Change %
|
|
Biologics
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,324.7
|
|
|
$
|
663.8
|
|
|
$
|
21.4
|
|
|
$
|
639.5
|
|
|
96
|
%
|
|
Segment EBITDA
|
421.9
|
|
|
150.7
|
|
|
9.4
|
|
|
261.8
|
|
|
174
|
%
|
|
Softgel and Oral Technologies
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
711.4
|
|
770.8
|
|
14.6
|
|
$
|
(74.0)
|
|
|
(10)
|
%
|
|
Segment EBITDA
|
143.0
|
|
171.0
|
|
3.1
|
|
$
|
(31.1)
|
|
|
(18)
|
%
|
|
Oral and Specialty Delivery
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
499.9
|
|
|
457.2
|
|
|
11.5
|
|
|
31.2
|
|
|
7
|
%
|
|
Segment EBITDA
|
96.3
|
|
|
117.0
|
|
|
4.3
|
|
|
(25.0)
|
|
|
(21)
|
%
|
|
Clinical Supply Services
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
286.2
|
|
|
261.4
|
|
|
6.7
|
|
|
18.1
|
|
|
7
|
%
|
|
Segment EBITDA
|
77.4
|
|
|
70.2
|
|
|
3.0
|
|
|
4.2
|
|
|
6
|
%
|
|
Inter-segment revenue elimination
|
(12.4)
|
|
|
(6.5)
|
|
|
—
|
|
|
(5.9)
|
|
|
(91)
|
%
|
|
Unallocated Costs (1)
|
49.0
|
|
|
(134.6)
|
|
|
(5.9)
|
|
|
189.5
|
|
|
141
|
%
|
|
Combined totals
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
2,809.8
|
|
|
$
|
2,146.7
|
|
|
$
|
54.2
|
|
|
$
|
608.9
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from operations
|
$
|
787.6
|
|
|
$
|
374.3
|
|
|
$
|
13.9
|
|
|
$
|
399.4
|
|
|
107
|
%
|
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain (loss) on sale of subsidiary, impairment charges, certain other corporate-directed costs, and other costs that are not allocated to the segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
(Dollars in millions)
|
2021
|
|
2020
|
|
Impairment charges and gain (loss) on sale of assets
|
$
|
(7.7)
|
|
|
$
|
(1.0)
|
|
|
Equity compensation
|
(38.5)
|
|
|
(35.5)
|
|
|
Restructuring and other special items (a)
|
(22.9)
|
|
|
(28.6)
|
|
|
Gain (loss) on sale of subsidiary (b)
|
184.0
|
|
|
(1.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net (c)
|
(5.1)
|
|
|
(37.2)
|
|
|
Non-allocated corporate costs, net
|
(60.8)
|
|
|
(31.2)
|
|
|
Total unallocated costs
|
$
|
49.0
|
|
|
$
|
(134.6)
|
|
(a) Restructuring and other special items during the nine months ended March 31, 2021 include (i) transaction costs for the sale of our Blow-Fill-Seal Business, (ii) transaction and integration costs associated with the acquisition of a new facility in Anagni, Italy and the Acorda, Masthercell Global Inc. (“MaSTherCell”), Delphi, and Skeletal acquisitions, (iii) restructuring costs associated with the closure of our Clinical Supply Services facility in Bolton, U.K. Restructuring and other special items during the nine months ended March 31, 2020 include transaction and integration costs associated with our cell and gene therapy acquisitions, the disposal of a facility in Australia, and other restructuring initiatives across our network of sites.
(b) For the nine months ended March 31, 2021, gain on sale of subsidiary is affiliated with the divestiture of our Blow-Fill-Seal Business. Loss on sale of subsidiary for the nine months ended March 31, 2020 is affiliated with the disposal of a facility in Australia.
(c) Refer to Note 8, Other expense, net for details of financing charges and foreign currency translation adjustments recorded within other expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
(Dollars in millions)
|
2021
|
|
2020
|
|
Net earnings
|
$
|
402.6
|
|
|
$
|
66.5
|
|
|
Depreciation and amortization
|
216.0
|
|
|
187.3
|
|
|
Interest expense, net
|
78.1
|
|
|
105.6
|
|
|
Income tax expense
|
90.9
|
|
|
14.9
|
|
|
|
|
|
|
|
EBITDA from operations
|
$
|
787.6
|
|
|
$
|
374.3
|
|
Biologics segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Nine Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
88
|
%
|
|
169
|
%
|
|
Impact of acquisitions
|
8
|
%
|
|
5
|
%
|
|
Constant currency change
|
96
|
%
|
|
174
|
%
|
|
Foreign exchange fluctuation
|
3
|
%
|
|
6
|
%
|
|
Total % change
|
99
|
%
|
|
180
|
%
|
|
|
|
|
|
Net revenue in our Biologics segment increased by $639.5 million, or 96%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020. Net revenue increased 88%, compared to the nine months ended March 31, 2020, excluding the impact of acquisitions. The increase was driven across all segment offerings with robust end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $261.8 million, or 174%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020. Segment EBITDA increased 169%, compared to the nine months ended March 31, 2020, excluding the impact of acquisitions. The increase was driven across all segment offerings with robust end-market demand for our global drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs.
Since December 30, 2019, we acquired a facility in Anagni, Italy, part of which operates within the Biologics segment, in addition to the MaSTherCell, Skeletal, and Delphi acquisitions, which together increased net revenue and Segment EBITDA on an inorganic basis in our Biologics segment by 8% and 5%, respectively, in the nine months ended March 31, 2021 compared to the corresponding prior-year period.
Softgel and Oral Technologies segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Nine Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
(8)
|
%
|
|
(18)
|
%
|
|
|
|
|
|
|
Impact of divestitures
|
(2)
|
%
|
|
—
|
%
|
|
Constant currency change
|
(10)
|
%
|
|
(18)
|
%
|
|
Foreign exchange fluctuation
|
2
|
%
|
|
2
|
%
|
|
Total % change
|
(8)
|
%
|
|
(16)
|
%
|
Softgel and Oral Technologies’ net revenue decreased $74 million, or 10%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020. Net revenue decreased 8%, compared to the nine months ended March 31, 2020, excluding the impact of divestitures. The decrease primarily relates to reduced end-market demand for prescription
products within North America and Europe, as well as lower demand in consumer health products, particularly in cough, cold, and over-the-counter pain relief products attributable to the effects of the COVID-19 pandemic. The net revenue decrease is partially offset by strong development revenue growth.
Softgel and Oral Technologies’ Segment EBITDA decreased by $31.1 million, or 18%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020. Divestitures did not impact Segment EBITDA for the nine months ended March 31, 2020. The decrease, similar to that of net revenue, is primarily driven by a decrease in demand in both the prescription and consumer health portfolio of products, offset in part by the margin generated from strong development revenue growth.
In October 2019, we divested a manufacturing facility in Australia in order to better streamline our global operations. The facility divestiture resulted in a decrease in net revenue of 2% and an increase in Segment EBITDA of less than 1%, in the nine months ended March 31, 2021 compared to the nine months ended March 31, 2020.
Oral and Specialty Delivery segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Nine Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
(3)
|
%
|
|
(35)
|
%
|
|
Impact of acquisitions
|
10
|
%
|
|
14
|
%
|
|
|
|
|
|
|
Constant currency change
|
7
|
%
|
|
(21)
|
%
|
|
Foreign exchange fluctuation
|
2
|
%
|
|
3
|
%
|
|
Total % change
|
9
|
%
|
|
(18)
|
%
|
Net revenue in our Oral and Specialty Delivery segment increased by $31.2 million, or 7%, compared to the nine months ended March 31, 2020, excluding the impact of foreign exchange. Net revenue decreased 3%, compared to the nine months ended March 31, 2020, excluding the impact of acquisitions. The loss of volume resulting from the voluntary recall of a previously-launched product in our respiratory and ophthalmic specialty platform and decreased demand for other non-Zydis orally delivered commercial products were partially offset by increased demand for the segment’s orally delivered Zydis commercial products and early-phase development programs.
Oral and Specialty Delivery’s Segment EBITDA decreased by $25.0 million, or 21%, compared to the nine months ended March 31, 2020, excluding the impact of foreign exchange. Segment EBITDA decreased 35% compared to the nine months ended March 31, 2020, excluding the impact of acquisitions. The decrease from prior-year period was primarily driven by the loss of volume and voluntary recall impact of a previously launched product in our respiratory and ophthalmic platform, inclusive of charges totaling $29 million, associated with the recall. Increased demand for the segment’s orally delivered Zydis commercial products and favorable manufacturing efficiencies within our respiratory and ophthalmic specialty platform partially offset the charges associated with this product recall.
Clinical Supply Services segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 vs. 2020
|
|
Year-Over-Year Change
|
Nine Months Ended
March 31,
|
|
|
Net Revenue
|
|
Segment EBITDA
|
|
Organic
|
7
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Constant currency change
|
7
|
%
|
|
6
|
%
|
|
Foreign exchange fluctuation
|
2
|
%
|
|
4
|
%
|
|
Total % change
|
9
|
%
|
|
10
|
%
|
Clinical Supply Services’ net revenue increased by $18.1 million, or 7%, compared to the nine months ended March 31, 2020, excluding the impact of foreign exchange. The increase was driven by strong demand in our manufacturing and packaging and storage and distribution offerings in North America.
Clinical Supply Services’ Segment EBITDA increased by $4.2 million, or 6%, excluding the impact of foreign exchange, compared to the nine months ended March 31, 2020, primarily due to strong global demand in our manufacturing and packaging and storage and distribution businesses, partially offset by an unfavorable sales mix in Europe.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have been cash flows generated from operations and occasional capital market activities. The principal uses of cash are to fund operating and capital expenditures, business or asset acquisitions, interest payments on debt, the payment of deferred purchase consideration from the Catalent Indiana, LLC acquisition, the payment of the quarterly dividend on the Series A Preferred Stock, and any mandatory or discretionary principal payment on our debt. At the current stated value of the Series A Preferred Stock outstanding as of March 31, 2021, the aggregate amount of each regular quarterly dividend, if paid in cash, is approximately $4.8 million. As of March 31, 2021, Catalent Pharma Solutions, Inc., the our principal operating subsidiary (“Operating Company”), following the February 2021 execution of Amendment No. 5 to the amended and restated credit agreement, dated as of May 20, 2014, governing its senior secured credit facilities (as amended, the “Credit Agreement”), had available a $725.0 million revolving credit facility that matures in May 2024, the capacity of which was reduced by $6.3 million in letters of credit outstanding as of March 31, 2021. The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as swing-line borrowings.
We believe that our cash on hand, cash from operations, and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next twelve months, including our quarterly regular dividend on the Series A Preferred Stock, if paid in cash, as well as the amounts expected to become due with respect to our pending capital projects. We have no significant maturity under any of our bank or note debt until the July 2027 maturity of our U.S. dollar-denominated 5.0% senior notes due 2027 (the "2027 Notes”). As of March 31, 2021, we had only one remaining payment of $50.0 million, due in October 2021, on the deferred purchase consideration for the acquisition of Catalent Indiana, LLC.
Cash Flows
The following table summarizes our consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31,
|
|
|
|
(Dollars in millions)
|
2021
|
|
2020
|
|
$ Change
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
$
|
298.7
|
|
|
$
|
267.6
|
|
|
$
|
31.1
|
|
|
Investing activities
|
$
|
(435.9)
|
|
|
$
|
(664.8)
|
|
|
$
|
228.9
|
|
|
Financing activities
|
$
|
159.3
|
|
|
$
|
670.7
|
|
|
$
|
(511.4)
|
|
Operating Activities
For the nine months ended March 31, 2021, cash provided by operating activities was $298.7 million, compared to $267.6 million for the corresponding prior-year period. Cash flow from operating activities for the nine months ended March 31, 2021 increased primarily due to an increase in operating earnings, which increased from $224.2 million in the corresponding prior-year period to $576.7 million for the nine months ended March 31, 2021, which was partially offset by an unfavorable impact from inventory due to an increase of materials on-hand to assure adequate supply during the pandemic and an increase in in-process inventory.
Investing Activities
For the nine months ended March 31, 2021, cash used in investing activities was $435.9 million, compared to $664.8 million for the nine months ended March 31, 2020. The decrease in cash used in investing activities was primarily driven by a $266.0 million increase in proceeds from sale of subsidiary and a $232.6 million decrease in cash used for business acquisition activities, partially offset by an increase in cash used in the acquisition of property, plant, and equipment, which totaled $497.1 million in the nine months ended March 31, 2021 compared to $303.5 million for the nine months ended March 31, 2020.
Financing Activities
For the nine months ended March 31, 2021, cash provided by financing activities was $159.3 million, compared to $670.7 million for the nine months ended March 31, 2020. The decrease in cash provided by financing activities was primarily driven by a $412.4 million decrease in net proceeds from equity offerings from the prior year period and a $188.4 million decrease in net cash received from the issuance of new long-term debt compared to the prior year period.
Guarantees and Security
The Senior Notes
All obligations under Operating Company's 2027 Notes, 2028 Notes, and 2029 Notes (collectively, the "Senior Notes") are general, unsecured, and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all they 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 Holdings LLC or Catalent, Inc.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s (and the 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 the Company’s subordinated indebtedness; and change the Company’s lines of business.
The Credit Agreement also contains change-of-control provisions and certain customary affirmative covenants and events of default. The revolving credit facility requires compliance with a net leverage covenant when there is a 30% or more draw outstanding at a period end. As of March 31, 2021, we were in compliance with all material covenants under the Credit Agreement.
Subject to certain exceptions, the Credit Agreement permits us and our restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of our non-U.S. subsidiaries or our Puerto Rico subsidiary is a guarantor of the loans.
Under the Credit Agreement, our ability to engage in certain activities such as incurring certain additional indebtedness, making certain investments, and paying certain dividends is tied to ratios based on Adjusted EBITDA (which is defined as “Consolidated EBITDA” in the Credit Agreement). Adjusted EBITDA is based on the definitions in the Credit Agreement, is not defined under U.S. GAAP, and is subject to important limitations.
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the “adjusted issue price” (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, or in related adverse tax consequences to us.
The Senior Notes
The several indentures governing each series of the Senior Notes (collectively, the “Indentures”) contain certain covenants that, among other things, limit our ability to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of Operating Company or certain of its subsidiaries. Upon an event of default, either the holders of at least 30% in principal amount of each of the then-outstanding series of Senior Notes, or the applicable Trustee under the Indentures, may declare the applicable Senior Notes immediately due and payable; or in certain circumstances, the applicable Senior Notes will become automatically immediately due and payable. As of March 31, 2021, Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As of March 31, 2021 and June 30, 2020, our non-U.S. subsidiaries held cash and cash equivalents of $308.8 million and $228.0 million, respectively, out of the total consolidated cash and cash equivalents of $988.1 million and $953.2 million, respectively. These balances are dispersed across many locations around the world.
Interest Rate Risk Management
A portion of the debt used to finance our operations is exposed to interest-rate fluctuations. We may use various hedging strategies and derivative financial instruments to create an appropriate mix of fixed- and floating-rate assets and liabilities. In February 2021, we replaced one interest-rate swap agreement with Bank of America N.A. with another, and each acts or acted as a hedge against the economic effect of a portion of the variable-interest obligation associated with our U.S dollar-denominated term loans under our senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on future interest expense. The applicable rate for the U.S. dollar-denominated term loan under the Credit Agreement was LIBOR (subject to a floor of 0.50%) plus 2.00% as of March 31, 2021; however, as a result of the interest-rate swap agreement, the floating portion of the applicable rate on $500.0 million of the term loan was effectively fixed at 0.9985% as of March 31, 2021.
Currency Risk Management
We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our investments in our foreign operations in Europe. While we do not actively hedge against changes in foreign currency, we have mitigated the exposure of our investments in our European operations by denominating a portion of our debt in euros. At March 31, 2021, we had $974.0 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in foreign operations. Refer to Note 10 to our Consolidated Financial Statements for further discussion of net investment hedge activity in the period.
From time to time, we may use forward foreign currency exchange contracts to manage our exposure to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs. In addition, we may use such contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use any forward foreign currency exchange contracts. We expect to continue to evaluate hedging opportunities for foreign currency in the future.
Contractual Obligations
The contractual obligations of the Company are set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Fiscal 2020 10-K. Other than the contractual obligations noted below, there has been no material change to the disclosure presented in our Fiscal 2020 10-K. Refer to Note 6, Long-Term Obligations and Short-Term Borrowings to our Consolidated Financial Statements for a further discussion regarding our long-term obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Total
|
Fiscal 2021
|
Fiscal 2022-Fiscal 2023
|
Fiscal 2024-Fiscal 2025
|
Thereafter
|
|
Venture capital investment commitments (1)
|
$
|
10.7
|
|
$
|
10.7
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
(1) The timing of the remaining capital commitment payments to venture capital funds is subject to the procedures of the limited liability partnerships and limited liability companies; the above table reflects the earliest possible date the payment can be required under the relevant agreements.
Off-Balance Sheet Arrangements
Other than short-term operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangement as of March 31, 2021.