Company Quick10K Filing
Catalent
Price50.64 EPS1
Shares146 P/E49
MCap7,405 P/FCF39
Net Debt2,615 EBIT185
TEV10,021 TEV/EBIT54
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-05
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8-K 2020-06-11
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8-K 2018-02-05
8-K 2018-01-09

CTLT 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 catalent-20200331xex311.htm
EX-31.2 catalent-20200331xex312.htm
EX-32.1 catalent-20200331xex321.htm
EX-32.2 catalent-20200331xex322.htm

Catalent Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
10.07.95.83.81.7-0.42014201620182020
Assets, Equity
0.80.60.40.30.1-0.12014201620182020
Rev, G Profit, Net Income
1.30.80.3-0.3-0.8-1.32014201620182020
Ops, Inv, Fin

ctlt-20200331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________
FORM 10-Q
______________________________ 
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-36587
(Commission File Number)
 _____________________________
Catalent, Inc.
(Exact name of registrant as specified in its charter)
_____________________________ 
Delaware 20-8737688
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
14 Schoolhouse Road,Somerset,NJ 08873
(Address of principal executive offices) (Zip code)
(732) 537-6200
Registrant's telephone number, including area code
______________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).       Yes ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨ Yes     No 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbols(s)Name of each exchange on which registered
Common StockCTLTNew York Stock Exchange

On May 1, 2020, there were 154,897,515 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.



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CATALENT, INC. and Subsidiaries

INDEX TO FORM 10-Q
For the Three and Nine Months Ended March 31, 2020
 
ItemPage
Part I.
Item 1.
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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Special Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.
These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statement is subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements.
Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include, but are not limited to, those described under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “Fiscal 2019 10-K”) and the following:
Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic.
We participate in a highly competitive market, and increased competition may adversely affect our business.
The demand for our offerings depends in part on our customers’ research and development and the clinical and market success of their products. Our business, financial condition, and results of operations may be harmed if our customers spend less on, or are less successful in, these activities. In addition, customer spending may be affected by, among other things, the COVID-19 pandemic or recessionary economic conditions caused in whole or in part by the pandemic.
We are subject to product and other liability risks that could exceed our anticipated costs or adversely affect our results of operations, financial condition, liquidity, and cash flows.
Failure to comply with existing and future regulatory requirements could adversely affect our results of operations and financial condition or result in claims from customers.
Failure to provide quality offerings to our customers could have an adverse effect on our business and subject us to regulatory actions or costly litigation.
The services and offerings we provide are highly exacting and complex, and, if we encounter problems providing the services or support required, our business could suffer.
Our global operations are subject to economic, political, and regulatory risks, including the risks of changing regulatory standards or changing interpretations of existing standards, that could affect the profitability of our operations or require costly changes to our procedures. In addition, changes to our procedures, or additional procedures, implemented to comply with public health orders or best practice guidelines as a result of the COVID-19 pandemic may increase our costs or reduce our productivity and thereby affects our business, financial condition, or results of operations.
The exit of the United Kingdom (the “U.K.”) from the European Union, particularly after the end of the current transitional period, could have future adverse effects on our operations, revenues, and costs, and therefore our profitability.
If we do not enhance our existing or introduce new technology or service offerings in a timely manner, our offerings may become obsolete over time, customers may not buy our offerings, and our revenue and profitability may decline.
We and our customers depend on patents, copyrights, trademarks, know-how, trade secrets, and other forms of intellectual property protections, but these protections may not be adequate.
Our offerings or our customers’ products may infringe on the intellectual property rights of third parties.
Our future results of operations are subject to fluctuations in the costs, availability, and suitability of the components of the products we manufacture, including active pharmaceutical ingredients, excipients, purchased components, and raw materials. In addition, the COVID-19 pandemic may interfere with the
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operations of certain of our direct or indirect suppliers or with international trade for these supplies, which may either raise our costs or reduce the productivity or slow the timing of our operations.
Changes in market access or healthcare reimbursement for our customers’ products in the United States (“U.S.”) or internationally, including possible changes to the U.S. Affordable Care Act, could adversely affect our results of operations and financial condition by affecting demand for our offerings or the financial health of our customers.
As a global enterprise, fluctuations in the exchange rate of the U.S. dollar, our reporting currency, against other currencies could have a material adverse effect on our financial performance and results of operations.
Tax legislative or regulatory initiatives, new interpretations or developments concerning existing tax laws, or challenges to our tax positions could adversely affect our results of operations and financial condition.
Our ability to use our net operating loss carryforwards, ex-U.S. tax credit carryforwards, and certain other tax attributes may be limited.
Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net U.S. deferred tax assets.
We are dependent on key personnel whose continued employment and engagement at current levels cannot be assured.
We use advanced information and communication systems to run our operations, compile and analyze financial and operational data, and communicate among our employees, customers, and counter-parties, and the risks generally associated with information and communications systems could adversely affect our results of operations. We are continuously working to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cyber-security risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises of data security.
We engage from time to time in acquisitions and other transactions that may complement or expand our business or divest of non-strategic businesses or assets. We may not be able to complete such transactions, and such transactions, if executed, pose significant risks, including risks relating to our ability to successfully and efficiently integrate acquisitions or execute on dispositions and realize anticipated benefits therefrom. The failure to execute or realize the full benefits from any such transaction could have a negative effect on our operations.
Gene and cell therapies are relatively new and still-developing modes of treatment, dependent on cutting-edge technologies, and our customers’ gene or cell therapies may be perceived as unsafe or may result in unforeseen adverse events. Negative public opinion, continuing research, or increased regulatory scrutiny of gene or cell therapies and their financial cost may damage public perception of the safety, utility, or efficacy of gene or cell therapies and harm our customers’ ability to conduct their business or obtain regulatory approvals for their gene or cell therapy products, and thereby have an indirect, adverse effect on our gene or cell therapy offerings.
We are subject to environmental, health, and safety laws and regulations, which could increase our costs and restrict our operations in the future.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
Certain of our pension plans are underfunded, and additional cash contributions we may make to increase the funding level will reduce the cash available for our business, such as the payment of our interest expense.
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry, expose us to interest-rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness. These risks may be increased in a recessionary environment, particularly as sources of capital may become less available or more expensive.
Despite our high indebtedness level, we and our subsidiaries are still capable of incurring significant additional debt, which could further exacerbate the risks associated with our substantial indebtedness.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
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Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability timely to pay our substantial indebtedness.
We are currently using and may in the future use derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable-rate indebtedness or changes in currency exchange rates, and any such instrument may expose us to risks related to counterparty credit worthiness or non-performance of these instruments.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We use our website (www.catalent.com), our corporate Facebook page (https://www.facebook.com/CatalentPharmaSolutions), and our corporate Twitter account (@catalentpharma) as channels for the distribution of information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission (“SEC”) filings, and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.
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PART I. FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

Catalent, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited; dollars in millions, except per share data)

Three Months Ended  
March 31,
Nine Months Ended  
March 31,
2020201920202019
Net revenue$760.6  $617.5  $2,146.7  $1,792.3  
Cost of sales521.8  418.8  1,498.0  1,243.7  
Gross margin238.8  198.7  648.7  548.6  
Selling, general, and administrative expenses136.1  129.9  419.9  368.6  
Impairment charges and (gain)/loss on sale of assets0.6  (0.1) 2.1  2.7  
Restructuring and other1.3  3.1  2.5  12.9  
Operating earnings100.8  65.8  224.2  164.4  
Interest expense, net34.4  26.4  105.6  80.0  
Other (income)/expense, net36.7  (3.2) 37.2  3.9  
Earnings from operations before income taxes 29.7  42.6  81.4  80.5  
Income tax expense8.8  10.9  14.9  14.2  
Net earnings20.9  31.7  66.5  66.3  
Less: Net earnings attributable to preferred shareholders(9.1)   (27.8)   
Net earnings attributable to common shareholders$11.8  $31.7  $38.7  $66.3  
Earnings per share:
Basic
Net earnings$0.08  $0.22  $0.26  $0.46  
Diluted
Net earnings$0.08  $0.22  $0.26  $0.46  
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Catalent, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)
(Unaudited; dollars in millions)

Three Months Ended  
March 31,
Nine Months Ended  
March 31,
2020201920202019
Net earnings$20.9  $31.7  $66.5  $66.3  
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments(43.1) 21.5  (42.8) (4.9) 
Pension and other post-retirement adjustments0.1  0.4  3.1  1.4  
Other comprehensive income/(loss), net of tax(43.0) 21.9  (39.7) (3.5) 
Comprehensive income/(loss)$(22.1) $53.6  $26.8  $62.8  
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Catalent, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited; in millions, except share and per share data)
 
March 31,
2020
June 30,
2019
ASSETS
Current assets:
Cash and cash equivalents $608.4  $345.4  
Trade receivables, net 698.7  693.1  
Inventories297.2  257.2  
Prepaid expenses and other 141.8  100.1  
Total current assets 1,746.1  1,395.8  
Property, plant, and equipment, net 1,769.5  1,536.7  
Other assets:
Goodwill2,449.3  2,220.9  
Other intangibles, net907.3  930.8  
Deferred income taxes45.1  38.6  
Other162.3  61.2  
Total assets $7,079.6  $6,184.0  
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations and other short-term borrowings $271.8  $76.5  
Accounts payable 276.2  255.8  
Other accrued liabilities 369.1  338.4  
Total current liabilities 917.1  670.7  
Long-term obligations, less current portion 2,926.9  2,882.8  
Pension liability137.6  143.6  
Deferred income taxes95.6  74.4  
Other liabilities208.1  124.3  
Commitment and contingencies (see Note 16)    
Total liabilities4,285.3  3,895.8  
Redeemable preferred stock, $0.01 par value; 1.0 million shares authorized on March 31, 2020 and June 30, 2019; 650,000 shares issued and outstanding on March 31, 2020 and June 30, 2019
606.6  606.6  
Shareholders' equity:
Common stock, $0.01 par value; 1.0 billion shares authorized on March 31, 2020 and June 30, 2019; 154.9 million and 145.7 million issued and outstanding on March 31, 2020 and June 30, 2019, respectively1.5  1.5  
Preferred stock, $0.01 par value; 99 million authorized on March 31, 2020 and June 30, 2019; 0 issued and outstanding on March 31, 2020 and June 30, 2019    
Additional paid in capital3,261.0  2,757.4  
Accumulated deficit(681.2) (723.4) 
Accumulated other comprehensive income/(loss)(393.6) (353.9) 
Total shareholders' equity2,187.7  1,681.6  
Total liabilities, redeemable preferred stock, and shareholders' equity$7,079.6  $6,184.0  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)
 
Three Months Ended March 31, 2020
Columns may not foot due to roundingShares of Common Stock
Common
Stock
Additional
Paid in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Shareholders'
Equity
Balance at December 31, 2019146,359.5  $1.5  $2,759.2  $(694.0) $(350.6) $1,716.1  
Equity offering, sale of common stock 8,445.9  0.1  494.1  494.2  
Share issuances related to stock-based
     compensation
62.4    
Stock-based compensation8.6  8.6  
Cash paid, in lieu of equity, for tax
     withholding
(0.9) (0.9) 
Preferred dividend(8.1) (8.1) 
Net earnings20.9  20.9  
Other comprehensive loss, net of tax(43.0) (43.0) 
Balance at March 31, 2020154,867.8  $1.5  $3,261.0  $(681.2) $(393.6) $2,187.7  

Three Months Ended March 31, 2019
Shares of Common StockCommon StockAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Shareholders' Equity
Balance at December 31, 2018145,622.9  $1.5  $2,735.1  $(822.4) $(351.2) $1,563.0  
Equity offering, sale of common stock(0.2) (0.2) 
Share issuances related to stock-based
     compensation
83.9    
Stock-based compensation6.6  6.6  
Cash paid, in lieu of equity, for tax
withholding
(2.3) (2.3) 
Net earnings31.7  31.7  
Other comprehensive income, net of tax21.9  21.9  
Balance at March 31, 2019145,706.8  $1.5  $2,739.2  $(790.7) $(329.3) $1,620.7  

 

















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Catalent, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited; dollars in millions, except share data in thousands)

Nine Months ended March 31, 2020
Columns may not foot due to roundingShares of Common StockCommon StockAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive Income/(Loss)Total Shareholders' Equity
Balance at June 30, 2019145,738.3  $1.5  $2,757.4  $(723.4) $(353.9) $1,681.6  
Equity offering, sale of common stock8,445.9  0.1  494.1  494.2  
Share issuances related to stock-based
     compensation
683.6    
Stock-based compensation35.5  35.5  
Cash paid, in lieu of equity, for tax
withholding
(25.3) (25.3) 
Non-qualified stock(0.7) (0.7) 
Preferred dividend(24.3) (24.3) 
Net earnings66.5  66.5  
Other comprehensive loss, net of tax(39.7) (39.7) 
Balance at March 31, 2020154,867.8  $1.5  $3,261.0  $(681.2) $(393.6) $2,187.7  

Nine Months ended March 31, 2019
Shares of Common StockCommon StockAdditional Paid in CapitalAccumulated DeficitAccumulated Other Comprehensive LossTotal Shareholders' Equity
Balance at June 30, 2018133,423.6  $1.3  $2,283.3  $(872.1) $(325.8) $1,086.7  
Cumulative effect of change in accounting
     for ASC 606, net of tax
15.1  15.1  
Equity offering, sale of common stock11,431.4  0.1  445.2  445.3  
Share issuances related to stock-based
     compensation
851.8  0.1  (0.1)   
Stock-based compensation24.1  24.1  
Cash paid, in lieu of equity, for tax
withholding
(13.3) (13.3) 
Net earnings66.3  66.3  
Other comprehensive loss, net of tax(3.5) (3.5) 
Balance at March 31, 2019145,706.8  $1.5  $2,739.2  $(790.7) $(329.3) $1,620.7  
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Catalent, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited; dollars in millions)

Nine Months Ended 
March 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings$66.5  $66.3  
Adjustments to reconcile earnings from operations to net cash from operations:
Depreciation and amortization187.3  173.9  
Non-cash foreign currency transaction loss, net2.5  (1.7) 
Amortization and write-off of debt financing costs
10.7  7.1  
Asset impairments charges and /loss on sale of assets
2.1  2.7  
Call premium on debt redemption
10.0    
Loss on derivative instrument24.9    
Equity compensation
35.5  24.1  
Benefit for deferred income taxes5.4  (0.7) 
Provision for bad debts and inventory11.4  10.6  
Change in operating assets and liabilities:
Decrease/(increase) in trade receivables(15.5) (26.6) 
Decrease/(increase) in inventories(54.7) (43.1) 
Increase in accounts payable29.9  5.9  
Other assets/accrued liabilities, net—current and non-current
(48.4) (58.7) 
Net cash provided by operating activities267.6  159.8  
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, equipment, and other productive assets(303.5) (129.3) 
Proceeds from sale of subsidiaries20.8  0.4  
Payment for acquisitions, net of cash acquired(379.7) (127.5) 
Payment made for investments(2.4) (1.3) 
Net cash (used in) investing activities(664.8) (257.7) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in other borrowings(45.2) (6.5) 
Proceeds from borrowing, net1,109.1    
Payments related to long-term obligations(808.9) (508.0) 
Financing fees paid
(25.1)   
Dividends paid(28.1)   
Proceeds from sale of common stock, net494.2  445.3  
Cash paid, in lieu of equity, for tax-withholding obligations(25.3) (13.3) 
Net cash (used in)/provided by financing activities670.7  (82.5) 
Effect of foreign currency exchange on cash(10.5) (1.9) 
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS263.0  (182.3) 
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD345.4  410.2  
CASH AND EQUIVALENTS AT END OF PERIOD$608.4  $227.9  
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid$88.7  $74.6  
Income taxes paid, net$38.9  $35.4  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. (Catalent or the Company) directly and wholly owns PTS Intermediate Holdings LLC (Intermediate Holdings). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. (Operating Company). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (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 nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending June 30, 2020. The consolidated balance sheet at June 30, 2019 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, 2019 filed with the Securities and Exchange Commission (the SEC).
In the first quarter of fiscal 2020, 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 changed the components of three of its four operating segments:
Softgel and Oral Technologies, which includes formulation, development, and clinical and commercial manufacturing of soft capsules, or “softgels”, as well as large-scale manufacturing of oral solid dose forms, for pharmaceutical and consumer health markets, and supporting ancillary services; and
Biologics, which encompasses biologic cell-line, viral vector gene therapy, and cell therapy development and manufacturing; formulation, development, and manufacturing for parenteral dose forms, including prefilled syringes, vials, and cartridges; and analytical development and testing services for large molecules; and
Oral and Specialty Delivery, which includes formulation, development, and small-to-medium scale manufacturing for most types of oral solid dose forms, including Zydis orally dissolving tablets; formulation, development, and manufacture of blow-fill-seal unit doses, metered dose inhalers, and nasal products; and analytical development and testing capabilities for small molecules.
Each of these three segments, along with the Company's fourth segment, Clinical Supply Services, which remains unchanged, reports through a separate management team and ultimately reports to the Company's Chief Executive Officer, who is designated as the Chief Operating Decision Maker (“CODM”) for segment reporting purposes. The Company's operating segments are the same as its reporting segments. All prior-period comparative segment information has been restated to reflect the current reportable segments in accordance with Accounting Standards Codification ("ASC") 280, Segment Reporting, promulgated by the Financial Accounting Standards Board (the “FASB”).
Reclassification
Certain prior-period amounts were reclassified to conform to the current period presentation. Contract assets previously presented in trade receivables, net are now presented in prepaid expenses and other, which amounts are further detailed in Note 18, Supplemental Balance Sheet Information.
Foreign Currency Translation
The financial statements of the Company’s operations are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of operations outside the U.S. into U.S. dollars are accumulated as a component of other comprehensive income/(loss) utilizing period-end exchange rates. Since July 1, 2018, the Company has accounted for its Argentine operations as highly inflationary.
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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 $0.6 million and $1.8 million for the three and nine months ended March 31, 2020, respectively, and $0.9 million and $2.4 million for the three and nine months ended March 31, 2019, 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 $15.8 million and $44.3 million for the three and nine months ended March 31, 2020, respectively, and $11.8 million and $37.4 million for the three and nine months ended March 31, 2019, respectively.
Recent Financial Accounting Standards
Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (ASU”) 2016-02, Leases (Topic 842), which supersedes 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 became effective for public reporting entities in annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. The guidance requires adoption of the new standard using the modified retrospective approach. The Company adopted the guidance on July 1, 2019 and elected the transition method that allows for the application of the standard at the adoption date rather than at the beginning of the earliest comparative period presented in the financial statements. The Company also elected the package of practical expedients; as a result, it did not reassess: (i) whether any expired or existing contract is or contains a lease, (ii) whether any expired or existing lease requires capitalization under the new guidance, and (iii) the initial direct cost for any existing lease. The Company also elected (x) not to reassess lease terms using hindsight and (y) to combine lease and non-lease components within a single lease agreement. Upon adoption, the Company recognized $46 million of lease liabilities and a corresponding amount for right-of-use assets on its consolidated balance sheet. The adoption of the guidance did not have any effect on the Company’s consolidated statements of operations or cash flows. Refer to Note 15, Leases for further discussion of the Company's lease accounting policy.
New Accounting Standards Not Adopted as of March 31, 2020
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for the discontinuation of a reference rate such as LIBOR, formerly known as the London Interbank Offered Rate, because of reference rate reform. The expedients and exceptions provided by the guidance do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the incremental approach for intraperiod allocation, deferred tax recognition requirement for changes in equity method investments and foreign subsidiaries, and methodology for calculating income taxes in an interim period. The guidance also simplifies certain aspects of the accounting for franchise taxes, the accounting for step-up in the tax basis of goodwill, and accounting for the change in the enacted change in tax laws or rates. The ASU will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years and allows for either retrospective or prospective application. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirement for Fair Value Measurement, which changes the disclosure requirements on fair value measurements in Topic 820. The guidance eliminates certain disclosure requirements that are no longer considered cost
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beneficial and adds new disclosure requirement for Level 3 fair value measurements. The ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduces a new accounting model known as Credit Expected Credit Losses (CECL). CECL requires earlier recognition of credit losses on financial assets, 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 financial assets at the time they are 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 apply to receivables arising from revenue transactions such as contract assets and accounts receivables. The ASU will be effective for fiscal years beginning after December 15, 2019. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party.
The company generally expenses sales commissions as incurred because either the amortization period is one year or less, or the balance with an amortization period greater than one year is not material.
The following tables allocate revenue, for the three and nine months ended March 31, 2020 and March 31, 2019, by type of activity and reporting segment (in millions):
Three Months Ended March 31, 2020Softgel & Oral TechnologiesBiologicsOral & Specialty DeliveryClinical Supply ServicesTotal
Manufacturing & commercial product supply$217.6  $85.2  $127.2  $