Catalent Inc.
11/05/2024 | Press release | Distributed by Public on 11/05/2024 15:02
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
ctlt-20240930
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
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, | New Jersey | 08873 |
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(Address of principal executive offices)_______
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(Zip code) |
(732) 537-6200
Registrant's telephone number, including area code
____________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, $0.01 par value per share
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CTLT
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New York Stock Exchange
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____________________________________
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.
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. ¨
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Large accelerated filer
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☒
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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¨
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Emerging growth company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ☒ No
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On October 28, 2024, there were 181,511,586 shares of the Registrant's common stock, par value $0.01 per share, issued and outstanding.
Table of Contents
CATALENT, INC.
Index to Form 10-Q
For the Three Months Ended September 30, 2024
| Item | Page | |
| Part I. |
Financial Information
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| Item 1. |
Financial Statements (unaudited)
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7
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Consolidated Statements of Operations for the Three Months Ended September 30, 2024 and September 30, 2023
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7
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Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2024 and September 30, 2023
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8
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Consolidated Balance Sheets as of September 30, 2024 and June 30, 2024
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9
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Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended September 30, 2024 and September 30, 2023
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10
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Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2024 and September 30, 2023
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11
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Notes to Unaudited Consolidated Financial Statements
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12
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations
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28
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| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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38
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| Item 4. |
Controls and Procedures
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39
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| Part II. |
Other Information
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40
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| Item 1. |
Legal Proceedings
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40
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| Item 1A. |
Risk Factors
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40
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
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40
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| Item 3. |
Defaults Upon Senior Securities
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40
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| Item 4. |
Mine Safety Disclosures
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40
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| Item 5. |
Other Information
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40
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| Item 6. |
Exhibits
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41
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Signatures
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42
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Special Note Regarding Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q of Catalent, Inc. ("Catalent" or the "Company") contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "approximately," "predicts," "intends," "plans," "estimates," "anticipates," "future," "forward," "sustain," 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 summarized below, in addition to those described more fully (i) in Part II, "Item 1A. Risk Factors" and elsewhere in this report, (ii) from time to time in reports that we have filed or in the future may file with the Securities and Exchange Commission (the "SEC"), and (iii) under the section entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2024 (the "Fiscal 2024 10-K").
Risks Relating to Pending Merger with Novo Holdings
• We may not complete the pending merger with Novo Holdings A/S ("Novo Holdings") within the timeframe anticipated, or at all, which could have a material adverse effect on our business, financial condition or results of operations, as well as negatively impact our share price.
Risks Relating to Our Business and the Industry in Which We Operate
•Actions of activist shareholders could impact the pursuit of our business strategies and adversely affect our results of operations, financial condition, or share price.
•We anticipate being subject to increasing focus by our investors, regulators, customers, and other stakeholders on environmental, social, and governance ("ESG") matters.
•We are a part of the highly regulated healthcare industry, subject to stringent regulatory standards and other applicable laws and regulations, which can change unexpectedly or be the subject of unexpected changes in interpretation or enforcement, any of which may adversely impact our business.
•Any failure to implement fully, monitor, and continuously improve our quality management strategy could lead to quality or safety issues and expose us to significant costs, potential liability, and adverse publicity.
•We have experienced, and may continue to experience, productivity issues and higher-than-expected costs at certain of our facilities, which have resulted in, and may continue to result in, material and adverse impacts on our financial condition and results of operations.
•The declining demand for various COVID-19 vaccines and treatments from both patients and governments around the world has affected and may continue to affect sales of the COVID-19 products we manufacture and our financial condition.
•The demand for our offerings depends in part on our customers' research and development and the clinical and market success of their products.
•Our 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, and other supplies or equipment we need to run our business.
•Our goodwill has been subject to impairment and may be subject to further impairment in the future, which could have a material adverse effect on our results of operations, financial condition, or future operating results.
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•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
•We may acquire businesses and offerings that complement or expand our business or divest non-strategic businesses or assets. We may not be able to complete desired 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 and profitability.
•We may become subject to litigation, other proceedings, and government investigations relating to us or our operations, and the ultimate outcome of any such matter may have an adverse impact on our business, prospects, financial condition, and results of operations.
•Our global operations are subject to economic and political risks, including risks resulting from continuing inflation, disruptions to global supply chains, destabilization of a regional or national banking system, or from the Ukrainian-Russian war or the effect of the evolving nature of the recent war in Gaza between Israel and Hamas and conflict in the Middle East, which could affect the profitability of our operations or require costly changes to our procedures.
•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 counterparties, and the risks generally associated with information and communications systems could adversely affect our results of operations. We continuously work to install new, and upgrade existing, systems and provide employee awareness training around phishing, malware, and other cybersecurity risks to enhance the protections available to us, but such protections may be inadequate to address malicious attacks or inadvertent compromises affecting data security or the operability of such systems.
•Artificial intelligence-based platforms present new risks and challenges to our business.
•Our cash, cash equivalents, and financial investments could be adversely affected if the financial institutions in which we hold our cash, cash equivalents, and financial investments fail.
Risks Relating to Our Indebtedness
•The size of our indebtedness and the obligations associated with it 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 or to deploy capital to grow our business, expose us to interest-rate risk to the extent of our variable-rate debt, or 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 interest expense on our variable-rate debt may continue to increase if and to the extent that policymakers combat inflation through interest-rate increases on benchmark financial products.
•Despite the limitations in our debt agreements, we retain the ability to take certain actions that may interfere with our ability to timely pay our substantial indebtedness.
•We may not be able to pay our indebtedness when it becomes due.
•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.
Risks Relating to Ownership of Our Common Stock
•We do not presently maintain effective disclosure controls and procedures due to a material weakness we have identified in our internal control over financial reporting. Material weaknesses have in this past resulted in the revision of our financial statements. If we fail to remediate this material weakness, or if any other material weakness or significant deficiency is identified in the future or if we otherwise fail to maintain an effective system of internal controls, material misstatements in our financial statements could result, and, as in the past, we could fail to timely meet our periodic reporting obligations.
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•Our stock price has historically been and may continue to be volatile, and a holder of shares of our common stock may not be able to resell such shares at or above the price such stockholder paid, or at all, and could lose all or part of such investment as a result.
•Future sales, or the perception of future sales, of our common stock, by us or our existing stockholders could cause the market price for our common stock to decline.
•We are not currently eligible to use the Form S-3 registration statement, which could impair our capital-raising activities.
•Provisions in our organizational documents could delay or prevent a change of control.
We caution that the risks, uncertainties, and other factors referenced above may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors' likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by law.
Social Media
We use our website (catalent.com), Facebook page (facebook.com/CatalentPharmaSolutions), LinkedIn page (linkedin.com/company/catalent-pharma-solutions/) and Twitter account (@catalentpharma) as channels of distribution of information concerning our activities, our offerings, our various businesses, and other related matters. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information contained on or accessible through our website, our social media channels, or any other website that we may maintain is not a part of this Quarterly Report.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Catalent, Inc.
Consolidated Statements of Operations
(Unaudited; dollars in millions, except per share data)
|
Three Months Ended September 30, |
||||
| 2024 | 2023 | |||
| Net revenue | $ | 1,023 | $ | 982 |
| Cost of sales | 842 | 813 | ||
| Gross margin | 181 | 169 | ||
| Selling, general, and administrative expenses | 252 | 205 | ||
| Gain on sale of subsidiary | (17) | - | ||
| Goodwill impairment charges | - | 689 | ||
| Other operating expense, net | 13 | 1 | ||
| Operating loss | (67) | (726) | ||
| Interest expense, net | 60 | 58 | ||
| Other (income) expense, net | (10) | 13 | ||
| Loss before income taxes | (117) | (797) | ||
| Income tax expense (benefit) | 12 | (38) | ||
| Net loss | $ | (129) | $ | (759) |
| Earnings (loss) per share: | ||||
| Basic | ||||
| Net loss | $ | (0.71) | $ | (4.19) |
| Diluted | ||||
| Net loss | $ | (0.71) | $ | (4.19) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statements of Comprehensive Loss
(Unaudited; dollars in millions)
|
Three Months Ended September 30, |
||||
| 2024 | 2023 | |||
| Net loss | $ | (129) | $ | (759) |
| Other comprehensive income (loss), net of tax | ||||
| Foreign currency translation adjustments | 66 | (39) | ||
| Pension and other post-retirement adjustments | 1 | - | ||
| Derivatives and hedges | (13) | 5 | ||
| Other comprehensive income (loss), net of tax | 54 | (34) | ||
| Comprehensive loss | $ | (75) | $ | (793) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Balance Sheets
(Unaudited; in millions, except share and per share data)
|
September 30, 2024 |
June 30, 2024 |
|||
| ASSETS | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 335 | $ | 289 |
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Trade receivables, net of allowance for credit losses of $12 and $23, respectively
|
760 | 921 | ||
| Inventories | 553 | 574 | ||
| Prepaid expenses and other current assets | 859 | 813 | ||
| Total current assets | 2,507 | 2,597 | ||
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Property, plant, and equipment, net of accumulated depreciation of $1,983 and $1,915, respectively
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3,671 | 3,643 | ||
| Other assets: | ||||
| Goodwill | 2,366 | 2,333 | ||
| Other intangibles, net | 811 | 841 | ||
| Deferred income taxes | 32 | 7 | ||
| Other long-term assets | 321 | 332 | ||
| Total assets | $ | 9,708 | $ | 9,753 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
| Current liabilities: | ||||
| Current portion of long-term obligations and other short-term borrowings | $ | 48 | $ | 48 |
| Accounts payable | 375 | 361 | ||
| Other accrued liabilities | 575 | 622 | ||
| Total current liabilities | 998 | 1,031 | ||
| Long-term obligations, less current portion | 4,886 | 4,857 | ||
| Pension liability | 96 | 95 | ||
| Deferred income taxes | 22 | 5 | ||
| Other long-term liabilities | 164 | 161 | ||
| Total liabilities | 6,166 | 6,149 | ||
| Commitment and contingencies (See Note 14) | ||||
| Shareholders' equity: | ||||
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Common stock, $0.01 par value; 1.00 billion shares authorized at September 30, 2024 and June 30, 2024; 181 million and 181 million issued and outstanding at September 30, 2024 and June 30, 2024, respectively
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2 | 2 | ||
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Preferred stock, $0.01 par value; 100 million shares authorized at September 30, 2024 and June 30, 2024; 0 shares issued and outstanding at September 30, 2024 and June 30, 2024
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- | - | ||
| Additional paid in capital | 4,800 | 4,787 | ||
| Accumulated deficit | (910) | (781) | ||
| Accumulated other comprehensive loss | (350) | (404) | ||
| Total shareholders' equity | 3,542 | 3,604 | ||
| Total liabilities and shareholders' equity | $ | 9,708 | $ | 9,753 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statements of Changes in Shareholders'Equity
(Unaudited; dollars in millions, except share data in thousands)
Three Months Ended September 30, 2024
| Shares of Common Stock | Common Stock | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||
| Balance at June 30, 2024 | 180,998 | $ | 2 | $ | 4,787 | $ | (781) | $ | (404) | $ | 3,604 |
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Share issuances related to stock-
based compensation
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491 | - | - | - | - | - | |||||
| Stock-based compensation | - | - | 11 | - | - | 11 | |||||
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Cash received, in lieu of equity, for tax withholding obligations |
- | - | 1 | - | - | 1 | |||||
| Exercise of stock options | - | - | 1 | - | - | 1 | |||||
| Net loss | - | - | - | (129) | - | (129) | |||||
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Other comprehensive income, net of tax |
- | - | - | - | 54 | 54 | |||||
| Balance at September 30, 2024 | 181,489 | $ | 2 | $ | 4,800 | $ | (910) | $ | (350) | $ | 3,542 |
Three Months Ended September 30, 2023
| Shares of Common Stock | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity | ||||||
| Balance at June 30, 2023 | 180,273 | $ | 2 | $ | 4,701 | $ | 262 | $ | (354) | $ | 4,611 |
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Share issuances related to stock-
based compensation
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248 | - | - | - | - | - | |||||
| Stock-based compensation | - | - | 19 | - | - | 19 | |||||
| Exercise of stock options | - | - | 1 | - | - | 1 | |||||
| Employee stock purchase plan | - | - | 3 | - | - | 3 | |||||
| Net loss | - | - | - | (759) | - | (759) | |||||
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Other comprehensive loss, net
of tax
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- | - | - | - | (34) | (34) | |||||
| Balance at September 30, 2023 | 180,521 | $ | 2 | $ | 4,724 | $ | (497) | $ | (388) | $ | 3,841 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Consolidated Statements of Cash Flows
(Unaudited; dollars in millions)
| Three Months Ended September 30, | ||||
| 2024 | 2023 | |||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net loss | $ | (129) | $ | (759) |
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Adjustments to reconcile net loss to net cash from operations:
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| Depreciation and amortization | 113 | 112 | ||
| Goodwill impairment charges | - | 689 | ||
| Non-cash foreign currency transaction (gain) loss, net | (10) | 9 | ||
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Amortization of debt issuance costs
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3 | 2 | ||
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Impairments charges and loss/gain on sale of assets, net
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4 | (1) | ||
| Gain on sale of subsidiary | (17) | - | ||
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Stock-based compensation
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17 | 19 | ||
| Benefit from deferred income taxes | (5) | (44) | ||
| Provision for bad debts and inventory | 39 | 10 | ||
| Change in operating assets and liabilities: | ||||
| Decrease in trade receivables | 173 | 160 | ||
| Increase in inventories | (10) | (31) | ||
| Decrease in accounts payable | (10) | (73) | ||
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Other assets/accrued liabilities, net-current and non-current
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(107) | (163) | ||
| Net cash provided by (used in) operating activities | 61 | (70) | ||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | ||||
| Acquisition of property, equipment, and other productive assets | (57) | (84) | ||
| Proceeds from sale of property and equipment | - | 1 | ||
| Proceeds from sale of subsidiary | 23 | - | ||
| Payment for investments | - | (1) | ||
| Net cash used in investing activities | (34) | (84) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Proceeds from borrowing | - | 115 | ||
| Payments related to long-term obligations | (5) | (35) | ||
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Financing fees paid
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- | (1) | ||
| Cash received, in lieu of equity, for tax-withholding obligations | 1 | - | ||
| Exercise of stock options | 1 | 1 | ||
| Other financing activities | (7) | 18 | ||
| Net cash (used in) provided by financing activities | (10) | 98 | ||
| Effect of foreign currency exchange on cash and cash equivalents | 29 | (15) | ||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 46 | (71) | ||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 289 | 280 | ||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 335 | $ | 209 |
| SUPPLEMENTARY CASH FLOW INFORMATION: | ||||
| Interest paid | $ | 68 | $ | 65 |
| Income taxes paid, net | $ | 9 | $ | 19 |
| Non-cash purchase of property, equipment, and other productive assets | $ | 18 | $ | 21 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Catalent, Inc.
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Catalent, Inc. ("Catalent"or the "Company") directly and wholly owns PTS Intermediate Holdings LLC ("Intermediate Holdings"). Intermediate Holdings directly and wholly owns Catalent Pharma Solutions, Inc. ("Operating Company"). The financial results of Catalent are comprised of the financial results of Operating Company and its subsidiaries on a consolidated basis.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending June 30, 2025. The consolidated balance sheet at June 30, 2024 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information on the Company's accounting policies and footnotes, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2024 filed with the Securities and Exchange Commission (the "SEC") on September 6, 2024.
Reportable Segments
Set forth below is a summary description of the Company's two current operating and reportable segments.
Biologics-The Biologics segment provides development and manufacturing for biologic proteins; cell, gene, and other nucleic acid therapies; plasmid DNA ("pDNA"); induced pluripotent stem cells ("iPSCs"), and oncolytic viruses; and vaccines. It also provides formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; analytical development and testing services for large molecules.
Pharma and Consumer Health-The Pharma and Consumer Health segment comprises the Company's market-leading capabilities for complex oral solids, softgel formulations, Zydis® fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; and clinical trial development and supply services.
Each segment reports through a separate management team and ultimately reports to the Company's President and Chief Executive Officer, who is designated as the Chief Operating Decision Maker for segment reporting purposes. The Company's operating segments are the same as its reportable segments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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 United States ("U.S.") into U.S. dollars are accumulated as a component of other comprehensive income utilizing period-end exchange rates. Since July 1, 2018, the Company has accounted for its Argentine operations as highly inflationary.
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Concentrations of Credit Risk and Major Customers
Concentration of credit risk, with respect to accounts receivable, is limited due to the large number of customers and their dispersion across different geographic areas. The customers are primarily concentrated in the pharmaceutical, biopharmaceutical and consumer products industries. The Company does not normally require collateral or any other security to support credit sales. The Company performs ongoing credit evaluations of its customers' financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company's expectations.
As of September 30, 2024 and June 30, 2024, the Company had one customer that represented 37% and 34%, respectively, of its aggregate net trade receivables and current contract asset values, primarily associated with the Company's Biologics segment. After performing a risk assessment of this customer, the Company has determined that a reserve is not warranted as of September 30, 2024. Additionally, the Company had one customer in its Biologics segment that represented approximately 16% of consolidated net revenue during the three months ended September 30, 2024 and 2023.
Depreciation
Depreciation expense was $80 million and $78 million for the three months ended September 30, 2024 and 2023, respectively. Depreciation expense includes amortization of assets related to finance leases. The Company charges repairs and maintenance costs to expense as incurred.
Amortization
Amortization expense related to other intangible assets was $33 million and $34 million for the three months ended September 30, 2024 and 2023, respectively.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development costs amounted to $4 million and $4 million for the three months ended September 30, 2024 and 2023, respectively.
New Accounting Standards Not Adopted as of September 30, 2024
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which focuses on income tax disclosures by requiring public business entities, on an annual basis, to disclose specific categories in the rate reconciliation, provide information for reconciling items that meet a quantitative threshold, and certain information about income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements.
2. REVENUE RECOGNITION
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in three primary revenue streams: manufacturing and commercial product supply, development services, and clinical supply services. The Company measures the revenue from customers based on the consideration specified in its contracts, excluding any sales incentive or amount collected on behalf of a third party, that the Company expects to be entitled to receive in exchange for transferring the promised goods to and/or performing services for the customer (the "Transaction Price"). To the extent the Transaction Price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the Transaction Price utilizing either the expected value method or the most likely amount method, depending on which method is expected to better predict the amount of consideration to which the Company will be entitled. The value of variable consideration is included in the Transaction Price if, and to the extent, it is probable that a significant reversal of the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustment required is recorded on a cumulative catch-up basis, which would affect revenue and net income in the period of adjustment.
The Company's customer contracts generally include provisions entitling the Company to a termination penalty when the customer terminates prior to the contract's nominal end date. The termination penalties in customer contracts vary but are generally considered substantive for accounting purposes and create enforceable rights and obligations throughout the stated durations of the contracts. The Company accounts for a contract termination as a contract modification in the period in which the customer gives notice of termination. The determination of the contract termination penalty is based on the terms stated in the relevant customer agreement. As of the modification date, the Company updates its estimate of the Transaction Price using the expected value method, subject to constraints, and to the extent that it is probable that a significant reversal in the amount of
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cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. These estimates are re-assessed each reporting period, as required, and any adjustment required is recorded on a cumulative catch-up basis, which would affect revenue and net income in the period of adjustment.
Where multiple performance obligations exist in a single contract, the Company allocates consideration to each performance obligation using the "relative standalone selling price" as defined under ASC 606. Generally, the Company utilizes observable standalone selling prices in its allocations of consideration. If observable standalone selling prices are not available, the Company estimates the applicable standalone selling price using a cost-plus-margin approach or an adjusted market assessment approach, in each case, representing the amount that the Company believes the market is willing to pay for the applicable service. Payment is typically due 30 to 45 days following the invoice date, based on the payment terms set forth in the applicable customer agreement.
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.
Customer contracts that include commitments by the Company to make facility space or equipment available may be deemed to include lease components, which are evaluated under ASC 842, Leases. For arrangements that contain both lease and non-lease components, consideration in the contract is allocated on a relative standalone selling-price basis. Determining the lease term and contract term of non-lease components, as well as the variable and fixed consideration in these arrangements, including when variability is resolved, often requires management judgment in order to determine the allocation to the lease and non-lease components.
Manufacturing & Commercial Product Supply Revenue
Manufacturing and commercial product supply revenue consists of revenue earned by manufacturing products supplied to customers under long-term commercial supply arrangements. In these arrangements, the customer typically owns and supplies the active pharmaceutical ingredient ("API") or other proprietary materials used in the manufacturing process. The contract generally includes the terms of the manufacturing services and related product quality assurance procedures to comply with regulatory requirements. Due to the regulated nature of the Company's business, these contract terms are highly interdependent and, therefore, are considered to be a single combined performance obligation. The transaction price is generally stated in the agreement as a fixed price per unit, with no contractual provision for a refund or price concession. In most circumstances, control is transferred to the customer over time, creating a corresponding right to recognize the related revenue, because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date. The selection of the method for measuring progress towards the completion of the Company's performance obligation requires judgment and is based on the nature of the products to be manufactured. For the majority of the Company's arrangements, progress is measured based on the units of product that have successfully completed the contractually required product quality assurance process, because the conclusion of that process defines the time when the applicable contract and the related regulatory requirements permit the customer to exercise control over the product's disposition. The customer is typically responsible for arranging the shipping and handling of product following completion of the quality assurance process. Payment is typically due 30 to 45 days after invoice date, based on the payment terms set forth in the applicable customer agreement.
The Company also recognizes commercial revenue for certain contracts in its Biologics segment that have a notably long manufacturing cycle, and for which the customer exercises control over the product throughout the manufacturing process. For these contracts, revenue is recognized over time and progress is measured using an input method based on effort expended, which provides an appropriate depiction of the Company's progress toward fulfilling its performance obligation.
Development Services and Clinical Supply Revenue
Development services contracts generally take the form of short-term, fee-for-service arrangements. Performance obligations vary, but frequently include biologic cell-line development, performing formulation, analytical stability, or other services related to product development, and providing manufacturing services for products that are under development or otherwise not intended for commercial sale. They can also include a combination of the following services: the manufacturing, packaging, storage, distribution, destruction, and inventory management of customer clinical trial material, as well as the sourcing of comparator drug products on behalf of customers to be used in clinical trials to compare performance with the drug under clinical investigation. The transaction prices for these arrangements are fixed and include amounts stated in the contracts for each promised service, and each service is generally considered to be a separate performance obligation. In most instances, the Company recognizes revenue over time because there is no alternative use to the Company for the asset created and the Company has an enforceable right to payment for performance completed as of that date.
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The Company measures progress toward the completion of its performance obligations satisfied over time based on the nature of the services to be performed. For certain types of arrangements, revenue is recognized over time and measured using an output method based on the completion of tasks and activities that are performed to satisfy a performance obligation. For certain types of arrangements, revenue is recognized over time and measured using an input method based on effort expended. Each of these methods provides an appropriate depiction of the Company's progress toward fulfilling its performance obligations for its respective arrangement. In certain development services arrangements that require a portion of the contract consideration to be received in advance at the commencement of the contract, such advance payment is initially recorded as a contract liability. In certain clinical supply arrangements, revenue is recognized at the point in time when control transfers, which occurs upon either the delivery of the related output of the service to the customer or the completion of quality testing with respect to the product, and the Company has an enforceable right to payment based on the terms of the arrangement.
The Company records revenue for comparator sourcing arrangements on a net basis because it is acting as an agent that does not control the product or service before it is transferred to the customer. Payment for comparator sourcing activity is typically received in advance at the commencement of the contract and is initially recorded as a contract liability.
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 reflect net revenue for the three months ended September 30, 2024 and 2023, by type of activity and reportable segment (in millions):
| Three Months Ended September 30, 2024 | Biologics | Pharma and Consumer Health | Total | |||
| Manufacturing & commercial product supply | $ | 244 | $ | 362 | $ | 606 |
| Development services & clinical supply | 217 | 201 | 418 | |||
| Total | $ | 461 | $ | 563 | $ | 1,024 |
| Inter-segment revenue elimination | (1) | |||||
| Combined net revenue | $ | 1,023 |
| Three Months Ended September 30, 2023 | Biologics | Pharma and Consumer Health | Total | |||
| Manufacturing & commercial product supply | $ | 282 | $ | 334 | $ | 616 |
| Development services & clinical supply | 166 | 200 | 366 | |||
| Total | $ | 448 | $ | 534 | $ | 982 |
| Inter-segment revenue elimination | - | |||||
| Combined net revenue | $ | 982 |
The following table allocates revenue by the location where the goods were made or the service performed:
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
| United States | $ | 658 | $ | 645 |
| Europe | 331 | 274 | ||
| Other | 68 | 88 | ||
| Elimination of revenue attributable to multiple locations | (34) | (25) | ||
| Total | $ | 1,023 | $ | 982 |
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Contract Liabilities
Contract liabilities relate to cash consideration that the Company receives in advance of satisfying the related performance obligations. The contract liabilities balances (current and non-current) as of September 30, 2024 and June 30, 2024 are as follows:
| (Dollars in millions) | ||
| Balance at June 30, 2024 | $ | 255 |
| Balance at September 30, 2024 | $ | 275 |
| Revenue recognized in the period from amounts included in contracts liability at the beginning of the period: | $ | (108) |
Contract liabilities that will be recognized within 12 months of September 30, 2024 are accounted for in Other accrued liabilities and those that will be recognized longer than 12 months after September 30, 2024 are accounted for in Other long-term liabilities.
Contract Assets
Contract assets primarily relate to the Company's conditional right to receive consideration for services that have been performed for customers as of September 30, 2024 relating to the Company's development services but had not yet been invoiced as of September 30, 2024. Contract assets are transferred to trade receivables, net when the Company's right to receive the consideration becomes unconditional. Contract assets totaled $609 million and $602 million as of September 30, 2024 and June 30, 2024, respectively. Contract assets expected to transfer to trade receivables within 12 months are accounted for within Prepaid expenses and other current assets. Contract assets expected to transfer to trade receivables longer than 12 months are accounted for within Other long-term assets.
As of September 30, 2024, the Company recorded no reserve against its aggregate contract asset balance.
Performance Obligations
Remaining performance obligations represent firm orders for future development services as well as manufacturing and commercial product supply, including minimum volume commitments, for which there are incomplete performance obligations for work not yet completed under executed contracts. Remaining performance obligations as of September 30, 2024 were $868 million. The Company expects to recognize approximately 45% of the remaining performance obligations in existence as of September 30, 2024 after September 30, 2025.
3. BUSINESS COMBINATIONS AND DIVESTITURES
Research Triangle Park Small Molecule Analytical Services Divestiture
In September 2024, the Company divested of its Research Triangle Park Small Molecule Analytical Services subsidiary ("RTP") for $23 million in cash, RTP, based in North Carolina, was part of the Company's Pharma and Consumer Health segment. The divestiture resulted in a gain on sale of subsidiary of $17 million.
All consideration received was measured at its divestiture date fair value. The Company valued the total consideration received from divestiture as follows:
| (Dollars in millions) | Fair Value of Consideration Received | |
| Cash | $ | 23 |
|
Other(1)
|
4 | |
| Total | $ | 27 |
(1) Other includes assumption of liabilities, prepaid rent and a working capital holdback.
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4. GOODWILL
The following table summarizes the changes between June 30, 2024 and September 30, 2024 in the carrying amount of goodwill in total and by segment:
| (Dollars in millions) | Biologics | Pharma and Consumer Health | Total | |||
| Balance at June 30, 2024 | $ | 1,163 | $ | 1,170 | $ | 2,333 |
|
Divestitures(1)
|
- | (2) | (2) | |||
| Foreign currency translation adjustments | 15 | 20 | 35 | |||
| Balance at September 30, 2024 | $ | 1,178 | $ | 1,188 | $ | 2,366 |
(1) Represents goodwill associated with the divestiture of RTP.
Accumulated goodwill impairment charges amount to $897 million.
5. LONG-TERM OBLIGATIONS AND SHORT-TERM BORROWINGS
Long-term obligations and short-term borrowings consisted of the following at September 30, 2024 and June 30, 2024:
| (Dollars in millions) | Maturity | September 30, 2024 | June 30, 2024 | ||
| Senior secured credit facilities | |||||
| Term loan facility B-3 (7.034% as of September 30, 2024) | February 2028 | $ | 1,400 | $ | 1,404 |
| Term loan facility B-4 (7.919% as of September 30, 2024) | February 2028 | 597 | 598 | ||
| 5.000% senior notes due 2027 | July 2027 | 500 | 500 | ||
|
2.375% Euro senior notes due 2028(1)
|
March 2028 | 919 | 883 | ||
| 3.125% senior notes due 2029 | February 2029 | 550 | 550 | ||
| 3.500% senior notes due 2030 | April 2030 | 650 | 650 | ||
| Financing lease obligations | 2024 to 2038 | 328 | 332 | ||
| Other obligations | 2024 to 2028 | 31 | 32 | ||
| Unamortized discount and debt issuance costs | (41) | (44) | |||
| Total debt | $ | 4,934 | $ | 4,905 | |
|
Less: current portion of long-term obligations and other short-term borrowings |
48 | 48 | |||
| Long-term obligations, less current portion | $ | 4,886 | $ | 4,857 |
(1) The change in the carrying value of this euro-denominated debt was due to fluctuations in foreign currency exchange rates.
As of September 30, 2024, we were in compliance with all material covenants under the Credit Agreement.
The available capacity under the revolving credit facility is further reduced by the aggregate value of all outstanding letters of credit under the Credit Agreement. As of September 30, 2024, Operating Company had $1.09 billion of unutilized capacity under the revolving credit facility, due to $6 million of outstanding letters of credit.
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Measurement of the Estimated Fair Value of Debt
The estimated fair value of the Company's senior secured credit facilities and other senior indebtedness is classified as a Level 2 determination (see Note 10, Fair Value Measurements, for a description of the method by which fair value classifications are determined) in the fair-value hierarchy and is calculated by using a discounted cash flow model with a market interest rate as a significant input. The carrying amounts and the estimated fair values of the Company's principal categories of debt as of September 30, 2024 and June 30, 2024 are as follows:
| September 30, 2024 | June 30, 2024 | ||||||||
| (Dollars in millions) | Fair Value Measurement |
Carrying
Value
|
Estimated Fair
Value
|
Carrying
Value
|
Estimated Fair
Value
|
||||
| 5.000% senior notes due 2027 | Level 2 | $ | 500 | $ | 501 | $ | 500 | $ | 498 |
| 2.375% Euro senior notes due 2028 | Level 2 | 919 | 905 | 883 | 849 | ||||
| 3.125% senior notes due 2029 | Level 2 | 550 | 544 | 550 | 532 | ||||
| 3.500% senior notes due 2030 | Level 2 | 650 | 648 | 650 | 627 | ||||
| Senior secured credit facilities & other | Level 2 | 2,356 | 2,117 | 2,366 | 2,107 | ||||
| Subtotal | $ | 4,975 | $ | 4,715 | $ | 4,949 | $ | 4,613 | |
|
Unamortized discount and debt issuance costs |
(41) | - | (44) | - | |||||
| Total debt | $ | 4,934 | $ | 4,715 | $ | 4,905 | $ | 4,613 |
6. LOSS PER SHARE
The Company computes earnings (loss) per share of the Company's common stock, par value $0.01 (the "Common Stock") using the treasury stock method. Diluted net (loss) earnings per share is computed using the weighted average number of shares of Common Stock outstanding plus the weighted average number of shares of Common Stock that would be issued assuming exercise or conversion of all potentially dilutive instruments. Dilutive securities having an anti-dilutive effect on diluted net earnings per share are excluded from the calculation. The dilutive effect of the securities that are issuable under the Company's equity incentive plans are reflected in diluted earnings per share by application of the treasury stock method. The reconciliations between basic and diluted earnings per share attributable to Catalent common shareholders for the three months ended September 30, 2024 and 2023, respectively, are as follows:
|
Three Months Ended September 30, |
||||
| (In millions except per share data) | 2024 | 2023 | ||
| Net loss | $ | (129) | $ | (759) |
| Weighted average shares outstanding - basic | 182 | 181 | ||
| Weighted average dilutive securities issuable - stock plans | - | - | ||
| Weighted average shares outstanding - diluted | 182 | 181 | ||
| Loss per share: | ||||
| Basic | $ | (0.71) | $ | (4.19) |
| Diluted | $ | (0.71) | $ | (4.19) |
Shares with an antidilutive effect on the weighted average shares outstanding for the three months ended September 30, 2024 and 2023 were not material.
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7. OTHER (INCOME) EXPENSE, NET
The components of other (income) expense, net for the three months ended September 30, 2024 and 2023 are as follows:
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
|
Foreign currency (gains) losses (1)
|
$ | (10) | $ | 12 |
| Other | - | 1 | ||
| Total other (income) expense, net | $ | (10) | $ | 13 |
(1) Foreign currency remeasurement gains/losses include both cash and non-cash transactions.
8. RESTRUCTURING COSTS
From time to time, the Company implements plans to restructure certain operations, both domestically and internationally. The restructuring plans focused on various aspects of operations, including, among others, closing and consolidating certain manufacturing operations, rationalizing headcount and aligning operations in a strategic and more cost-efficient structure. In addition, the Company may incur restructuring charges in the future in cases where a material change in the scope of operation with its business occurs. Employee-related restructuring costs consist primarily of severance costs and also include outplacement services provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods. Facility exit and other such restructuring costs consist of equipment relocation costs and costs associated with planned facility expansions and closures to streamline Company operations.
During the fiscal year ended June 30, 2023, the Company adopted plans to reduce costs, consolidate facilities, and optimize its infrastructure across the organization. During the fiscal year ended June 30, 2024 and three months ended September 30, 2024 the Company extended its restructuring efforts to reduce costs and headcount in both its Biologics and Pharma and Consumer Health segments. In connection with these restructuring plans, during the three months ended September 30, 2024, the Company reduced its headcount by approximately 50 employees and incurred cumulative employee-related charges of approximately $2 million, primarily associated with cash severance programs.
Restructuring costs for the three months ended September 30, 2024 and 2023 were recorded in Other Operating Expense in the Consolidated Statement of Operations.
The following table summarizes the charges recorded within restructuring costs:
|
Three Months Ended September 30, |
||||
|
(Dollars in millions)
|
2024 | 2023 | ||
| Restructuring costs: | ||||
| Employee-related reorganization | $ | 2 | $ | 2 |
| Facility exit and other costs | 7 | - | ||
| Total restructuring costs | $ | 9 | $ | 2 |
The following table summarizes the charges recorded within restructuring costs by segment. These amounts are excluded from Segment EBITDA as described in Note 15, Segment Information.
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|
Three Months Ended September 30, |
||||
|
(Dollars in millions)
|
2024 | 2023 | ||
| Restructuring costs: | ||||
| Biologics | $ | 4 | $ | 1 |
| Pharma and Consumer Health | 5 | 1 | ||
| Total restructuring costs | $ | 9 | $ | 2 |
The following tables illustrates the change in the employee separation-related liability associated with the plans.
| Employee-related restructuring | ||
|
(Dollars in millions)
|
||
| Balance, June 30, 2024 | $ | 10 |
| Charges to income | 2 | |
| Payments | (7) | |
| Balance, September 30, 2024 | $ | 5 |
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to fluctuations in the currency exchange rates applicable to its investments in operations outside the U.S. While the Company does not actively hedge against changes in foreign currency, the Company has mitigated exposure from its investments in its European operations by denominating a portion of its debt in euros. At September 30, 2024, the Company had euro-denominated debt outstanding of $919 million (U.S. dollar equivalent), which is designated and qualifies as a hedge against its net investment in its European operations. For non-derivatives designated and qualifying as net investment hedges, the effective portion of translation gains or losses are reported in accumulated other comprehensive loss as part of the cumulative translation adjustment. The following table summarizes net investment hedge activity during the three months ended September 30, 2024 and 2023.
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
|
Unrealized foreign exchange gain (loss) within other comprehensive income
|
$ | (36) | $ | 32 |
The net accumulated gain on the instrument designated as a hedge as of September 30, 2024 within other comprehensive loss was approximately $82 million. Amounts are reclassified out of accumulated other comprehensive loss into earnings when the entity to which the gains and losses relate is either sold or substantially liquidated.
Interest-Rate Swap
In February 2021, the Company entered into an interest-rate swap agreement with Bank of America N.A. (the "2021 Rate Swap") as a hedge against the economic effect of a portion of the variable interest obligation associated with its Term B-3 Loans. The 2021 Rate Swap effectively fixed the rate of interest payable on that portion of the Term B-3 Loans, thereby reducing the impact of future interest rate changes on future interest expense. As a result of the 2021 Rate Swap, the variable portion of the applicable interest rate on $500 million of the Term B-3 Loans is now effectively fixed at 0.9985%.
To conform with the adoption of Topic 848, Reference Rate Reform and the Eighth Amendment, the Company amended the 2021 Rate Swap in June 2023 (the "2023 Rate Swap"). The 2023 Rate Swap continues to effectively fix the rate of interest payable on the same portion of our U.S. dollar-denominated term loans under our senior secured credit facilities. As a result of the 2023 Rate Swap, the variable portion of the applicable interest rate on $500 million of the U.S. dollar-denominated term loans is now effectively fixed at 0.9431%.
The 2023 Rate Swap continues to qualify for a cash-flow hedge. The Company evaluates hedge effectiveness at the inception of the hedge and on an ongoing basis. The cash flows associated with the 2023 Rate Swap amendment is reported in
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cash provided by operating activities in the consolidated statements of cash flows. The unrealized loss recorded in stockholder's equity from marking the 2023 Rate Swap to market during the three months ended September 30, 2024 was $13 million.
A summary of the estimated fair value of the 2023 Rate Swap reported in the consolidated balance sheets is stated in the table below:
| September 30, 2024 | June 30, 2024 | |||||
| (Dollars in millions) | Balance Sheet Classification | Estimated Fair Value | Balance Sheet Classification | Estimated Fair Value | ||
| Interest-rate swap | Other long-term assets | $ | 23 | Other long-term assets | $ | 36 |
10. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement,defines fair value as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which Level 1 and Level 2 are considered observable and Level 3 is considered unobservable:
Level 1- Quoted prices in active markets for identical assets or liabilities.
Level 2- Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses of the Company approximate fair value based on the short maturities of these instruments.
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification as of the end of each reporting period. The following table sets forth the Company's financial assets and liabilities that were measured at fair value on a recurring basis and the fair value measurement for such assets and liabilities at September 30, 2024 and June 30, 2024:
| (Dollars in millions) | Basis of Fair Value Measurement | |||||||
| September 30, 2024 | Total | Level 1 | Level 2 | Level 3 | ||||
| Assets: | ||||||||
| Interest-rate swap | $ | 23 | $ | - | $ | 23 | $ | - |
| Trading securities | 3 | 3 | - | - | ||||
| June 30, 2024 | ||||||||
| Assets: | ||||||||
| Interest-rate swap | $ | 36 | $ | - | $ | 36 | $ | - |
| Trading securities | 1 | 1 | - | - |
The fair value of the 2021 Rate Swap was determined, and the fair value of the 2023 Rate Swap will be determined, at the end of each reporting period based on valuation models that use interest rate yield curves and discount rates as inputs. The discount rates are based on U.S. deposit or U.S. Treasury rates. The significant inputs used in the valuation models are readily
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available in public markets or can be derived from observable market transactions, and the valuation is therefore classified as Level 2 in the fair-value hierarchy.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-lived assets, goodwill, and other intangible assets are subject to non-recurring fair value measurement for the evaluation of potential impairment. Other than the goodwill impairment recorded in the prior year period, there was no non-recurring fair value measurement during the three months ended September 30, 2024 and September 30, 2023.
11. INCOME TAXES
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Generally, fluctuations in the effective tax rate are due to changes in relative amounts of U.S. and non-U.S. pretax income, the tax impact of special items, and other discrete tax items. Discrete items include, but are not limited to, changes in foreign statutory tax rates, amortization of certain assets, changes in the Company's reserve for uncertain tax positions, and tax impact of certain equity compensation.
In the normal course of business, the Company is subject to examination by taxing authorities around the world. The Company is presently under audit in select jurisdictions in the U.S. and in Europe, but no material impact is expected to the financial results once these audits are completed.
ASC 740 provides guidance for the accounting of uncertain income tax positions recognized in the Company's tax filings. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolution of any related appeal or litigation process. As of September 30, 2024 and June 30, 2024, the Company's reserve against uncertain income tax positions remained substantially unchanged at $4 million. Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
The Company recorded a provision for income taxes for the three months ended September 30, 2024 of $12 million relative to loss before income taxes of $117 million. The Company recorded a benefit for income taxes for the three months ended September 30, 2023 of $38 million relative to earnings before income taxes of $797 million. The income tax expense during the quarter is primarily from income taxes on the Company's profitable international operations and certain discrete items recognized during the quarter. The income tax benefit for the prior-year quarter was primarily the result of a deferred tax benefit resulting from the impairment of goodwill during the quarter and certain discrete income tax benefits. This quarterly provision/benefit was also impacted by the geographic distribution of the Company's pretax income/loss resulting from our business mix, changes in the tax impact of permanent differences, restructuring, special items, certain equity related compensation, and other discrete tax items that may have unique tax implications depending on the nature of the item.
12. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of the Company's net periodic benefit costs are as follows:
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
| Components of net periodic benefit cost: | ||||
| Selling, general, and administrative expenses: | ||||
| Service cost | $ | 1 | $ | 1 |
| Other expense, net: | ||||
| Interest cost | 2 | 3 | ||
| Expected return on plan assets | (2) | (2) | ||
| Net amount recognized | $ | 1 | $ | 2 |
As previously disclosed, the Company notified the trustees of a multi-employer pension plan of its withdrawal from participation in such plan in fiscal 2012. The actuarial review process administered by the plan trustees ended in fiscal 2015. The liability reported reflects the present value of the Company's expected future long-term obligations. The estimated discounted value of the projected contributions related to such plans was $44 million as of September 30, 2024 and June 30, 2024, and is included within pension liability on the consolidated balance sheets. The annual cash impact associated with the Company's obligations in such plan is approximately $2 million.
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13. EQUITY AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Description of Capital Stock
The Company is authorized to issue 1.00 billion shares of its Common Stock and 100 million shares of preferred stock, par value $0.01 per share. In accordance with the Company's amended and restated certificate of incorporation, each share of Common Stock has one vote, and the Common Stock votes together as a single class.
Accumulated Other Comprehensive Loss
The components of the changes in the cumulative translation adjustment, derivatives and hedges, and minimum pension liability for the three months ended September 30, 2024 and 2023 are presented below.
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
| Foreign currency translation adjustments: | ||||
| Net investment hedge | $ | (36) | $ | 32 |
| Long-term intercompany loans | 19 | (16) | ||
| Translation adjustments | 82 | (65) | ||
| Total foreign currency translation adjustment, pretax | 65 | (49) | ||
| Tax benefit | (1) | (10) | ||
| Total foreign currency translation adjustment, net of tax | $ | 66 | $ | (39) |
| Net change in derivatives and hedges: | ||||
| Net (loss) gain recognized during the period | $ | (13) | $ | 6 |
| Total derivatives and hedges, pretax | (13) | 6 | ||
| Tax expense | - | 1 | ||
| Net change in derivatives and hedges, net of tax | $ | (13) | $ | 5 |
| Net change in minimum pension liability: | ||||
| Net gain recognized during the period | $ | 1 | $ | - |
| Total pension liability, pretax | 1 | - | ||
| Tax benefit | - | - | ||
| Net change in minimum pension liability, net of tax | $ | 1 | $ | - |
For the three months ended September 30, 2024 and 2023, the changes in accumulated other comprehensive loss, net of tax by component are as follows:
| (Dollars in millions) | Foreign Exchange Translation Adjustments | Pension and Liability Adjustments | Derivatives and Hedges | Other | Total | |||||
| Balance at June 30, 2024 | $ | (378) | $ | (48) | $ | 23 | $ | (1) | $ | (404) |
|
Other comprehensive income (loss) before reclassifications |
66 | - | (13) | - | 53 | |||||
|
Amounts reclassified from accumulated other comprehensive loss |
- | 1 | - | - | 1 | |||||
|
Net current period other comprehensive
income (loss)
|
66 | 1 | (13) | - | 54 | |||||
| Balance at September 30, 2024 | $ | (312) | $ | (47) | $ | 10 | $ | (1) | $ | (350) |
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| (Dollars in millions) | Foreign Exchange Translation Adjustments | Pension and Liability Adjustments | Derivatives and Hedges | Other | Total | |||||
| Balance at June 30, 2023 | $ | (346) | $ | (52) | $ | 45 | $ | (1) | $ | (354) |
|
Other comprehensive (loss) income before reclassifications |
(39) | - | 5 | - | (34) | |||||
|
Net current period other comprehensive (loss)
income
|
(39) | - | 5 | - | (34) | |||||
| Balance at September 30, 2023 | $ | (385) | $ | (52) | $ | 50 | $ | (1) | $ | (388) |
14. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business, including, without limitation, inquiries and claims concerning environmental contamination as well as litigation and allegations in connection with acquisitions, product liability, manufacturing or packaging defects, and claims for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of any of which could be significant. Such matters are inherently uncertain, and there can be no guarantee that the outcome of any such matter will be decided favorably to the Company or that the resolution of any such matter will not have a material adverse effect upon the Company's consolidated financial statements. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amount of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary for its consolidated financial statements not to be misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the Company's consolidated financial statements. Any legal or other expenses associated with the litigation are accrued for as the expenses are incurred. The Company intends to vigorously defend itself against any such litigation and does not currently believe that the outcome of any such litigation will have a material adverse effect on the Company's consolidated financial statements. In addition, the healthcare industry is highly regulated and government agencies continue to scrutinize certain practices affecting government programs and otherwise.
City of Warwick Retirement System Class Action
In February 2023, an alleged shareholder filed a complaint styled City of Warwick Retirement System v. Catalent, Inc., et al., No. 23-cv-01108, in New Jersey federal court against the Company and three of its then-officers (collectively, "the Warwick Defendants") purportedly on behalf of a putative "class" consisting of persons who purchased or otherwise acquired Company securities between August 30, 2021 and October 31, 2022, inclusive. On September 15, 2023, the Warwick complaint was amended (together with the original complaint, the "Warwick Complaint"), which amended complaint expanded the class period to between August 30, 2021 and May 7, 2023, inclusive (the "Class Period"). The Warwick Complaint purports to assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and the related regulations, alleging that, unbeknownst to investors, the Warwick Defendants purportedly engaged in accounting and channel stuffing schemes to pad the Company's revenues and failed to disclose adverse facts that purportedly were known to or recklessly disregarded by the Warwick Defendants. Specifically, the Warwick Complaint alleges that the Warwick Defendants (i) overstated revenue and earnings by prematurely recognizing revenue in violation of U.S. GAAP; (ii) suffered material weaknesses in its internal control over financial reporting related to revenue recognition; (iii) falsely represented demand for its products while knowingly selling more product to its direct customers than could be sold to healthcare providers and end consumers; (iv) cut corners on safety and control procedures at key production facilities; (v) disregarded regulatory rules at key production facilities in order to rapidly produce excess inventory that was used to pad the Company's financial results through premature revenue recognition in violation of U.S. GAAP or stuffing its direct customers with this excess inventory; and (vi) lacked a reasonable basis for their positive statements about the Company's financial performance, outlook, and regulatory compliance during the Class Period. On November 15, 2023, the Warwick Defendants filed a motion to dismiss the Warwick Complaint. On June 28, 2024, the Court granted, in part, and denied, in part, the Company's motion to dismiss. The Warwick Defendants' answer to the Warwick Complaint was filed on August 12, 2024. The Company believes that the Warwick Defendants have defenses to the remaining allegations and intends to vigorously defend against these allegations. The parties are currently engaging in discovery.
Merger Related Claims
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In connection with the proposed Merger, as disclosed below, three purported Catalent stockholders filed lawsuits alleging that certain disclosures made in the proxy statement were materially false and misleading: Garfield v. Barber, et al., C.A. No. SOM-C 012027-24 (N.J. Super. Ct.), which was filed in the Superior Court of New Jersey; Moore v. Catalent, Inc., et al., No. 652403/2024 (N.Y. Sup. Ct.), which was filed in the Supreme Court of New York; and Clark v. Catalent, Inc., et al., No. 652407/2024 (N.Y. Sup. Ct.), which was filed in the Supreme Court of New York. The aforementioned lawsuits are collectively referred to as the "Actions." The Actions alleged, among other things, that certain disclosures in the proxy statement filed in connection with the Merger Agreement omitted certain purportedly material information. The Garfield Action asserted violations of New Jersey Uniform Securities Law § 49:3-71 and negligent misrepresentation and concealment and negligence under New Jersey common law. The Moore and Clark Actions each asserted a single claim for breach of fiduciary duty. On May 17, 2024, the Garfield Action was voluntarily dismissed with prejudice. On June 26, 2024, the Moore and Clark Actions were voluntarily dismissed with prejudice.
Subpoenas and Requests for Information
From time to time, the Company receives subpoenas or requests for information from various governmental agencies or private parties, including from state attorneys general, the U.S. Department of Justice, and private parties. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort and can result in considerable costs being incurred.
Entry Into an Agreement and Plan of Merger
On February 5, 2024, the Company entered into the Agreement and Plan of Merger (the "Merger Agreement"), with Creek Parent, Inc. ("Parent"), a Delaware corporation and a wholly owned subsidiary of Novo Holdings, and Creek Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent will acquire all the issued and outstanding shares of Common Stock of the Company.
At the effective time of the Merger (the "Effective Time"), each share of Common Stock, par value $0.01 per share, of the Company (such shares, collectively, the "Company Common Stock," and each, a "Share") that is issued and outstanding immediately prior to the Effective Time (other than any Shares held by (i) the Company, Parent or Merger Sub or any other direct or indirect wholly owned subsidiary of the Company or Parent immediately prior to the Effective Time, or (ii) a holder who has not voted in favor of the adoption of the Merger Agreement and is entitled to demand and properly demands appraisal of such Shares under the DGCL), will be converted automatically into the right to receive an amount in cash equal to $63.50 per Share, without interest. The transaction values the Company at $16.50 billion on an enterprise value basis.
Consummation of the Merger is subject to customary closing conditions, including (i) receipt of certain governmental waivers, consents, clearances, decisions, declarations, approvals, and expirations of applicable waiting periods, including the expiration or early termination of the waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, with respect to (A) the Merger and (B) the sale of three of the Company's fill-finish sites (which are located in Anagni, Italy, Bloomington, Indiana, U.S., and Brussels, Belgium) and related assets from Novo Holdings to Novo Nordisk A/S, of which Novo Holdings is the controlling shareholder (the "Carve-Out"), and (ii) the absence of any order, injunction or law prohibiting the Merger or the Carve-Out, in each case, without a Burdensome Condition (as defined in the Merger Agreement). Parent's and Merger Sub's obligations to close the Merger are also conditioned upon the absence of a Material Adverse Effect (as defined in the Merger Agreement) on the Company.
15. SEGMENT INFORMATION
The Company evaluates the performance of its segments based on segment earnings before other (expense) income, impairments, restructuring costs, interest expense, income tax expense, and depreciation and amortization ("Segment EBITDA").
Segment EBITDA is subject to important limitations. These consolidated financial statements include information concerning Segment EBITDA (a) because Segment EBITDA is an operational measure used by management in the assessment of the operating segments, the allocation of resources to the segments, and the setting of strategic goals and annual goals for the segments, and (b) in order to provide supplemental information that the Company considers relevant for the readers of the consolidated financial statements. The Company's presentation of Segment EBITDA may not be comparable to similarly titled measures used by other companies.
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The following tables include Segment EBITDA for each of the Company's current reportable segments during the three months ended September 30, 2024 and 2023:
| (Dollars in millions) |
Three Months Ended September 30, |
|||
| 2024 | 2023 | |||
| Biologics | ||||
| Net revenue | $ | 461 | $ | 448 |
| Operating expenses | 413 | 399 | ||
| Segment EBITDA | $ | 48 | $ | 49 |
| Pharma and Consumer Health | ||||
| Net revenue | $ | 563 | $ | 534 |
| Operating expenses | 446 | 433 | ||
| Segment EBITDA | $ | 117 | $ | 101 |
| Inter-segment revenue elimination | (1) | - | ||
| Combined net revenue | $ | 1,023 | $ | 982 |
| (Dollars in millions) |
Three Months Ended September 30, |
|||
| 2024 | 2023 | |||
| Segment EBITDA reconciled to net loss: | ||||
| Biologics | $ | 48 | $ | 49 |
| Pharma and Consumer Health | 117 | 101 | ||
| Sub-Total | $ | 165 | $ | 150 |
| Reconciling items to net (loss) earnings | ||||
|
Unallocated costs (1)
|
(109) | (777) | ||
| Depreciation and amortization | (113) | (112) | ||
| Interest expense, net | (60) | (58) | ||
| Income tax benefit (expense) | (12) | 38 | ||
| Net loss | $ | (129) | $ | (759) |
(1) Unallocated costs include restructuring and special items, stock-based compensation, gain on sale of subsidiary, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
| (Dollars in millions) |
Three Months Ended
September 30,
|
|||
| 2024 | 2023 | |||
| Impairment charges and gain/loss on sale of assets | $ | (4) | $ | 1 |
| Stock-based compensation | (17) | (19) | ||
|
Restructuring and other special items(a)
|
(75) | (23) | ||
|
Goodwill impairment charges(b)
|
- | (689) | ||
|
Gain on sale of subsidiary(c)
|
17 | - | ||
|
Other income (expense), net(d)
|
10 | (13) | ||
| Unallocated corporate costs, net | (40) | (34) | ||
| Total unallocated costs | $ | (109) | $ | (777) |
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(a) Restructuring and other special items during the three months ended September 30, 2024 include acquisition related charges for the Merger Agreement with Novo Holdings and restructuring charges associated with plans to reduce costs, consolidate facilities, and optimize our infrastructure across the organization. For further details on restructuring charges, see Note 8,Restructuring Costs.
Restructuring and other special items during the three months ended September 30, 2023 include (i) restructuring charges associated with plans to reduce costs, consolidate facilities, and optimize our infrastructure across the organization and (ii) transaction and integration costs associated with the Metrics acquisition.
(b) Goodwill impairment charges during the three months ended September 30, 2023 were associated with the Company's Consumer Health and Biomodalities reporting units, which are part of the Company's Pharma and Consumer Health and Biologics segments, respectively.
(c) Gain on sale of subsidiary represents the sale of the Company's Small Molecule Analytical Services subsidiary located in Research Triangle Park, North Carolina.
(d) Other income expense, net during the three months ended September 30, 2024 and 2023 primarily includes foreign currency remeasurement losses/gains.
The following table includes total assets for each segment, as well as reconciling items necessary to total the amounts reported in the consolidated financial statements.
| (Dollars in millions) |
September 30, 2024 |
June 30, 2024 |
||
| Assets: | ||||
| Biologics | $ | 5,222 | $ | 5,326 |
| Pharma and Consumer Health | 4,658 | 4,643 | ||
| Corporate and eliminations | (172) | (216) | ||
| Total assets | $ | 9,708 | $ | 9,753 |
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16. SUPPLEMENTAL BALANCE SHEET INFORMATION
Supplemental balance sheet information at September 30, 2024 and June 30, 2024 is detailed in the following tables.
Inventories
Work-in-process and inventories include raw materials, labor, and overhead. Total inventories consist of the following:
| (Dollars in millions) |
September 30, 2024 |
June 30, 2024 |
||
| Raw materials and supplies | $ | 604 | $ | 646 |
| Work-in-process | 131 | 138 | ||
| Total inventories, gross | 735 | 784 | ||
| Inventory cost adjustment | (182) | (210) | ||
| Total inventories | $ | 553 | $ | 574 |
Prepaid expenses and other
Prepaid expenses and other consist of the following:
| (Dollars in millions) |
September 30, 2024 |
June 30, 2024 |
||
| Prepaid expenses | $ | 59 | $ | 46 |
| Short-term contract assets | 592 | 585 | ||
| Spare parts supplies | 30 | 29 | ||
| Prepaid income tax | 27 | 45 | ||
| Non-U.S. value-added tax | 106 | 60 | ||
| Other current assets | 45 | 48 | ||
| Total prepaid expenses and other | $ | 859 | $ | 813 |
Other accrued liabilities
Other accrued liabilities consist of the following:
| (Dollars in millions) |
September 30, 2024 |
June 30, 2024 |
||
| Contract liabilities | $ | 272 | $ | 250 |
| Accrued employee-related expenses | 127 | 181 | ||
| Accrued expenses | 125 | 115 | ||
| Operating lease liabilities | 13 | 13 | ||
| Restructuring accrual | 5 | 10 | ||
| Accrued interest | 27 | 37 | ||
| Accrued income tax | 6 | 16 | ||
| Total other accrued liabilities | $ | 575 | $ | 622 |
17. SUBSEQUENT EVENTS
In October 2024, the Company announced it has entered into a definitive agreement to sell its oral solids development and small-scale manufacturing facility in Somerset, New Jersey. The transaction is expected to close in early 2025. Financial details of the agreement have not been disclosed but are not expected to be material to Company's Consolidated Financial Statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
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We provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, vaccines, and consumer health products at fifty facilities across four continents under rigorous quality and operational standards. Our oral, injectable, and respiratory delivery technologies, along with our state-of-the-art protein, plasmid, viral, and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical, pharmaceutical, and consumer health industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial and commercial supply, we can help our customers take products to market faster; we have supported more than half of new drug products approved by the U.S. Food and Drug Administration (the "FDA") in the last decade. Our development and manufacturing platforms, our proven formulation, supply, and regulatory expertise, and our broad and deep development and manufacturing know-how enable our customers to advance and then bring to market more products and better treatments for patients and consumers. Our commitment to reliably supply our customers' and their patients' needs is the foundation for the value we provide; annually, we produce nearly 70 billion unit doses for nearly 8,000 customer pharmaceutical and consumer health products, or approximately 1 in every 28 unit doses of such products taken each year by patients and consumers around the world. We believe that, through our investments in state-of-the-art facilities and capacity expansion, including investments in facilities focused on new treatment modalities and other attractive market segments, our continuous improvement activities devoted to operational and quality excellence, the sales of existing and introduction of new customer products, and, in some cases, our innovation activities and patents, we will continue to attract premium opportunities and realize the growth potential from these areas.
Our operating structure consists of two operating and reportable segments: (i) Biologics, and (ii) Pharma and Consumer Health. The Biologics segment provides formulation, development, and manufacturing for biologic proteins, cell gene, and other nucleic acid therapies; pDNA; iPSCs, oncolytic viruses, and vaccines; formulation, development, and manufacturing for parenteral dose forms, including vials, prefilled syringes, and cartridges; and analytical development and testing services for large molecules. Our Pharma and Consumer Health segment provides market-leading capabilities for complex oral solids, softgel formulations, Zydis fast-dissolve technologies, and gummy, soft chew, and lozenge dosage forms; formulation, development, and manufacturing platforms for oral, nasal, inhaled, and topical dose forms; cold-chain storage and distribution, and clinical trial development and supply services.
Pending Merger with Novo Holdings
On February 5, 2024, the Company entered into the Merger Agreement, pursuant to which, and subject to the satisfaction or waiver of the conditions set forth therein, the Company will survive the Merger as a wholly owned subsidiary of Parent, a Delaware corporation and a wholly owned subsidiary of Novo Holdings. Parent will acquire all the issued and outstanding shares of common stock of the Company. On May 29, 2024, the Company held a special meeting of its stockholders at which the Company's stockholders approved, among other things, the Merger Agreement. The Merger is expected to close towards the end of calendar year 2024, subject to customary closing conditions, including receipt of required regulatory approvals. For more information, see Note 13, Commitments and Contingenciesto our Consolidated Financial Statements.
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.
Goodwill and Indefinite-Lived Intangible Assets
We account for purchased goodwill and intangible assets with indefinite lives in accordance with ASC 350, Intangibles --Goodwill and Other. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. We perform an impairment evaluation of goodwill annually during the fourth quarter of our fiscal year or when circumstances otherwise indicate an evaluation should be performed. The evaluation may begin with a qualitative assessment for each reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the qualitative assessment does not generate a positive response, or if no qualitative assessment is performed, a quantitative assessment, based upon discounted cash flows, is performed and requires management to estimate future cash flows, growth rates, and economic and market conditions.
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Non-GAAP Metrics
EBITDA from operations
Management measures operating performance based on consolidated earnings from operations before interest expense, expense 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 historical investments that we have made 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 the Consolidated Financial Statements, and such information is not meant to replace or supersede U.S. GAAP measures. Our definition of EBITDA from operations may not be the same as similarly titled measures used by other companies. The most directly comparable measure to EBITDA from operations defined under U.S. GAAP is net earnings. Included in this Management's Discussion and Analysis is a reconciliation of net earnings to EBITDA from operations.
In addition, we evaluate the performance of our segments based on segment earnings before non-controlling interests, other expense (income), impairments, restructuring costs, interest expense, income tax expense, and depreciation and amortization ("Segment EBITDA"). For a reconciliation of Segment EBITDA to net earnings, see Note 15, Segment Information to our Consolidated Financial Statements.
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 period results using prior period foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange. These results should be considered in addition to, not as a substitute for, results reported in accordance with U.S. GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not measures of performance presented in accordance with U.S. GAAP.
Other Non-GAAP Measures
Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current period sales and profitability from existing operations. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency exchange, acquisitions of operating or legal entities, and divestitures within the applicable periods. 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 September 30, 2024 Compared to the Three Months Ended September 30, 2023
The below tables summarize several financial metrics we use to measure performance for the three months ended September 30, 2024 and 2023. Refer to the discussions below regarding performance and use of key financial metrics.
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Results for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 were as follows:
|
Three Months Ended September 30, |
FX Impact | Constant Currency Increase (Decrease) | ||||||||
| (Dollars in millions) | 2024 | 2023 | Change $ | Change % | ||||||
| Net revenue | $ | 1,023 | $ | 982 | $ | 3 | $ | 38 | 4 | % |
| Cost of sales | 842 | 813 | 2 | 27 | 3 | % | ||||
| Gross margin | 181 | 169 | 1 | 11 | 7 | % | ||||
| Selling, general, and administrative expenses | 252 | 205 | - | 47 | 23 | % | ||||
| Gain on sale of subsidiary | (17) | - | - | (17) | * | |||||
| Goodwill impairment charges | - | 689 | - | (689) | (100) | % | ||||
| Other operating expense, net | 13 | 1 | - | 12 | * | |||||
| Operating loss | (67) | (726) | 1 | 658 | 91 | % | ||||
| Interest expense, net | 60 | 58 | - | 2 | 2 | % | ||||
| Other (income) expense, net | (10) | 13 | (1) | (22) | (170) | % | ||||
| Loss before income taxes | (117) | (797) | 2 | 678 | 85 | % | ||||
| Income tax expense (benefit) | 12 | (38) | 1 | 49 | 129 | % | ||||
| Net loss | $ | (129) | $ | (759) | $ | 1 | $ | 629 | 83 | % |
* Not meaningful
Change % calculations are based on amounts prior to rounding
Net Revenue
| 2024 vs. 2023 | ||
| Year-Over-Year Change |
Three Months Ended September 30, |
|
| Net Revenue | ||
| Organic | 4 | % |
| Constant-currency change | 4 | % |
| Foreign currency translation impact on reporting | - | % |
| Total % change | 4 | % |
Net revenue increased $38 million, or 4%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2023. Net revenue increased 4% organically primarily due to growth in the manufacture of prescription products,
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increased demand for our orally disintegrating Zydis commercial products and our gene therapy offerings, partially offset by a decline in demand for COVID-19 related programs.
Gross Margin
Gross margin increased $11 million, or 7%, compared to the three months ended September 30, 2023, excluding the impact of foreign exchange. On a constant-currency basis, gross margin, as a percentage of revenue, increased 50 basis points to 17.7% in the three months ended September 30, 2024, compared to 17.2% in the prior-year period, primarily due to a favorable shift in product mix and increased productivity, partially offset by an increase in inventory related charges.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $47 million, or 23%, compared to the three months ended September 30, 2023, excluding the impact of foreign exchange. The year-over-year increase was attributable to acquisition costs associated with the pending Novo merger, a $6 million increase in employee related expenses and $5 million of incremental credit losses.
Gain on Sale of Subsidiary
For the three months ended September 30, 2024, gain on sale of subsidiary represents the sale of our Small Molecule Analytical Services subsidiary located in Research Triangle Park, North Carolina.
Goodwill Impairment Charges
Goodwill impairment charges during the three months ended September 30, 2023 were associated with our Consumer Health and Biomodalities reporting units, which are part of our Pharma and Consumer Health and Biologics segments, respectively.
Other Operating Expense, net
Other operating expense, net for the three months ended September 30, 2024 increased $12 million, compared to the three months ended September 30, 2023. The year-over-year increase was primarily due to a $7 million increase in restructuring charges and a $5 million increase in fixed-asset impairment charges,
Interest Expense, net
Interest expense, net of $60 million for the three months ended September 30, 2024 remained consistent, compared to the three months ended September 30, 2023, excluding the impact of foreign exchange.
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" below and Note 5, Long-Term Obligations and Short-Term Borrowingsto our Consolidated Financial Statements.
Other (Income) Expense, net
Other income, net of $10 million for the three months ended September 30, 2024 was primarily driven by $10 million of foreign currency gains.
Other expense, net of $13 million for the three months ended September 30, 2023 was primarily driven by $12 million of foreign currency losses.
Income Tax Expense (Benefit)
Our provision for income taxes for the three months ended September 30, 2024, was $12 million relative to loss before taxes of $117 million. Our benefit for income taxes for the three months ended September 30, 2023, was $38 million relative to loss before income taxes of $797 million. The income tax expense during the quarter is primarily from income taxes on our profitable international operations and certain discrete items recognized during the quarter. The income tax benefit for the three months ended September 30, 2023, was primarily the result of a deferred tax benefit resulting from the impairment of goodwill during the quarter and certain discrete income tax benefits. This quarterly provision/benefit was also impacted by the geographic distribution of our pretax income/loss resulting from our business mix, changes in the tax impact of permanent differences, restructuring, special items, certain equity related compensation, and other discrete tax items that may have unique tax implications depending on the nature of the item.
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Segment Review
The following charts depict the percentages of net revenue from each of our two reportable segments for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. 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 September 30, 2024 compared to the three months ended September 30, 2023 were as follows:
|
Three Months Ended September 30, |
FX Impact | Constant Currency Increase (Decrease) | ||||||||
| (Dollars in millions) | 2024 | 2023 | Constant Currency Increase (Decrease) | |||||||
| Biologics | ||||||||||
| Net revenue | $ | 461 | $ | 448 | $ | 2 | $ | 11 | 3 | % |
| Segment EBITDA | 48 | 49 | - | (1) | (3) | % | ||||
| Pharma and Consumer Health | ||||||||||
| Net revenue | 563 | 534 | 2 | 27 | 5 | % | ||||
| Segment EBITDA | 117 | 101 | 1 | 15 | 15 | % | ||||
| Inter-segment revenue elimination | (1) | - | (1) | - | (60) | % | ||||
|
Unallocated Costs (1)
|
(109) | (777) | 1 | 667 | 86 | % | ||||
| Combined totals | ||||||||||
| Net revenue | $ | 1,023 | $ | 982 | $ | 3 | $ | 38 | 4 | % |
| EBITDA (loss) from operations | $ | 56 | $ | (627) | $ | 2 | $ | 681 | * |
* Not meaningful
Change % calculations are based on amounts prior to rounding.
(1) Unallocated costs include restructuring and special items, stock-based compensation, impairment charges, gain on sale of subsidiary, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
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|
Three Months Ended September 30, |
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| (Dollars in millions) | 2024 | 2023 | ||
| Impairment charges and gain/loss on sale of assets | $ | (4) | $ | 1 |
| Stock-based compensation | (17) | (19) | ||
|
Restructuring and other special items (a)
|
(75) | (23) | ||
| Gain on sale of subsidiary | 17 | - | ||
|
Goodwill impairment charges (b)
|
- | (689) | ||
|
Other income (expense), net (c)
|
10 | (13) | ||
| Unallocated corporate costs, net | (40) | (34) | ||
| Total unallocated costs | $ | (109) | $ | (777) |
(a) Restructuring and other special items during the three months ended September 30, 2024 include (i) acquisition related charges for the Merger Agreement with Novo Holdings and (ii) restructuring charges associated with plans to reduce costs, consolidate facilities, and optimize our infrastructure across the organization. Restructuring and other special items during the three months ended September 30, 2023 include (i) restructuring charges associated with our plans to reduce costs, consolidate facilities, and optimize infrastructure across the organization and (ii) transaction and integration costs associated with our Metrics Contracts Services ("Metrics") acquisition.
(b) Goodwill impairment charges during the three months ended September 30, 2023 were associated with our Consumer Health and Biomodalities reporting units, which are part of our Pharma and Consumer Health and Biologics segments, respectively.
(c) Refer to Note 7, Other (Income) Expense, Netto our Consolidated Financial Statements for details of amounts recorded within other (income) expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net loss to EBITDA from operations:
|
Three Months Ended September 30, |
||||
| (Dollars in millions) | 2024 | 2023 | ||
| Net loss | $ | (129) | $ | (759) |
| Depreciation and amortization | 113 | 112 | ||
| Interest expense, net | 60 | 58 | ||
| Income tax expense (benefit) | 12 | (38) | ||
| EBITDA (loss) from operations | $ | 56 | $ | (627) |
Biologics segment
| 2024 vs. 2023 | ||||
| Year-Over-Year Change |
Three Months Ended September 30, |
|||
| Net Revenue | Segment EBITDA | |||
| Organic | 3 | % | (3) | % |
| Constant-currency change | 3 | % | (3) | % |
| Foreign exchange translation impact on reporting | - | % | 1 | % |
| Total % change | 3 | % | (2) | % |
Biologics net revenue increased by $11 million, or 3%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2023. The increase was primarily driven by growth in our gene therapy offerings, partially offset by a decline in demand for COVID-19 related programs.
Biologics Segment EBITDA decreased by $1 million, or 3%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2023. The decrease was primarily driven by a decline in demand for COVID-19 related programs partially offset by growth in our gene therapy offerings.
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Pharma and Consumer Health segment
| 2024 vs. 2023 | ||||
| Year-Over-Year Change |
Three Months Ended September 30, |
|||
| Net Revenue | Segment EBITDA | |||
| Organic | 5 | % | 15 | % |
| Constant-currency change | 5 | % | 15 | % |
| Foreign currency translation impact on reporting | - | % | 1 | % |
| Total % change | 5 | % | 16 | % |
Pharma and Consumer Health net revenue increased by $27 million, or 5%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2023. Net revenue increased 5% organically primarily driven by increased revenue from the manufacture of prescription products and increased demand for our orally disintegrating Zydis commercial products.
Pharma and Consumer Health Segment EBITDA increased $15 million, or 15%, excluding the impact of foreign exchange, compared to the three months ended September 30, 2023. The increase was driven by the increase from the manufacture of prescription products, increased demand for our orally disintegrating Zydis commercial products and an increase in our consumer health products, primarily in our wellness products.
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 our debt, and any mandatory or discretionary principal payment on our debt. As of September 30, 2024, Catalent Pharma Solutions, Inc., our principal operating subsidiary ("Operating Company"), following the November 2022 execution of Amendment No. 7 to the amended and restated credit agreement, dated as of May 20, 2014, governing our senior secured credit facilities (as amended, the "Credit Agreement"), had available $1.09 billion in borrowing capacity under our revolving credit facility, due to $6 million in letters of credit outstanding as of September 30, 2024.
We believe that our cash on hand, cash from operations, and available borrowings under our revolving credit facility will be adequate to meet our liquidity needs for at least the next 12 months, as well as the amounts expected to become due with respect to our pending capital projects.
Cash Flows
The following table summarizes our consolidated statements of cash flows:
|
Three Months Ended September 30, |
||||||
| (Dollars in millions) | 2024 | 2023 | $ Change | |||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | 61 | $ | (70) | $ | 131 |
| Investing activities | $ | (34) | $ | (84) | $ | 50 |
| Financing activities | $ | (10) | $ | 98 | $ | (108) |
Operating Activities
For the three months ended September 30, 2024, cash provided by operations was $61 million compared to $70 million in cash used in operations for the three months ended September 30, 2023. The year-over-year change was primarily due to a benefit in working capital.
Investing Activities
For the three months ended September 30, 2024, cash used in investing activities was $34 million, compared to $84 million for the three months ended September 30, 2023. The decrease in cash used in investing activities was primarily driven
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by a decrease in acquisition of property, equipment, and other productive assets. The three months ended September 30, 2024 also include $23 million in proceeds from the sale of a subsidiary.
Financing Activities
For the three months ended September 30, 2024, cash used in financing activities was $10 million, compared to cash provided by financing activities of $98 million for the three months ended September 30, 2023. The three months ended September 30, 2023 included borrowing proceeds of $115 million.
Debt Covenants
Senior Secured Credit Facilities
The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our (and our restricted subsidiaries') ability to incur additional indebtedness or issue certain preferred shares; create liens on assets; engage in mergers and consolidations; sell assets; pay dividends and distributions or repurchase capital stock; repay subordinated indebtedness; engage in certain transactions with affiliates; make investments, loans, or advances; make certain acquisitions; enter into sale and leaseback transactions; amend material agreements governing our subordinated indebtedness; and change our lines of business.
The Credit Agreement also contains change-of-control provisions and certain customary affirmative covenants and events of default. The revolving credit facility requires compliance with a net leverage covenant when there is a 30% or more draw outstanding at a period end. As of September 30, 2024, 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.
The Senior Notes
The several indentures governing each series of our outstanding 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 September 30, 2024, Operating Company was in compliance with all material covenants under the Indentures.
Capital Resources
As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the "adjusted issue price" (as defined for U.S. federal income tax purposes) may result in taxable cancellation of indebtedness income to us, which amounts may be material, or in related adverse tax consequences to us.
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Geographic Allocation of Cash
As of September 30, 2024 and June 30, 2024, our foreign subsidiaries held cash and cash equivalents of $277 million and $257 million, respectively, out of the total consolidated cash and cash equivalents of $335 million and $289 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 entered into an interest-rate swap agreement with Bank of America N.A. that acts as a hedge against the economic effect of a portion of the variable-interest obligation associated with our U.S. dollar-denominated term loan 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 September 30, 2024; however, as a result of this interest-rate swap agreement, the variable portion of the applicable rate on $500 million of the term loan was effectively fixed at 0.9985% as of February 2021.
To conform with the adoption of ASC 848, Reference Rate Reform and the Eighth Amendment, the Company amended the 2021 Rate Swap in June 2023 (the "2023 Rate Swap"). The 2023 Rate Swap continues to effectively fix the rate of interest payable on the same portion of our U.S dollar-denominated term loan under our secured credit facilities. The applicable rate for the U.S. dollar-denominated term loan under the Credit Agreement was SOFR (subject to a floor of 0.39%) plus 2.00% as of June 30, 2023. As a result of the 2023 Rate Swap, the variable portion of the applicable interest rate on $500 million of the U.S. dollar-denominated term loan is now effectively fixed at 0.9431%.
Currency Risk Management
We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our investments in our operations in Europe. While we do not actively hedge against changes in foreign currency, we have mitigated the exposure of our investments in our European operations by denominating a portion of our debt in euros. At September 30, 2024, we had $919 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in European operations. Refer to Note 9, Derivative Instruments and Hedging Activities,to our Consolidated Financial Statements for further discussion of net investment hedge activity in the period.
From time to time, we may use forward foreign currency exchange contracts to manage our exposure to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs. In addition, we may use such contracts to protect the value of existing foreign currency assets and liabilities. Currently, we do not use any forward foreign currency exchange contracts. We continue to evaluate hedging opportunities for foreign currency in the future.
Off-Balance Sheet Arrangements
Other than short-term operating leases and outstanding letters of credit as discussed above, we do not have any material off-balance sheet arrangement as of September 30, 2024.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our quantitative and qualitative disclosures about market risks, see the section titled Item 7A, Quantitative and Qualitative Disclosures About Market Risks in our Fiscal 2024 10-K. As of September 30, 2024, there has been no material change in this information.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any control or procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, including our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2024, our disclosure controls and procedures were not effective to accomplish their objectives at the reasonable assurance level, as a result of the material weakness in our internal control over financial reporting disclosed below.
Material Weakness in Internal Control over Financial Reporting
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal controls over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim Consolidated Financial Statements will not be prevented or detected on a timely basis.
Previously Disclosed Material Weakness in Internal Control over Financial Reporting - Inventory Costing and Valuation
As previously disclosed, in connection with our evaluation for the three months ended June 30, 2024, we did not maintain effective internal control over inventory costing and valuation at our Bloomington, Indiana facility. Specifically, there was a lack of stability of personnel with the requisite expertise to effectively execute transactional controls related to inventory costing and valuation. When coupled with a manual inventory reconciliation process and insufficient standard operating procedure documentation, the preparation and review of inventory costing and valuation manual journal entries at our Bloomington facility was not performed with the necessary level of technical competency to detect a material misstatement.
Plan to Remediate Material Weakness in Internal Control over Financial Reporting - Inventory Costing and Valuation
The Company, with oversight by the Audit Committee of the Board, is actively developing and implementing a comprehensive remediation plan that will include the following initiatives:
• We have established a Steering Committee to evaluate the processes and resourcing requirements specific to inventory costing and valuation.
• We have already engaged internal and temporary third-party resources with the appropriate level of technical knowledge and experience in accounting related to inventory costing and valuation to complement the Bloomington site resources.
• We plan to hire develop and retain incremental full-time personnel at the Bloomington facility with the appropriate accounting expertise.
• We will review and update our processes to minimize the level of complexity and manual work required.
• We will create detailed process documentation related to inventory costing and valuation.
• We will provide training to personnel on our revised inventory costing and valuation processes.
Changes in Internal Control over Financial Reporting
We are taking actions to complete the remediation of the remaining material weakness relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in Note 14, Commitments and Contingencies,to the Consolidated Financial Statements and is incorporated by reference herein.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in the section entitled "Risk Factors" in our Fiscal 2024 10-K, which could materially affect our business, financial condition, or future results. The risks described in our Fiscal 2024 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results.
There has been no material change to the risk factors disclosed in our Fiscal 2024 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Equity Securities
We did not sell any unregistered equity securities during the period covered by this Quarterly Report.
Issuer Purchases of Equity Securities
We did not purchase any of our equity securities during the period covered by this Quarterly Report.
Trading Arrangements
During the fiscal quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated the contracts, instructions or written plans for the purchase or sale of our securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibits:
|
31.1
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
|
31.2
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. * | |
|
32.1
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
|
32.2
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
| 101 | The following financial information from Catalent, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 formatted in inline XBRL: (i) Consolidated Statements of Operations for the Three Months Ended September 30, 2024 and 2023; (ii) Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2024 and 2023 (iii) Consolidated Balance Sheets as of September 30, 2024 and June 30, 2024; (iv) Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended September 30, 2024 and 2023; (v) Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2024 and 2023; and (vi) Notes to Unaudited Consolidated Financial Statements. | |
| 104 |
The cover page of this Quarterly Report on Form 10-Q, formatted as Inline XBRL and contained in Exhibit 101.
|
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CATALENT, INC.
(Registrant)
|
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| Date: | November 5, 2024 | By: | /s/ MICHAEL HATZFELD | |
| Michael Hatzfeld | ||||
| Vice President and Chief Accounting Officer | ||||
| (Duly Authorized Officer and Chief Accounting Officer) |
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