CATALENT, INC. The Company We provide differentiated development and manufacturing solutions for drugs, protein-based biologics, cell and gene therapies, and consumer health products at over 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 and cell and gene therapy manufacturing capacity, address a wide and growing range of modalities and therapeutic and other categories across the biopharmaceutical and consumer health industries. Through our extensive capabilities, growth-enabling capacity, and deep expertise in product development, regulatory compliance, and clinical trial supply, we can help our customers take products to market faster, including nearly half of new drug products approved by theU.S. Food and Drug Administration (the "FDA") in 31 -------------------------------------------------------------------------------- Table of Contents the last decade. Our development and manufacturing platforms, which include those in our Biologics, Softgel and Oral Technologies, and Oral and Specialty Delivery segments, 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 more than 70 billion doses for nearly 7,000 customer products, or approximately 1 in every 24 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. We currently operate in four operating segments, which also constitute our four reporting segments: Biologics, Softgel and Oral Technologies, Oral and Specialty Delivery, and Clinical Supply Services. The COVID-19 Pandemic Our response to COVID-19 Since the start of the COVID-19 pandemic, we have taken and continue to take steps to protect our employees, ensure the integrity and quality of our products and services, and to maintain business continuity for our customers and their patientswho depend on us to manufacture and supply critical products to the market. To address the multiple dimensions of the pandemic, senior, multi-disciplinary teams reporting directly to our Chief Executive Officer have been continuously monitoring the global situation, executing mitigation activities whenever and wherever required, and implementing a phased and structured return to our facilities as circumstances have permitted for those employeeswho have been working remotely. Among other things, we implemented measures to avoid or reduce infection or contamination in line with guidelines issued by theU.S. Centers for Disease Control and Prevention , theWorld Health Organization , and local authorities where we operate, re-emphasized good hygiene practices, restricted non-employee access to our sites, reorganized our workflows where permitted to maximize physical distancing, limited employee travel, facilitated safer alternatives to travel to and from work, and employed remote-working strategies. We have reviewed and will continue to analyze our supply chain to identify any risk, delay, or concern that may have an impact on our ability to deliver our services and products. To date, we have not identified any significant risk, delay, or concern that would have a substantial effect on such delivery. We have adopted various procedures to minimize and manage any future disruption to our ongoing operations, including the creation and activation of new and existing business continuity plans when needed. Our existing procedures, which are consistent with current good manufacturing practices and other regulatory standards, are intended to assure the integrity of our supply against any contamination. We have a detailed response plan to manage any impact of the virus on employee health, site operations, and product supply, including immediate assessment of the health of employees reporting symptoms, comprehensive risk assessment of any impact to quality, additional cleaning protocols, and alternative shift patterns to compensate should fewer employees be available.
Impact of COVID-19 on Our Business and Results of Operations
We continue to assess any impact the COVID-19 pandemic may have on our business and results of operations. We have seen increased demand and significant revenue increases and the potential for further revenue increases from COVID-19-related products, particularly in our Biologics segment. As part of our response to the COVID-19 pandemic, we accelerated and enhanced certain of our capital improvement plans to expand capacity for manufacturing drug substance and drug product for protein-based biologics and cell and gene therapies, particularly at our drug product facilities inBloomington, Indiana , and Anagni,Italy , as well as our commercial-scale viral vector manufacturing facility inMaryland . We have also implemented various strategies to protect our financial condition and results of operations should we experience a reduction in demand for COVID-19 related products, such as ensuring contractual take-or-pay and minimum volume requirements for the manufacture of certain COVID-19 related products. However, the extent and duration of revenue associated with COVID-19-related products is uncertain and dependent, in important respects, on factors outside our control. The COVID-19-vaccines we manufacture are still pending approval from the FDA and other non-U.S. regulatory authorities and may not receive approval. The future duration and extent of the COVID-19 pandemic and the future demand for COVID-19 vaccines and therapies is unknown. Public opinion of certain COVID-19 vaccines and therapies and the product owners and manufacturers can change quickly and affect the demand for certain products and services, although they should not affect any required minimum payment for a COVID-19 related product subject to a "take-or-pay" provision. In addition, any 32 -------------------------------------------------------------------------------- Table of Contents concentration of revenue from certain COVID-19 vaccine products enhances our operational risk with respect to quality, security, regulatory inspections and business disruption resulting from any unforeseen event that affects any of the facilities and communities in which we manufacture COVID-19 vaccines. Because some of our work on COVID-19 vaccines is performed under subcontracts toU.S. government contracts, new regulations affectingU.S. federal government prime and subcontractors may affect our operations, efficiency, and ability to deliver on our obligations to customers for COVID-19 vaccines, other COVID-19 related products, and other unrelated products and services. We have implemented various mechanisms to protect our customers, their material and product, and our business continuity, such as enhanced security measures at certain facilities and heightened cybersecurity controls. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). Management made certain estimates and assumptions during the preparation of the consolidated financial statements in accordance withU.S. GAAP. These estimates and assumptions affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities in the consolidated financial statements. These estimates also affect the reported amount of net earnings during the reporting periods. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on the consolidated financial statements than others. There was no material change to our critical accounting policies or in the underlying accounting assumptions and estimates from those described in our Fiscal 2021 10-K, other than recently adopted accounting principles disclosed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies to the unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (the "Consolidated Financial Statements"), which adoptions had no material impact on our financial condition or results of operations. Non-GAAP Metrics EBITDA from operations Management measures operating performance based on consolidated earnings from operations before interest expense, expense (benefit) for income taxes, and depreciation and amortization, adjusted for the income or loss attributable to non-controlling interests ("EBITDA from operations"). EBITDA from operations is not defined underU.S. GAAP, is not a measure of operating income, operating performance, or liquidity presented in accordance withU.S. GAAP, and is subject to important limitations. We believe that the presentation of EBITDA from operations enhances an investor's understanding of our financial performance. We believe this measure is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business and use this measure for business planning purposes. In addition, given the significant investments that we have made in the past in property, plant, and equipment, depreciation and amortization expenses represent a meaningful portion of our cost structure. We believe that EBITDA from operations will provide investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, to service debt, and to undertake capital expenditures because it eliminates depreciation and amortization expense. We present EBITDA from operations in order to provide supplemental information that we consider relevant for the readers of our Consolidated Financial Statements, and such information is not meant to replace or supersedeU.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 underU.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 (benefit), and depreciation and amortization ("Segment EBITDA"). Use of Constant Currency As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors' ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a 33 -------------------------------------------------------------------------------- Table of Contents 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 withU.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 withU.S. GAAP. Other Non-GAAP Measures Organic revenue growth and Segment EBITDA growth are measures we use to explain the underlying results and trends in the business. Organic revenue growth and Segment EBITDA growth are measures used to show current year sales and earnings from existing operations. Organic revenue growth and Segment EBITDA growth exclude the impact of foreign currency exchange, acquisitions of operating or legal entities, and divestitures within the year. These measures should be considered in addition to, not as a substitute for, performance measures reported in accordance withU.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 withU.S. GAAP. Three Months EndedDecember 31, 2021 Compared to the Three Months EndedDecember 31, 2020 The below tables summarize several financial metrics we use to measure performance for the three months endedDecember 31, 2021 and three months endedDecember 31, 2020 . Refer to the discussions below regarding performance and use of key financial metrics. [[Image Removed: ctlt-20211231_g2.jpg]] [[Image Removed: ctlt-20211231_g3.jpg]] Results for the three months endedDecember 31, 2021 compared to the three months endedDecember 31, 2020 were as follows: Three Months Ended December 31, FX Impact Constant Currency Increase (Decrease) (Dollars in millions) 2021 2020 Change $ Change % Net revenue$ 1,217 $ 911 $ (13) $ 319 35 % Cost of sales 812 613 (8) 207 34 % Gross margin 405 298 (5) 112 38 % Selling, general, and administrative expenses 228 165 (1) 64 38 % Other operating expense 16 6 (1) 11 185 % Operating earnings 161 127 (3) 37 30 % Interest expense, net 32 26 - 6 24 % Other expense (income), net 14 (8) (2) 24 (292) % Earnings before income taxes 115 109 (1) 7 6 % Income tax expense 18 21 - (3) (14) % Net earnings $ 97$ 88 $ (1) $ 10 11 %
Change % calculations are based on amounts prior to rounding
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Net Revenue
2021 vs. 2020
Three Months Ended
Year-Over-Year Change December 31 ,
Net Revenue
Organic 32 %
Impact of acquisitions 6 %
Impact of divestitures (3) %
Constant-currency change 35 %
Foreign currency translation impact on reporting (1) %
Total % change 34 %
Net revenue increased $319 million , or 35%, excluding the impact of foreign
exchange, compared to the three months ended December 31, 2020 . Net revenue
decreased 3% inorganically principally due to the sale of Catalent USA
Woodstock, Inc. and certain related assets (collectively, the "Blow-Fill-Seal
Business") in March 2021 . Net revenue increased 32% organically on a
constant-currency basis, primarily due to (i) broad-based strength across our
Biologics segment in part related to demand for COVID-19-related programs, and
(ii) increased demand for our customers' prescription products, a continued
rebound in our consumer health products, particularly in cough, cold, and
over-the-counter pain relief products, and growth in development services in our
Softgel and Oral Technologies segment.
Gross Margin
Gross margin increased $112 million , or 38%, compared to the three months ended
December 31, 2020 , excluding the impact of foreign exchange, primarily as a
result of the strong margin profile on broad-based offerings in our Biologics
segment, in part for COVID-19 related programs, a favorable impact from the
decline in recall charges in our Oral and Specialty Delivery segment, and
increased demand for our prescription products and development growth in our
Softgel and Oral Technologies segment, partially offset by a $13 million
increase in depreciation and amortization expense. On a constant-currency basis,
gross margin, as a percentage of revenue, increased 60 basis points to 33.3% in
the three months ended December 31, 2021 , compared to 32.7% in the prior-year
period, primarily due to the factors described above.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased $64 million , or 38%,
compared to the three months ended December 31, 2020 , excluding the impact of
foreign exchange, which includes $15 million in net incremental expenses from
acquired and divested companies. The year-over-year increase in selling,
general, and administrative expenses was primarily due to an $18 million
increase in employee-related costs principally incurred for wages and bonuses,
$13 million in transaction and integration costs primarily associated with our
acquisition of Bettera Holdings, LLC ("Bettera"), $5 million of amortization and
depreciation, and $4 million of bad debt expense.
Other Operating Expense
Other operating expense for the three months ended December 31, 2021 increased
by $11 million , or 185%, compared to the three months ended December 31, 2020 ,
when excluding the impact of foreign exchange. The year-over-year increase was
primarily due to a $15 million increase in fixed asset impairment charges
primarily associated with a product in our respiratory and specialty platform.
Interest Expense, net
Interest expense, net of $32 million for the three months ended December 31,
2021 increased $6 million , or 24%, compared to the three months ended December
31, 2020 , excluding the impact of foreign exchange. The savings from repayment
of our formerly outstanding term loans and 4.875% senior notes due 2026 were
offset by increases in interest expense due to our most recent tranche of term
loans, 3.125% senior notes due 2029 (the "2029 Notes"), and 3.500% senior notes
due 2030 (the "2030 Notes").
For additional information concerning our debt and financing arrangements,
including the changing mix of debt and equity in our capital structure, see
"Liquidity and Capital Resources" and Note 6, Long-Term Obligations and
Short-Term Borrowings to our Consolidated Financial Statements.
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Other Expense (Income), net
Other expense, net of $14 million for the three months ended December 31, 2021
was primarily driven by $15 million of foreign currency losses.
Other income, net of $8 million for the three months ended December 31, 2020 was
primarily driven by a gain of $7 million related to the change in fair value of
the derivative liability arising from the dividend-adjustment mechanism of our
formerly outstanding Series A convertible preferred stock, par value $0.01 (the
"Series A Preferred Stock").
Income Tax Expense
Our provision for income taxes for the three months ended December 31, 2021 was
$18 million relative to earnings before taxes of $115 million . Our provision for
income taxes for the three months ended December, 31, 2020 was $21 million
relative to earnings before taxes of $109 million . The decrease in income tax
provision was primarily the result of a shift in pretax income in international
tax jurisdictions with favorable tax rates.
Segment Review
The following charts depict the percentages of net revenue from each of our four
reporting segments for the three months ended December 31, 2021 compared to the
three months ended December 31, 2020 . Refer below for discussions regarding each
segment's net revenue and EBITDA performance and to "Non-GAAP Metrics" for a
discussion of our use of Segment EBITDA, a measure that is not defined under
U.S. GAAP.
[[Image Removed: ctlt-20211231_g4.jpg]]
Our results on a segment basis for the three months ended
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Three Months Ended
December 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2021 2020 Change $ Change %
Biologics
Net revenue $ 638 $ 404 $ (6) $ 240 60 %
Segment EBITDA 197 136 (2) 63 47 %
Softgel and Oral Technologies
Net revenue 329 247 (6) 88 36 %
Segment EBITDA 78 46 (1) 33 73 %
Oral and Specialty Delivery
Net revenue 156 170 - (14) (8) %
Segment EBITDA 44 44 - - - %
Clinical Supply Services
Net revenue 99 93 (2) 8 7 %
Segment EBITDA 27 25 (1) 3 9 %
Inter-segment revenue elimination (5) (3) 1 (3) (61) %
Unallocated Costs (1) (101) (45) 2 (58) (130) %
Combined totals
Net revenue $ 1,217 $ 911 $ (13) $ 319 35 %
EBITDA from operations $ 245 $ 206 $ (2) $ 41 20 %
Change % calculations are based on amounts prior to rounding (1) Unallocated costs include restructuring and special items, stock-based compensation, impairment charges, certain other corporate directed costs, and other costs that are not allocated to the segments as follows:
Three Months Ended
December 31,
(Dollars in millions) 2021 2020
Impairment charges and gain (loss) on sale of assets (a) $ (16) $ (1)
Stock-based compensation (11) (11)
Restructuring and other special items (b) (23) (15)
Other (expense) income, net (c) (14) 8
Unallocated corporate costs, net (37) (26)
Total unallocated costs $ (101) $ (45)
(a) Impairment charges and gain (loss) on sale of assets during the three
months ended December 31, 2021 include fixed asset impairment charges associated
with a product in our respiratory and specialty platform.
(b) Restructuring and other special items during the three months ended
December 31, 2021 include (i) transaction and integration costs primarily
associated with the acquisition of Bettera, (ii) restructuring costs associated
with the closure of our Clinical Supply Services facility in Bolton, U.K.
Restructuring and other special items during the three months ended December 31,
2020 include transaction costs for the sale of our Blow-Fill-Seal Business, and
restructuring costs associated with the closure of our Bolton facility.
(c) Refer to Note 8, Other Expense (Income), Net for details of financing
charges and foreign currency translation adjustments recorded within other
expense (income), net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
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Three Months Ended
December 31,
(Dollars in millions) 2021 2020
Net earnings $ 97 $ 88
Depreciation and amortization 98 71
Interest expense, net 32 26
Income tax expense (benefit) 18 21
EBITDA from operations $ 245 $ 206
Biologics segment
2021 vs. 2020
Three Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 59 % 48 %
Impact of acquisitions 1 % (1) %
Constant-currency change 60 % 47 %
Foreign exchange translation impact on reporting (2) % (2) %
Total % change 58 % 45 %
Biologics net revenue increased by $240 million , or 60%, excluding the impact of
foreign exchange, compared to the three months ended December 31, 2020 . The
increase was driven by robust end-market demand for our drug product, drug
substance and gene therapy offerings, in part related to demand for COVID-19
related programs.
Biologics Segment EBITDA increased by $63 million , or 47%, excluding the impact
of foreign exchange, compared to the three months ended December 31, 2020 . The
increase was driven by robust end-market demand for our drug product, drug
substance and gene therapy offerings, in part related to demand for COVID-19
related programs.
Softgel and Oral Technologies segment
2021 vs. 2020
Three Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 14 % 43 %
Impact of acquisitions 22 % 30 %
Constant-currency change 36 % 73 %
Foreign currency translation impact on reporting (3) % (3) %
Total % change 33 % 70 %
Softgel and Oral Technologies net revenue increased by $88 million , or 36%,
excluding the impact of foreign exchange, compared to the three months ended
December 31, 2020 . The increase in organic revenue was driven by strong
end-market demand for prescription products, a continued rebound in consumer
health products, particularly in cough, cold, and over-the-counter pain relief
products, and growth in development services.
Softgel and Oral Technologies Segment EBITDA increased $33 million , or 73%,
excluding the impact of foreign exchange, compared to the three months ended
December 31, 2020 . The organic portion of the increase, similar to that of net
revenue, was driven by an increase in end-market demand in prescription
products, a continued rebound in consumer health products, particularly in
cough, cold, and over-the-counter pain relief products, and growth in
development services.
We completed the Bettera acquisition in October 2021 , which increased net
revenue and Segment EBITDA on an inorganic basis by 22% and 30%, respectively,
in the three months ended December 31, 2021 , compared to the corresponding
prior-year period.
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Oral and Specialty Delivery segment
2021 vs. 2020
Three Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 5 % 24 %
Impact of acquisitions 2 % (7) %
Impact of divestitures (15) % (17) %
Constant currency change (8) % - %
Foreign currency translation impact on reporting - % - %
Total % change (8) % - %
Oral and Specialty Delivery net revenue decreased by $14 million , or 8%,
excluding the impact of foreign exchange, compared to the three months ended
December 31, 2020 . Net revenue increased 5%, compared to the three months ended
December 31, 2020 , excluding the impact of acquisitions and divestitures,
primarily driven by demand for early-phase development programs and orally
delivered Zydis commercial products.
Oral and Specialty Delivery Segment EBITDA remained unchanged, excluding the
impact of foreign exchange, compared to the three months ended December 31,
2020 . Segment EBITDA increased 24%, compared to the three months ended December
31, 2020 , excluding the impact of acquisitions and divestitures. The increase in
Segment EBITDA from the prior-year period was primarily driven by the increased
demand for commercial products and a favorable impact from prior year recall
costs in our respiratory and specialty platform.
We completed the acquisition of the manufacturing and packaging operations of
the Acorda Therapeutics, Inc. ("Acorda") dry powder inhaler and spray dry
manufacturing business in February 2021 . For the three months ended December 31,
2021 , this acquisition increased our net revenue and unfavorably impacted
Segment EBITDA on an inorganic basis by 2% and 7%, respectively, compared to the
corresponding prior-year period.
We completed the Blow-Fill-Seal Business divestiture in March 2021 . For the
three months ended December 31, 2021 , this divestiture decreased our net revenue
and unfavorably impacted Segment EBITDA on an inorganic basis by 15% and 17%,
respectively, compared to the corresponding prior-year period.
Clinical Supply Services segment
2021 vs. 2020
Three Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 7 % 9 %
Constant currency change 7 % 9 %
Foreign currency translation impact on reporting - % (1) %
Total % change 7 % 8 %
Clinical Supply Services net revenue increased by $8 million , or 7%, excluding
the impact of foreign exchange, compared to the three months ended December 31,
2020 . The increase was driven by growth in our manufacturing and packaging and
storage and distribution offerings in North America .
Clinical Supply Services Segment EBITDA increased $3 million , or 9%, excluding
the impact of foreign exchange, compared to the three months ended December 31,
2020 . The increase was driven by demand in our manufacturing and packaging and
storage and distribution offerings in North America .
Six Months Ended December 31, 2021 Compared to the Six Months Ended December 31,
2020
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The below tables summarize several financial metrics we use to measure
performance for the six months ended December 31, 2021 and six months ended
December 31, 2020 . Refer to the discussions below regarding performance and use
of key financial metrics.
[[Image Removed: ctlt-20211231_g5.jpg]] [[Image Removed: ctlt-20211231_g6.jpg]]
Results for the six months ended December 31, 2021 compared to the six months
ended December 31, 2020 were as follows:
Six Months Ended
December 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2021 2020 Change $ Change %
Net revenue $ 2,242 $ 1,757 $ (6) $ 491 28 %
Cost of sales 1,513 1,210 (4) 307 25 %
Gross margin 729 547 (2) 184 34 %
Selling, general, and administrative expenses 411 330 - 81 24 %
Gain on sale of subsidiary (1) - - (1) *
Other operating expense 20 9 (1) 12 138 %
Operating earnings 299 208 (1) 92 44 %
Interest expense, net 58 51 1 6 12 %
Other expense (income), net 23 (19) (1) 43 (223) %
Earnings before income taxes 218 176 (1) 43 24 %
Income tax expense 28 5 - 23 400 %
Net earnings $ 190 $ 171 $ (1) $ 20 11 %
Change % calculations are based on amounts prior to rounding *Percentage not meaningful
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Net Revenue
2021 vs. 2020
Six Months Ended
Year-Over-Year Change December 31 ,
Net Revenue
Organic 27 %
Impact of acquisitions 4 %
Impact of divestitures (3) %
Constant currency change 28 %
Foreign currency translation impact on reporting - %
Total % change 28 %
Net revenue increased by $491 million , or 28%, excluding the impact of foreign
exchange, compared to the six months ended December 31, 2020 . Net revenue
increased 4% inorganically as a result of acquisitions, which was partially
offset by a 3% decrease in net revenue due to the sale of our Blow-Fill-Seal
Business. We acquired Skeletal Cell Therapy Support ("Skeletal") in November
2020 , Delphi Genetics SA ("Delphi") and the manufacturing and packaging assets
of Acorda in February 2021 , and Bettera in October 2021 . Net revenue increased
27% organically on a constant-currency basis, primarily related to (i) robust
demand across all our Biologics offerings, in particular demand for our drug
product and drug substance offerings for COVID-19-related programs, (ii)
increased demand for our customers' prescription products, a continued rebound
in our consumer health products, particularly in cough, cold, and
over-the-counter pain relief products, and growth in development services in our
Softgel and Oral Technologies segment.
Gross Margin
Gross margin increased by $184 million , or 34%, compared to the six months ended
December 31, 2020 , excluding the impact of foreign exchange, primarily due to
the strong margin profile for all Biologics segment offerings, including demand
across our drug product and drug substance offerings for COVID-19 related
programs. Additional factors for such growth included an increased demand for
prescription products and continued rebound in consumer health products in our
Softgel and Oral Technologies segment and a favorable impact from the decline in
recall charges in our Oral and Specialty Delivery segment. Margin growth was
offset in part by a $23 million increase in depreciation and amortization
expense. On a constant-currency basis, gross margin, as a percentage of revenue,
increased 140 basis points to 32.5% in the six months ended December 31, 2021 ,
compared to 31.1% in the corresponding prior-year period.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased by $81 million , or 24%,
compared to the six months ended December 31, 2020 , excluding the impact of
foreign exchange, which includes $16 million in net incremental expenses from
acquired and divested companies. The year-over-year increase in selling, general
and administrative expenses was primarily due to $28 million for
employee-related costs principally incurred for wages and bonuses, $16 million
in transaction and integration costs primarily associated with our Bettera
acquisition, $6 million of incremental depreciation and amortization expense, a
$6 million increase in information technology spend associated with additional
cyber security initiatives, and $4 million of bad debt expense, partially offset
by $4 million in cost savings associated with employee health and welfare costs.
Other Operating Expense
Other operating expense of $20 million for the six months ended December 31,
2021 increased by $12 million , or 138%, compared to the six months ended
December 31, 2020 , excluding the impact of foreign exchange. The year-over-year
increase was primarily due to a $15 million increase in fixed asset impairment
charges associated with a product in our respiratory and specialty platform.
Interest Expense, net
Interest expense, net of $58 million for the six months ended December 31, 2021
increased by $6 million , or 12%, compared to the six months ended December 31,
2020 , excluding the impact of foreign exchange. The savings from repayment of
our formerly outstanding term loans and 4.875% senior notes due 2026 were offset
by increases in interest expense due to our most recent tranche of term loans,
the 2029 Notes, and the 2030 Notes. The savings also includes a $3 million
reduction in capitalized interest costs for the six months ended December 31,
2021 .
Other Expense (Income), net
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Other expense, net of $23 million for the six months ended December 31, 2021 was
primarily driven by $24 million of foreign currency losses, $4 million of
financing charges related to our outstanding term loans, partially offset by a
$2 million gain related to the change in fair value of the derivative liability
arising from the dividend-adjustment mechanism of our formerly outstanding
Series A Preferred Stock.
Other income, net for the six months ended December 31, 2020 of $19 million was
primarily driven by a gain of $16 million related to the change in fair value of
the derivative liability arising from the dividend-adjustment mechanism of our
Series A Preferred Stock.
Income Tax Expense
Our provision for income taxes for the six months ended December 31, 2021 was
$28 million relative to earnings before income taxes of $218 million . Our
provision for income taxes for the six months ended December 31, 2020 of $5
million relative to earnings before income taxes of $176 million . The increase
in the provision was the result of a decrease in non-U.S. tax credits claimed on
an amended U.S. federal income tax filing compared to the prior-year period. The
provision for income taxes in each of these periods was also impacted by the
relative amount and mix of permanent tax adjustments included in the income tax
computation and other discrete tax items recognized in the periods.
Segment Review
The below charts depict the percentage of revenue for each of our four segments
for the six months ended December 31, 2021 compared to the six months ended
December 31, 2020 . Refer below for discussions regarding each segment's revenue
and EBITDA performance.
[[Image Removed: ctlt-20211231_g7.jpg]]
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Our results on a segment basis for the six months ended
Six Months Ended
December 31, FX Impact Constant Currency Increase/(Decrease)
(Dollars in millions) 2021 2020 Change $ Change %
Biologics
Net revenue $ 1,184 $ 781 $ (5) $ 408 52 %
Segment EBITDA 363 242 (1) 122 50 %
Softgel and Oral Technologies
Net revenue 572 468 (4) 108 23 %
Segment EBITDA 119 83 (1) 37 44 %
Oral and Specialty Delivery
Net revenue 302 328 4 (30) (9) %
Segment EBITDA 77 66 2 9 15 %
Clinical Supply Services
Net revenue 195 186 - 9 5 %
Segment EBITDA 53 50 - 3 5 %
Inter-segment revenue elimination (11) (6) (1) (4) (67) %
Unallocated Costs (1) (157) (74) - (83) (114) %
Combined totals
Net revenue $ 2,242 $ 1,757 $ (6) $ 491 28 %
EBITDA from operations $ 455 $ 367 $ - $ 88 24 %
Change % calculations are based on amounts prior to rounding (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:
Six Months Ended
December 31 ,
(Dollars in millions) 2021 2020
Impairment charges and gain (loss) on sale of assets (a)
$ (2) Equity compensation (32)
(30)
Restructuring and other special items (b) (31)
(20)
Gain on sale of subsidiary (c) 1 -
Other expense (income), net (d) (23) 19
Non-allocated corporate costs, net (53) (41) Total unallocated costs$ (157) $ (74) (a) Impairment charges and gain (loss) on sale of assets during the six months endedDecember 31, 2021 include fixed asset impairment charges associated with a product in our respiratory and specialty platform. (b) Restructuring and other special items during the six months endedDecember 31, 2021 include (i) transaction and integration costs associated with the acquisitions of Delphi,Hepatic Cell Therapy Support SA ,RheinCell Therapeutics GmbH , and Bettera and, (ii) restructuring costs associated with the closure of theBolton facility. Restructuring and other special items during the six months endedDecember 31, 2020 include transaction costs for the sale of our Blow-Fill-Seal Business, acquisitions of facilities inItaly andBelgium , disposal of a site inAustralia , restructuring costs associated with the closure of theBolton facility and other restructuring initiatives across our network of sites. (c) For the six months endedDecember 31, 2021 , gain on sale of subsidiary was due to the divestiture of our Blow-Fill-Seal Business. 43
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(d) Refer to Note 8, Other expense (income), net for details of financing
charges and foreign currency translation adjustments recorded within other
expense, net in our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
Six Months Ended
December 31,
(Dollars in millions) 2021 2020
Net earnings $ 190 $ 171
Depreciation and amortization 179 140
Interest expense, net 58 51
Income tax expense 28 5
EBITDA from operations $ 455 $ 367
Biologics segment
2021 vs. 2020
Six Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 52 % 51 %
Impact of acquisitions - % (1) %
Constant-currency change 52 % 50 %
Foreign exchange translation impact on reporting - % - %
Total % change 52 % 50 %
Net revenue in our Biologics segment increased by $408 million , or 52%,
excluding the impact of foreign exchange, compared to the six months ended
December 31, 2020 . The increase was driven across all segment offerings with
robust end-market demand for our drug product, drug substance, and cell and gene
therapy offerings, primarily related to demand for COVID-19-related programs.
Biologics Segment EBITDA increased by $122 million , or 50%, excluding the impact
of foreign exchange, compared to the six months ended December 31, 2020 . Segment
EBITDA increased 51%, compared to the six months ended December 31, 2020 ,
excluding the impact of acquisitions. The increase was driven across all segment
offerings with robust end-market demand for our drug product, drug substance,
and cell and gene therapy offerings, primarily related to demand for
COVID-19-related programs.
Softgel and Oral Technologies segment
2021 vs. 2020
Six Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 12 % 28 %
Impact of acquisitions 11 % 16 %
Constant-currency change 23 % 44 %
Foreign exchange translation impact on reporting (1) % (2) %
Total % change 22 % 42 %
Softgel and Oral Technologies net revenue increased $108 million , or 23%,
excluding the impact of foreign exchange, compared to the six months ended
December 31, 2020 . Net revenue increased 12%, compared to the six months ended
December 31, 2020 , excluding the impact of acquisitions. The increase in organic
revenue primarily relates to strong end-market demand for prescription products,
a continued rebound in consumer health products, particularly in cough, cold,
and over-the-counter pain relief products, and growth in development services
within North America
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Softgel and Oral Technologies Segment EBITDA increased $37 million , or 44%,
excluding the impact of foreign exchange, compared to the six months ended
December 31, 2020 . Segment EBITDA increased 28% compared to the six months ended
December 31, 2020 , excluding the impact of acquisitions. The organic portion of
the increase, similar to that of net revenue, was primarily driven by an
increase in demand in both the prescription and consumer health portfolio of
products, as well as the margin generated from strong development revenue
growth.
We completed the Bettera acquisition in October 2021 , which increased net
revenue and Segment EBITDA on an inorganic basis by 11% and 16%, respectively,
in the six months ended December 31, 2021 , compared to the corresponding
prior-year period.
Oral and Specialty Delivery segment
2021 vs. 2020
Six Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 4 % 50 %
Impact of acquisitions 1 % (12) %
Impact of divestitures (14) % (23) %
Constant-currency change (9) % 15 %
Foreign exchange translation impact on reporting 1 % 3 %
Total % change (8) % 18 %
Net revenue in our Oral and Specialty Delivery segment decreased by $30 million ,
or 9%, compared to the six months ended December 31, 2020 , excluding the impact
of foreign exchange. Net revenue increased 4%, compared to the six months ended
December 31 . 2020, excluding the impact of acquisitions and divestitures,
primarily driven by demand for the segment's orally delivered Zydis commercial
products and early-phase development programs.
Oral and Specialty Delivery's Segment EBITDA increased by $9 million , or 15%,
compared to the six months ended December 31, 2020 , excluding the impact of
foreign exchange. Segment EBITDA increased 50% compared to the six months ended
December 31, 2020 , excluding the impact of acquisitions and divestitures. The
organic portion of the increase from the corresponding prior-year period was
primarily driven by increased demand for the segment's orally delivered Zydis
commercial products and a favorable impact from prior year recall costs in our
respiratory and specialty platform.
Clinical Supply Services segment
2021 vs. 2020
Six Months Ended
Year-Over-Year Change December 31,
Net Revenue Segment EBITDA
Organic 5 % 5 %
Constant-currency change 5 % 5 %
Foreign exchange translation impact on reporting - % 1 %
Total % change 5 % 6 %
Clinical Supply Services' net revenue increased by
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Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have been cash flows generated from
operations and occasional capital market activities. The principal uses of cash
are to fund operating and capital expenditures, business or asset acquisitions,
interest payments on debt, and any mandatory or discretionary principal payment
on our debt. As of December 31, 2021 , Catalent Pharma Solutions, Inc. , our
principal operating subsidiary ("Operating Company"), following the September
2021 execution of Amendment No. 6 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 a $725 million revolving credit
facility that matures in May 2024 , the capacity of which was reduced by $5
million in letters of credit outstanding as of December 31, 2021 . The revolving
credit facility includes borrowing capacity available for letters of credit and
for short-term borrowings, referred to as swing-line borrowings.
On October 1, 2021 , we acquired Bettera, a manufacturer of nutraceuticals
specializing in gummy, soft chew, and lozenge delivery systems paying
approximately $1.00 billion in cash. We funded this acquisition through a
combination of additional borrowings under our senior secured credit facilities
and the net proceeds of the 2030 Notes.
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. We have no significant maturity
under any of our bank or note debt until the July 2027 maturity of our 5.000%
senior notes due 2027 (the "2027 Notes").
Cash Flows
The following table summarizes our consolidated statements of cash flows:
Six Months Ended
December 31,
(Dollars in millions) 2021 2020 $ Change
Net cash provided by (used in): Operating activities$ 232 $ 224 $ 8 Investing activities$ (1,299) $ (354) $ (945) Financing activities$ 1,033 $ (7) $ 1,040 Operating Activities For the six months endedDecember 31, 2021 , cash provided by operating activities was$232 million , compared to$224 million for the corresponding prior-year period. This increase in cash flow from operating activities was primarily due to an increase in operating earnings, which increased from$208 million in the corresponding prior-year period to$299 million for the six months endedDecember 31, 2021 , and a favorable impact from the timing of collection of trade receivables, which was primarily offset by an unfavorable impact from the increase in contract assets. Investing Activities For the six months endedDecember 31, 2021 , cash used in investing activities was$1.30 billion , compared to$354 million for the six months endedDecember 31, 2020 . The increase in cash used in investing activities was primarily driven by a$1.00 billion increase in cash used for business acquisition activities, partially offset by a$62 million decrease in cash used for purchases of property, plant, and equipment. Financing Activities For the six months endedDecember 31, 2021 , cash provided by financing activities was$1.03 billion , compared to cash used in financing activities of$7 million for the six months endedDecember 31, 2020 . Cash provided by financing activities was primarily driven by the$1.1 billion in net cash received from the issuance of the 2030 Notes and incurrence of our most recent tranche of term loans. Cash used in financing activities for the six months endedDecember 31, 2020 was primarily driven by an annual installment on the deferred purchase consideration for the acquisition ofCatalent Indiana, LLC and cash paid, in lieu of equity, for tax withholdings partially offset by theJuly 2020 exercise of an over-allotment option on 1.2 million additional shares by the underwriter for the equity offering inJune 2020 , resulting in net proceeds of$82 million . 46 -------------------------------------------------------------------------------- Table of Contents Guarantees and Security The Senior Notes All obligations underOperating Company's 2027 Notes, 2.375% euro-denominated senior notes due 2028, 2029 Notes, and 2030 Notes (collectively, the "Senior Notes") are general, unsecured, and subordinated to all existing and future secured indebtedness of the guarantors to the extent of the value of the assets securing such indebtedness. Each of the Senior Notes is separately guaranteed by all of our wholly ownedU.S. subsidiaries that guarantee the senior secured credit facilities. None of the Senior Notes is guaranteed by eitherPTS Intermediate Holdings LLC orCatalent, Inc. 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 ofDecember 31, 2021 , we were in compliance with all material covenants under the Credit Agreement. Subject to certain exceptions, the Credit Agreement permits us and our restricted subsidiaries to incur certain additional indebtedness, including secured indebtedness. None of our non-U.S. subsidiaries or ourPuerto 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 underU.S. GAAP, and is subject to important limitations. As market conditions warrant, we and our affiliates may from time to time seek to purchase our outstanding debt in privately negotiated or open-market transactions, by tender offer or otherwise. Subject to any applicable limitation contained in the Credit Agreement, any purchase made by us may be funded by the use of cash on hand or the incurrence of new secured or unsecured debt. The amounts involved in any such purchase transaction, individually or in the aggregate, may be material. Any such purchase may be with respect to a substantial amount of a particular class or series of debt, with the attendant reduction in the trading liquidity of such class or series. In addition, any such purchase made at prices below the "adjusted issue price" (as defined forU.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. 47 -------------------------------------------------------------------------------- Table of Contents The Senior Notes The several indentures governing each series of the Senior Notes (collectively, the "Indentures") contain certain covenants that, among other things, limit our ability to incur or guarantee more debt or issue certain preferred shares; pay dividends on, repurchase, or make distributions in respect of their capital stock or make other restricted payments; make certain investments; sell certain assets; create liens; consolidate, merge, sell; or otherwise dispose of all or substantially all of their assets; enter into certain transactions with their affiliates, and designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions, limitations, and qualifications as set forth in the Indentures. The Indentures also contain customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness ofOperating 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 ofDecember 31, 2021 ,Operating Company was in compliance with all material covenants under the Indentures. Geographic Allocation of Cash As ofDecember 31, 2021 andJune 30, 2021 , our non-U.S. subsidiaries held cash and cash equivalents of$360 million and$351 million , respectively, out of the total consolidated cash and cash equivalents of$849 million and$896 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. InFebruary 2021 , we replaced one interest-rate swap agreement withBank of America N.A . with another, and each acts or acted as a hedge against the economic effect of a portion of the variable-interest obligation associated with ourU.S. dollar-denominated term loans under our senior secured credit facilities, so that the interest payable on that portion of the debt becomes fixed at a certain rate, thereby reducing the impact of future interest-rate changes on future interest expense. The applicable rate for theU.S. dollar-denominated term loan under the Credit Agreement was LIBOR (subject to a floor of 0.50%) plus 2.00% as ofDecember 31, 2021 ; however, as a result of the current 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 ofFebruary 2021 . Currency Risk Management We are exposed to fluctuations in the euro-U.S. dollar exchange rate on our investments in our operations inEurope . 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. AtDecember 31, 2021 , we had$933 million of euro-denominated debt outstanding that qualifies as a hedge of a net investment in European operations. Refer to Note 10, 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 ofDecember 31, 2021 . 48
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