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 50 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, and have done so for nearly half of new drug products approved by theU.S. Food and Drug Administration (the "FDA") in 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 32
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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 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. In addition, any 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 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 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 33
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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, and depreciation and amortization ("Segment EBITDA").
Use of Constant Currency
As exchange rates are an important factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors' ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. In this Quarterly Report on Form 10-Q, we compute constant currency by calculating current-year results using prior-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign 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 Ended
The below tables summarize several financial metrics we use to measure
performance for the three months ended
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Results for the three months ended
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Three Months Ended
March 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2022 2021 Change $ Change %
Net revenue $ 1,273 $ 1,053 $ (24) $ 244 23 %
Cost of sales 850 687 (15) 178 26 %
Gross margin 423 366 (9) 66 18 %
Selling, general, and administrative expenses 207 173 (2) 36 21%
Gain on sale of subsidiary - (184) - 184 * Other operating expense 5 8 - (3) (39) % Operating earnings 211 369 (7) (151) (41) % Interest expense, net 33 27 (1) 7 25 % Other expense, net 2 25 (2) (21) (85) % Earnings before income taxes 176 317 (4) (137) (43) % Income tax expense 35 85 - (50) (58) % Net earnings$ 141 $ 232 $ (4) $ (87) (38) %
Change % calculations are based on amounts prior to rounding
*Percentage not meaningful
Net Revenue
2022 vs. 2021
Three Months Ended
Year-Over-Year Change March 31 ,
Net Revenue
Organic 20 %
Impact of acquisitions 5 %
Impact of divestitures (2) %
Constant-currency change 23 %
Foreign currency translation impact on reporting (2) %
Total % change 21 %
Net revenue increased $244 million , or 23%, excluding the impact of foreign
exchange, compared to the three months ended March 31, 2021 . Net revenue
increased 20% organically 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.
Net revenue increased 5% inorganically as a result of acquisitions, which was
partially offset by a 2% decrease in net revenue due to the sale of of Catalent
USA Woodstock, Inc. and certain related assets (collectively, the
"Blow-Fill-Seal Business") in March 2021 . We acquired Delphi Genetics SA
("Delphi") and the manufacturing and packaging assets of Acorda Therapeutics,
Inc. ("Acorda") in February 2021 , RheinCell Therapeutics GmbH ("RheinCell") in
August 2021 , and Bettera Holdings, LLC ("Bettera") in October 2021 .
Gross Margin
Gross margin increased$66 million , or 18%, compared to the three months endedMarch 31, 2021 , 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$9 million increase in depreciation and amortization expense, a one-time non-cash$7 million fair value inventory adjustment associated with our Bettera acquisition and an unfavorable impact from remediation related activities at our facility inBrussels, Belgium . On a constant-currency basis, gross margin, as a percentage of revenue, decreased 140 basis points to 33.3% in the three months endedMarch 31, 2022 , compared to 34.7% in the prior-year period, primarily due to the factors described above. 35
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased$36 million , or 21%, compared to the three months endedMarch 31, 2021 , excluding the impact of foreign exchange, which includes$14 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 a$6 million increase in employee health and welfare costs,$4 million of amortization and depreciation, and$3 million of bad debt expense.
Other Operating Expense
Other operating expense for the three months ended
Interest Expense, net
Interest expense, net of$33 million for the three months endedMarch 31, 2022 increased$7 million , or 25%, compared to the three months endedMarch 31, 2021 , excluding the impact of foreign exchange. The savings from repayment of our formerly outstanding term loans and 4.875% senior notes due 2026 (the "2026 Notes") were offset by increases in interest expense due to incremental borrowing to fund our Bettera acquisition. The incremental borrowing includes our most recent tranche of term loans, 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.
Other Expense, net
Other expense, net of
Other expense, net of$25 million for the three months endedMarch 31, 2021 was primarily driven by (i) a$11 million premium on early redemption of the 2026 Notes, (ii) a write-off of$4 million of previously capitalized financing charges related to our repaid term loans and our redeemed 2026 Notes, (iii)$2 million of financing charges related to our outstanding term loans, and (iv)$7 million of foreign currency losses.
Income Tax Expense
Our provision for income taxes for the three months endedMarch 31, 2022 was$35 million relative to earnings before taxes of$176 million . Our provision for income taxes for the three months endedMarch 31, 2021 was$85 million relative to earnings before taxes of$317 million . The decrease in income tax provision relative to the prior-year period was largely the result of the discrete tax expense we incurred on the gain on the sale of our Blow-Fill-Seal Business recognized in the prior-period and a shift in non-domestic pretax income to tax jurisdictions with favorable tax rates. Generally, fluctuations in the effective tax rate are due to changes in the geographic distribution of our pretax income 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. Segment Review The following charts depict the percentages of net revenue from each of our four reporting segments for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . 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 underU.S. GAAP. 36
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Our results on a segment basis for the three months ended
Three Months Ended
March 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2022 2021 Change $ Change %
Biologics
Net revenue $ 698 $ 544 $ (10) $ 164 30 %
Segment EBITDA 216 180 (5) 41 23 %
Softgel and Oral Technologies
Net revenue 324 244 (9) 89 37 %
Segment EBITDA 75 59 (2) 18 29 %
Oral and Specialty Delivery
Net revenue 154 171 (3) (14) (8) %
Segment EBITDA 41 31 (1) 11 37 %
Clinical Supply Services
Net revenue 101 100 (2) 3 3 %
Segment EBITDA 30 27 (1) 4 14 %
Inter-segment revenue elimination (4) (6) - 2 34 %
Unallocated Costs (1) (54) 123 2 (179) (146) %
Combined totals
Net revenue $ 1,273 $ 1,053 $ (24) $ 244 23 %
EBITDA from operations $ 308 $ 420 $ (7) $ (105) (25) %
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:
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Three Months Ended
March 31,
(Dollars in millions) 2022 2021
Impairment charges and gain (loss) on sale of assets
$ (5) Stock-based compensation (10)
(8)
Restructuring and other special items (a) (12)
(3)
Gain on sale of subsidiary (b) -
184
Other expense, net (c) (2)
(25)
Unallocated corporate costs, net (28) (20) Total unallocated costs$ (54) $ 123 (a) Restructuring and other special items during the three months endedMarch 31, 2022 include integration costs primarily associated with the Bettera acquisition, and unrealized losses on venture capital investments. Restructuring and other special items during the three months endedMarch 31, 2021 include transaction costs for the sale of our Blow-Fill-Seal Business, and restructuring costs associated with the closure of our Bolton facility.
(b) For the three months ended
(c) Refer to Note 8, Other Expense, Net for details of financing charges and
foreign currency translation adjustments recorded within other expense, net in
our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
Three Months Ended
March 31,
(Dollars in millions) 2022 2021
Net earnings $ 141 $ 232
Depreciation and amortization 99 76
Interest expense, net 33 27
Income tax expense 35 85
EBITDA from operations $ 308 $ 420
Biologics segment
2022 vs. 2021
Three Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 30 % 23 %
Impact of acquisitions - % - %
Constant-currency change 30 % 23 %
Foreign exchange translation impact on reporting (2) % (3) %
Total % change 28 % 20 %
Biologics net revenue increased by $164 million , or 30%, excluding the impact of
foreign exchange, compared to the three months ended March 31, 2021 . The
increase was driven by strong end-market demand for our drug product, drug
substance, and cell and gene therapy offerings, in part related to demand for
COVID-19 related programs.
Biologics Segment EBITDA increased by $41 million , or 23%, excluding the impact
of foreign exchange, compared to the three months ended March 31, 2021 . The
increase was driven by strong end-market demand for our drug product, drug
substance, and cell and gene therapy offerings, in part related to demand for
COVID-19 related programs, partially offset by an unfavorable impact from
remediation-related activities at our Brussels facility.
We completed the acquisition of RheinCell in
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Softgel and Oral Technologies segment
2022 vs. 2021
Three Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 14 % 16 %
Impact of acquisitions 23 % 13 %
Constant-currency change 37 % 29 %
Foreign currency translation impact on reporting (4) % (3) %
Total % change 33 % 26 %
Softgel and Oral Technologies net revenue increased by
Softgel and Oral Technologies Segment EBITDA increased$18 million , or 29%, excluding the impact of foreign exchange, compared to the three months endedMarch 31, 2021 . The organic portion of the increase, similar to that of net revenue, was driven by a continued rebound in consumer health products, particularly in cough, cold, and over-the-counter pain relief products, growth in development services, and increased end-market demand for prescription products. We completed the Bettera acquisition inOctober 2021 , which increased net revenue and Segment EBITDA on an inorganic basis by 23% and 13%, respectively, in the three months endedMarch 31, 2022 , compared to the corresponding prior-year period. For the three months endedMarch 31, 2022 , in association with our Bettera purchase accounting, we recorded a one-time non-cash inventory fair value adjustment for$7 million , which unfavorably impacted Segment EBITDA.
Oral and Specialty Delivery segment
2022 vs. 2021
Three Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 4 % 64 %
Impact of acquisitions 1 % (10) %
Impact of divestiture (13) % (17) %
Constant-currency change (8) % 37 %
Foreign currency translation impact on reporting (2) % (4) %
Total % change (10) % 33 %
Oral and Specialty Delivery net revenue decreased by $14 million , or 8%,
excluding the impact of foreign exchange, compared to the three months ended
March 31, 2021 . Net revenue increased 4%, compared to the three months ended
March 31, 2021 , excluding the impact of acquisitions and divestitures, primarily
driven by demand for early-phase development programs.
Oral and Specialty Delivery Segment EBITDA increased $11 million , or 37%,
excluding the impact of foreign exchange, compared to the three months ended
March 31, 2021 . Segment EBITDA increased 64%, compared to the three months ended
March 31, 2021 , excluding the impact of acquisitions and divestitures. The
increase in Segment EBITDA from the prior-year period was primarily driven by
demand for early-phase development programs 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 dry powder inhaler and spray dry manufacturing business in February
2021 . For the three months ended March 31, 2022 , this acquisition increased our
net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 1%
and 10%, respectively, compared to the corresponding prior-year period.
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We completed the Blow-Fill-Seal Business divestiture inMarch 2021 . For the three months endedMarch 31, 2022 , this divestiture decreased our net revenue and Segment EBITDA on an inorganic basis by 13% and 17%, respectively, compared to the corresponding prior-year period.
Clinical Supply Services segment
2022 vs. 2021
Three Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 3 % 14 %
Constant-currency change 3 % 14 %
Foreign currency translation impact on reporting (2) % (4) %
Total % change 1 % 10 %
Clinical Supply Services net revenue increased by $3 million , or 3%, excluding
the impact of foreign exchange, compared to the three months ended March 31,
2021 . The increase was driven by growth in our manufacturing and packaging
offerings in North America .
Clinical Supply Services Segment EBITDA increased $4 million , or 14%, excluding
the impact of foreign exchange, compared to the three months ended March 31,
2021 . The increase, similar to that of net revenue, was driven by growth in our
manufacturing and packaging offerings in North America .
Nine Months Ended
The below tables summarize several financial metrics we use to measure performance for the nine months endedMarch 31, 2022 and nine months endedMarch 31, 2021 . Refer to the discussions below regarding performance and use of key financial metrics.
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Results for the nine months ended
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Nine Months Ended
March 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2022 2021 Change $ Change %
Net revenue $ 3,515 $ 2,810 $ (30) $ 735 26 %
Cost of sales 2,363 1,897 (19) 485 26 %
Gross margin 1,152 913 (11) 250 27 %
Selling, general, and administrative expenses 618 503 (2) 117 23 %
Gain on sale of subsidiary (1) (184) - 183 (99) %
Other operating expense 25 17 - 8 46 %
Operating earnings 510 577 (9) (58) (10) %
Interest expense, net 91 78 - 13 17 %
Other expense, net 25 5 (4) 24 465 %
Earnings before income taxes 394 494 (5) (95) (19) %
Income tax expense 63 91 - (28) (30) %
Net earnings $ 331 $ 403 $ (5) $ (67) (17) %
Change % calculations are based on amounts prior to rounding
Net Revenue
2022 vs. 2021
Nine Months Ended
Year-Over-Year Change March 31 ,
Net Revenue
Organic 26 %
Impact of acquisitions 2 %
Impact of divestitures (2) %
Constant-currency change 26 %
Foreign currency translation impact on reporting (1) %
Total % change 25 %
Net revenue increased by $735 million , or 26%, excluding the impact of foreign
exchange, compared to the nine months ended March 31, 2021 . Net revenue
increased 26% organically on a constant-currency basis, primarily related to (i)
broad-based strength 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.
Net revenue increased 2% inorganically as a result of acquisitions, which was
partially offset by a 2% 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 and the manufacturing and packaging assets of Acorda in
February 2021 , RheinCell in August 2021 , and Bettera in October 2021 .
Gross Margin
Gross margin increased by$250 million , or 27%, compared to the nine months endedMarch 31, 2021 , 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$32 million increase in depreciation and amortization expense, a one-time non-cash$7 million fair value inventory adjustment associated with our Bettera acquisition and an unfavorable impact from remediation related activities at ourBrussels facility. On a constant-currency basis, gross margin, as a percentage of revenue, increased 30 basis points to 32.8% in the nine months endedMarch 31, 2022 , compared to 32.5% in the corresponding prior-year period. 41
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Selling, General, and Administrative Expense
Selling, general, and administrative expense increased by$117 million , or 23%, compared to the nine months endedMarch 31, 2021 , excluding the impact of foreign exchange, which includes$31 million in net incremental expenses from acquired and divested companies. The year-over-year increase in selling, general, and administrative expense was primarily due to$16 million in acquisition, transaction and integration costs primarily associated with the Bettera acquisition,$13 million associated with employee health and welfare costs,$11 million for employee-related costs principally incurred for wages and bonuses, a$10 million increase in information technology spend associated with additional cyber-security initiatives,$10 million of incremental depreciation and amortization expense, and$7 million of bad debt expense.
Other Operating Expense
Other operating expense of$25 million for the nine months endedMarch 31, 2022 increased by$8 million , or 46%, compared to the nine months endedMarch 31, 2021 , excluding the impact of foreign exchange. The year-over-year increase was primarily due to a$13 million increase in fixed asset impairment charges primarily associated with a product in our respiratory and specialty platform partially offset by a$5 million decrease in restructuring costs.
Interest Expense, net
Interest expense, net of$91 million for the nine months endedMarch 31, 2022 increased by$13 million , or 17%, compared to the nine months endedMarch 31, 2021 , excluding the impact of foreign exchange. The savings from repayment of our formerly outstanding term loans and the 2026 Notes were more than 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$5 million reduction in capitalized interest costs for the nine months endedMarch 31, 2022 .
Other Expense, net
Other expense, net of$25 million for the nine months endedMarch 31, 2022 was primarily driven by$28 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 expense, net for the nine months endedMarch 31, 2021 of$5 million was primarily driven by a$11 million premium on early redemption of the 2026 Notes, a write-off of$4 million of previously capitalized financing charges related to our repaid term loans and our redeemed 2026 Notes,$2 million of financing charges related to our outstanding term loans, and foreign currency losses of$6 million . Income Tax Expense Our provision for income taxes for the nine months endedMarch 31, 2022 was$63 million relative to earnings before income taxes of$394 million . Our provision for income taxes for the nine months endedMarch 31, 2021 was$91 million relative to earnings before income taxes of$494 million . The decrease in the provision relative to the prior-year period was largely the result of the discrete tax expense we incurred on the gain on the sale of our Blow-Fill-Seal Business recognized in the prior-period and a shift in non-domestic pretax income to tax jurisdictions with favorable tax rates, partially offset by non-U.S. tax credits claimed on an amendedU.S. federal income tax filing. 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 nine months endedMarch 31, 2022 compared to the nine months endedMarch 31, 2021 . Refer below for discussions regarding each segment's revenue and EBITDA performance. 42
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Our results on a segment basis for the nine months ended
Nine Months Ended
March 31, FX Impact Constant Currency Increase (Decrease)
(Dollars in millions) 2022 2021 Change $ Change %
Biologics
Net revenue $ 1,882 $ 1,325 $ (15) $ 572 43 %
Segment EBITDA 579 422 (6) 163 39 %
Softgel and Oral Technologies
Net revenue 896 711 (13) 198 28 %
Segment EBITDA 194 143 (3) 54 38 %
Oral and Specialty Delivery
Net revenue 456 500 - (44) (9) %
Segment EBITDA 118 97 1 20 22 %
Clinical Supply Services
Net revenue 296 286 (2) 12 4 %
Segment EBITDA 83 77 (1) 7 8 %
Inter-segment revenue elimination (15) (12) - (3) (19) %
Unallocated Costs (1) (211) 49 3 (263) (537) %
Combined totals
Net revenue $ 3,515 $ 2,810 $ (30) $ 735 26 %
EBITDA from operations $ 763 $ 788 $ (6) $ (19) (2) %
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:
Nine Months Ended
March 31,
(Dollars in millions) 2022 2021
Impairment charges and gain (loss) on sale of assets (a) $ (21) $ (8)
Stock-based compensation (42) (38)
Restructuring and other special items (b) (43) (23)
Gain on sale of subsidiary (c) 1 184
Other expense, net (d) (25) (5)
Non-allocated corporate costs, net (81) (61)
Total unallocated costs $ (211) $ 49
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(a) Impairment charges and gain (loss) on sale of assets during the nine months endedMarch 31, 2022 include fixed asset impairment charges associated with a product in our respiratory and specialty platform. (b) Restructuring and other special items during the nine months endedMarch 31, 2022 include (i) transaction and integration costs associated with the acquisitions of Delphi,Hepatic Cell Therapy Support SA , Acorda, RheinCell, and Bettera, (ii) unrealized losses on venture capital investments, and (iii) restructuring costs associated with the closure of the Bolton facility. Restructuring and other special items during the nine months endedMarch 31, 2021 include transaction costs for the sale of our Blow-Fill-Seal Business, transaction and integration costs associated with the Acorda acquisition and acquisition of facilities inItaly andBelgium , disposal of a site inAustralia , restructuring costs associated with the closure of the Bolton facility, and other restructuring initiatives across our network of sites.
(c) For the nine months ended
(d) Refer to Note 8, Other expense, net for details of financing charges and
foreign currency translation adjustments recorded within other expense, net in
our Consolidated Financial Statements.
Provided below is a reconciliation of net earnings to EBITDA from operations:
Nine Months Ended
March 31,
(Dollars in millions) 2022 2021
Net earnings $ 331 $ 403
Depreciation and amortization 278 216
Interest expense, net 91 78
Income tax expense 63 91
EBITDA from operations $ 763 $ 788
Biologics segment
2022 vs. 2021
Nine Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 43 % 40 %
Impact of acquisitions - % (1) %
Constant-currency change 43 % 39 %
Foreign exchange translation impact on reporting (1) % (2) %
Total % change 42 % 37 %
Net revenue in our Biologics segment increased by
Biologics Segment EBITDA increased by$163 million , or 39%, excluding the impact of foreign exchange, compared to the nine months endedMarch 31, 2021 . Segment EBITDA increased 40%, compared to the nine months endedMarch 31, 2021 , excluding the impact of acquisitions. The increase was driven across all segment offerings with strong end-market demand for our drug product, drug substance, and cell and gene therapy offerings, primarily related to demand for COVID-19-related programs, partially offset by an unfavorable impact from remediation related activities at ourBrussels facility. We completed the acquisition of RheinCell inAugust 2021 . For the nine months endedMarch 31, 2022 , this acquisition had an immaterial impact on our net revenue and decreased Segment EBITDA on an inorganic basis by 1% compared to the corresponding prior-year period. 44
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Softgel and Oral Technologies segment
2022 vs. 2021
Nine Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 13 % 23 %
Impact of acquisitions 15 % 15 %
Constant-currency change 28 % 38 %
Foreign exchange translation impact on reporting (2) % (3) %
Total % change 26 % 35 %
Softgel and Oral Technologies net revenue increased $198 million , or 28%,
excluding the impact of foreign exchange, compared to the nine months ended
March 31, 2021 . Net revenue increased 13%, compared to the nine months ended
March 31, 2021 , 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.
Softgel and Oral Technologies Segment EBITDA increased $54 million , or 38%,
excluding the impact of foreign exchange, compared to the nine months ended
March 31, 2021 . Segment EBITDA increased 23%, compared to the nine months ended
March 31, 2021 , 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 15%, during the nine months
ended March 31, 2022 , compared to the corresponding prior-year period. For the
nine months ended March 31, 2022 , in association with our Bettera purchase
accounting, we recorded a one-time non-cash inventory fair value adjustment for
$7 million , which unfavorably impacted Segment EBITDA.
Oral and Specialty Delivery segment
2022 vs. 2021
Nine Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 4 % 55 %
Impact of acquisitions 1 % (12) %
Impact of divestitures (14) % (21) %
Constant-currency change (9) % 22 %
Foreign exchange translation impact on reporting - % 1 %
Total % change (9) % 23 %
Net revenue in our Oral and Specialty Delivery segment decreased by $44 million ,
or 9%, compared to the nine months ended March 31, 2021 , excluding the impact of
foreign exchange. Net revenue increased 4%, compared to the nine months ended
March 31, 2021 , 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 $20 million , or 22%,
compared to the nine months ended March 31, 2021 , excluding the impact of
foreign exchange. Segment EBITDA increased 55%, compared to the nine months
ended March 31, 2021 , 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 early-phase development programs and a favorable impact
from prior-year recall costs in our respiratory and specialty platform.
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We completed the acquisition of the manufacturing and packaging operations of the Acorda dry powder inhaler and spray dry manufacturing business inFebruary 2021 . For the nine months endedMarch 31, 2022 , this acquisition increased our net revenue and unfavorably impacted Segment EBITDA on an inorganic basis by 1% and 12%, respectively, compared to the corresponding prior-year period. We completed the Blow-Fill-Seal Business divestiture inMarch 2021 . For the nine months endedMarch 31, 2022 , this divestiture decreased our net revenue and Segment EBITDA on an inorganic basis by 14% and 21%, respectively, compared to the corresponding prior-year period.
Clinical Supply Services segment
2022 vs. 2021
Nine Months Ended
Year-Over-Year Change March 31,
Net Revenue Segment EBITDA
Organic 4 % 8 %
Constant-currency change 4 % 8 %
Foreign exchange translation impact on reporting - % (1) %
Total % change 4 % 7 %
Clinical Supply Services' net revenue increased by $12 million , or 4%, compared
to the nine months ended March 31, 2021 , excluding the impact of foreign
exchange. 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 by
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 ofMarch 31, 2022 ,Catalent Pharma Solutions, Inc. , our principal operating subsidiary ("Operating Company"), following theSeptember 2021 execution of Amendment No. 6 to the amended and restated credit agreement, dated as ofMay 20, 2014 , governing our senior secured credit facilities (as amended, the "Credit Agreement"), had available a$725 million revolving credit facility that matures inMay 2024 , the capacity of which was reduced by$4 million in letters of credit outstanding as ofMarch 31, 2022 . The revolving credit facility includes borrowing capacity available for letters of credit and for short-term borrowings, referred to as swing-line borrowings. InApril 2022 , through our wholly owned subsidiary,Catalent Oxford Limited , we acquired certain related assets fromThe Vaccine Manufacturing and Innovation Centre UK Limited for$133 million in cash, funded with cash on hand, customary adjustments. In connection with this acquisition, inApril 2022 , we also paid$37 million for future development of the facility. Also inApril 2022 , we acquired cell therapy commercial manufacturing operations and a facility inPrinceton, New Jersey , for$45 million in cash, funded with cash on hand, subject to customary adjustments. 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 theJuly 2027 maturity of our 5.000% senior notes (the "2027 Notes"). 46
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Cash Flows
The following table summarizes our consolidated statements of cash flows:
Nine Months Ended
March 31,
(Dollars in millions) 2022 2021 $ Change
Net cash provided by (used in): Operating activities$ 370 $ 299 $ 71 Investing activities$ (1,490) $ (436) $ (1,054) Financing activities$ 1,030 $ 159 $ 871 Operating Activities For the nine months endedMarch 31, 2022 , cash provided by operating activities was$370 million , compared to$299 million for the nine months endedMarch 31, 2021 . This increase in cash flow from operating activities was primarily due to an increase in operating income, excluding the gain derived from the sale of the Blow-Fill-Seal business inMarch 2021 , a favorable impact from the timing of collection of trade receivables, and a favorable impact from inventory, which was partially offset by an unfavorable impact from the timing of payments of accounts payable and unfavorable impact from the increase in contract assets.
Investing Activities
For the nine months endedMarch 31, 2022 , cash used in investing activities was$1.49 billion , compared to$436 million for the nine months endedMarch 31, 2021 . The increase in cash used in investing activities was primarily driven by a$886 million increase in cash used for business acquisition activities, partially offset by a$72 million decrease in cash used for purchases of property, plant, and equipment.
Financing Activities
For the nine months endedMarch 31, 2022 , cash provided by financing activities was$1.03 billion , compared to cash provided by financing activities of$159 million for the nine months endedMarch 31, 2021 . The increase in cash provided by financing activities was primarily driven by a$933 million increase in net cash received from the issuance of debt, 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 . 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 of
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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-
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. 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 ofMarch 31, 2022 ,Operating Company was in compliance with all material covenants under the Indentures.
Geographic Allocation of Cash
As ofMarch 31, 2022 andJune 30, 2021 , our non-U.S. subsidiaries held cash and cash equivalents of$368 million and$351 million , respectively, out of the total consolidated cash and cash equivalents of$786 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 ofMarch 31, 2022 ; 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. AtMarch 31, 2022 , we had$905 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. 48
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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
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