Catalent(CTLT) - 2019 Q2 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (unaudited) Unaudited Q2 FY19 financials show a turnaround to net earnings, increased equity, and impact from ASC 606 adoption Consolidated Statements of Operations Q2 FY19 net revenue reached $623.0 million with net earnings of $49.0 million, a significant turnaround from a prior-year net loss Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | Six Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2017 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $623.0 | $606.3 | $1,174.8 | $1,150.2 | | Operating earnings | $78.2 | $68.3 | $98.6 | $99.7 | | Net earnings/(loss) | $49.0 | $(21.9) | $34.6 | $(18.1) | | Diluted EPS | $0.33 | $(0.16) | $0.24 | $(0.14) | Consolidated Balance Sheets As of Dec 31, 2018, total liabilities decreased significantly, leading to a substantial increase in total shareholder's equity Balance Sheet Summary (in millions) | Metric | December 31, 2018 | June 30, 2018 | | :--- | :--- | :--- | | Total current assets | $1,071.5 | $1,240.3 | | Total assets | $4,441.6 | $4,531.1 | | Total current liabilities | $514.3 | $576.9 | | Long-term obligations | $2,130.0 | $2,649.4 | | Total shareholder's equity | $1,563.0 | $1,086.7 | Consolidated Statements of Cash Flows Net cash from operating activities decreased for the six months ended Dec 31, 2018, impacted by acquisitions and debt repayment Cash Flow Summary for Six Months Ended Dec 31 (in millions) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $84.5 | $176.0 | | Net cash (used in) investing activities | $(208.8) | $(825.7) | | Net cash (used in)/provided by financing activities | $(73.8) | $682.4 | | Net (decrease)/increase in cash | $(202.3) | $41.2 | Notes to Unaudited Consolidated Financial Statements Notes detail ASC 606 adoption, Juniper acquisition, debt restructuring, and updated segment reporting aligning with strategy - The company adopted revenue recognition standard ASC 606 on July 1, 2018, using the modified retrospective method. This resulted in changes to revenue timing and presentation, notably recording comparator drug sourcing revenue on a net basis[58][59] - On August 14, 2018, the company acquired Juniper Pharmaceuticals for $127.5 million, net of cash. This acquisition enhanced the Oral Drug Delivery segment's capabilities and added $42.9 million to its goodwill[87][89] - The company repaid $450.0 million of its U.S. dollar-denominated term loans on July 31, 2018, using proceeds from a public equity offering[97] - As of December 31, 2018, the company had remaining performance obligations of $1,274.5 million, with approximately 58% expected to be recognized as revenue over the next six months[86] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 FY19 revenue growth to acquisitions and ASC 606, improving capital structure and impacting cash flow Results of Operations Q2 FY19 net revenue increased 3% (5% constant currency) driven by acquisitions, with improved gross margin and operating earnings Q2 FY19 vs Q2 FY18 Performance (Constant Currency) | Metric | Change $ | Change % | | :--- | :--- | :--- | | Net revenue | $27.6M | 5% | | Gross margin | $17.0M | 9% | | Operating earnings | $12.1M | 18% | | Net earnings/(loss) | $72.1M | * | - The adoption of ASC 606, which requires netting revenue for comparator sourcing, decreased reported net revenue by 5% but increased the gross margin percentage by 140 basis points for the quarter[168][170] - For the quarter, the company recorded a net tax benefit of $6.9 million, adjusting the provisional amount recorded for the 2017 Tax Act, primarily due to additional foreign tax credit benefits[181] Segment Review Q2 FY19 segment performance mixed, with strong Biologics and Oral Drug Delivery growth, offset by Softgel and Clinical Supply Services declines Q2 FY19 Segment Performance (Constant Currency % Change YoY) | Segment | Net Revenue % | Segment EBITDA % | | :--- | :--- | :--- | | Softgel Technologies | (3)% | (9)% | | Biologics and Specialty Drug Delivery | 25% | 28% | | Oral Drug Delivery | 14% | 11% | | Clinical Supply Services | (25)% | 13% | - Biologics and Specialty Drug Delivery growth was driven by the Catalent Indiana acquisition (10% revenue impact) and strong demand for U.S.-based drug substance offerings[193][195] - Clinical Supply Services revenue was down 27% due to the ASC 606 accounting change for comparator sourcing, which had no impact on Segment EBITDA[200] Liquidity and Capital Resources The company improved its capital structure through a significant equity offering and debt repayment, impacting cash flow from operations - Completed a public equity offering in July 2018, raising net proceeds of $445.5 million[243] - Used equity offering proceeds and cash on hand to repay $450.0 million of U.S. dollar-denominated term loans and make a $50 million payment on deferred purchase consideration[97][174][243] - Cash flow from operations for the six months ended Dec 31, 2018 decreased by $91.5 million year-over-year, primarily due to higher collection of receivables in the prior year and higher inventory levels in the current year[239][241] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risks are interest rate fluctuations and foreign currency exchange, managed through diversified portfolio and euro-denominated debt - Primary market risks are identified as interest rate risk and foreign currency exchange risk[261] - The company mitigates exposure to the euro by holding $777.7 million of euro-denominated debt, which is designated as a hedge of its net investment in foreign operations[256] - As of December 31, 2018, the company had no interest-rate swap agreements in place to manage its variable-rate debt exposure[262] Item 4. Controls and Procedures Disclosure controls were effective as of Dec 31, 2018, with no material changes to internal controls, and ongoing integration of acquired business - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2018[265] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[266] - The company is continuing the process of integrating the internal controls of the acquired Catalent Indiana business[267] Part II. Other Information Item 1. Legal Proceedings The company is cooperating with an SEC inquiry regarding pre-acquisition revenue recognition restatements by Juniper Pharmaceuticals - An ongoing SEC inquiry exists concerning revenue recognition restatements made by Juniper Pharmaceuticals prior to its acquisition by Catalent[269][270] - The company is cooperating with the SEC and does not believe the outcome of the investigation will be material[270] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Fiscal 2018 10-K have occurred - There has been no material change to the risk factors disclosed in the company's Fiscal 2018 10-K[273] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or repurchases of own equity securities were reported during the period - None reported[274][275] Item 6. Exhibits Exhibits include corporate governance documents, compensatory plans, CEO/CFO certifications, and interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications and financial statements formatted in inline XBRL[281]