Catalent(US:CTLT)2024-05-08 20:23Part I. Financial Information This section presents the company's financial statements, management's discussion, market risk disclosures, and internal controls Financial Statements (unaudited) For the nine months ended March 31, 2024, Catalent reported a net loss of $1.066 billion, a significant increase from a $146 million loss in the prior-year period, primarily driven by a $687 million goodwill impairment charge. Total assets decreased to $9.88 billion from $10.78 billion, mainly due to the goodwill impairment. Cash from operating activities was $54 million, a slight decrease from the prior year Consolidated Statements of Operations Highlights | | Three Months Ended March 31, | Nine Months Ended March 31, | | :--- | :--- | :--- | :--- | :--- | | (In millions) | 2024 | 2023 | 2024 | 2023 | | Net revenue | $1,074 | $1,037 | $3,080 | $3,208 | | Gross margin | $229 | $180 | $569 | $825 | | Goodwill impairment charges | $0 | $210 | $687 | $210 | | Operating loss | $(17) | $(235) | $(855) | $(37) | | Net loss | $(101) | $(227) | $(1,066) | $(146) | | Net loss per share (Basic & Diluted) | $(0.56) | $(1.26) | $(5.87) | $(0.81) | Consolidated Balance Sheets Highlights | | March 31, 2024 | June 30, 2023 | | :--- | :--- | :--- | | (In millions) | | | | Cash and cash equivalents | $162 | $280 | | Goodwill | $2,339 | $3,039 | | Total assets | $9,879 | $10,777 | | Total liabilities | $6,268 | $6,166 | | Total shareholders' equity | $3,611 | $4,611 | Consolidated Statements of Cash Flows Highlights | | Nine Months Ended March 31, | | :--- | :--- | :--- | | (In millions) | 2024 | 2023 | | Net cash provided by operating activities | $54 | $58 | | Net cash used in investing activities | $(253) | $(834) | | Net cash provided by financing activities | $84 | $572 | | Net decrease in cash and cash equivalents | $(118) | $(197) | Notes to Unaudited Consolidated Financial Statements The notes detail significant accounting policies, revenue recognition, business combinations, and major financial events. Key disclosures include a $687 million goodwill impairment charge, restructuring activities including a facility closure, and the pending merger agreement with Novo Holdings for $16.5 billion. The company also details its debt structure, including new term loans, and identifies major customers, with one customer representing 31% of net trade receivables - The company operates through two reportable segments: Biologics and Pharma and Consumer Health434445 - A goodwill impairment charge of $687 million was recorded for the nine months ended March 31, 2024, related to the Consumer Health and Biomodalities reporting units due to underperformance and macroeconomic conditions777980 - On February 5, 2024, Catalent entered into a merger agreement with Novo Holdings to be acquired for $63.50 per share in cash, valuing the company at an enterprise value of $16.5 billion. The deal is subject to stockholder and regulatory approval137138139 - One customer in the Biologics segment represented 31% of net trade receivables as of March 31, 2024, and 14% of consolidated net revenue for the third quarter50 - In December 2023, the company incurred $600 million in new Term B-4 Loans to repay its existing Revolving Credit Facility86 - The company is undergoing restructuring plans to reduce costs and optimize infrastructure, which includes closing its San Francisco facility. Restructuring costs for the nine months ended March 31, 2024, were $30 million959697 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion focuses on financial performance, segment results, and liquidity. For the nine months ended March 31, 2024, net revenue decreased 4% to $3.08 billion, primarily due to a significant decline in COVID-19 related programs. This led to a substantial net loss of $1.066 billion, exacerbated by a $687 million goodwill impairment. The Biologics segment saw a 15% revenue decline, while the Pharma and Consumer Health segment grew 6%. The company believes its liquidity, including $1.10 billion available under its revolving credit facility, is sufficient for the next 12 months Q3 FY2024 vs. Q3 FY2023 Results In Q3 FY2024, net revenue increased 4% to $1.074 billion (3% in constant currency), driven by growth in prescription products, gene therapy, and consumer health, which was partially offset by declining COVID-19 program demand. Gross margin improved to 21.3% from 17.4% in the prior year. The company reported a net loss of $101 million, a significant improvement from the $227 million loss in Q3 2023, which had included a $210 million goodwill impairment charge Q3 FY2024 vs. Q3 FY2023 Performance Summary | (Dollars in millions) | Q3 2024 | Q3 2023 | Change % (Constant Currency) | | :--- | :--- | :--- | :--- | | Net revenue | $1,074 | $1,037 | 3% | | Gross margin | $229 | $180 | 26% | | Operating loss | $(17) | $(235) | 91% | | Net loss | $(101) | $(227) | 55% | - Organic revenue grew 3%, driven by prescription products, Zydis commercial products, and consumer health products, partially offset by a decline in COVID-19 related programs170 Q3 FY2024 Segment Performance (Constant Currency) | Segment | Net Revenue Change % | Segment EBITDA Change % | | :--- | :--- | :--- | | Biologics | (3)% | 876% | | Pharma and Consumer Health | 8% | 21% | Nine Months FY2024 vs. FY2023 Results For the first nine months of FY2024, net revenue decreased 4% to $3.08 billion (-5% in constant currency), primarily due to a significant decline in demand for COVID-19 related programs. Gross margin fell to 18.5% from 25.7%. The company recorded a net loss of $1.066 billion, compared to a $146 million loss in the prior-year period, largely driven by a $687 million goodwill impairment charge. The Biologics segment revenue declined 15%, while the Pharma and Consumer Health segment grew 5% (3% organic) Nine Months FY2024 vs. FY2023 Performance Summary | (Dollars in millions) | 9M 2024 | 9M 2023 | Change % (Constant Currency) | | :--- | :--- | :--- | :--- | | Net revenue | $3,080 | $3,208 | (5)% | | Gross margin | $569 | $825 | (32)% | | Goodwill impairment charges | $687 | $210 | * | | Operating loss | $(855) | $(37) | * | | Net loss | $(1,066) | $(146) | * | - Organic revenue decreased 6% on a constant-currency basis, primarily due to a significant decline in demand for COVID-19 related programs188 - A goodwill impairment charge of $687 million was recorded, associated with the Consumer Health and Biomodalities reporting units192 Nine Months FY2024 Segment Performance (Constant Currency) | Segment | Net Revenue Change % | Segment EBITDA Change % | | :--- | :--- | :--- | | Biologics | (15)% | (55)% | | Pharma and Consumer Health | 5% | 1% | Liquidity and Capital Resources The company's principal sources of liquidity are cash from operations and capital markets. As of March 31, 2024, Catalent had $1.10 billion available under its revolving credit facility. Management believes cash on hand and available borrowings are adequate to meet liquidity needs for the next 12 months. For the nine months ended March 31, 2024, cash from operations was $54 million, cash used in investing was $253 million (down from $834 million due to less M&A), and cash from financing was $84 million - As of March 31, 2024, the company had $1.10 billion in borrowing capacity available under its revolving credit facility210 Cash Flow Summary (Nine Months Ended March 31) | (Dollars in millions) | 2024 | 2023 | $ Change | | :--- | :--- | :--- | :--- | | Operating activities | $54 | $58 | $(4) | | Investing activities | $(253) | $(834) | $581 | | Financing activities | $84 | $572 | $(488) | - The company was in compliance with all material debt covenants under its Credit Agreement and Senior Notes Indentures as of March 31, 2024218222 Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its quantitative and qualitative disclosures about market risks from those disclosed in its Annual Report on Form 10-K for the fiscal year ended June 30, 2023 - As of March 31, 2024, there has been no material change in the company's market risk information from the Fiscal 2023 10-K232 Controls and Procedures Management concluded that as of March 31, 2024, the company's disclosure controls and procedures were not effective at a reasonable assurance level. This conclusion is based on the identification of five distinct, unremediated material weaknesses in internal control over financial reporting related to contract modifications, income tax provisions, revenue recognition, the financial statement close process, and inventory reconciliation. The company has outlined remediation plans for each weakness, which are currently in progress - The CEO and CFO concluded that as of March 31, 2024, disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting234 - The company identified five material weaknesses that remain unremediated as of March 31, 2024: - Contract Modifications: Ineffective controls to properly identify and assess accounting for contract modifications under ASC 606 - Income Tax Provision: Ineffective controls over the preparation and review of the interim income tax provision - Revenue Recognition: Ineffective controls over revenue recognition for customer agreement modifications at the Bloomington, Indiana facility - Financial Statement Close Process: Ineffective controls over evaluating and accounting for complex non-routine transactions, such as goodwill impairment assessments - Inventory Reconciliation: Ineffective controls over inventory reconciliation at the Baltimore, Maryland facility236237239242244 - Management has developed and is implementing remediation plans for each material weakness, with an expected completion by the fourth quarter of fiscal 2024245246249250251 Part II. Other Information This section covers legal proceedings, risk factors, equity sales, and other disclosures Legal Proceedings The company is involved in a shareholder class-action lawsuit (City of Warwick Retirement System v. Catalent, Inc., et al.) alleging violations of securities laws, including overstated revenue and material weaknesses in internal controls. The company filed a motion to dismiss the complaint in November 2023 and is awaiting the court's decision. Related derivative claims have been voluntarily dismissed - The company is defending against a shareholder class-action lawsuit alleging accounting schemes and failure to disclose adverse facts between August 2021 and May 2023. A motion to dismiss is pending130 - Two related shareholder derivative lawsuits (Husty and Brown) were voluntarily dismissed by the plaintiffs in April and May 2024131132 Risk Factors The primary risk factors highlighted relate to the pending merger with Novo Holdings. These include the risk that the merger may not be completed on time or at all, potential adverse effects on the business during the pendency of the deal, the requirement to pay a substantial termination fee of approximately $345 million under certain circumstances, and restrictions on business activities while the agreement is in effect. Other risks include potential litigation related to the merger - There is a risk that the pending merger with Novo Holdings may not be completed within the anticipated timeframe, or at all, due to failure to meet closing conditions like stockholder and regulatory approvals257258 - The company could be required to pay Novo Holdings a termination fee of approximately $345 million if the Merger Agreement is terminated under specific circumstances259263 - The announcement and pendency of the merger could disrupt business, affect employee retention, and negatively impact relationships with customers and suppliers261 - While the Merger Agreement is in effect, the company is subject to restrictions on its business activities, including limitations on acquisitions, asset sales, investments, and incurring debt266267 Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended March 31, 2024, the company did not sell any unregistered equity securities and did not purchase any of its own equity securities - No unregistered equity securities were sold during the period274 - The company did not purchase any of its equity securities during the period275 Defaults Upon Senior Securities None reported - None276 Mine Safety Disclosures Not applicable - Not applicable277 Other Information During the fiscal quarter ended March 31, 2024, none of the company's directors or officers adopted or terminated any trading plans for the purchase or sale of company securities - No directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter278